Q2 2013 Earnings Call
February 25, 2013 10:00 am ET
Richard Sheffer - Director of Investor Relations and Assistant Treasurer
William M. Cook - Chairman of the Board, Chief Executive Officer and President
James F. Shaw - Chief Financial Officer and Vice President
Hamzah Mazari - Crédit Suisse AG, Research Division
Eli S. Lustgarten - Longbow Research LLC
Laurence Alexander - Jefferies & Company, Inc., Research Division
Kevin R. Maczka - BB&T Capital Markets, Research Division
Charles D. Brady - BMO Capital Markets U.S.
Brian Drab - William Blair & Company L.L.C., Research Division
Brian Sponheimer - Gabelli & Company, Inc.
Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division
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Thank you, Ron, and welcome to Donaldson's Fiscal 2013 Second Quarter Earnings Conference Call and Webcast. Following this brief introduction, Bill Cook, our Chairman, President and CEO, and Jim Shaw, our Vice President and CFO, will review our second quarter earnings and our updated outlook for fiscal '13.
Next, I need to review our Safe Harbor statement with you. Any statements in this call regarding our business that are not historical facts are forward-looking statements, and our future results could differ materially from the forward-looking statements made today. Our actual results may be affected by many important factors, including the risks and uncertainties identified in our press release and in our SEC filings.
Now I'd like to turn the call over to Bill Cook. Bill?
William M. Cook
Thanks, Rich, and good morning, everyone. Those of you who have followed our company know that we've been focused on building a diversified portfolio of global filtration businesses over the past 25 years. During our second quarter, this diversified portfolio worked again to our advantage as our Gas Turbine Products sales increased 79%, offsetting decreases in our Engine Products businesses and helping to deliver an overall 3% increase in company sales during the quarter.
Now I'd like to take a few minutes to review the sales trends within each of our reporting segments, starting first with Engine Products. Except for the agricultural equipment markets, where conditions for large farm equipment remain strong, our other engine OEM end markets had a slower quarter. Many of our OEM customers cut back their production levels to reflect the drop-off in end-user demand for equipment and also to reduce their own finished equipment inventory levels. Among those end markets that had notable decreases were North American and Asian heavy truck and the global construction and mining equipment markets. While recent economic reports suggest that conditions are starting to improve in some of these end markets, many of our customers have recently reported that they're still working to reduce their finished equipment inventories. Therefore, we now believe that it will take several months for our customers' production rates to improve enough for our businesses serving these end markets to post year-over-year growth.
We did, however, see better conditions in our engine aftermarket, where we supply replacement filters and mufflers through both our OEM and independent channels. Our engine aftermarket businesses in North America, Latin America and Asia all grew at least 4% in the quarter. Only our European aftermarket business was down year-over-year.
Now I'll switch to our Engine Products segment. As I have already noted, the outstanding quarter of Gas Turbine, which had sales of $66 million, up 79% from the same quarter last year and up 40% sequentially from our first quarter. I'm also pleased to note that during the quarter, we shipped our largest Gas Turbine order ever, worth about $22 million, consisting of 11 systems to be installed to support power generation in Qurayyah, Saudi Arabia.
In our Industrial Filtration Solutions business, sales were flat as sales increases in North America were offset by decreases in Europe and Asia. And in our Special Applications Products, sales of our disk drive filters increased 8% in the quarter. However, to be fair, I should note that our second quarter last year was impacted by the floods in Thailand. In addition, our Integrated Venting filter business increased sales 45% in the quarter.
We also had a number of countries with very solid year-over-year local currency sales performances, including China, South Africa, Mexico, Brazil, Chile and Australia. So there were some pluses and minuses during the quarter, but fortunately, enough went right to generate a positive overall sales growth. Again, I attribute this to our relentless focus on growth through diversification.
I'll now turn the call over to Jim for his comments on our operations before I discuss our updated outlook for fiscal '13. Jim?
James F. Shaw
Thanks, Bill, and good morning, everyone. Our gross margin was 33.4% in the quarter compared to 34.6% in last year's second quarter. As we noted in our press release, the biggest drivers of the decrease in the gross margin were lower fixed costs absorption due to the decrease in production volumes in our plants and the mix impact of the large Gas Turbine project shipments. The lower fixed costs absorption was primarily in our plants which support our engine OEM businesses. As Bill noted earlier, conditions were worse than we had initially forecast for the end of the calendar year as our OEM customer plant holiday shutdowns were longer than we expected as customers continue to adjust their production and inventory levels. This lower fixed cost absorption, along with the mix impact generated by the larger number of Gas Turbine shipments during the quarter, combined to lower our gross margin by 280 basis points.