Release Date: August 28, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Donaldson Co Inc (DCI, Financial) achieved record sales, margins, and EPS for fiscal 2024, with sales surpassing $3.5 billion and an operating margin of 15.4%.
- The company returned $286 million to shareholders through dividends and share buybacks, demonstrating strong shareholder value.
- Sales increased 6% year-over-year in Q4, driven by higher volumes across all three operating segments.
- The acquisition of a 49% stake in Medica S.p.A. positions Donaldson Co Inc (DCI) for future growth in bioprocessing and food and beverage applications.
- R&D investment increased by approximately 16% over 2023, focusing on product development initiatives in both legacy and newly acquired businesses.
Negative Points
- Donaldson Co Inc (DCI) faced continued declines in its first-fit businesses, with off-road sales decreasing by 13% and on-road sales declining by 12% in Q4.
- The macro environment in China remains difficult, with sales decreasing 19% year-over-year due to declines in first-fit businesses.
- Life sciences segment profitability was negatively impacted by a slower acquisition-related sales ramp and investments for growth, resulting in a pretax loss of approximately 1%.
- The fiscal 2026 sales growth expectation was lowered to a 3% to 7% CAGR from the previous 4% to 8% projection, driven by a slower-than-expected sales ramp-up in life sciences.
- The company anticipates a reduction in discrete tax benefits, leading to an increased tax rate forecast of 23% to 25% for fiscal 2025, up from 22.7% in fiscal 2024.
Q & A Highlights
Q: I was hoping to level-set a bit more on life sciences trends and outlook, at least with our growth trends and outlook. And I know that bioprocessing trailing revenue base is quite limited. So the numbers there are impacted by that, but are you willing to speak to fiscal '24 growth rates across food and bev, disk drive, vehicle electrification, and bioprocessing? And then what's contemplated in your fiscal '25 outlook for each?
A: Bryan, we haven't broken the model out externally to that level. We can tell you that we do expect a low-double-digit growth in food and beverage. Bioprocessing will certainly be a bit more muted, and that's what we put within the model. Disk drive will continue to crawl forward from the bottoms we experienced over the past year. That's generally how you would put the model together.
Q: The step up in fiscal '26 mobile and industrial profit expectations is encouraging, certainly supported by the trends of your operations. Maybe speak to what the key drivers have been for much stronger-than-expected margin expansion in the legacy segments, particularly in mobile. And then on the life sciences side, we know that the demand backdrop in biopharma is still muted. Is that the exclusive driver of the lowered growth and profit outlook, or are there also differences in the forward model in terms of investments required, cost structure, etc.?
A: In mobile, the power of the mix overall is expanding the operating margin. We have clear share gain within our aftermarket organizations and the benefit of a tailwind due to OE destocking in the past. For life sciences, the bioprocessing upstream and downstream is where we look to grow, but the market is more careful now. New cell and gene therapy development is also slower than expected, impacting our growth and profit outlook.
Q: Perhaps offer a little more color around Medica S.p.A., and then fit in the portfolio and your continued build-out of the bioprocessing puzzle that you've laid out.
A: We're optimistic about our bioprocessing activities. The market is telling us it will take longer than we hoped. Programs in bioprocessing seem to slip a year or two years rather than a quarter or two quarters. Customers are excited about our products, which are disruptive and efficient. We need to continue to commercialize them, but it will take more time than initially thought.
Q: The first question was on the Industrial segment. I was hoping you could give a little more color specifically on IFS and you mentioned in the release some of the timing issues that may have impacted sales in the quarter, but the kind of a step-up in growth projected here in '25.
A: In IFS, dust collection equipment in Europe is muted, and power generation projects are lumpy. We expect power generation to be up year-over-year, supported by healthy backlogs. Dust collection in Europe is tough, but conditions are expected to improve. Our connected-based products are gaining momentum, driving Aftermarket share gains, particularly in the U.S.
Q: With respect to the growth aspirations in life sciences in light of the tougher cyclical backdrop, does it change your motivation or plan in terms of how much you want to invest in that area?
A: Our priorities for capital deployment have not changed. We will invest back into the company organically and inorganically, targeting Life Sciences and service aspects in industrial. We like the long-term returns in life sciences despite the elongated timeline. Our M&A pipeline is full, and we are developing good relationships.
Q: Gross margin improvement has been very impressive. Besides price cost, what are the main buckets leading to better-than-expected gross margins in the businesses? And any thoughts on expectations for gross margin going forward as the environment normalizes?
A: We've worked hard on gross margins, focusing on reasonable commercial relationships and efficient execution. We expect to maintain current gross margin levels, with price forecasted to be 1% of revenues next year. Our plants have performed well, and we continue to leverage higher sales for profitability. We also announced a footprint and cost optimization program for long-term benefits.
Q: What is the on-road product line that is it related to? And do you expect to do any more product-line rationalization?
A: We are exiting the DEF tank product line, which is not core to our technology-led filtration solutions. This decision is strategic, focusing on capital and future investments. The revenue impact is accounted for in our guidance.
Q: I was wondering if you could talk more specifically about the NAPA partnership and what went into that win. Specifically, I'm curious if you could talk about the NAPA Gold product line. What end markets are you getting increased access to?
A: The NAPA partnership win is due to our technology portfolio covering medium and heavy-duty diesel engines across multiple end markets like construction, ag, and mining. Our strong customer service and relationships also played a key role. This partnership continues to contribute to growth in the independent channel.
Q: Just related to the restructuring that you outlined, Scott, you mentioned that those benefits would play out over time. Is there something included in the '25 outlook related to the benefits from those, or do they extend beyond '25?
A: There won't be much impact in '25. We will continue to focus on footprint and cost optimization, with benefits expected to show up in year two or three.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
