Donaldson Company, Inc. (DCI) Q1 2009 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen, thank you for standing by. Welcome to the Donaldson First Quarter 2009 Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. [Operator Instructions]. This conference is being recorded today November 25, 2008. I would now like to turn the conference over to Rich Sheffer. Please go ahead sir.

Thank you Brandy, and welcome everyone to Donaldson's 2009 first quarter conference call and webcast. Following my brief introduction, Tom VerHage our Vice President and CFO will give us a brief review of our record first quarter operating results. Tom will then turn the call over to Bill Cook our Chairman, President, and CEO, who will discuss our updated outlook for fiscal 2009, the business conditions shaping that view. Following Bill's remarks, we'll open up the call to questions. 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?

Thanks Rich, and good morning everyone. As you saw in our press release late yesterday, we reported another record quarter. Thanks to continued strength in a number of our end markets that provided year-over-year sales growth and positive results in reducing our operating expenses as a percent of sales. Each of our three regions and nearly all of our major product lines contributed to a 9% sales growth. The impact from foreign currencies being less than a percentage point as the U.S. dollar strengthened dramatically during the quarter. Assuming foreign currency rates stay close to where they have been trading the last couple of weeks, we expect currency to reduce reported sales by approximately 6% for the year compared to last year. Looking at the remainder of the income statement, our operating margin came in at 12.2% roughly equal to last year and much better than our fourth quarter operating margin of 11.2%. While our gross margin declined 30 basis points to 32.6% in the quarter, our operating expense ratio improved 40 basis points to 20.4%. The gross margin benefited from the higher growth in our industrial product segment and from product cost reductions and manufacturing efficiency improvements, which are an ongoing component of our internal cost reduction efforts. Gross margin was negatively impacted by the delay in recovery on our material cost increases from several major engine customers. We did experience the expected material price increases from our suppliers in the quarter. And we did realize a portion of our targeted price increase to our customers. We are continuing efforts to get fully recovered from the commodity cost increases and expect to achieve full recovery later in this fiscal year. On the positive side, the upward cost pressure on our raw materials is stabilizing. But some commodities such as steel, we are indexed with a number of our customers. So, as prices come down, it will be good for both our customers and us. In operating expenses, we began focusing on cost containment as soon as the financial crisis and economic slowdown became evident. We have implemented a global hire increase, a reduction contractors and temporary workers, targeted restructuring within a couple of business units and a host of discretionary spending cuts. We saw the benefit of these efforts in the second half of the quarter. And we will continue to hold the line on discretionary expenses until we see improvements in our end markets. We continue to expect to achieve our long-term gross margin target of at least 32%, now that the upward pressure on raw material is lessened, and we are beginning to benefit from some cost declines. Combined with our operating expense containment and productivity initiatives, we plan to exceed our historical operating margin target of 11% this year. Our tax rate for the quarter was 30%. In the quarter, we had $1.8 million of benefits primarily from the reinstatement of the R&D tax credit and a positive development regarding our foreign tax contingency that we had previously reserved. Last year, our first quarter rate was 27.1%, which included $3.9 million of benefits related to the expiration of statutes on unrecognized tax benefits and the German tax rate reduction. In our guidance, we noted that we have several other tax contingencies that may conclude by the end of our fiscal year and could reduce our tax rate if they are resolved favorably. In light of this, we have widened the range of our guidance for a tax rate to 25% to 31% for the year. Our CapEx came in at $11.5 million for the quarter, which was flat with last year. We are moving forward with projects that we had previously started, but will delay new major expansions and certain other projects until economic conditions in our end markets improve. So we are reducing our full year CapEx guidance to $60 million to $70 million from our previous guidance of $70 million to $80 million. We expect quarterly depreciation and amortization to be in the range of $14.7 million to $15.7 million, which includes the amortization of intangibles from the Western Filter acquisition. Free cash flow came in at $40 million, which is $30 million higher than last year and gave us a cash conversion ratio of 84% in the quarter. We expect free cash flow and our conversion ratio to continue to improve over the balance of fiscal 2009, and we have increased our free cash flow guidance to $130 million to $160 million. Late in the quarter, we acquired Western Filter Corporation. Western is based in California and manufactures liquid filters for the aerospace and defense industries. We expect Western Filter to generate approximately $23 million of sales, the balance of this fiscal year and to be earnings neutral after accounting for the incremental interest expense and the amortization of intangibles related to the acquisition. In addition, we sold our air dryer business in Maryville, Tennessee at the end of the quarter in net of these two transactions, as shown in our cash flow statement, what is an outflow of $74.5 million. We repurchased 802,000 shares or 1% of our outstanding shares in mid-September. The share repurchase is consistent with our long term practice of reducing our share count on average of approximately 2% a year. In October, we priced a new $80 million private placement, which was funded on November 14. This is a five year note with a coupon rate of 6.59%. We believe the ability to price this transaction at that time is an indication of Donaldson's financial stability. We issued this note to free up our credit lines following the Western Filter acquisition to provide assurance of liquidity to continue to fund our operations and other strategically important initiatives and transactions that may arise in the near term. At the end of the quarter, our debt to cap ratio was 37% and debt to EBITDA was 1.2. Both of these are well within the financial covenants in our various debt agreements. We're now expecting interest expense in fiscal 09 to be approximately $19 million. Our press release contains our updated fiscal 09 sales guidance, which is now between $2.15 billion and $2.23 billion for the year. Excluding the expected foreign currency headwind of approximately 6%, we expect local currency sales to increase in the low single digits. So, despite the very uncertain global economy, we are pleased to be able to report a good start to our fiscal 2009 with another record quarter. And if we achieve our outlook for an EPS between $2.16 and $2.36 per share, it will be year 20 of this record string of earnings. So now with that, I will pass it over to Bill, who will provide more background on our outlook. Bill?

Thanks Tom and good morning all. As you may know, we have two reporting segments Engine and Industrial; and what I'd like to do next is give you a few of their respective highlights from the quarter. So starting first with our Engine segment in Europe; our European engine OEM business declined by 2% local currency. Sales to our European customers and manufacture agricultural equipment remained healthy; however the markets for our customers' new trucks and construction equipment were weak. Now switching to Asia; our Asian engine businesses were up combined 6% in local currency. Both our OEM offered equipment and aftermarket businesses had strong first quarters up 5% and 9% respectively. And in NAFTA, our engine business was up 8%. Within our off-road equipment business, a particular note were our sales for military applications, which were up on continued strong demand particularly for filters for the new MRAP vehicles and replacement filters for existing military equipment in the field especially for the Blackhawk Helicopters. Sales to our customers for their production of large Ag and mining equipment also remained good, while demand for small off-road equipment remained weak due primarily to the continued weak residential construction end market. In our NAFTA engine after market business, sales were up 10% in the quarter as demand remained strong for large off-road equipment replacement filters as well as our retrofit emission control devices. And finally our NAFTA heavy and medium duty truck business, sales declined 17%, while Class A truck builds at our customers were up 7% in the quarter the medium duty build rates dropped 31%. Now, I am going to switch to the other part of our company, the Industrial segment; and within that, our Industrial Filtration Solutions business had a good quarter up 13% local currency. Europe was up 8% as we continued to see solid demand for our products in both Western and Central Europe. Asia was up 25% with strong sales of both industrial dust collection equipment and compressed air filtration products throughout the region. Our NAFTA sales were up 13% as a result of good demand for both new dust collection equipment as well as replacement filters. In addition, last years acquisition of LMC West contributed about 2% of the 13% sales increase in NAFTA. Our global gas turbine business had another extremely strong quarter with sales of $60 million, which represented a 22% increase over last year. Both continued to be good in both the power generation and oil and gas end markets. And finally, our global special application business sales were up 2% in local currency. Sales of our disk drive filters declined slightly, but these were offset by strong sales growth from our PTFE membrane filtration products. So, now switching to a talk a little bit more about our outlook and we provided, as Tom mentioned, updated guidance for fiscal 09 in our press release yesterday. So, the following are some summary thoughts. As everyone is aware, global economic conditions have changed since we provided our initial guidance in early September. As a result, in local currency or at constant exchange rates, we are now expecting low single digit growth of full year sales growth in both engine and industrial segments. The good news is that we continue to expect that many of our businesses will deliver unit volume growth this year despite the current recessions in the U.S., Europe and Japan. However, given the recent rebound in the strength of U.S. dollar, which is up 14% versus the euro since August, and as Tom mentioned, we are now expecting a significant headwind from foreign currency translation. This will offset our local currency or unit volume sales growth and result in our overall company sales to be flat or slightly down. Bottom line: we now expect our full year fiscal 09 sales to be between $2.15 billion and $2.23 billion. Continuing with our outlook and I'll talk about our engine business first. The end markets for aerospace defense and larger off-road equipment remain good. Recent forecasts from our customers indicate that both heavy construction in mining equipments rates, production rates should remain solid. And our customers that produce agricultural equipment continue to expect growth in the sales of larger tractors and combines. We should also benefit from the recent acquisition of Western Filter. Western brings us extensive liquid filtration capabilities and customers in the military and aerospace markets that we already served with our air filtration products. Within our transportation or truck business, we expect NAFTA Class A truck builds to remain flat through the remainder of our fiscal year as we no longer expect to pre-buy in advance of the 2010 diesel emission regulations. We also expect NAFTA to classify the seven build rates to be lower than last year. Finally, we are expecting new truck build rates to decline at least 10% in both Europe and Japan. Now, engine after market, we expect our sales to grow as we focus on a continuing to develop new geographic markets and create proprietary replacement opportunities. Now switching to the outlook for our Industrial segment; within our IFS business, which includes our industrial dust collectors and compressed air filters. While our visibility is typically weeks versus months, we do expect that our recent strong shipment patterns should continue for a while. In addition, we believe that we will benefit from the demand from our newly introduced products. As a result, we expect low single digits sales growth in local currency in fiscal 09. In our global gas turbine business, we have good visibility of our shipments over the next few quarters. We expect our full year local currency growth rate to be in low single digits. The industry is still expecting demand for turbines to continue growing at least through the balance of our fiscal year. And finally, we expect our global special application business to be flat in local currency. We are expecting continued growth in our PTFE membrane products to offset lower disk drive filter sales. Now, I'll give you a brief update on two of our major growth initiatives, and the first is PowerCore. We continue to be very successful with this breakthrough air filtration technology. Our sales... our engine PowerCore sales were up 25% in the quarter to $16 million as first fit sales grew 21% and replacement filter sales grew 27%. I'm also very happy to report on the progress of our PowerCore Generation2 or Gen2. Gen2 allows us to further reduce the system size or enhance the system performance for our customers. We have already one 10 platforms, five on road and five off-road with our Gen2 technology. Combination of PowerCore and our other proprietary filtration solutions have allowed us to be very successful in winning air intake programs for the upcoming on and off-road diesel emission regulations in the U.S. and Europe. For these upcoming programs, we have won over 90% of the programs awarded to-date by the big seven OEMs and there are still many other new programs in play with these and other major OEM customers. On the industrial side of our business, we introduced PowerCore and our Torit dust collectors. These new dust collectors are 50% smaller than the Baghouse collectors they compete with. Since we launched Torit, PowerCore up this past spring, we've already received orders for 125 systems and shipped 90. What do these breakthrough technologies like PowerCore mean for Donaldson? Remember, our strategy is to provide the most compelling filtration solutions for our customers both in terms of technology and value. This strategy is working and we will grow our global OEM market share as these systems are installed over the coming years. Furthermore, we will also grow our market share in the replacement filter market as the ultimate owners of this equipment in the field will come back to our customers and us for the replacement filters. Second growth initiative I'd like to give you an update on is our expansion projects. As Tom mentioned, we now expect to spend between $60 million and $70 million on CapEx given the uncertain economic climate we have prioritized these projects to focus on those with the best and quickest paybacks. So, these investments are focused on two areas; first: supporting numerous process improvement and cost reduction projects around the world; and second: selective manufacturing capacity expansions to support our continued long-term growth and local customer support plans. But there are three of those that I would like to give you an update on; first is in Brazil. And our air filtration manufacturing line is complete there, and we will begin production now for customers in Brazil. Second is we have continued to expand our existing air filtration plant in India. This should be completed by the end of our fiscal year. This represents essentially a tripling of our current facility and is necessary to support the continued growth of our customers in India. And finally, the expansion of our disk drive filter plant in Thailand is proceeding on schedule, and we expect to have that additional cleaner of manufacturing capacity available on the next few months. Now, before I open the call up to your questions. I'd like to offer a few closing summary comments. Some of you have followed Donaldson for many years and may still remember the Donaldson of the 1980s. It was a great company, but very cyclical as it was mostly focused on a handful of end markets and mostly in the U.S. Our focus over the past two plus decades has been growing our company by diversifying it into a variety of filtration end markets around the world. I believe that you can see the results of our efforts over the past 20 years and our first quarter numbers. In the first quarter, 56% of our sales were outside of NAFTA, 43% were on replacement products and 46% was in our industrial business. Some have speculated that the current economic crisis could be as bad as twin recessions of the early 1980s. If it is, the Donaldson Company will have to deal with it significantly different and much stronger than the Donaldson of 1980. The essence of our business model has been our relentless focus to have both extensive geographic and end market diversification. Overtime, our diversification has reduced the negative impact of any one end market cycle and allows us the opportunity through effective execution to serve our customers and deliver consistent financial results for our shareholders. So, what are we doing today? So although we had a good first quarter with 9% revenue growth, a 12% operating margin and EPS up 13%, we have been very focused on proactively managing our business in order to protect our customers, our employee base, and our shareholders. We have taken a number of difficult, but very necessary steps to prepare ourselves in the event that our business conditions dramatically deteriorate. I mentioned that few of these actions earlier in our call. We can't forecast what is going to happen in the global economy of the balance of our fiscal year. But I can tell you that, we have been through other downturns and we are using our lessons learnt to... we will use our lessons learnt to successfully get though this downturn as we have in the past. We are focusing on numerous products and process cost reduction activities and our plans in our sales and administrative operations in order to reduce our costs, protect our margins, and the consistency of our financials. We know how to do this work and as a result of our plans and efforts we expect to deliver an operating margin that exceeds our long-term target of 11%. So, I hope what is evident to you in both our first quarter results and our outlook, is a many strengths of the business model we've developed over the past 20 plus years. The bottom line is we have our sight set on delivering our 20th consecutive earnings record with our EPS guidance for this year of between $2.16 and $2.36 per share. Brandy, that concludes our prepared remarks. Now we'd like to open up to the questions. Question And Answer

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions]. And our first question comes from line of Kevin Maczka with BB&T Capital Markets. Please go ahead. Kevin Maczka - BB&T Capital Markets: Bill, Tom, good morning.

Good morning, Kevin.

Good morning, Kevin. Kevin Maczka - BB&T Capital Markets: I guess my first question on capacity; Tom, you mentioned the projects in Brazil, India, and Thailand. And those are complete or nearly complete. I guess my question is: once they're all complete, as you look at your capacity, give us some color on how you view your capacity situation. How much excess capacity you have? And some of these targeted restructurings you're talking about, does that involve significant downsizing of our capacity elsewhere?

Kevin, this is Bill. Those capacity issues are really focused on their original needs. So the needs in Brazil or India or in Asia with our disk drive business. I would say generally around the world, we have been making capacity adjustments in our plants and distributions centers just to respond to the local demands. So, we have reduced production employees in the U.S. and Europe starting first with the contract and temporary employees as Tom mentioned. And I think in terms of, what is that put us in terms of capacity, I'd say generally we wait a long time before we decide to add capacity, so we don't... it doesn't put us in a significant over capacity situation these additions are. They are small and sort of stepped investments, so it will add to as those local markets build.

Kevin, you also asked about targeted restructurings; this is Tom. And really those are restructurings or more efficient in better ways to do things within our view business units rather than a major accidental business or anything like that? Kevin Maczka - BB&T Capital Markets: Okay, thanks for that. A separate question on pricing if I could; you talked about some pricing actions in the press release, but you obviously had some issues with some customers in the engine business. So, I guess can you quantify for us what kind of pricing actions you are talking about, maybe how your strategy is changing now that the global macro has changed so much in the last couple of months? And maybe also if you could how much were your margins impacted in engine because of these customer delays?

Kevin, this is Bill I will start and then I will pass it to Tom, but generally our pricing actions this year and through time have really been just about recovery of material cost increases that we've incurred. It's not about expanding our margins; it is essentially protecting our margins. We talked about it in the press release is that, there have been a few delays. Those refer material cost increases that we started incurring this past summer, and we are still negotiating for the recovery of those. Even in advance of what happens with commodity prices if they continue to come down, we want to try and recover of impact for that period of time that we were exposed to it. But just about material cost recovery for actual increases that we felt.

And Kevin on your gross margin question, for the company in total and this is maybe a little bit of a rough, I suppose to a precise number. We felt in the first quarter that the unrecovered commodity price increases were about 1.2 percentage points. Now that impact was greater in the engine business for the reasons that you are aware of in of lower number in the industrial side. Kevin Maczka - BB&T Capital Markets: Okay, great. And just one more and I will jump back in line. The gas turbine business such strong revenue growth this quarter, but your guidance for the full year, I guess, implies that you will turn negative at some point in the back half. Is this still a function of some supply chain constraints with other companies in the supply chain or is this more a function of a true slowing in demand?

Kevin, Bill here. First in terms of the high revenues in the quarter, $60 million we are very happy about that. But that's typical of the gas turbine business that it's very lumpy quarter-by-quarter. If you go back over the past 10 years, you can see that. So, it's not a very linear business like most of the others because of the nature of this large projects and one that just happened to ship. So that's may be the first question about the sales in the quarter. In terms of the year, I think we are still, as I mentioned in my comments, it's expected that the gas turbine market will continue to grow. But as we mentioned in our guidance in September on our call on September actually as well, what we have heard from our customers is that there were capacity constraints, not our products but other supplier capacity constraints that have reduced the number of their turbines to be built for this year. And we think that is still at play. I think the other factor I think you alluded to is how much of the current economic conditions is affecting the market. I think that would be specifically around maybe financing for these projects, and we haven't really seen any significant impact of that yet. We have seen two projects, one in the U.S. and one in Europe be deferred or delayed slightly. But I am not sure if that's the result of financing on economic crisis, because some of that happens almost every year, projects get delayed because of constructions delays et cetera. So, I would... we are still pretty positive longer term on the gas turbine market at this point. Kevin Maczka - BB&T Capital Markets: Okay Bill, Tom, Rich thank you.

Thanks.

Welcome.

Thank you. Our next question comes from the line of Charlie Brady with BMO Capital Markets. Please go ahead.

Hi, thanks, good morning. With respect to the cost recovery negotiations, does your guidance in better expectation of receiving that recovery in fiscal 09?

Yes, Charlie; this is Tom. And I think you're referring again to the OE portion of our engine business. But yes, for whatever commodity cost increases that we are not recovered at this point, our intent is late in fiscal 09 that we would get recover for those cost increases.

Okay. And with regard to the special applications, can you just remind us as I understand the bulk of that is hard disc drive and as follow-up portion would be may be a membrane; is that correct?

Right.

What's your visibility into that markets, specifically into the hard disc drive market?

Charlie, this is Tom again. We get public projections about disc drive bills. And we review those; we factor those into our guidance. But they are changing rapidly. So, generally the market seems to be very positive with the increased storage demands. But, given the economic concerns at this point, there certainly could be a dip in purchases for example personal computers and the like. So, we see the public guidance, we don't have any particular information that's any better than that. But long-term we feel very positive about that business.

Okay, thanks. And just to clarify in our EPS guidance and don't tell that with your tax rates guidance, bottom end of your EPS guidance assumes bottom end of the... the top end of your guidance assumes bottom end of the tax rate and vice versa, or is there a midpoint estimate in your tax rate you are assuming in your estimates?

No, that's... the tax rate sort of book in that guidance is pretty well, Charlie.

Okay, thanks. I will get back in queue.

Thank you. Our next question comes from the line Eli Lustgarten with Longbow Securities. Please go ahead.

Good morning.

Good morning.

One clarification: you mentioned the Western Filter acquisition as $23 million, but you have a divestiture. How much is the basic takeaway or sort of what's the net sales gain from the acquisition versus the divestiture?

Eli, this is Tom. I did mention that the Western revenues for the remainder of this fiscal year, we think are going to be in about the $23 million range. The very small divestiture that we did Maryville, Tennessee has annual sales roughly in the $15 million range.

So, basically that's sort of like a $10 million, $12 million revenue gain?

Yes, you are close there, Eli.

Just to get some idea. So, you are implying a little bit weaker market than the overall sales numbers we are talking when you factor out the acquisition. Can you talk a little bit now on the tax settlement says you are potentially talking about? Are those one shot deals and do those carry on to hold the tax rate for 2010 also?

Eli, we have a number of tax investigations by the authorities in process and any settlements there would principally be onetime deals. We do have a situation in China, where we think we have a good chance of receiving a lower rate than we have been accruing. Thus far this year so that would be ongoing. But for the most part, any significant impact for the rest of this year would be one time.

So, if we... if when we model this year, which will be somewhere in the higher 20, we have to actually go back to 30% for 2010?

Yes Eli, that's a good point. Our underlying tax rate without any of these, so-called discrete items is roughly in that 31% to 32% range.

Okay. And that makes the difference. It was nice to see almost the reversal of margins between Engine products and Industrial products on the year basis when industrial product, which is start for the quarter. Most of... in the Engine product margin decline, you are saying is mostly the quest price and some product mix and that expected to probably to stay like this for the year. I know you're going to get the quest price improvement, but volume is going to weaken as you go about the rest of the year. And I guess the same question in industrial product is a very impressive step up in profitability, how much is that sustainable and how much do we get back as we go through the rest of the year.

Yes, Eli, I think you actually you summarized it pretty well. The deterioration on the engine side is primarily because of the inability to recover our cost increases. And the improvement on the industrial side, we entered the fiscal year with significant backlogs as you saw, our sales volumes on the industrial side were very positive in the first quarter. So, the lion share of that year-over-year improvement on the industrial side is due to volume. We have relatively low unabsorbed overhead in our plans because of all the volume that was going though our plans. So, just to follow up on your second question, if volumes would tend to come down on the industrial side upward for the rest of the year, then we would indeed see that margin due to that factor coming down.

All right, thank you.

Thank you. Our next question comes from the line of Andrew Obin with Merrill Lynch. Please go ahead.

Hi, yes, good morning. Just a question, just a follow up on the industrial performance; the revenue performance in Europe and Asia has been very strong. Could you give us a little bit more color as to what specific end market by industry generated this demand and how much visibility you have into this demand, and what metrics you used to gauge that demand? Thank you.

Andrew, it's Bill. I don't think we disclosed specific industries, but generally it's tied to either new manufacturing investments or new plans or upgrading of facilities already in place. And I think we've just seen that coupled with our new products and moved to our type of technology have been the factors that have really driven the growth. So, in Europe, it's both Western and Central Europe and in Asia, it's really all around the region that we've seen that growth.

Okay. How big is China for you in Asia? Is that a big portion?

On the Industrial side?

Yes.

It's still small, but rapidly growing. So I don't think we've broken it out, but it's smaller...

I know it was timely disproportionate driver of the growth in the quarter or not?

No.

Okay. And just a broader question; as we go back and I appreciate you looking at the earlier years and thinking about the double recession. It sounds like... if you go back to sort of 99, 2000 timeframe, could you describe us as we see the markets, what is similar and how are the current markets different from your perspective, you'll get rated for the next downturn?

It's a good question Andrew. I am trying to think of a good answer. I think that... maybe the cause or factors are always going to maybe different or how they're aligned. I think with our comments what we see in front of us, and that I'll go back to the outlook. We see some markets as you will know that are down or heading down that would be, say the small construction equipment and the trucks in both Europe and in the U.S. But we see say our aerospace and defense business going the other way and see larger construction equipment holding up well. And we see our penetration and a lot of these newer geographies for us with lots of upsides. So, again it's the combination of some minuses in the end markets offset by some pluses that really we think is the basic for outlook for the year.

And when you talk about geographies, is it you guys entering geographies or is it your belief that these geographies will hold up particular well just because they're more in a growth mode than the Western mode?

I think it's a combination of both Andrew; say, in Brazil we have a very small market share and now we are there with the plants. So, we have good expectations going forward, just from a share perspective of growing our business there. In China, we're already there; and even though some of the experts are calling down the GDP growth rates for the China maybe the 8%, that's still very healthy and our market share is at very low. So, even in our markets maybe not growing at 10% only at 8%, we have high expectations for it. So it's a combination of new geographies. We are entering the ones that we are in with still very good growth rates.

And just to think, I mean if global growth rates will not meet your expectations. Is there a short-term contingency plan to meet these more challenging conditions or will you just take it one step at a time?

Andrew, we have developed contingency plans. A lot of the actions that we've already taken were taking during the quarter when we were doing pretty well because, we want to be prepared in case the tsunami crashes over us that we are ahead of it. So we gave our best guidance in terms of what we see for this year based on what we see happening out there and talking to our customers. But we are preparing with our contingency plans in the event that it gets worse than that. Yes.

Thank you very much.

Thanks.

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

Hi Brian. Brian Drab - William Blair & Co.: Couple of questions, first at the end of the fiscal fourth quarter, you talked about pricing contributing about 3.5 percentage points, so overall sales growth rate. I know there has been a lot of questions on pricing today, but I don't think if you comment specifically as to whether that's still part of your revenue forecast, has not been modified?

Yes, Brian, this is Tom. That is a tough one to answer with all of the commodity price increases, but we do expect what it probably won't be 3.5%, but perhaps something closer to the 3% range. And I'd say, keep in mind that sort of a composite of all of our products, so some will be more some will be less, but something in that 3% range, I think is fairly reasonable. Brian Drab - William Blair & Co.: Okay, thanks. And just wanted to follow-up on some of the end markets; first, you talked about mining on the engine side of the business is new resource of the growth in the quarter. Was commodity prices having fallen off? Do you expect that that's going to be the driver of growth throughout the year?

Brian, this is Rich. As we listen to some of our customers, as they are giving us their forecast for builds, slot... the demand for large mining equipment is still good and this is with updates within the last week or so. Commodity prices were already down. We are seeing good activity in coal mining still, our customers are, I should say, we don't actually do the mining equipment; we do the filters for it. So, the demand is there. There has been a huge backlog, because they haven't been able to build enough to satisfy demand. So their order books are holding in, and that's what they are passing on to us. Brian Drab - William Blair & Co.: Okay, thanks, I'll jump back in the queue.

Thank you. Our next question comes from the line of Adam Brooks with Sidoti & Company. Please go ahead. Adam Brooks - Sidoti & Company: Hi, good afternoon. Looking at the balance sheet, you guys... it looks like you did a pretty good job in managing working capital obviously... especially sequentially generally the first quarter is higher than the fourth. It was lower for receivables and inventories, is this sustainable going forward and kind of what was the catalyst for this? Was this the retail distribution centers or is there another factor?

Adam, this is Tom. One of the reasons that you see the balance sheet sort of getting smaller for example on the asset side is the impact of foreign currency translation. Adam Brooks - Sidoti & Company: Okay.

As we translate the weaker foreign currencies or assets in those foreign currencies into the U.S. dollar, that reduced the value of our assets on the balance sheet. So, you mentioned inventories in particular, actually the majority of that decline or essentially all of that decline is foreign currency related. I would call your attention to the Western Filter Acquisition, which added about $4 million to our inventories. But we do indeed have plans to do our best to bring our inventories in constant dollars down this fiscal year. We'll have to see what the impact of the economy is, but we are working that issue really hard. Adam Brooks - Sidoti & Company: So, have seen any impact from the retail distribution? I know we have talked about how obviously in source to run Western Europe? And I think going on North America, you originally had a... maybe a little bit difficulty, but seem like you got it under control. Have you seen the impact of that maybe helping inventory turns of forward or no impact quite yet?

Adam, Tom here. Yes, those inventories have come down. So, we are seeing an impact and the really good news is that we are pulling inventory levels down in those distribution centers. But we are keeping our customer service levels high, our fuel rates are very high. So, we are quite pleased with that progress, but we know we have a long ways to go. Adam Brooks - Sidoti & Company: And one quick question kind of on our PowerCore: is there significant margin betweens, say, a PowerCore, and the downturn during their sell-throughs or do you not speak about that or is there any way we should maybe quantify the margin difference between two types of products?

Adam, this is Bill. Typically, we're try in the market that the new technology products are about the same margin as the ones that we're replacing. Because what we are trying to do is get them installed and the big win for us in addition to the first fit is the replacement purchase locking that up. So, it's better longer term for us from a after market perspective and over time. The operating margin or after market products is better, but it's sort of a it's a sales growth and over time and margin improvement, but it's not going into it if they are priced about the same. Adam Brooks - Sidoti & Company: Okay, thank you very much.

Thank you. Our next question comes from the line of Jeff Hammond with Key Banc Capital Markets. Please go ahead.

Hi good morning guys.

Good Morning Jeff.

Just, I mean a lot has changed from macro perspective since you initially gave guidance and you are certainly trying to reflect that, but I want to get a better sense of just a pace of business through the quarter, I mean we had heard through our field trips that things have really deteriorated into October, November. And I am just wondering how the business flushed out through the quarter. And then in the areas, where you're seeing deterioration, where are you kind of more surprised by that deterioration from an end market perspective or it may be vice versa, where you're more surprised and things proving out to be more resilient?

Jeff, it's Bill here. Now I'll start with saying that we are sort of heading into a unusual time of the year for us anyway with the holidays. So it's not only our second quarter is revenue weaker typically than the other quarters. But and I would say that all of what we see today is baked into our guidance further going forward. So I think the big surprise is that we see or we are seeing say that, we are not seeing... and we're not projecting a rebound in the North American heavy truck market in advance of 2010 emission regulation. So now we are not looking at a pre-buy, and we're seeing more extended shut downs with many of our customers around the holidays this year than we had been anticipating. But I am going to point back and say that's all baked into our outlook guidance that we gave yesterday in the release and in the call today. But, it is obviously from a revenue perspective. We've called on our revenue both for foreign exchange, the change in the dollar versus the euro primarily, but also because we are seeing some generally weaker conditions.

Right, but would you say your October, your second half of the quarter was materially weaker than the first half, on the slash reported or is it, kind of on a stable deceleration?

Jeff, this is Tom. We did have as we talked on the last call. It could backlog, and lot of strength going into the quarter or the fiscal year. If incoming orders did drop as you might expect, because I know you've been reading the newspapers, incoming orders did drop in October. So there definitely was a down trend in the quarter. But as Bill mentioned, that is baked into our guidance.

Okay, great. And then, just as I look at your margins over the last few years, they have been essentially stable around that 11% target. And within that period, you had healthy volume rates. And just as I look at your guidance, it seems like you are calling for some margin, actual margin expansion into fiscal 09. Conversely volume seem to be coming under some deceleration or pressure. So, I am just trying to understand how you are able to start to get margin expansion in a slowing growth period versus the past few years, where margins have been fairly stable?

Jeff, this is Tom again. So, I think there is probably a number of responses to your question. One is what Bill mentioned and what I mentioned, we are going after discretionary spending very aggressively. So, that's an important part of our sort of margin maintenance objective. Also you'll recall this very well, as we talked with you over the last couple of years about challenges and in our distribution centers, efficiency improvement opportunities in the like the new warehouse management system that we put in last year. While I said before we have a ways to go those one time problems R&D behind us. And you'll also recall that we talked from time to time about low margins and some big projects in the gas turbine area in the IFS area, and we don't have any of those baked into our guidance. So, hopefully it's going to be a combination of all of those things that will be able to maintain our operating margin target at that minimum level of 11%.

Okay, great. Thanks guys.

Thank you. Our next question comes from the line of Richard Eastman with Robert W. Baird & Company. Please go ahead. Richard Eastman - Robert W. Baird & Company: Bill, could you just review for a second on the engine side of the business, you mentioned Asia was down in local currency by 6%. And I think you've said off-road was up and after market was up; was the OE business there down double digits; is that... am I interpreting that right?

Yes, hang on a second Rick. Rich is looking at the numbers to make sure that I get this right, so...

Yes, we were pretty flat in the truck business, and... Richard Eastman - Robert W. Baird & Company: Which is mostly in Japan?

Yes. Richard Eastman - Robert W. Baird & Company: Okay.

And then we've had... looks like we had growth in both... modest growth in off-road, better growth in the after market. Richard Eastman - Robert W. Baird & Company: Okay, so the OE business in Asia accounted for the decline in local currency overall. When I look at fiscal 09 and your guidance was basically local currency growth in the lowest single digits, how do you see that playing out in the three regions?

Rick, I just want to correct some of that. We said that our Asian engine sales were up 6% local currency. Richard Eastman - Robert W. Baird & Company: Plus 6%?

Plus 6%, right. Richard Eastman - Robert W. Baird & Company: Okay. In Asia engine okay, that makes more sense.

Yes, I was trying to connect with that here. So the off-road... what we said was the off-road was up 5%, and the after market was up 9%. And as Rich mentioned in a minute ago, the one that was not up was up less than average was the truck business in Japan. Richard Eastman - Robert W. Baird & Company: Okay, now that makes sense. And then, when I look at again 09 local currency, low single-digits is kind of the overall sales guidance in local currency. How do you think that plays out geographically NAFTA, Europe, and Asia?

For the engine business or overall? Richard Eastman - Robert W. Baird & Company: Overall sales guidance for the fiscal 09 was kind of low single-digit local currency sales growth. And I am just... I am curious. I mean are you thinking that any of the three geographies will be down?

Europe, we'd say Europe would be down. Richard Eastman - Robert W. Baird & Company: Okay.

And the U.S., I would say would probably be flat and Asia up. We're just looking directionally. Richard Eastman - Robert W. Baird & Company: Okay, okay. And then what was the... I think I just missed this, but the dollar amount on the private placement to five year note, what was that? How large was that?

Yes Rick, this is Tom. That was $80 million. Richard Eastman - Robert W. Baird & Company: Okay. Okay, thank you.

[Operator Instructions]. And we have follow up question from the line of Charlie Brady with BMO Capital Markets. Please go ahead.

Hi, thanks. Just with regards to foreign currency. I am assuming that the majority of it is Euro related exposure. How much... can you quantify how much of that would be out of Japanese Yen or Pounds Sterling in UK?

Charlie, it's Bill, it's mostly the... the downward pressure is on our results has been the Euro, mostly the Euro. The Yen has actually gone the other way.

Okay thanks.

Sure.

And we have a follow up question from the line of Richard Eastman with Robert W. Baird & Company. Please go ahead. Richard Eastman - Robert W. Baird & Company: I am sorry. One more thought on the sales of this air business in Tennessee, I believe, were there net proceeds from that sale?

Rick, this Tom. The net proceeds were approximately $4 million. Richard Eastman - Robert W. Baird & Company: Okay. And so by definition then on Western Filter, is that kind of a $70 million, I mean that was the only thing you acquired in the period, right?

Rick, your math is pretty good I know, what you are trying to figure out. The Western Filter acquisition was $78.5 million. So if you are reconciling to the cash flow statement on the proceeds on from the Southern business were $4 million. Richard Eastman - Robert W. Baird & Company: Okay. All right thank you.

Thanks.

Thank you. And at this time, there are no further questions. I will now turn the call over to Bill Cook for any closing remarks.

Thanks Brandy. To all of you participating and listening, I want to thank you for your time and your interest. To everyone on the Donaldson team, thank you for delivering another record quarter and for your continuing support. We all have a lot to be thankful for. So have a great Thanksgiving holiday. Good bye.

Thank you. Ladies and gentleman, this concludes the Donaldson First Quarter 2009 conference call. If you'd like to listen to a replay of today's conference, please dial 1800-406-7325 or 303-590-3030 followed by the access code of 3943190. Thank you for your participation. You may now disconnect. .