Donaldson Company, Inc. (DCI) Q3 2008 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you very much for standing by and welcome to the Donaldson Third Quarter Fiscal Year 2008 Conference Call. At this time, all participants are in a listen-only mode. And following today's presentation, instructions will be given for the question-and-answer session. [Operator Instructions]. As a reminder this conference is being recorded Wednesday, May 28, 2008. I will now like to turn the call over to Rich Sheffer. Please go ahead.

Thanks Mike, and welcome everybody to Donaldson's Third Quarter Conference Call and webcast. I am Rich Sheffer Donaldson's Assistant Treasurer and Director of Investor Relations. Following my brief introduction Tom VerHage, our Vice President and CFO will give us a brief review of our record third quarter operating results. Tom will then turn the call over Bill Cook, our Chairman, President, and CEO who will discuss our positive outlook for the balance of fiscal 2008 and the business conditions shaping that view. Following Bill's remarks, we'll open up the call to questions. Please note that we will not be providing fiscal 2009 guidance today. We are currently working on next year's operating plan and we'll provide those details on our fourth quarter call. Before I turn the call over to Tom, 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 introduce Tom VerHage. Tom?

Well thanks Rich, and good morning everyone. Well, as you all saw in our press release late yesterday, we reported another quarter of record earnings, thanks to the continued broad base strength in our sales growth. Each of our three regions and nearly all of our major product lines contributed to a 21% sales growth with the impact of stronger foreign currencies being 7.6%. Our bottom-line was also helped by a net tax benefit of $4 million. Both our gross margin and operating income margins as a percent of sales improved over last year's margins. Last year during the third quarter webcast, we discussed the reasons for our lower than expected margins, which included some unusually low margins on a number of large projects in the gas turbine and industrial filtration solutions product lines. Increased distribution and logistics costs and an increase in plant start-up and restructuring costs related to a new dust collector plant in the Czech Republic. You will recall from our discussion last quarter that we encountered inefficiencies and delays in processing customer orders after we went live with a new house management system at our distribution center in Indiana. These inefficiencies led to a cost of $2.1 million in the second quarter and a deferral of sales of approximately $5.5 million. So, how are we doing on this implementation. Well the system is working. It is stable. We have caught up on our late shipments and we believe we are on track to eliminate the incremental costs resulting from this implementation by the end of our fiscal year. Incremental costs associated with these efforts were $3.6 million in the third quarter. And we are projecting another $2 million to $3 million of such costs in the fourth quarter. But more importantly going forward, we see opportunities to optimize the benefits that this and related systems will provide in streamlining our distribution and logistics processes. As all of you are no doubt aware, commodity costs in nearly all categories are increasing rapidly on a global basis. Steel and petroleum based commodities are at the top of our list of cost pressures. The good news is that for the most part we are able to avoid a significant impact in the third quarter through intense negotiations with suppliers and our internal cost reduction efforts. But the bad news is that some impact from these increases is inevitable. We are taking pricing actions in many of our product groups, and we will continue to discuss recovery of these costs from our customers. In addition, we remained focused on our own product cost reduction efforts in terms of the many uncertainties of when we will experience these cost increases, the impact of our cost reduction efforts and when we may achieve recovery through customer price increases we are not providing a specific estimate of this impact for the fourth quarter. However, we have not changed our annual margin outlook which is for gross margin to exceed 32% and operating expense to be in the 21% range. If we achieve these targets our operating margin should a minimum of 11%. We expect our operating income to grow by 17% to 19% this year compared to last year's $211 million. Our tax rate for the quarter was 25.6% compared to 16.2% last year. As I mentioned earlier we recorded a net tax benefit of $4 million due primarily to the expiration of a statute of limitations on matters previously reserved. Last year in the third quarter we had an even larger benefit of $7.8 million related to the resolution of open foreign and state tax positions, the expiration of the statute of limitations and a dividend from a foreign subsidiary. Our updated tax rate outlook range is now 28% to 31%. Interest expense for the fourth quarter should be relatively flat compared to last year's fourth quarter. We have narrowed our CapEx outlook to be in the $65 million to $70 million range from previous $60 million to $70 million. And our projection for depreciation and amortization for the year is a range of $55 million to $58 million. In addition, we have narrowed our free cash flow outlook to a range of $75 million to $100 million. So when you add it all up, thanks in large part to the lower tax rate in the third quarter we have increased our EPS outlook to a range of $2.08 to $2.13 per share. Now with that I will pass it over to Bill who will provide some more background on our outlook, Bill?

Good morning everyone and thanks Tom. First, I'd like to start with some of our third quarter highlights. As Tom mentioned our sales growth for the third quarter was up 21% and excluding the positive lift we had from foreign exchange it was over 13%. By region local currency sales were up 17% in NAFTA, 11% in Europe and 9% in Asia Pacific, all-in-all a very good revenue quarter. As all of you know we have two reporting segments engine and industrial and I would like to give some of their individual highlights from the quarter, and will I start first with our engine segment and the European part of that business. Our European engine, OE, off-road and on-road businesses both grew at 15% in local currency as a production build rates of new equipment by our customers continues to grow. In addition, we continue to gain market share as we have won new customers and equipment programs. Our European engine aftermarket business grew by 6% to local currency, aftermarket growth in the European emerging markets has been one of our key growth priorities as we continue to expand our distribution coverage throughout this region. Now switching to Asia, our engine off-road and aftermarket business also had strong quarters up 28% and 9% respectively in local currency. Off-road production by our customers is strong across Asia including in Japan, China, India and Australia. As the construction mining and ag end markets there remain in a growth mode. And in NAFTA our engine business is up 11%, commercial off-road equipment was particularly good in the quarter due especially the strong ag, heavy construction and mining equipment production by our customers. In addition, our filtration sales for military equipment were up on continued strong demand particularly for filters for new MRAP vehicles and replacement filters for the existing military equipment in the field that needs to be overhauled. In our NAFTA engine aftermarket business truck ton miles remain below last year's levels, as the economy has slowed. Equipment utilization rates remain mixed better for large equipment and ag, but lower for small equipment and trucks. Now switching to our industrial segment, our Industrial Filtration Solutions or IFS business had a good quarter, up 12% in Europe in local currency and up 21% in NAFTA. In Europe, we are seeing continued solid demand for IFS products in Western and Central Europe, although conditions in the U.K. have recently weakened. Our NAFTA sales were strong for both new IFS equipment and replacement filters. In addition, our recent acquisition of LMC West in California contributed about 5% of the 21% sales increase in NAFTA. Our gas turbine business had their best revenue quarter, since fiscal 2002 with shipments of $59 million. This represented a 43% sales increase over the same quarter last year. The gas turbine markets we serve continue to enjoy an up cycle. Growth has been good globally in both the power generation and oil and gas markets, and is expected to continue for the next couple of years. And finally, our special application sales were good again in Q3 up 13% in local currency as our sales of disk drive filters and PTFE membrane filtration products were strong. That's some of the third quarter highlights. Now I want to switch into our outlook for the balance of the year. We're nearly a month into a fourth quarter, so we have pretty good visibility what's going to happen and the bottom-line is our sales outlook remain good for balance of fiscal 2008. As noted in our press release, we once again increased our full year sales expectations for both of our reporting segments. Our full year engine filtration business sales were previously forecast to be up between 10% and 12%, and now are expected to up between 11% and 13%. Within our engine business the international end markets remained particularly strong. Both construction and mining equipment production rates by our customers remain although in NAFTA the production rates for smaller equipment used primarily for residential construction remains soft. We see our NAFTA heavy truck related businesses to be up slightly in our Q4 as current new production... new truck production our customers are now slightly higher rates this time last year. Our customers' agriculture equipment production rates are expected to remain good. Latest public reports forecast both crop prices and farm incomes to be up, which is positive for the AG equipment market. And finally, we expect our aftermarket or replacement filter sales to continue strong growth internationally, as we focus on continuing to develop new markets. Now switching gears to talk about the outlook for our industrial segment. In our industrial businesses, we see full year sales higher in all three major product groups. In total our full year industrial businesses had been previously forecasted to be up between 14% and 16%, and now we are projecting them to be up between 17% and 19% for the year. Within our IFS business which includes our industrial dust collectors and compressed air and gas filters, we expect that our current strong shipment patterns will continue through the end of the year, and as a result we expect the full year sales growth of 15% to 20%. In our gas turbine filtration business, we see also a good finish to the year. Based on the shipments schedule for the orders already in process and as a result, we have increased our full year outlook to 25% to 30% sales growth. And finally, we've increased our expectations for our sales... for our specialty applications business. We now expect sales to be up between 15% and 20% versus our prior outlook of 10% to 15%, and this continues to be led by the sales of our hard disk drive filters and PTFE membrane filtration products. I would like to give you an update on two of our major growth initiatives that we've talked about in the past and the first is PowerCore. We continue to be very successful with this breakthrough air filtration technology. We have now won a 124 equipment platforms with our OEM customers with an additional five wins this past quarter. 86 of this total 124 wins are already in production and another 11 are expected to go into production during the balance of this fiscal year. Our PowerCore sales were up 47% in the quarter to $16 million as both the first fifth and replacement filer sales increased over 45%. As we look forward we still have another 55 platforms in the proposal stage with our OEM customers. In addition, we are happy to report that we have raised the bar once again with our introduction at the Conexpo Show in March of PowerCore G2. This new technology allows us to either further reduce the system size or enhance the performance for our customers. We've already won six platforms with G2 three on-road and three off-road and with the new G2 technology 30 of the 55 platforms in the proposal stage I mentioned a minute ago we're proposing the G2 technology. And finally, one more PowerCore milestone I would like to announce is that during our third quarter we entered into our first license agreement with another filter company, granting them a limited license to utilize certain of our patents related to our PowerCore technology. We believe that this is further validation of the uniqueness of our PowerCore technology. The second major growth initiative I would like to cover is our expansion projects, as Tom mentioned we will spend between $65 million and $70 million on CapEx this year. In addition to supporting numerous process improvement and cost reduction projects around the world, we also have four major expansion projects underway to support our continued growth. The first is that we are in the final stages of completing a major expansion of our existing engine air filter plant in the Czech Republic. We expect to be in full production with our expanded capacity before the end of our fiscal year. The second project relates to Brazil and I visited our new operation in Brazil last month and I am very pleased to report that the start-up of our air filtration manufacturing line is proceeding very well and we expect to bring this online in the coming months. The third project is that we are expanding our existing air filtration plant in India and expect this to be completed within the year. This represents essentially a tripling of our current faculty and is necessary to support the continued growth of our customers in India. And finally, as mentioned in my comments our disk drive filter business is having another very good year. And to support this business we are expanding our disk drive filter plant in Thailand. We expect to have that additional clean room manufacturing capacity available later this calendar year. Now before we open the call up to your questions I would like to offer a few summary comments. We have completed the first the nine months of fiscal 2008 with strong sales growth and a 10.9% operating margin. Our sales outlook for the balance of the year is good and we had again increased our full year expectations for both our engine and industrial segments. We now expect total company sales to be up between 12% and 15% over last year. I hope what is evident in our results is the strength of the business model we have pursued over the past 20 years. The essence of our business model is our relentless focus to be a filtration company with both extensive geographic and end market diversification. This diversification reduces a negative impact of any one end market or regional economic cycle and allows us the opportunity through effective execution to both serve our customers and to continue to deliver record financial results for our shareholders. Bottom-line is that we expect the strength of our diversified portfolio filter businesses combined with effective execution deliver yet another year of record sales and earnings. As Tom mentioned earlier we've increased our full year EPS estimate range now expect to be between $2.08, $2.13 per share, this means that our EPS should be up between 14% and 16% also marking our 19th consecutive year of record earnings. And finally, before we move to the Q&A, I would like to announce that we will be at the New York Stock Exchange on September 4th, day after our fourth quarter earnings call, to host an Analyst Day and also to ring the closing bell to celebrating achieving our 1st $2 billion year end revenues. One of our fellow Donaldson employees will ring the bell, based on the winner of our Guess the Date We Hit $2 Billion contest, in order to conduct our Guess The Date contest we will be providing regular updates on our website for both our employees and shareholders to track our year-to-date sales progress until we hit the $2 billion milestone. This concludes our prepared remarks. Mike now we'd like to open it up to questions. Question And Answer

Thank you, sir. [Operator Instructions]. The first question comes from the line of Kevin Maczka with BB&T Capital Markets. Please go ahead sir. Kevin Maczka - BB&T Capital Markets: Good morning.

Good morning, Kevin. Kevin Maczka - BB&T Capital Markets: Hey Tom can you just a talk a little bit more about the commodity cost issue. You mentioned steel and petroleum having some issues there but it sounds like it's pretty very well contained given that your gross margins were up. But I'm just wondering if you can kind of quantify what kind of inflation you are seeing in general and what kind of pricing you are taking to offset that?

Good morning, Kevin. Yes, I did mention the commodity price issue and I did mention that it did not have a significant impact on our operations in the third quarter. We had been successful in deferring the impact, but it is upon us in the fourth quarter. So, I mentioned steel. We buy a lot of different types of commodities. Year-over-year steel prices might be up about 30% to 50%. That continues from there, diesel fuel up about 60% and anything petrochemical related is going to be up significantly. We are working with our customers on recovering what we can from these price increases, and we're also working our cost reduction efforts. So as I indicated we are going to providing guidance in the fourth quarter on what that impact might be just because of all of the variables that surround this issue. Kevin Maczka - BB&T Capital Markets: Okay, but you also won't talk about the magnitude of price increase that you've been able to take already?

We are not going to talk about specific customer and pricing actions Kevin. Kevin Maczka - BB&T Capital Markets: Okay. On the operating expenses the jump that we saw there, it sounds like a portion of that is still the ongoing distribution center issues, but I think that those costs were still up significantly even if I back that out. So, I guess my question is some of the other things that you are spending money on there. Are those, is that kind of new run-rate going forward or some of these things more one time in nature like the DC issue?

Yes, Kevin the DC issue is primarily in gross margin as opposed to operating expenses. So we haven't changed our operating expense guidance for the year. We're still estimating 21% of sales and in our business units in order to achieve this higher level of sales we've got to make some investments, we've got to make investments in product development initiatives, in our sales force we've IT initiatives and all of those are pretty critical in order for us to achieve the robust sales growth that you have seen. So its been intentional and necessary to support the growth that you've been seeing.

Kevin, this is Bill. Just to reiterate what Tom was saying in his remarks is that even including the headwinds from the material cost increases through the pricing and cost reduction actions, we're continuing with the same gross margin... gross margin guidance we have been talking about of 32%, and the same thing applies to the operating expense is that we're holding firm to the 21% for the year. Kevin Maczka - BB&T Capital Markets: Okay and I guess my last question as it relates to margin just... you're spending money to drive the higher revenue growth which I understand but I guess I am wondering if at some point even once your achieving this higher revenue growth if its reasonable to expect more on that to drop to the bottom-line and I know margins were up year-over-year this quarter, but could they be up even more than that at some point going forward or will you have to continue spending to drive the revenue growth?

Kevin, this is Bill. I think we've been asked this question probably in every meeting in terms of margin expansion on the operating income line. What we are trying to do is a balance between funding higher growth than we've achieved historically and maintain an operating margin of at least 11%. So to Tom's point, our assumption is that we are going to continue to invest back in the business to get higher growth and protect the 11% margin. The 11% margin is also... is relatively recent high watermark for the company. We achieved that just a couple years ago, so we want to maintain that while growing faster than we have historically. So, we're not... our guidance only talks about a minimum of 11%, not anymore than that at this point. Kevin Maczka - BB&T Capital Markets: Got it, all right thanks for time guys.

Thank you sir. The next question comes from the line of Charlie Brady with BMO Capital Markets please go ahead.

Hi thanks, good morning.

Hi, Charlie.

With respect to the commodity cost can give us a sense of how much of cost of goods sold would come out of steel and other commodity costs that have been going up?

Yes, Charlie this is Tom again. Just roughly and this is really going to vary depending on our individual products, but if you look at our cost of sales line approximately 60% of that line is material. And then of that 60% roughly a 20% to 25% is steel, fabricated parts and the like. Another 20% is media that goes in our filters and then the third significant commodity is anything petroleum based again plastics, urethane and the like. So that gives you a little bit of ranking of our key commodities.

Thanks, that's helpful and just with respect to I guess Bill's prior comment in your guidance it sounded that obviously you have embedded the headwind from commodity cost into your existing Q4 guidance. Would it be fair to say then as part of your cost recovery efforts, would you expect if you were successful to realize any of that cost recovery in Q4, and I guess what I'm really kind of get to is it sounds like may be there's upside to the guidance you've put out there if you were successful in recovering some of these costs in Q4?

Yes, Charlie, our guidance includes what I mentioned the commodity price increases, some recovery from our customers, and our cost reduction efforts. So all three of those variables are based into that guidance.

Okay, thanks. One quick, I'll get back in the queue. On the Thailand facility expansion, how much increase in capacity is that going to give you there?

Charlie, Bill here its... I think its probably in the low double-digits in that facility in terms of increase in capacity. The disk drive market generally is going up in the high teens, so it should give us enough capacity probably for another may be two years.

Great thanks very much.

Thank you. The next question comes from the line of Brian Drab with William Blair. Please go ahead. Brian Drab - William Blair & Company: Good morning.

Good morning, Brian. Brian Drab - William Blair & Company: I've a couple of questions. First, in the heavy duty truck market, looks like you did reach the bottom in the quarter and just wonder if you could tell us about when in the quarter you tried to reach the bottom and what type of growth should we expect going forward here in the next quarter or may be over the next 12 months?

Brian Bill here. We think it bottomed up probably in March or April. Now its starting to come back up slightly up. I think, so we'll see some slight recovery in our fourth quarter, which is good news over the last couple of quarters certainly, just heading... directionally its going up rather than what we have seen over the last year. I think the biggest uptick that we are projecting is in the second half of the calendar year, which would have been fiscal '09. Our current assumption for full year class A production is about 220,000 trucks. Brian Drab - William Blair & Company: Okay.

That's baked into sort of our assumptions about the balance of this year and overlooking that for next year. Brian Drab - William Blair & Company: Okay, thanks. And it seems like a lot of the focus this morning has been on commodity costs and I haven't heard you mention the pricing system that you used to index for steel and my understanding is your pricing is in index to steel. I was wondering if you talk about that little bit?

Hey Brian, Bill here again. After the last time steel took off which was about four year ago we did put into place with our major engine OEM customers agreements that indexed our pricing with steel going up or down. So that's still true. A lot of what Tom was saying is the fact that we are seeing commodity increases more broad based and that were around the petrochemicals and media and so that will be.... those would be separate discussions. The other is really the price recovery efforts on our industrial side of our business. Where those are sort of the case-by-case type of negotiation. So yes, we do have, we still have the mechanism around our engine OEM customers in terms of steel price relief. Brian Drab - William Blair & Company: Okay, thanks. And the last quick one is it looks like you are probably going to come in a little bit under the $7 million regarding the warehouse management incremental expenses you mentioned $7 million at the end of the second quarter, am I doing the math here correctly and thinking that you are going to comment a little bit on to that?

Yes, Brian this Tom. I think you have to go back to the second quarter as well so just to give you a reminder. Brian Drab - William Blair & Company: Yes.

In the second quarter we had extra costs of $2.1 million and the $3.6 million that I mentioned in the third quarter and then on top of that, the $2 million to $3 million in the fourth quarter that we are projecting. So if you add that all up, I think that works out to $7.7 million to $8.7 million. Brian Drab - William Blair & Company: Right, okay. Yes, that is what I was thinking. Okay thank you very much.

Thanks.

Thank you. The next question comes from the line of Andrew Deangelis with KeyBanc Capital Markets. Please go ahead.

Hi guys.

Hi, Andrew.

Just to be clear on the commodity cost issue, I guess net of pricing that you anticipate getting in the fourth quarter, is that... is it your intent to signal some net headwind, during the fourth quarter after considering that pricing?

Andrew, Bill here. I think everybody is reading about what's happening in the papers, so we thought, we once we get it out there, that we are not going to be unaffected by this as is no other industrial company but we are working on it and we started working on it early and that's baked into the guidance that we've given around the fourth quarter in terms of that, there is headwind there but we are going to offset it in terms of cost reductions and price increases and we stick into our guidance for the full year.

In the real headwind though, it would come in the industrial part of the business with the GTS and the IFS businesses?

It would really be almost all of our businesses because we use a lot of steel and petrochemical base commodities and media in both sides of the... both reporting segments.

Okay. And then I guess just last question I'll certainly appreciate what you guys are trying to achieve in terms of worldwide growth just kind of wondering about what rigors you guys have in place in terms of capital efficiency and really using your organic capabilities as effectively as you can, that you already have in place rather than making additional capital outlays?

Andrew, Bill again. It's a good question we always try and take a look at making sure that we are fully utilizing any assets that we deploy to some extent the nature of our products and good customer service requires us to be local with our manufacturing. It also provides us with a natural currency hedge that we're producing in Japan in yen and selling in yen for example. But going back to the first point its hard to ship filters long distances because we are shipping lot of air, so you have to be local from a cost prospective and you have to be also local from a service prospective. We are always taking a look at our capacity utilization around the world and making sure before we make an investment that we really need to.

And the shipping cost or would that be included within cost of sales or OpEx?

Andrew, Tom here again, the extra distribution costs that I mentioned are almost all in cost of sales.

Okay I am sorry that I missed that.

Yes, there is a little bit in shipping, which would be an operating expenses but the lion's share is in cost to sales.

Thanks.

Thank you, sir. The next question comes from the line of Scott Graham with Bear Stearns. Please go ahead.

Hey good morning, nice quarter.

Hi, Scott.

Just one question for you was regarding the roll off of these warehouse cost, its look like this was may be at or near the peak perhaps and heading down, next quarter is that a trend line we can expect to continue downward from here?

Hi, Scott good morning, Tom here. Yes, the answer is yes. I mentioned $3.6 million in the third quarter, a range of $2 million to $3 million in the fourth quarter and I think as I mentioned in my opening comments we expect that those incremental costs are not going to be with us from the first quarter of next fiscal year.

I think I missed that and you captured all of the sales... the shipments that were delayed last quarter, this quarter?

Yes we did. We mentioned about $5.5 million in the second quarter we were deferred and we caught up and it was actually early in the third quarter.

Those were really all my questions, thank you.

Sure, thanks.

Thank you, sir. The next question comes from the line of Richard Eastman with Robert W. Baird. Please go ahead.

Yes hi Bill and Tom.

Good morning, Rick.

A nice quarter. A couple of questions on the NAFTA business. Did you suggest that the aftermarket business was down year-over-year?

Rich is looking for the number Rick.

We were up 14% NAFTA aftermarket Rick.

Okay, all right. That's just the aftermark [ph]. We saw the overall NAFTA engine business you said was 11?

Right. I did in my comments Rick I did talk about that some of the industry conditions are, have weakened the ton miles and utilization rates but our mix in our business is up.

It is still up 14. Okay. And then the industrial piece in NAFTA, I guess I don't have the ability to weight these, but NAFTA was up 17% in local currency engine was plus 11, so industrial was like plus 20 or something?

Yes, IFS in local currency is about 21%.

21%. Okay. And then just a question Bill when we talked about these plants that we're expanding here. Could you just give me a sense of the air filter expansion in the Czech Republic is that dust collection primarily?

Rick its for the elements that go in to either an engine air cleaner or potentially a dust collector. So it's the actual element not the metal housing.

And then can I just ask the same question with Brazil and India, again you termed it as air filtration, is this the same general product lines?

The Brazil is initially is going to be focused on engine air as well and India is both, we do both industrial and engine air filters there today.

Okay all right. But nothing on... no initiatives at all on the HVAC side or anything or commercial HVAC or anything like that?

Rick its not a business that we're in today so.

I realize that, that's up may be... you might be thinking about it?

We have enough good opportunities right now.

Okay. And Bill will you look at the how the year has played out through nine months. We track through the year pushing sales forecast up and obviously the corresponding EPS number is up. When you look at how the year unfolded versus where we sit today what part of the plan would you say are we well above your expectations early in the year is it mainly geography or is it more product line?

It's a good question Rick. I think to start with certainly we're tend to be very... we're getting more lift than we anticipated from foreign exchange, okay.

Perfect [ph].

Stripping that out I would say that we seen specially internationally stronger local currency growth than we expected starting the year. But I think we also have been surprised that sort of the resilience of the businesses in North America because six months ago people were talking about businesses... business conditions really falling off in NAFTA and we've been doing better a lot better than that. So, primarily internationally its been a big surprise but also I would say in NAFTA we had conditions have been better than we had maybe thought six months ago. On the negative side, sorry, Rick, I would just say that the, what happened with warehouse our management implementation was a negative surprise so not everything has gone our way. We had some things go pluses and minuses and certainly the commodity headwinds Tom talked about, we will deal with that but that's another challenge that we hadn't anticipated six months ago.

Okay. And then just one last question on the international business, you had talked about the share gains in Europe and I think you suggested both on the first fit side as well as aftermarket. But can you just give us any color there I mean is that a function of PoweCore or is that a function of relationships with some OEs that you weren't involved with? What's transpired there that suggests that, that's ongoing on and --

First, in a historical perspective you have to realize that our market share is on... say the engine side or on the engine side are lot lower than they are in the U.S. because we got started there later. We have been in Europe for about 40 years, but I'd say we really focused on growing the business over the last 20 years. So our market shares are lower there's lots of opportunity to grow. I think we've... and we've been growing on the first fit side by offering innovative technologies like PowerCore and other technologies not just PowerCore isn't the only story but its around starts with the technology. And then I think it's the geographic presence as we continue to expand and site operations, we also driving a lot of cost out of our products so we have technology at a very competitive price that's the first fit side. I think on the aftermarket side Rick its around expanding our coverage and really as I mentioned in my comments making a push in really were we were not well represented in Eastern Europe in the Middle East where there were markets where there is a lot of equipment with Donaldson product on it but we weren't capturing our fair share of the aftermarket. So that's more a distribution or coverage story there.

And following the OEs from here?

Right, exactly.

Okay, well thank you.

Sure thank you.

Thank you, sir. [Operator Instructions]. This time there are no further questions. I would like to turn it over to Bill for concluding remarks.

Thanks, Mike and to all of you participating and listing. I want to thank you for your time and interest. To my fellow employees I want to thank you for delivering yet another record quarter in both sales and earnings. I look forward to your continued support and efforts as we achieve our first $2 billion sales year and our 19th consecutive EPS record. Thank you all and good bye.

Thank you, sir. Ladies and gentlemen, this does conclude Donaldson third quarter fiscal year 2008 conference call. You may now disconnect. Thank you for using the Teleconferencing Center.