Donaldson Company Earnings Call INSIGHTS: Engine Guidance, OEM Truck Build Rate

On Monday, Donaldson Company, Inc. (NYSE:DCI) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Engine Guidance

Kevin Maczka – BB&T Capital Markets: Bill first question on the engine guidance, strong year this year up 9%, but we exited the year flat in the fourth quarter. So my question is given what you said about truck environment and the declining OEM build rates I know we have more emerging market expansion, we have new products, but what gives you the comfort that we can accelerate to as much 10% for the year when things seem to be moderating and we exited the year flat?

William M. Cook – Chairman, President and CEO: Kevin, part of it is, take a look at China, we are forecasting for China to begin recovering in the fourth quarter might have been sort of the bottom for us. So part of it is our business in Asia and it’s not just our business in China, but how it impacts the rest of Asia in terms of South Korea and Japan. Then I think a lot of it is covered — you touched on in terms of our emerging market growth objectives in terms of more distribution, more product line expansion will help us in the aftermarket. So, those are a couple of the factors. We’re also seeing the ag equipment market remaining good and construction absent mining also remaining good. So, the heavy truck numbers are the ones that we’ve all been looking at in the last couple of weeks and as I noted they are projecting builds to be down in our fiscal year by about 8%, but that’s still from pretty good levels from where we were up in fiscal ’12. So, we put all that together Kevin in our guidance and so some couple of minuses and some pluses as well.

Kevin Maczka – BB&T Capital Markets: So you have a minus assumed in your for the OEM truck build portion of the business?

William M. Cook – Chairman, President and CEO: We do, yes.

Kevin Maczka – BB&T Capital Markets: On the ERP if I can shift gears and just ask a question there, that sometimes makes investors nervous for good reason when they hear about ERP rollout globally. We did recently see another big filtration company had some issues with that. Can you just talk about the scope of this project and kind of what you are doing to prepare for it to hopefully avoid some issues that other companies have had?

William M. Cook – Chairman, President and CEO: Yeah, it’s a good question Kevin, and I know there’s some sensitivity about ERP as mentioned. We are taking a very cautious and planful approach. This is a (four-year) project, so it’s not a revolutionary change, it’s an evolutionary change. We feel this is critical to supporting our strategic growth goals when we – at a $5 billion Company, our goal to be that by fiscal ’21 that we need to be acting as a global Company with really on one system. So it’s in support of that, but it’s a (four-year) project, so it’s very planful in terms of how we are going to execute it. We are going to not jeopardize the business as we do this, but we are going to do it in conjunction with running the business on a day-to-day basis.

OEM Truck Build Rate

Charles Brady – BMO Capital Markets: Just on the Engine Products growth question and the OEM truck build rate, I know you said you are factoring the forecast not to be down, but I’m trying to gauge, you expecting that to be down to the same degree as kind of industry build rate or are you picking up – is there some share build in there? Also, how much of that fiscal ’13 Engine Products growth is coming from having those liquid programs starting to hit the revenue line?

William M. Cook – Chairman, President and CEO: Charlie, to the first question, we factored in, as I mentioned to Kevin, the recent forecast in terms of the build rate production. We feel that we are probably getting a little bit of share during fiscal ’13, additional share to offset that, but mostly it’s some downward pressure due to build rates. On the liquid filtration, we haven’t quantified publicly how much of that’s going to be in fiscal ’13. It’s a little bit, but it is additive, so that also helps offset the build rate reductions.

Charles Brady – BMO Capital Markets: Then on your engine growth forecast, again first half versus second half, given your commentary and what you said about Q1 and the comparison there, it sounds like you’d expect second half more growth in second half versus first half, is that correct?

William M. Cook – Chairman, President and CEO: Yes we do and we talk to Jim and I both talked about the first quarter and we have the currency headwinds strong as there if you’re looking at this as dollars, but the, and then the second quarter is traditionally one of our weaker ones just with the holidays, so certainly this year for the engine side, we’re looking for a stronger second half versus first half.

Charles Brady – BMO Capital Markets: Just can you give us what the share count is, the total share offset at the end of the quarter rather than just the average for the quarter?

William M. Cook – Chairman, President and CEO: We’re just looking it up, as I speak.