Donaldson Company, Inc. (DCI)

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Donaldson Co Inc. (DCI)

Bank of America Merrill Lynch Global Industrials & EU Autos Conference 2013

March 19, 2013 11:30 am ET

Executives

William M. Cook - Chairman of the Board, Chief Executive Officer and President

Analysts

Andrew Obin - BofA Merrill Lynch, Research Division

Presentation

Andrew Obin - BofA Merrill Lynch, Research Division

Good afternoon. Andrew Obin, BofA Merrill Lynch's Multi Industrials and E&C analyst. We are starting, the end of the day is near, so that's good. But with us we have Donaldson, global manufacturer of filtration products. I guess I've covered the company for many, many years, and I have to say it really is one of my favorite companies to cover. So I'm very pleased that I get to cover it even in my new capacity, very excited about that. So with us we have Bill Cook, the company's Chairman, President and CEO; and we also have Wim Vermeersch, company's Vice President of Europe and Middle East.

And with that, I'll let Bill speak. Thank you very much for being here.

William M. Cook

Great. Thanks, Andrew. Thank you all for your time and attention. I'm not sure if he says that to all of his companies about being the favorites or not, but I do appreciate that. So Arnold, does he say that to everybody else, too?

Unknown Attendee

No.

William M. Cook

No? Okay, right. Well, anyway, it's a pleasure to be with you all, and we'll have some time for questions and answers at the end. And also, I put copies of the slides outside if you're interested at the end to pick those up.

So before I get started, my general counsel makes sure I always have to say this that there are forward-looking statements in this presentation, so the actual events may be different than what we present today.

So who is Donaldson Company? We are a filtration company. We've been in business for almost 100 years. And really, what we aim to do is to be the technology leader in our markets and then use our technology to build out a diversified portfolio of businesses around the world. We weren't always like that. Up until about 25 years ago, Donaldson Company was mostly in North America, mostly focused on heavy trucks and off-road equipment and mostly first-fit. And what happened in the early '80s, and this is isn't a picture of me, I was never this cute. But I just want to pull your attention to the blackboard, we've been using this slide because it really represents what Donaldson did in the middle '80s. In '83, some of us probably remember there was a twin recession, and Donaldson Company lost money for the first time since the Great Depression. Frank Donaldson, who is our Chairman, and his CEO at the time decided to change the model of the company. So they said, mostly North America, mostly heavy equipment, mostly first-fit. Let's diversify the company, make it a more stable platform for both the customers, the employees and the shareholders. And so that's the journey the new Donaldson has really been in the last 25 years in terms of this journey of growth through diversification.

So what do we do today? We have 2 reporting segments, the first is Engine Products, and this is really part of where we started back almost 100 years ago, but we've expanded it. So today in the Engine Products, we sell air filters, liquid filters and exhaust and emission products. So the way to think about Donaldson in this area is we clean the air going into an engine, diesel engine; we clean the liquids around it, the fuel, the oil and hydraulic systems; and we treat the gas that's coming out of it for particulate or noise.

And this would be some of the typical applications that you would see. So we're on-road heavy trucks, off-road construction, ag, mining, defense. And then we do have an Aerospace and Defense business, which is both military vehicles, and the aerospace part is both commercial and civil aviation.

The other reporting segment is Industrial Products, and these are the newer businesses in Donaldson, the ones that we've been really focused at growing to help provide that diversification. And there's a couple of different product lines or businesses in here that I'll cover. So the first is Industrial Filtration Systems. So this is all types of manufacturing products found in a manufacturing plant. So this is an industrial dust collector that would clean the air in a plant. So it might collect welding fume, it might grinding particulate, particles from a woodworking operation. Whenever there's a particulate fume or mist that's generated that has to be cleaned up, that's what we're doing there.

The largest filters we manufacture are for gas turbines. This is probably the size of about a 4-storey building. You can see a stairs there on the platform. This is the filter. The turbine is actually back here. So we design and fabricate those filter houses, and in there could be hundreds or, in some cases, thousands of replacement filters.

And the smallest filters we manufacture are for hard disk drives. So in a laptop, there's a hard disk drive or on a server PC, and there's 2 or 3 filters in there cleaning the air in the drive.

You might be thinking, what's the common thread between these 3? It really gets back to the technology. We invest centrally in our R&D, and then we find ways of leveraging that across as many different markets as we can looking for growth and diversification as we do that. So even though these are very different, the -- some of the base technology is the same, how they capture and retain particles. And we can leverage that.

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