Donaldson Company, Inc. (DCI)

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Donaldson (DCI)

Q4 2013 Earnings Call

August 27, 2013 10:00 am ET

Executives

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

Analysts

Hamzah Mazari - Crédit Suisse AG, Research Division

Eli S. Lustgarten - Longbow Research LLC

Laurence Alexander - Jefferies LLC, 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.

Nicholas V. Prendergast - BB&T Capital Markets, Research Division

Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Donaldson's Fourth Quarter and Year-end Conference Call. [Operator Instructions] This conference is being recorded today, Tuesday, August 27, 2013. I would now like to turn the conference over to Mr. Rich Sheffer. Please go ahead, sir.

Richard Sheffer

Thank you, Lara, and welcome, everyone, to Donaldson's Fiscal 2013 Fourth 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 fourth quarter earnings and our initial outlook for fiscal '14.

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 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. I'd like to start with a few thoughts to summarize our release. Our fourth quarter represented a solid finish to our year. We are very pleased with our operating performance based on key metrics, including our gross and operating margins. Our strong free cash flow in the quarter brought our full year cash flow -- free cash flow to $222 million, our second best year ever. And finally, our earnings per share of $0.48 represented a fourth quarter record.

Now, like all industrial companies, we dealt with a wide mixture of economic conditions in our end markets during the quarter, ranging from strong, recovering and still weak. As a result of leveraging growth opportunities where we could, and by aggressively focusing on those aspects of our business that we control, the Donaldson team continues to operate our company very well.

Finally, in addition to running our company for today's uncertain conditions, we remain committed to our long-term growth and financial objectives, and have and are continuing to invest in support of our strategic growth plan.

Now I'd like to review some of the key details in our fourth quarter. And I'll begin by discussing our sales results, and then Jim will discuss our operating performance. After Jim, I'll conclude our presentation by discussing our outlook for fiscal '14.

So starting with our fourth quarter sales, measured in local currency, Engine Products sales posted a small increase year-over-year. Within Engine Products, our OEM businesses were weak in the Americas and Asia, decreasing 21% and 7% versus the prior year, respectively. But we had a surprising rebound in Europe, with sales increasing 9% in local currency. Our strong OEM results in Europe were helped by the launch of a new emissions platform for a European-based ag customer.

As we look at our OEM end markets around the world, conditions varied a lot. In the ag equipment market, especially for large farm equipment, business remains strong globally. However, our other OEM end markets had a weaker quarter, with our on-road truck decreasing 14% from last year. Our off-road equipment sales decreased 3% due primarily to the construction and mining markets. As reported elsewhere, during the quarter, many of our construction, mining and heavy truck OEM customers continue to schedule their production levels below last year to reflect their current end-user demand for new equipment while also continuing to work down their own finished equipment inventory levels.

Now fortunately, we saw better conditions in our Engine Aftermarket, where we supply replacement filters and exhaust products through both our OEM and independent distribution channels. Our Engine Aftermarket sales increased 3% in the quarter, with strong sales in both the Americas and Europe. We attribute our growth here to the combination of improving equipment utilization in the field, the absence of any more significant channel inventory reductions and our own market growth initiatives.

Now I'll switch and talk about our Industrial Products reporting segment. Our Gas Turbine sales in the quarter were $50 million, which represented a good finish as this business achieved a new full year record with revenues of $233 million.

In our Industrial Filtration Solutions business, our sales were down 6% in local currency, as the continuing weak capital spending environment reduced demand for our industrial dust collectors and compressed air filtration systems. We attribute this current weakness in our dust collection and compressed air equipment sales to the ongoing general economic uncertainty, which has resulted in the continued pullback in new plant investments by end users. Fortunately, we were able to offset -- to at least partially offset this new equipment decline with very good growth in our replacement filter sales, which were up 8%.

And finally, in our Special Applications business, our sales decreased 14% for 2 reasons: first, the continued weakness in the PC-related hard disk drive market drove a demand -- a decrease in demand for our disk drive filters; and second, the same weakness in industrial plant investments I mentioned a minute ago drove a decrease for our membrane products.

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