Donaldson Company, Inc. Morgan Stanley's 14th Annual Laguna Conference

Happy to be here. Thank you.

Sure. Maybe a bit of the background on it. I have been with the company for 11 years. Rich has been with the company for more than 20. One thing with the strategy, Rich has been a direct report of the CEO for a decade plus and definitely had a role in the strategy. I think what we are really optimistic and encouraged by is that our strategic priorities are largely unchanged. How we execute them and some of the focus areas, which I will go to, are things that we are going to evolve. As far as where we sit today, Donaldson is a leader in technology filtration. We have an underpinning of capabilities that gives us access to lots of markets using the filtration knowhow, and then availability and scale and customer relationships are a core part of how we drive value.

We are in good markets, so it is about continuing to look for those opportunities. The evolution, I think, is going to be on our portfolio and analysis and really the granularity of how we get into things. As we think about the next 5, 10 years for the company, it is about ensuring that every business has its role in the portfolio and every business earns its place in the company. Some of that looks like classic prioritization work, 80/20, and really managing long tails of things, focusing on the regions that make the most sense for the specific markets that we are in. The good news is Donaldson touches pretty much every corner of the economy, so our access to the world is very high, then it is about prioritizing choices within that.

I think a combination, largely organic growth, but also inorganic as we look for opportunities like the recently acquired Facet and getting more into aerospace and defense, making sure that we dig deeper or go deeper into the markets that are exciting for us.

Sure. The place to start on this that I think is important for the group is the composition of the company. About two-thirds of our revenue is recurring revenue, so a version of an aftermarket part across three segments. In our mobile solutions, things we watch are any measure of activity. So think about freight index or truck miles driven, farm activity, anything like that that helps drive aftermarket, which is about 80% of the mobile solutions business. Then new equipment production. We are in ag, mining, construction, and transportation. So to the extent that new equipment production is going up, that favors us well. Of course, right now, as probably everybody knows, it's looking better than it has in a while across all of these markets, especially with ag and transportation.

In the industrial space, again, any unit of activity is important, so IP is a very good measure that we tend to watch. About 50% of our industrial segment is some recurring revenue, and the places that I'm really focused on right now are more the CapEx goods and the project side. What I do want to delineate, though, is you almost have to look at our industrial businesses as data center versus non-data center right now. The data center side, things like power generation are doing very well, and we all see that. Then the other part of the business, new projects and new factories, brownfield, greenfield, those are the places that, again, look for industrial CapEx.

Yeah, this is an important question. The OEs that we support, especially in mobile solutions, tend to have much more volatile production cycles on up cycles. It tends to go up maybe 10% or 20% or even 30% in discrete periods. So to the extent that we're at a recovery like that, what we tend to see is a bit more gross margin pressure that gets leveraged on SG&A. So earnings, cash earnings growth, but we might have a margin pressure there. I think what's important to note is in the last several years, we've changed our posture on pricing with OEs. We used to, in the 20-teens, be in more of a price down type of cycle. We haven't had a real, I'm going to put the post-COVID recovery aside, that was nuanced.