Donaldson Company, Inc. (DCI)

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Donaldson Company, Inc. (DCI)

F2Q12 Earnings Call

February 22, 2012 10:00 AM ET

Executives

Rich Sheffer – Director, IR

Bill Cook – Chairman, President and CEO

Jim Shaw – VP and CFO

Analysts

Hamzah Mazari – Credit Suisse

Charles Brady – BMO Capital Markets

Kevin Maczka – BB&T

Laurence Alexander – Jefferies

Rick Eastman – Robert W. Baird

Brian Sponheimer – Gabelli & Company

Eli Lustgarten – Longbow Securities

Presentation

Operator

Welcome to the (inaudible) FY2012 Q2 Conference Call on February 22, 2012. Throughout today’s reports presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions.

(Operator Instructions).

I’ll now hand the conference over to Rich Sheffer. Please go ahead, sir.

Rich Sheffer

Good morning, and welcome to Donaldson’s fiscal 2012 second quarter 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 second quarter earnings and our updated outlook for fiscal 2012.

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 seen in the press release we issued earlier this morning, we had a very good quarter as we set second quarter records for sales, operating margin, earnings per share. In fact, this was our fifth consecutive quarter posting new records for all three of these metrics.

Now I’ll take a few minutes to review our results.

Our second quarter sales were $581 million, up 8% year over year. Excluding the negative impact of foreign currency translation, we were very pleased with our organic sales growth of 9%. The combination of organic sales growth of 9% and a 12.9% operating margin helped to deliver a net income increase of 21%, an EPS increase of 25%, an EPS record of $0.70 per share. As you know, we have two reporting segments and I will cover the highlights for each.

First, in our Engine Product segment, excluding the impact of foreign exchange, our local currency sales increased 13% over last year. The primary drivers of this 13% year-over-year increase were our OEM businesses, On-Road and Off-Road, which were up 36% and 18%, respectively. This 36% increase in our On-Road product sales was primarily due to the significant rebound in North American heavy-truck build rates at our customers.

For example, for the past calendar year, Class 8 heavy-truck builds in North America were 256,000, a 66% increase over 2010. Our Off-Road product sales were up 18% as the agricultural, construction, and mining end markets we serve have continued to strengthen, thereby increasing the demand for our customers’ new equipment, upon which our new (inaudible) filtration systems are installed.

We also had help from our Engine aftermarket business as our replacement filter sales were up 9% as the utilization rates of existing truck and off-road equipment fleets have continued to improve. We also continue to expand our distribution networks and product line. In fact, since our last call, we have added another 75 distributors and nearly 800 part numbers to our product offering with the majority of these adds in our emerging market businesses.

Now switching to our Industrial Product segment, our local currency sales increased 2% as we experienced a wide range of business conditions. Starting first in our Industrial Filtration Solutions business, revenues were up 8% as sales of our new Torit dust collection equipment and our sales of replacement filters for those systems already in the field have remained strong.

Sales in Gas Turbine were up 6% in the quarter, driven mainly by strong replacement filter sales. I should note that we also had a number of major new systems in process during the quarter and are now very confident of a strong second half for Gas Turbine System sales, which I will cover in more detail in a few minutes.

And finally, sales in our Special Applications Products decreased 15% as the solid sales growth from our newer product line serving the membrane, semi-con and venting markets was offset by the flooding in Thailand and its impact on our hard disk drive customers. We talked a little bit about this in our last call, and I wanted to give you an update on this situation. So let me explain a little bit about what happened in the hard disk drive market.

As you know and you may recall, we have two cleanroom production facilities where we manufacture our disk drive filters, one in Thailand and the other in China. Our cleanroom in Thailand is located southeast of Bangkok and is outside of the flood plain. So it remained high and dry during the floods that began ravaging a large portion of Thailand in October.

However, several of our hard disk drive customers’ facilities and many of their other suppliers in Thailand were under water for a portion of the period from October until early December. As a result, there were severe supply shortages of critical components that caused disk drive industry volumes to contract by about 40% during this first part of our second quarter.

Read the rest of this transcript for free on seekingalpha.com