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Donaldson Company, Inc. (DCI)
F2Q2014 Results Earnings Conference Call
February 21, 2014, 10:00 am ET
Rich Sheffer - Director of Investor Relations and Assistant Treasurer
Bill Cook - Chairman of the Board, President, Chief Executive Officer
Jim Shaw - Chief Financial Officer, Vice President
Tod Carpenter - Chief Operating Officer, Director
Laurence Alexander - Jefferies
Hamzah Mazari - Credit Suisse
Eli Lustgarten - Longbow Research
Charlie Brady - BMO Capital Markets
Kevin Maczka - BB&T Capital Markets
Andrew Obin - Bank of America Merrill Lynch
Jim Giannakouros - Oppenheimer & Company
Richard Eastman - Robert W Baird
Brian Drab - William Blair
Brian Sponheimer - Gabelli & Company
Stanley Elliott - Stifel, Nicolaus
Previous Statements by DCI
» Donaldson Management Discusses Q1 2014 Results - Earnings Call Transcript
» Donaldson Management Discusses Q4 2013 Results - Earnings Call Transcript
» Donaldson Management Discusses Q3 2013 Results - Earnings Call Transcript
I would now like to turn the presentation over to Rich Sheffer. Please go ahead, sir.
Thank you, Craig, and welcome, everyone to Donaldson's fiscal 2014 second quarter earnings conference call and webcast. Following this brief introduction, Bill Cook, our Chief Executive Officer, Tod Carpenter, our Chief Operating Officer and Jim Shaw, Chief Financial Officer will review our second quarter earnings and our updated outlook for the balance of 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 would like to turn the call over to Bill Cook. Bill?
Thanks, Rich, and good morning, everyone. Before we talk through the details of our second quarter results and our outlook, I would like to offer some summary comments.
First, despite the ongoing uncertainty in some of our end-markets and regions, we are very pleased with delivered record earnings this quarter, and we did this despite slightly lower sales versus last year by focusing on our Continuous Improvement initiatives, which delivered an operating margin 50 basis points better. This, I believe, speaks to how well our company is operating and especially how well it's positioned for the future. Our sales decline year-over-year is a function of two factors, some foreign currency headwinds, the Japanese Yen, the Aussie dollar and the Brazilian Real but mostly due to the year-over-year decline in our gas turbine sales which we had foreseen after last year's record second quarter.
My second point is that many of our other businesses have local currency sales increases year-over-year, as well as we did in many of our regions. This speaks to the benefits of the diversification model we built into our company over the past 20 years and which has allowed us to deliver these results.
I would now like to turn the call over to Tod for a review of our second quarter sales. Tod?
Thanks, Bill and good morning, everyone. Our reported sales decreased 2.4% from last year's second quarter. 1.5% of this decrease came from foreign currency translation, particularly from the weakening of the emerging market currencies against the U.S. dollar. Measured in local currency, our total sales decreased a little less than 1% from last year. As a reminder, you can find a detailed analysis of currency translation by business unit and region on the Investor Relations homepage of our website. The rest of this review will discuss local currency results.
Within our Engine Products segment, our OEM businesses in the Americas decreased 7%, however our other major regions delivered OEM sales increases. Our European OEM businesses were up 7%, as we benefited from the continued growth in agricultural equipment market and a pickup in truck sales in advance of the upcoming Euro VI emission standards implementations. Our Asia-Pacific OEM sales increased 10% in the quarter. Our off-road sales improved in Japan and in China as OEM customers have now mostly completed their inventory level adjustments.
We continue to see improving 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 11% in the quarter with strong sales in all of our major regions. We attribute this growth to the combination of improving equipment utilization in the field, the absence of any more significant customer channel inventory reduction and our market growth initiatives. Aftermarket is our earliest cycle end-market and improvements we have seen over the last couple of quarters provide some confidence that conditions in our end-markets have sustainably improved.
Finishing my review of our Engine Products business, our aerospace and defense sales increased 5% as the slowdown in defense spending for ground-based military equipment continued in the quarter.
Sales in our Industrial Products segment decreased 12%. In our Industrial Filtration Solutions business, our sales increased 1% as solid levels of manufacturing activity drove record demand for replacement filters in our Torit dust collectors and our compressed air systems. This Aftermarket growth was enough to offset the continuing weak manufacturing capital spending levels, which has reduced demand for new industrial dust collectors.
In our Special Applications business, our sales increased 7% on continued growth of our integrated venting products, an increase in disk drive filter sales and an upturn in our Semicon imaging product sales. Offsetting these increases was the anticipated decline in our gas turbine business, which decreased 50% from last year's record quarter.