Donaldson's Q4 2025 Earnings Call: Contradictions Emerge on Ag Demand, Aerospace Visibility, Margins, Bioprocessing, and Connected Solutions

The above is the analysis of the conflicting points in this earnings call

Date of Call: August 27, 2025

Financials Results

• Revenue: $981M, up 5% YOY
• EPS: $1.03 adjusted EPS, up ~10% YOY
• Gross Margin: 34.8%, down 140 bps YOY
• Operating Margin: 16.4%, up 10 bps YOY

Guidance:

• FY26 sales expected to grow 1%–5% (~$3.8B midpoint); pricing ~1%; currency/tariff impacts negligible.
• Mobile Solutions: total flat to +4%; Off-Road mid-single digits; On-Road high single digits; Aftermarket low single digits.
• Industrial Solutions: +2%–6%; IFS mid-single digits; Aerospace & Defense flat.
• Life Sciences: +1%–5%; segment margin to mid-single digits.
• Operating margin 16.1%–16.7% (midpoint 16.4%), ~70 bps YOY improvement; incremental margin ~40%.
• EPS $3.92–$4.08 (~$4 midpoint).
• Cash conversion 85%–95%; CapEx $65–$85M.
• Share repurchases 2%–3%; maintain M&A priority; connected machines to grow >30%.

Business Commentary:

* Record Financial Performance: - Donaldson Company reported sales of $3.7 billion for fiscal 2025, marking an all-time high, with a 15.7% operating profit margin and earnings of $3.68 per share. - Growth was driven by consistent execution of strategy, despite macro uncertainty, and expansion in high-tech solutions.

• Mobile Solutions and Ag Market Recovery:
• Mobile Solutions reported record results, with aftermarket sales at $468 million, up 3%, and Off-Road sales at $95 million, increasing 5%.

• The recovery in the agriculture market and share gains in the independent channel contributed to this growth.

• Industrial Solutions and IFS Growth:

• Industrial Solutions saw an 8% increase in sales to $310 million, with IFS sales growing 11% to $262 million.

• Growth was driven by new equipment sales, particularly in dust collection and power generation project timing.

• Life Sciences Segment Momentum:

• The Life Sciences segment achieved 14% sales growth to $82 million, with food and beverage sales up over 20%.
• This was attributed to winning market share and successful integration of new and replacement part sales strategies.

Sentiment Analysis:

• Management reported a record year and quarter with sales up 5% YOY, record operating margin at 16.4%, and adjusted EPS up ~10%. They expect “another record year in fiscal 2026” with higher sales, margins, and EPS around $4. Backlogs support the outlook, late backlog is below pre-pandemic, and power generation demand shows no signs of cooling. Pricing muscle and structural cost actions underpin margin expansion despite tariff/LIFO headwinds.

Q&A:

• Question from Bryan Francis Blair (Oppenheimer): When did ag orders bottom, and what growth are you seeing early in FY26?
  Response: Ag bottomed in Q4 with a slight low-single-digit uptick; stabilization, not a sharp rebound.

• Question from Bryan Francis Blair (Oppenheimer): Bioprocessing commercialization timing and potential for breakeven EBIT in FY26?
  Response: Downstream launches are delayed; meaningful inflection is more FY27; FY26 remains muted and not breakeven.

• Question from Bryan Francis Blair (Oppenheimer): In IFS, how do first-fit and aftermarket growth compare in FY26?
  Response: Growth is driven by replacement parts/aftermarket across regions; first-fit mixed; gains are broad-based.

• Question from Nathan Hardie Jones (Stifel): What must change for bioprocessing to ramp as planned?
  Response: Complete NPD and scale GMP manufacturing; broader commercialization largely in FY27 once products are fully ready.

• Question from Nathan Hardie Jones (Stifel): Connected offerings—scale and monetization model?
  Response: Not subscription; connectivity deepens relationships and boosts aftermarket/service pull-through, lifting mix toward 50% aftermarket.

• Question from Brian Paul Drab (William Blair): How do you achieve ~40% incremental operating margin in FY26?
  Response: Gross margin expansion as LIFO/tariffs are offset plus tight opex control and footprint efficiency tailwinds.

• Question from Brian Paul Drab (William Blair): Operating margin cadence through the year?
  Response: Sequential step-up with back-half weighted profits from sales leverage.

• Question from Brian Paul Drab (William Blair): Quarterly growth progression—price vs volume and cadence?
  Response: Pricing steady; volume drives variability; sales mix roughly 48% H1 and 52% H2.

• Question from Laurence Alexander (Jefferies): China trends and backlog context?
  Response: China orders up but outlook cautious; backlogs support guidance; late backlog below pre-pandemic levels.

• Question from Laurence Alexander (Jefferies): Could operating margins reach low-20s with sustained end-market strength?
  Response: OE rebound pressures mix, but structural cost work supports continued expansion; no specific target given.

• Question from Angel Castillo (Morgan Stanley): Sub-segment cadence (Off-Road, On-Road, IFS, A&D) and 1H vs 2H?
  Response: First-fit improves over the year; On-Road high-single-digit off a small base; A&D lumpy; overall ~48/52 sales cadence.

• Question from Angel Castillo (Morgan Stanley): Update on M&A pipeline, buybacks, and CapEx outlook?
  Response: CapEx at 2%–2.5% of sales with sharper prioritization; buybacks 2%–3% to retain M&A flexibility; active, disciplined pipeline.

• Question from Timothy W. Thein (Raymond James): Drivers of mobile aftermarket outlook across channels?
  Response: FY26 growth led by independent channel share gains; OE restocking primarily benefited FY25.

• Question from Timothy W. Thein (Raymond James): Magnitude of Mighty distribution opportunity vs NAPA?
  Response: No customer-specific quantification; partnership is progressing well.

• Question from Timothy W. Thein (Raymond James): Power generation super cycle backlog and duration?
  Response: Capacity is full with the longest backlog; no cooling signs; execution focus and pricing discipline maintained.