Donaldson : Intellisight 2020 Virtual Conference Presentation

Intellisight 2020 Virtual Conference

Tod Carpenter, Chairman, President and CEO | August 12

Safe Harbor

Statements in this release regarding future events and expectations, such as forecasts, plans, trends and projections relating to the Company's business and financial performance, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and are identified by words or phrases such as "will likely result," "are expected to," "will continue," "will allow," "estimate," "project," "believe," "expect," "anticipate," "forecast," "plan," and similar expressions. These forward-looking statements speak only as of the date such statements are made and are subject to risks and uncertainties that could cause the Company's results to differ materially from these statements. These factors include, but are not limited to, economic and industrial conditions worldwide; the Company's ability to maintain competitive advantages; threats from disruptive innovation; highly competitive markets with pricing pressure; the Company's ability to protect and enforce its intellectual property; the difficulties in operating globally; customer concentration in certain cyclical industries; significant demand fluctuations; unavailable raw materials or material cost inflation; inability of operations to meet customer demand; difficulties with information technology systems and security; foreign currency fluctuations; governmental laws and regulations; litigation; changes in tax laws and tax rates, regulations and results of examinations; the Company's ability to attract and retain qualified personnel; changes in capital and credit markets; execution of the Company's acquisition strategy; the possibility of intangible asset impairment; the Company's ability to manage productivity improvements; unexpected events and the disruption on operations, including the COVID-19 pandemic; the Company's ability to maintain an effective system of internal control over financial reporting; and the United Kingdom's decision to end its membership in the European Union. These and other risks and uncertainties are described in Item 1A of the Company's Annual Report on Form 10-K for the year ended July 31, 2019 and Form 10-Q for the period ended April 30, 2020. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law. The results presented herein are preliminary, unaudited and subject to revision until the Company files its results with the United States Securities and Exchange Commission on Form 10-K.

2

Reminder: Fiscal Year 2020 Ended July 31, 2020

Statements made during today's presentation reflect the perspectives from the Company's third quarter 2020 earnings release and associated conference call on June 2, 2020, and/or the Company's 'Business Update' press release issued Thursday, August 6, 2020.

Donaldson is scheduled to report fourth quarter and full-year 2020 earnings on Thursday, September 3. The Company will provide an updated perspective at that time.

3

Value Proposition in the Context of COVID-19

4

Successfully Navigating COVID-19

Clear Priorities

Engaged Employees

Disciplined Execution

• Health and safety of employees
• Fulfill customer commitments
• Lessen the spread of COVID-19
• Global coordination and collaboration
• Flexibility with remote work environment
• Dedicated front-line employees
• Deep engagement with customers, suppliers
• Advance gross margin initiatives and control expenses
• Maintain strong financial position

Donaldson employees have done an excellent job managing through the dynamic environment!

5

Benefits of Value Proposition Magnified with COVID-19

1.

2.

3.

4.

5.

Technology-led

Diversified

Experienced

Global sales,

Culture of

filtration company

portfolio of global

management team

production and

ownership aligns

with deep

businesses with

and engaged

distribution

with shareholder

customer

recurring revenue

board of directors

footprint with

interests;

relationships

and expanding

committed to our

personalized

disciplined capital

addressable

long-term strategic

service of a local

allocation strategy

market

goals

firm

to drive strong

opportunities

shareholder

returns

6

Foundation for COVID-19 Response and Long-Term Success

1.

2.

3.

4.

5.

Technology-led

Diversified

Experienced

Global sales,

Culture of

filtration company

portfolio of global

management team

production and

ownership aligns

with deep

businesses with

and engaged

distribution

with shareholder

customer

recurring revenue

board of directors

footprint with

interests;

relationships

and expanding

committed to our

personalized

disciplined capital

addressable

long-term strategic

service of a local

allocation strategy

market

goals

firm

to drive strong

opportunities

shareholder

returns

7

Experienced and Aligned Leadership Team

Tod Carpenter	Scott Robinson	Amy Becker	Guillermo Briseño	Andrew Dahlgren
Chairman, President & CEO	SVP, CFO	VP, General Counsel & Sec.	VP, LATAM	VP, APAC
Years with DCI: 23 years	5 years	22 years	16 years	26 years

Sheila Kramer	Rich Lewis	Tom Scalf	Jeff Spethmann	Wim Vermeersch	Michael Wynblatt
VP, Human Resources	SVP, Global Operations	SVP, Engine Products	SVP, Industrial Products	VP, EMEA	VP, CTO
5 years	17 years	30 years	19 years	29 years	3 years

Nearly 200 Years of Combined Donaldson Experience Focused on Addressing Stakeholder Needs

8

Strong Alignment with Long-Term Shareholder Interests

STOCK OWNERSHIP REQUIREMENTS

		DCI	Common Market Practice1
CEO	10x	Base Salary	5x Base Salary
CFO & SVPs	5x	Base Salary	3x Base Salary
VPs	3x	Base Salary	1x Base Salary

		CEO
	83%
Target Total Direct	Performance-	17%
based Pay
Compensation Mix

19%

64%

Other NEOs2

	68%
	Performance-
	based Pay
 Annual Base Salary	32%
48%
 Target Annual Incentive
 Target Long-term Incentives	20%

Long-term Incentives | 50% Tied to ROI Target (Primary Requirement) and 50% to Sales

1 Source: Willis Towers Watson and Company estimates. 2 Named Executive Officers (NEOs).

9

Operational Footprint and Business Composition Provide

Some Insulation from COVID-19 Impact

1.

2.

3.

4.

5.

Technology-led

Diversified

Experienced

Global sales,

Culture of

filtration company

portfolio of global

management team

production and

ownership aligns

with deep

businesses with

and engaged

distribution

with shareholder

customer

recurring revenue

board of directors

footprint with

interests;

relationships

and expanding

committed to our

personalized

disciplined capital

addressable

long-term strategic

service of a local

allocation strategy

market

goals

firm

to drive strong

opportunities

shareholder

returns

10

Value Proposition as a Source of Strength During COVID-19

4.

Global sales, production and distribution footprint with personalized service of a local firm

• "Critical" and "Essential" Businesses
• • We have been operating throughout the pandemic
  • Teams employing new techniques (e.g. virtual selling, virtual training)
• Strong Operational Capabilities
• • Region-to-supportregion production strategy creates agility, flexibility
  • Currently at lowest level of disruption since pandemic began

Disruption Related to COVID-19 Has Been Immaterial to Operations

11

Value Proposition as a Source of Strength During COVID-19

2.

Diversified portfolio of global businesses with recurring revenue and expanding addressable market opportunities

• Replacement parts outperforming new equipment
• • Sales of replacement parts ~64% of total revenue in 4Q20
  • Continue winning share with higher-technology products that drive retention
• Addressable market growth in new, emerging markets
• • Penetrating markets with less COVID-19 impact (e.g. food and beverage)
  • Gaining share with local customers in China who move up technology curve

Diverse Business Composition Creates Relative Durability During COVID-19

12

Performance Reflects Strategic and Operational Benefits

Recent Performance*

(vs. prior year)

4Q Sales $

QTD GM %

QTD Expense $

4Q Cap Ex $

~(15)%

• July had highest sales of quarter (and June > May)
• YoY % change in order: APAC > EMEA > Americas
• Replacement > First Fit
• New markets (e.g. food and beverage) outperforming

• Gross margin benefits from optimization initiatives and tight control of manufacturing expense, combined with mix benefits and lower raw materials costs
• Expense savings from lower incentive compensation and tight control of discretionary expenses

• Consistent with prior expectations as investment cycle completed
• Long-termbenefits from new capacity in optimal locations
• New R&D facility coming online in 2020

* Details disclosed in August 6, 2020 'Business Update" press release; QTD (quarter-to-date) reflects the two-month period ended June 30, 2020.

13

Long-Term Focus on Innovation Remains

1.

2.

3.

4.

5.

Technology-led

Diversified

Experienced

Global sales,

Culture of

filtration company

portfolio of global

management team

production and

ownership aligns

with deep

businesses with

and engaged

distribution

with shareholder

customer

recurring revenue

board of directors

footprint with

interests;

relationships

and expanding

committed to our

personalized

disciplined capital

addressable

long-term strategic

service of a local

allocation strategy

market

goals

firm

to drive strong

opportunities

shareholder

returns

14

Donaldson is a Technology-Led Filtration Company

1.

Technology-led filtration company with deep customer relationships

• Continued investment in building capabilities
• • New research center in Bloomington, MN
  • Enhanced focus on materials science capabilities
• Prioritizing work on breakthrough technologies
• • Expand R&D investment as percent of sales to 3% to 4% (from 2% to 3%)
  • Diversify with new technologies in wide variety of applications

Strong Execution of Innovation Leadership Strategy to Maintain Innovation Advantage Post-COVID

15

Strategic Growth Priorities for $65B Filtration Products Market

O&G Other

Engine1

Water~$16B

Industrial Air2

HVAC~$6B

PROFITABLE

GROWTH

Automotive

& Medical

Pharma

Investment Agenda Aligned to Support Growth Priorities to Grow Market Share

1 Includes Hydraulics, Fuel, Engine Air, A&D and Lube; 2 Industrial Air Filtration, including industrial dust collection, inlet air filtration for gas turbines, and fume and mist extraction; 3 Served Addressable Market (SAM) including ~$2B within Food & Beverage.

16

Portfolio Analysis and Roles

Operating Profit Margin

		●	Advance & Accelerate	●	Mature
			-	IAF Aftermarket		-	Disk Drive
			-	Engine Aftermarket		-	Defense
			-	Venting Solutions
	55%			-	On-Compressor
		-	Process Filtration
			-	PTFE Rolled Goods
	ADVANCE &		-	Semiconductor		- Functional and Support Groups
		-	Industrial Hydraulics
	ACCELERATE		●	Fix & Reposition
	●	Critical Core
8%			-	Off-RoadFirst-fit		-	Gas Turbine Systems
			-	On-RoadFirst-fit		-	Exhaust and Emissions
MATURE	29%		-	IAF Equipment
		-	Compressed Air Filtration
	CRITICAL CORE		-	Aerospace

	FY17-FY19 Average % Revenue Change
	12%
8%	10%			Company Average
8%
FIX &	6%
4%
REPOSITION	2%
Sales Growth	0%
Advance & Accelerate	Critical Core	Mature	Fix & Reposition
				17

Portfolio Analysis and Roles - Changes for FY21

Operating Profit Margin

		●	Advance & Accelerate		●	Mature
			-	IAF Aftermarket			-	Disk Drive
		Defense to 'Critical Core'
	-		-	Engine Aftermarket			-	Defense
	Valuable program wins
	55% -		-	Venting Solutions
		-	Process Filtration			-	On-Compressor
				-	PTFE Rolled Goods
	Robust engineering capabilities
	ADVANCE &		-	Semiconductor
	ACCELERATE- Growth over a cycle- Industrial Hydraulics			- Functional and Support Groups
		●	Critical Core		●	Fix & Reposition
8%			-	Off-RoadFirst-fit			-	Gas Turbine Systems
			- On-RoadFirst-fit			-	Exhaust and Emissions
MATURE
29%		-	IAF Equipment				GTS to 'Mature'
		-	Compressed Air Filtration	-	Right-sized business
		-	Aerospace
	CRITICAL CORE		-	Strong profit improvement

		-	Valuable aftermarket opportunity
	FY17-FY19 Average % Revenue Change
	12%
8%	10%			Company Average
8%
FIX &	6%
4%
REPOSITION	2%
Sales Growth	0%
Advance & Accelerate	Critical Core	Mature	Fix & Reposition
				18

Disciplined Capital Deployment Framework

Use of Cash Over Last 3-Years1

~$1,170M

M&A 10%

26%

Dividends

32%

Share

Repurchases

32%

Capital

Expenditures

1 Includes the past 12 quarters through the 3-month period ended April 30, 2020.

FUTURE PRIORITIES

• Capex: elevated through FY20, then below long- term target of +/- 3% of sales for period of time
• Dividends: long-standing commitment to dividend growth
• Share Repurchases: consistent level over time
• M&A: disciplined and strategic approach to M&A

19

Longstanding Commitment to Consistent Dividend Growth

	$0.90		$0.78
	$0.80
	$0.70
Share	$0.60
$0.50
$0.40
Per
	$0.30
	$0.20	$0.02
	$0.10
	$0.00	FY90	FY19

• Paid quarterly dividend for 60 years
• Increased annually for 20+ years; added to S&P High-Yield Dividend Aristocrat Fund in Jan. 2016

20

Consistent Share Repurchase

Shares Outstanding (M)

250

200

150

100

50

0

FY90

FY19

• Long consistent history of repurchasing shares
• Committed to offset annual dilution of ~1%
• Level of incremental repurchase governed by balance sheet

21

Purpose and Principles Support our Strategy

Advancing Filtration for a Cleaner World

Technology-Led Filtration Company

• World-classmaterials science and conversion expertise
• Digitally intelligent solutions

Diverse Businesses with	Global Presence with Deep
Expanding Market Opportunities	Customer Relationships
•	Organic growth execution	•	End-to-end operational excellence
•	Strategic acquisitions	•	Talent management

Act with	Engage and	Deliver for our	Cultivate	Operate	Enrich our
Empower Our	Sustainably and
Integrity	Customers	Innovation	Communities
People	Safely

22

Thank You

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