Donaldson Company, Inc. Price & Performance (DCI)

At this time, I would like to welcome everyone to the Donaldson Second Quarter Fiscal Year twenty twenty five Earnings Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. I would now like to turn the conference over to Starika Dogwell, Senior Director, Investor Relations and ESG. You may begin.

Good morning. Thank you for joining Donaldson's second quarter fiscal twenty twenty five earnings conference call. With me today are Todd Carpenter, Chairman, President and CEO and Brad Pogo's Chief Financial Officer.

This morning, Todd and Brad will provide a summary of our second quarter performance and our updated outlook for fiscal twenty twenty five. During today's call, we will discuss non GAAP or adjusted results. For second quarter twenty twenty five non GAAP results, exclude pre tax restructuring charges of $2,200,000 dollars related to footprint optimization and cost reduction initiatives. As well as $4,400,000 of business development charges. A reconciliation of GAAP to non GAAP metrics is provided within the schedules attached to this morning's press release. Additionally, please keep in mind that any forward looking statements made during this call are subject to risks and uncertainties, which are described in our press release and SEC filings. With that, I will now turn the call over to Todd.

I'm proud of what the Donelson team accomplished this quarter through resilience and dedication, we delivered for our stakeholders, Total sales increased in constant currency and earnings rose at a faster pace reflecting overall margin improvement. We executed on what was in our control in light of macro Our team navigated a choppy operating environment and with the benefits of our diversified portfolio of businesses, delivered higher sales in key higher margin businesses We diligently managed costs and pricing and exercised strong expense discipline while still investing for the future. Now some highlights from each of our segments. In all three segments, sales were impacted by weak end market conditions, including in agriculture, transportation, industrial gases, dust collection, and bioprocessing. In spite of that backdrop, in mobile solutions, sales grew in constant currency driven by solid aftermarket performance where we continue to gain share. Our recently opened distribution center in Olive Branch, Mississippi is allowing us to deliver products with speed and reliability and our fill rates remain at almost 100%. We are also planning ahead and ensuring we are well with our alternative power solutions. In January, we announced a partnership with Daimler Truck North America on their hydrogen fuel cell project.

Donaldson's advanced air filter technology will be featured in the next generation Freightliner Super Truck two solidifying our position at the forefront of hydrogen fuel cell innovation. In Industrial Solutions, our aerospace and defense business is outperforming our expectations. Demand for new equipment in commercial aerospace has been at record levels and defense orders and quoting activity are very strong. Overall, we continue to build our industrial business through our create Connect, replace, service business model the number of connected machines and customer facilities is growing and both metrics were up double digits in the quarter. Our services businesses are performing well and our most recent acquisition, EasyFlow, which expanded our capabilities and presence in the Southeast United States is outpacing our sales expectations. In Life Sciences, pre tax profit margin improved sequentially and year over year. The cost reduction actions we implemented last quarter are taking hold and we are now leveraging with higher sales a more focused cost structure. We are working to grow our high margin legacy businesses such as Disc Drive and Food and Beverage and scale our acquired businesses. In bioprocessing, early stage capital spending is still constrained However, our therapy pipeline remains solid and we look forward to continuing to expand our presence.

Now, I'll cover some consolidated company highlights. Sales of $870,000,000 decreased 1% year over year driven by a 170 basis point [indiscernible] Impact from currency translation. Excluding currency, sales increased 1% with a pricing benefit of approximately 1%. Adjusted EPS in the quarter was $0.83 up roughly 3% versus prior year. Margins remained strong including operating margin which expanded year over year as a result of expense discipline. Our global operations teams in several cases working through supply chain challenges delivered on our backlogs We've maintained strong on time delivery rates and focused on serving our customers. Importantly, while we tightly managed our expenses in the quarter, we did invest for the future ensuring we maintain our leadership position in technology led filtration. Capital expenditures included investments in capacity expansion, and new products and technologies, R and D investments continued across all segments. We are committed to leveraging our robust free cash flow generation and strong balance sheet to continue targeted strategic investments both organic and inorganic. Now I'll provide some detail on second quarter sales. In Mobile Solutions, total sales were $548,000,000 down 1% versus 2024. Excluding currency, sales grew 1%. Aftermarket sales of $442,000,000 were up 4% year over year driven by low double digit growth in the OE channel.

OE demand was particularly strong this quarter and independent channel sales declined low single digits but were roughly flat on a constant currency basis. Importantly, independent channel sales strengthened as the quarter progressed. With respect to first fit sales, off road sales, of $80,000,000 were down 13% due to ongoing weakness in the agriculture market. On road sales of $25,000,000 declined 24 driven by an exit from non strategic product sales and a decrease in global truck production. Now on China. Mobile Solutions China sales increased 1% with aftermarket sales offsetting first fit softness. Macro weakness continues in the region However, we do believe we are near trough levels. We are also encouraged by market trends in off road including a recent large OEM program win and what we believe is a structural shift towards larger and more sophisticated equipment which bodes well for our technology led products. Turning to the Industrial Solutions and Life Sciences segments. Industrial sales decreased 4% to $254,000,000 Industrial Filtration Solutions or IFS sales decreased 8% to $2.00 $8,000,000 driven by slower investments in CapEx based [indiscernible] and power generation project timing. Aerospace and Defense sales growth of 19% partially offset IFS weakness. Life Sciences sales of $69,000,000 grew nine compared with the prior year due to ongoing strength in disk drive.

Overall, I'm encouraged by the results we were able to deliver this quarter and confident in our ability to achieve record earnings in fiscal twenty Now I will turn it over to Brad who will provide more details on the financials. Brad?

Thanks Todd. Good morning everyone. Second quarter results reflect a team effort Across the company, Donald's and colleagues banded together to prioritize all while keeping an eye on the future by pushing forward our strategic initiatives.

As I walk through some key points from the quarter, please keep in mind my profit comments will exclude the impact from the charges Sarika referenced earlier. At a high level, second quarter total sales were down about 1% versus 2024. Currency was a headwind of approximately 2% and pricing was a 1% benefit. Disciplined expense control drove operating margin up 40 basis points, and EPS of $0.83 was 3% above last year. Gross margin of 35.2% was flat to the prior year. With an unfavorable sales mix being fully offset by select input cost inflation. Operating expenses at rate of sales was 20% compared with 20.4% a year ago. With this strong leverage, driving operating margin up 40 basis points, to 15.2%. In terms of segment profitability, Mobile Solutions pre tax profit margin was 17.4%, down 60 basis points year over year driven primarily by an unfavorable sales mix and expense deleveraging. Similarly, expense deleveraging on softer sales brought the Industrial Solutions pre tax margin down 190 basis points to 16.1%.

As we mentioned last quarter, we expect industrial supported by the execution of our projects and backlog and leverage on higher sales. Life Sciences had a pre tax loss of approximately $500,000 the quarter, which is less than 1% as a rate of sales and significantly better than the prior year performance. The margin improvement was driven by cost optimization actions taken earlier this [indiscernible] which were related to prioritization efforts. And we also benefited from leverage on higher sales. Now our updated fiscal twenty twenty five outlook. First on sales, we are forecasting full year total sales to be flat to up 4%. Versus the prior guidance of a 2% to 6% increase Half of the change comes from an FX headwind which is disproportionately weighted to the second half of the fiscal year. We also factored in the impact from softer than expected end markets. Particularly in agriculture, and some of our industrial and life sciences project based businesses. We continue to expect a pricing benefit of approximately 1%. For mobile solutions, we're forecasting sales down 1% to up 3%. 100 basis points below our previous expectation driven by ongoing weakness in the agriculture market. As such, the only change we made to our mobile solutions forecast is in off road, where sales are now projected to be down mid single digits versus our previous guidance of a low single digit increase.

Our on road forecast is unchanged at a low double digit decrease due to a decline in global truck production. We continue to project growth in aftermarket, with sales up low single digits stemming from strong demand in the OEM channel and market share gains in the independent channel.

In Industrial Solution, sales are projected to increase between 15%, versus an increase of 4% to 8% in our previous guidance. IFS sales are forecast to grow low single digits down from our prior high single digit expectation as market conditions have weakened and capital spending on new equipment in areas such as dust collection has slowed. Aerospace and defense sales are projected to increase in the high single digits. Up from our previous flat guidance as robust end market conditions continue. For Life Sciences, we now project sales will increase in the high single digit range, compared with a low double digit increase previously. Growth in our larger businesses, Disc Drive and Food and Beverage, is partially offset by ongoing weakness in bioprocessing. With respect to Life Sciences' profitability, we continue to expect we'll be breakeven for the full year reflecting modest profitability in the second half.

On a consolidated profit basis, we plan to more than offset sales pressure with disciplined expense management. As such, we are increasing the midpoint of our operating margin guidance range by 20 basis points. Bringing the full year forecast between 15.616% The midpoint of this range is 15.8%. Which is up 40 basis points from last year and clearly demonstrates our focus on expanding our margin profile.

In terms of adjusted EPS, we are tightening our guidance range to between $3.6 and $3.68 per share. The midpoint of this range is in line with our previous guidance and represents a 6% year over year increase. Before moving to the cash flow forecast, I want to touch on the topic of tariffs. The situation is dynamic and there is still a high level of uncertainty and ambiguity regarding global tariff policies. Because of that, our guidance does not include any adjustments related to newly announced tariffs but I want to stress that we are prepared to act. I'll talk more about our plans in a moment, but first I want to make a couple points about how our operating structure creates some natural hedging. To start with, The U. S. Is a net [indiscernible] of products, Next, we have often talked about our region to support region manufacturing in What that means is that about 75% of goods produced in a certain region stay in that region. Given these organic hedges, our biggest exposure to incremental tariffs is more limited to goods we ship from Mexico If specific tariffs are enacted, we have plans to mitigate those impacts through a combination of supply chain and price adjustments including the application of surcharge We will certainly quantify any meaningful impact if we see that emerge.

Now on to the balance sheet and cash flow outlook. Our capital expenditures are forecast between $85,000,000 and $100,000,000 with the majority tilted towards growth initiatives including capacity expansion, new product development, and technology projects. Cash conversion is expected to be in the range of 85% to 95 on par with historical averages and we project cash conversion in the second half will be higher than the first half. Due to normal seasonality and a reduction in working capital. Namely inventory as we continue to work down our backlogs. Lastly, on capital deployment. Our priorities are unchanged. First, we invest. We are growing Donaldson Company. Organically through capital investments, and inorganically through strategic M and A with a focus mainly on life sciences and industrial services.

We paid dividends Our membership in the S and P high yield dividend aristocrat index is important to us we intend to maintain our status.

Calendar 2024 marked Donaldson's sixty ninth consecutive year of paying a quarterly cash dividend. And the twenty ninth year in a row of annual dividend increases. Finally, we repurchased shares. We expect to repurchase between 23% of our outstanding shares this year consistent with prior guidance, and slightly above our average over the last several years of about 2%. In closing, the outcome of our team's effort this quarter was strong margin performance, a higher full year margin projection and an earnings forecast that remains at a record level.

We recognize the work is not done, but I am confident that the Donaldson team is prepared to deliver Now I'll turn the call back to Todd. When we held our Investor Day, in April of twenty twenty three, we laid out our long term strategic vision and fiscal twenty twenty six financial targets. The close of this second quarter marks the halfway point to our three year journey Despite difficult conditions in many of our end markets, we have delivered on our expectations through the hard work and commitment of the Donaldson team executing our strategy, while making timely, tactical adjustments along the way. As the leader in technology led filtration, we have and continue to position ourselves to consistently create value for our shareholders through market share gains in many key businesses, and through record earnings results. We intend to remain on this trajectory by of our expansive and diversified customer base. Our earnings combined with our robust balance sheet allow for continued focused investments in growth initiatives as we build on our success. Across all three segments, our R and D and CapEx investment and efficient execution. Our M and A pipeline is robust and strategically focused.

Finally, I want to thank our talented employees for helping us build our future. I'm proud of the work they do and I'm impressed by their unwavering dedication. With that, I will now turn the call back to the operator. To open the line for questions.

Thank you. We will now begin the question and answer session.

Thank you. Our first question comes from the line of Brian Blair with Oppenheimer. Please go ahead.

Thank you.

Good morning, everyone.

Good morning.

Hi, Brian.

Todd, you called out a recent win in China that's perhaps reflective of structural shift that works in Donaldson's Donaldson. I found that comment very intriguing. It will be more about the noted win and more importantly the implications of that and what [indiscernible] shift transition could mean for Donaldson going forward.

It's just a continuation of technology wins for us within the overall sector of China. Remember, we've been talking for a number of quarters of really bringing our technology based platform proprietary razors to sell razor blades across that particular sector and we have done that This particular one happened to be in the liquid sector in hydraulics specifically for tractors And so you see us now gaining traction within that type of an application in addition to the momentum that we have on air based applications.

Understood. Appreciate the color. A level setting question, within life sciences, if we were to to simplify the segment to disk drive food and beverage processing and other or even just bioprocessing and legacy applications. What is the the split of profitability at this point? In the The impetus here is trying to gauge as you you gain scale have top line inflection in bioprocessing. What's that? Going to mean on a run rate basis when that business Yes. It's on the trajectory that your team is targeting.

So the way to think about that is if you take the traditional businesses that we had, they're all profitable. Remember that the acquisitions that we did were pre revenue, largely and so consequently obviously, those have headwinds. Really mixing down the overall current profitability of the segment. As we continue to push those new products out, which we fully expect happen here, within the next year or twelve months or so, you'll start see some of those new products come out and regain traction. That will only lift the overall sector even more positive.

Brian, this is Brad. I'll just add a point and reference back to my remarks to remember in first quarter we did some restructuring and that was all about prioritization within these specific businesses. As Todd mentioned, we have a project pipeline that we're working on to bring some of these items to to from pre revenue to revenue and so the teams have done really good work to try sharpen the pencil on where are we really going to invest that's giving us some momentum in Life Sciences' profitability as well.

Your next question comes from the line of Rob Mason with Baird. Please go ahead.

Yes, good morning all.

The first question is around the mobile solution, just the aftermarket in general. There's a couple of quarters now we've seen a meaningful divergence between the OED channel and the independent channel. And I was just curious what better explains that if that's just focus from the OEDs on their parts business or share gains, what have you. That's one. And then the second question still in the aftermarket is I know you didn't change the outlook there, but it doesn't look like for the second half there's much in the way of normal seasonality built into the guidance. And I'm just curious if that's conservatism or if that's reflecting somewhat underlying weaker demand or how you how you're viewing that?

Yes, sure. So when you look at our aftermarket business, what ended up happening here within the quarter is a little bit of a shift in the behavior between the independent and channel. The OE channel clearly has some more focus from the OEs on their parts based businesses as you call out. We clearly see that and we see that a little bit more demand from that side. On the independent channel, which is if I remind you, it is about 60% of the overall business. That felt a little bit more of a pullback, a little bit more cautious tone. And net net, we were up Now that's kind of some some interesting adjustments for us that we see in the behavior changes. However, the story remains for us is share gains. And how we continue to execute really, really well Our fill rates are near 100% when the customer wants the product. We're doing very well within that channel servicing that channel. And we're very happy overall with where we are.

Now we didn't change the guide, but we didn't change the guide because one basically offsets the other and so net debt it felt about a push.

Understood. And just as a follow-up, You just talked Todd just around the visibility in IFS. Understand can be lumpier with the projects. That move around and you you did pull the guide down there, but how are you I guess, risk adjusting for those projects in the second half of the year? And are those biased either to PowerGen Which my impression is that maybe those could be larger or for the dust collection business?

Yes. So PowerGen is clearly the largest project. And they move from quarter to quarter.

Based upon site availability, it's etcetera. We did see movement on power generation. It is about half that represents about half of the down in the quarter, if you will, year over year but those move out. And so consequently, that revenue will come, but in the quarter, it's clearly a notable headwind. Our power generation business remains very strong. We expect it to remain strong at at a minimum for another year, one point five years.

We have that much visibility. So very, very positive That's not really the story here for us in the change of the guide. Because we're still very bullish on power generation. The story really for us is in our capital based project businesses that are more related to manufacturing Specifically, we saw some movements within what we would say is the automotive arenas of that particular business where projects really pulled back and you could say that's more related to an electrification type of a situation, so battery manufacturing electric car manufacturing, those kind of activities. Certainly, certainly abated in the quarter more than we had expected. All other industries feel feel pretty good. Quotes remain still at a good level. But that meaningful shift is really more further indication that this electrification phenomenon is clearly not going to happen as quickly as many had hoped. And you see that over also in our vehicle for specifically electric cars in inventing based applications where that also felt a lot of pullback. So electrification really in the auto sector really explains a lot of that and we did not see that meaningful forthcoming, but it certainly happened within the quarter.

I see. Very good. I'll turn it back. Thank you.

Your next question comes from the line of Brian Drab with William Blair. Please go ahead.

Hi, good morning. I think that you touched on the somewhat, but can you just further elaborate on the IFS segment the average about $210,000,000 a quarter in the first half of the year and then Is this project based business? Is that what's driving the big step up to the guidance implies going to more like $250,000,000 a quarter in the second half.

Yes. So it's clearly project based. And again, Brian, so the power generation business really saw timing move at 25 half of the reduction in this quarter, but those project based businesses for power generation move They just moved into the next quarter, the third or fourth quarter. And in fact, we currently in the company within power generation, we did not change our annual guide for that business at all.

Okay. So that's all that's the power that's all power generation. Okay, thanks. The call is actually cutting in in and out a little bit, so I'm not catching everything. So sorry if I asked something that was if I'm repeating the question. No, no worries. [indiscernible] On the aerospace and defense side, Can you talk a little bit about where the particular strength is there more on the aerospace, more on the defense side and just kind of give us a little more granularity there. Thank you.

Yes. So it's both. And what we have good strength in both pieces of the business. What we had factored in when we gave our original guide this year is supply chain problems and difficulties within supply chain that we had expected. Keeping in mind that if we were to try to requalify a new supplier for a particular part of that business that could take as much as a year or a year and a half or two. And so we had expected that kind of a situation to give us headwinds and therefore flat. The supplier of course that we do have has actually improved performance to a little bit of our surprise, but through some fantastic work of hard work of our people here, working with that supplier. And so consequently that's that's why it's up. The backlog has always been there. The orders have always been there. It was more of a reflection of the supply chain and with us now knocking down some of those supply chain hurdles, that's what you're seeing in the guide.

Okay. Thanks very much.

Your next question comes from the line of Lauren Alexander with Jefferies. Please go ahead.

Good morning. Just a question about the dynamics you're seeing in off road.

I guess two parts. One, to what degree are the auto OEMs talking about if there are tariffs triggers a destock cycle or do they see sort of a bit of a prebuy to get ahead of it? Can you just give a sense for kind of do you see kind of the initial impact kind of which way it swings? But then secondly, when you think about your overall outlook adjustment for this year, How much of that do you think is lost demand as opposed to pent up demand that comes back in 2026?

Yes. So let me take the first one. Within the off road we have not had pre buys, we have not had any of those kind of activities. Out of our customers. As a result of the any of the tariff type of activities that's remember some of those off road markets like ag are really difficult for them. To see them taking on inventory right now. Would be kind of an interesting move as they try to really work down the inventory that's out in the channel. So we'll see. We'll keep an eye on that. We don't really see that happening. It's a bit more freight frankly at the macro business as usual across that that base relative to manufacturing and delivering for them. I would say that the one change that maybe has happened or accelerated in the behavior [indiscernible] asking our specifically always asking us our capability of building their products outside The United States. As Brad said, it is in his script that we are a net exporter from The U. S. And so So to the extent that OEs will want to have us rotate and build it more closely to their factories rather than having in U. S. And export it, you know, that we have received questions regarding that.

That's the only behavioral change really.

And then the second question It's just around to what degree do you see kind of slightly softer near term outlook being kind of a sign of pent up demand for next year or is it just more we're resetting the level Right, right. That's really tough to say because really being driven by the end markets. Nobody's nobody is behaving differently as a result of the uncertainties that are clearly being introduced into the business markets, if you will, And so to suggest that that people are holding back or pulling forward that's not what we're seeing at all. Now that's not to suggest that it won't happen, for us, that's not the macro that we see. And for our guide, we're taking what we know and we applied that within today's guidance.

Thank you.

Your next question comes from the line of Angel Castillo with Morgan Stanley. Please go ahead. Hi, good morning. This is actually Stefan Diaz sitting in for Angel.

Thanks for taking my question. Maybe if we could dig back into mobile Solutions aftermarket growth.

Would you be able to parse out Share gains versus market growth, And then maybe what sort of line of sight do you have in share gains continuing into your fiscal twenty twenty six?

So as a macro, we have interim models to really track us against comp we have factual data even though our quarters may be very different, etcetera. We have factual data that that we can track. And that that specifically tells us we are winning share gains and we have one share gains quarter after quarter after quarter And so we're really very, very proud of our Internet aftermarket team and what's taking place out there.

And we expect those share gains to continue looking forward.

Great. Thanks. And then, I believe last quarter you mentioned some CapEx projects being pushed out within Life Science Can we have an update there? Like, has there been any step change, you know, in either bringing projects back forward or maybe pushed out even further? Thanks. [indiscernible] [indiscernible] and those larger projects are in the upstream process specifically with bioreactors and activities like that. Last year we had very large projects, dollars 5,000,000, dollars 6,000,000, dollars 7,000,000 projects that were in flight those have now shipped giving us tougher comps as we look ahead. Within Life Sciences in the second half. And this is reason why our commentary says that it's certainly more guarded in that industry because those projects have not been replaced and large life sciences companies are not [indiscernible] and specifically our Solaris business tells us that. So we've not seen green shoots in that area at this point. But we'll continue to press forward and and manage our business appropriately.

Your next question comes from the line of Nathan Jones with Stifel. Please go ahead.

Good morning. This is Adam Farley on for Nathan.

I wanted to start on Hi, good morning guys. I wanted to start on operating margins within mobile, how should we think about margins for the remainder of the year? I think in the quarter, called out a little bit of a mix headwind, but with aftermarket growth how should we think about margins Adam, this is Brad. All three segments pick up from here at this point if you look second half versus first half, So some of it comes with the natural leveraging on sales and then some of it [indiscernible] the quality of the work that the teams have done around company to be smart about where we're pulling out expenses. Just a side note on that, we're not just there isn't a mandate that says take X percent out. It's teams reflecting what they need in certain regions or in certain businesses and then prioritizing that. So I think that's where you'll see this tick up. Again, it's it's across the company.

Turning back to industrial, and your Connected Solutions, are are you seeing any changes there on the adoption rate just given some of the it sounds like there might be some deceleration in industrial markets.

Yes. So we are. We've actually picked up Our overall connectivity So for example, year to date growth in connected machines alone is 30% so far through the first six months. And in facilities, so remembering a facility can have multiple machines is 29%. So we're getting a broad adoption across the customer base as well as customers often put more than one machine on this. Can tell you a story that happened within the quarter that was very fun. One particular customer I won't mention by name, but they contracted to hook up all 60 collectors on their site, a very large manufacturing site after they hooked the very first one and ran it for a while. So we're really starting to get a name out there now, gather momentum and continue the pace quickly to hook them up. Keep in mind that each time we hook those up, what we have seen is an increase in really customer relationships the depth of that relationship and more importantly, an increase in in parts and replacement parts sales. So So we're really proud of the efforts. We think we have really the best connected product out there and we'll continue to push forward that strategy.

Okay, great. Thank you for taking my questions.

Your next question comes from Brian Drab with William Blair. Please go ahead.

Hi. I just want to ask one follow-up question. I was wondering Todd, if you could talk about irrespective of what's happening in the life sciences market and the challenges there, is the development of the technology going and just kind of the pipeline that you're developing, for when the market improves within bioprocessing, therapeutics, bioreactor products that you're developing? Just how is the technology development going?

Yes. So Brian, what we needed is, Brad mentioned earlier is, we had a very broad agenda of products that we had in flight, all kind of fun ideas. And clearly, the market said, hey, you better focus. And so that's what we did do as a corporation.

But those that we focused on, it's coming really nice week. We really are pretty happy with the disruptive [indiscernible] that we have going forward. Still some time ahead of us before we bring those out to the market, but for example, we have some in in testing right now. So we're not it's not years away.

I would say it's quarters away and we've made significant Okay. Thanks very much.

Your next question comes from the line of Rob Mason with Baird. Please go ahead.

Yes. Thanks for taking the follow-up. Brad, you may have addressed this just a moment ago with your commentary around margins, but just maybe to put a finer point on it. It sounds like for the second half of the year, it looks like your guidance kind of implies about a 50 basis points or so of year over year margin expansion. You're saying that we will see both gross margin expansion and OpEx leverage the second half.

First versus second, yes. Now again, the OpEx leverage I'm sorry, Brad, you broke up for me a little bit. Yes. The first half It will improve in the second half from the first half. [indiscernible] I want to say operating expense leverage is a more meaningful contributor to that.

Okay.

Because your SG and A in the second quarter was kind of unseasonably [indiscernible] Does that carry forward or are there just some adjustments in the in the second quarter specifically?

No, we expect that to carry forward So we've got lower headcount year over year. We've got a real focus on any discretionary activities. Again, it's really broad based This is about the whole company sort of rallying around We have this unexpected FX headwind, for example, that we have to address. And we're pulling down where it makes sense and prioritizing.

Understood. Okay.

For closing comments.

That concludes the call today. Thanks to everyone who participated. We look forward to reporting our third quarter fiscal twenty twenty five results in June. Have a great day. Goodbye.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation and you may now disconnect.