Donaldson Company, Inc. (DCI)

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Donaldson (DCI)

Q4 2011 Earnings Call

August 29, 2011 10:00 am ET

Executives

William Cook - Executive Chairman, Chief Executive Officer and President

Richard Sheffer - Director of Investor Relations and Assistant Treasurer

James Shaw - Principal Accounting Officer and Controller

Analysts

Hamzah Mazari - Crédit Suisse AG

Richard Eastman - Robert W. Baird & Co. Incorporated

Gary Farber - CL King & Associates, Inc.

Thomas Brinkmann

Kevin Maczka - BB&T Capital Markets

Brian Drab - William Blair & Company L.L.C.

Laurence Alexander - Jefferies & Company, Inc.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Donaldson Company, Inc. Earnings Conference Call. My name is Jasmine, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today's conference to Mr. Rich Sheffer, Director of Investor Relations for the Donaldson Company. You may proceed.

Richard Sheffer

Good morning, and welcome to Donaldson's fiscal 2011 fourth quarter conference call and webcast. Following this brief introduction, Bill Cook, our Chairman, President and CEO; and Jim Shaw, our Corporate Controller, will review our record fourth quarter earnings and initial outlook for fiscal '12. They will be presenting their comments live from the New York Stock Exchange.

Next, I will 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 Cook

Thanks, Rich, and good morning, everyone. It is a great pleasure to be here at the New York Stock Exchange during our earnings webcast. With me here in New York today are Jim Shaw, our Corporate Controller; and Amy Becker, our Assistant General Counsel. I also want to remind everyone that 3 of our fellow employees will be doing the closing ceremony here at the Exchange today. Jennifer Zhang from Wuxi, China; Bart Vandenplas from Belgium; and Kathleen Flanagan from our Frankfort, Indiana, plant will be representing our 11,000 fellow employees around the world in celebration of both our record year and our updated strategy.

Okay, now back to our earnings call. As Rich mentioned, we issued our fourth quarter earnings release earlier this morning, and we're very pleased to report that we had a very good fourth quarter, as we set records for both quarterly sales and earnings per share. This also puts the finishing touch on a record fiscal '11 in which we had record sales of $2.3 billion and reported record gross and operating margins of 35.5% and 13.7%, respectively, which resulted in record net earnings of $225 million. And finally, we delivered record EPS of $2.87 per share. While clearly, fiscal '11 was a year with strong sales growth in most of our end markets and solid execution in our manufacturing plants and distribution centers, it may be less obvious to you that we also made key long-term strategic investments during the year. These investments will benefit us in the years to come and help us on our journey to build Donaldson into a $3 billion filter company.

But first, let's briefly review our fourth quarter results. Fourth quarter sales were a record $625 million, up 21% over the past year. While foreign currency translation was a help in the quarter, accounting for nearly 8% of this year-over-year increase, our organic sales growth was 13%. The combination of our 21% sales growth and a 14.4% operating margin delivered a net income increase of 29% and an EPS record of $0.84 in the quarter. In our Engine Products segment, local currency sales increased 18% over the prior year. Our Engine Aftermarket or Replacement Filter sales were up 12%, as utilization rates of existing truck and Off-Road equipment fleets continue to improve. We have also in our Aftermarket continued to add new distribution, more part numbers to our product line and new customers. Consequently, we believe that a portion of our sales growth is a result of increased market share. This is clearly evident in Asia, where Engine Aftermarket sales were up 27% in the quarter.

Our 2 Engine OEM businesses were also both up strongly in local currency terms. Off-Road Product sales were up 30%, as the agricultural, construction and mining end markets we serve have continued to strengthen and increased demand for our customers' new equipment upon which our filtration systems are installed. On-Road Product sales were up 51%, as North American and European new heavy truck build rates have continued rebounding.

Now switching to our Industrial Products segments. Local currency sales increased 7%. Revenues from our Industrial Filtration Solutions product increased 14%, as sales of new dust collection equipment continued to grow in the quarter. In addition, our sales of replacement filters for those dust collection systems already in the field have remained very strong. Although our Gas Turbine sales decreased 9% in the quarter, it does now appear to us that this late-cycle business has bottomed out and should start improving soon.

And finally, sales of our Special Application Products increased 3% in the quarter, as rapidly growing sales from our newer product lines, which serve the semiconductor, imaging and venting end markets, offset slower Disk Drive Filter sales.

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