Donaldson Company, Inc. (DCI)

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Donaldson Company, Inc. (DCI)

Q1 2012 Earnings Call

November 17, 2011 10:00 AM ET


Rich Sheffer – Investor Relations

Bill Cook – Chairman, President and CEO

Jim Shaw – Vice President and CFO


Hamzah Mazari – Credit Suisse

Kevin Maczka – BB&T Capital Markets

Charlie Brady – BMO Capital Markets

Eli Lustgarten – Longbow Securities

Jeff Farmer – Jefferies & Company

Rob Mason – Analyst



Good day, ladies and gentlemen, and thank you for standing by. Welcome to Donaldson’s First Quarter Fiscal Year 2012 Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for question. (Operator Instructions)

This conference is being recorded today, Thursday, November 17, 2011. And I’d now like to turn the conference over to Mr. Rich Sheffer. Please go ahead, sir.

Rich Sheffer

Thank you, Anisa. And welcome everyone to Donaldson’s fiscal 2012 first 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 record first quarter earnings and our updated outlook for fiscal ‘12.

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?

Bill Cook

Thanks, Rich, and good morning, everyone. As you’ve probably already seen in the earnings release we’ve issued earlier this morning, we are very pleased to report that we had a very good first quarter. We set first quarter record for sales and all-time records for both operating margin and earnings per share. This continues a streak of records that began in last year’s second quarter.

I will now take a few minutes to briefly review our first quarter results. Our sales were $608 million, up 13% year-over-year. While we did have some help from foreign currency translation in the quarter accounting for about 2.5% of the increase.

It’s important to note that organic sales growth excluding the currency impact was 11%. The combination of our 11% organic sales growth and a 14.8% operating margin delivered a net income increase of 29% and an EPS record of $0.90 per share.

As you know, we have two reporting segments and I’ll now cover a few highlights for each. In our Engine Products segment, local currency sales increased 16% over last year. Our Engine Aftermarket or replacement filter business sales were up 10% as utilization rates of existing truck and Off-Road equipment fleets continued to improve.

We’ve also continued to add new distributors and almost -- and part number -- and also added almost 500 part numbers to our product offering. In fact, we added 58 new distributors during the period August and September alone, and most of these in emerging markets. Consequently, we believe that a portion of our sales growth in the Aftermarket is a result of our increased market share.

Our two OEM -- engine OEM businesses were also both up strongly in local currency terms. Our Off-Road Product sales were up 26% as the agricultural, construction and mining end markets we serve have continued to strengthen and increased demand for our customer’s new equipment upon which our filtration systems are installed.

On-Road product sales were up 43% as North American new heavy truck build rates at our customers have continued rebounding.

Switching to our Industrial Product segment, local currency sales increased 3%. Revenues from our industrial filtration solutions products increased 9% as sales of our Torit dust collection equipment continued to grow in the quarter.

In addition, our sales replacement filters for the -- those systems already installed in the field have remained strong.

Sales of our Special Applications Products decreased 9% as the rapidly growing sales from our newer product lines serving the membrane and venting end markets were offset by the flooding in Thailand and its impact on the disk drive market.

Now let me take a minute to further explain this situation in a little more detail. As many of you know, we have two clean room production facilities where we manufactured our disk drive filters.

One is in Thailand and the other in China. Our clean room in Thailand is located southeast of Bangkok and outside the flood plain so it has remained fortunately high and dry during the floods that began ravaging a large portion of Thailand in October.

However, many of our disk drive customers and many of their other suppliers in Thailand were or still are currently underwater. While these companies are looking to shift production to other facilities as rapidly as they can, there are severe supply shortages of some critical drive components that will cause disk drive industry volumes to contract by an estimated 40% over the next couple of months.

It is estimated that it will take months for our customers to fully bring their production capacity and supply chains back online. In response to these conditions that our customers we’ve adjusted our production schedules in both Thai and Chinese facilities.

It’s important to note that while the disk drive filter business is a very important business to us, as a result of our aggressive diversification efforts over the past 10 years, it now represents about 5% of our total sales, so it’s not a major part of our total company.

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