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.

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?

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…

Thanks, Bill, and good morning, everyone. Our gross margin was 34.6% in the quarter, down 70 basis points from last year. There were some pluses and minuses in our gross margin number, which I’ll walk you through now. The largest impact in the quarter was lower absorption of fixed cost, which reduced gross margin by 90 basis points compared to last year. This decrease was mainly driven by two separate factors. First, our two disk drive filter plants were operating at lower levels of production during the quarter due to the disruption of the entire disk drive market caused by the Thailand floods. In fact, our factory in Thailand was closed for a period of time in November, not because we were flooded, but because our customers couldn’t get parts from other suppliers to assemble the hard disk drives. Under Thailand labor laws, we continued to pay our workers there a significant portion of their normal pay during the shutdown. We also reduced shifts at our disk drive filter plant in China due to the supply chain disruption. Fortunately, the industry production levels have improved substantially by the end of January and should be back to pre-flood levels over the next few months. The second driver of lower fixed cost absorption was a decrease in shipping days by five days in most of Asia compared to last year’s second quarter. This is due to the timing of Chinese New Year which was in February last year but fell in January this year. There were also less of the traditional holiday shutdowns at our customer in the United States and Europe last fiscal year as demand came back strong from the recession. This year was a more normal holiday shutdown period. Higher commodity prices compared to this time last year and…

Thanks, Jim. I think we’ve covered the quarter pretty well, and now we’re going to switch gears and look forward. And our current guidance is based on the expectation that overall European economy will remain at current levels during the second half of our fiscal year and for the Chinese economy to improve, which will obviously benefit China as well as the rest of Asia. We anticipate that the U.S. dollar will remain stronger than what we had assumed in our previous guidance that we issued in November. This stronger U.S. dollar does create about a nickel EPS headwind for us compared to our earlier outlook. We expect our full year sales to be between $2.45 billion and $2.55 billion or an increase of between 7% and 12% over last year’s record of $2.3 billion. Bottom line, we continue to see many growth opportunities and expect that we will continue to grow faster than the end-market averages through the introduction of new filtration technologies and products and also by increasing our sales coverage in emerging geographies. Now I’ll review our outlook by segment. Our full year Engine sales are forecasted to be an 8% to 12% increase over the prior year. Within Off-Road product sales, we expect continued strong demand for our OEM customers, ag, construction and mining equipment as the average age of equipment in the field still remains historically high. This should support an ongoing stronger equipment replacement cycle. We’re also forecasting continued strength in our On-Road product sales. For example, ACT research forecasts that heavy truck builds at our North American customers is expected to increase from 256,000 in calendar 2011 to 296,000 in calendar 2012, or a16% increase, and then increase again in calendar 2013 by another 8% to approximately 320,000 trucks. The average age of…

Thank you, sir. (Operator Instructions) The first question comes from Hamzah Mazari from Credit Suisse. Please go ahead. Hamzah Mazari – Credit Suisse: Good morning. Thank you. A question on how to think about incremental margins in your business going forward given most of the fixed cost absorption issues are behind you now. At the same time, you’re sort of slowing down head count but also making some capacity investments. How should we think about those incremental margins long term given where you are in the cycle right now?

Hamzah, this is Jim. I think as we talked before in terms of coming back from the recession, we had a little bit of a pick-up in terms of incremental margins on some of those first sales that came back. We’re well past that at this point. So I think as you look at, maybe, first gross margin, I think the challenges we had this quarter that I referred to in my prepared comments are past us. I think the wildcard is commodity prices and, as of right now, those are fairly stable. So I think from an operating margin, our longer-term goal is to continue to expand that in small increments because we’re not out to maximize operating margin because we do want to continue making some of these investments. But over time, we do see opportunities to slowly expand the operating margin.

Hamzah, this is Bill. Just to add to what Jim said, longer term, we have a goal of achieving and maintaining a 15%-plus operating margin. That’s not this year; point back to the guidance that Jim gave earlier between 13.7% and 14.5%. But over the next handful of years, our goal is to get to and maintain 15%-plus op margin. Hamzah Mazari – Credit Suisse: Great. And just a follow-up question. You spoke of PowerCore currently being at a $120 million annual run rate. Could you maybe talk about what your current aftermarket capture rate is and, as PowerCore gradually becomes a larger part of the install base, how we should be thinking about that capture rate moving up? Is it going to be a very gradual process? How should we think about that longer term?

Hamzah, Bill again. I think as we discussed and I’ll just sort of recap this, PowerCore offers advantages both on the first fit, so in some cases we’re picking up first fit business or share we didn’t have before. But probably the most significant opportunity it creates for both us and our customers is in the aftermarket. So with a non-proprietary technology, maybe a year after our system is in the field, we might only be capturing – we and our customers might be only capturing 30% or 40% of the aftermarket. With technologies like PowerCore or like Synteq XP, we can get that up to 100% for a period of time. So we can maintain at higher share for a longer period of time with these proprietary technologies, and then our goal going forward is to continue to refresh and introduce new technologies to keep that number up as high as possible. It’s growing very nicely. As we mentioned our Engine PowerCore sales were up 35% over the same quarter last year. We’re at this $120 million annualized rate at the end of the second quarter. We see that continuing to grow or accelerate. It’s really dependent on the launch by our customers of their new equipment platforms. So a lot of the programs that we won are won, but they’re just in the process of being launched. So we see that happening over the next couple of years that they’ll be out there and then we’ll see that that big pick-up in the aftermarket. Hamzah Mazari – Credit Suisse: Great. And just a last question from me on the acquisition side. Could you update us on your thinking on acquisitions, particularly on the liquid side and how much is liquid of your business right now?

So Bill again. About 18% of our sales are liquid today. That business has continued to grow very nicely. So by itself, it’s a $400-plus million business and we have plans, as we’ve discussed in other calls and presentations, to significantly grow our liquid business, essentially get that to $1 billion plus by fiscal 2021. We’re doing that both organically and through acquisitions, and we look at acquisitions on the air filter side as well. But most of our growth target, the, say, the 9% to 10% that we’re targeting as a CAGR in sales is organic. And we think we can do roughly 8% organically, and we say roughly 2% per year via acquisitions. So we’re still mostly an organic growth story, but we are always looking. We have a focused team looking at acquisitions both on the air and liquid side, but we probably are more focused on trying to find the liquid ones today. In fact, the last acquisition that we did, which is a couple of years ago, was Western Filter, which was liquid. Hamzah Mazari – Credit Suisse: Right. Great. Thank you.

Thanks.

Thank you. The next question comes from Charlie Brady from BMO Capital Markets. Please go ahead. Charles Brady – BMO Capital Markets: Hey, thanks. Good morning, guys.

Good morning, Charlie. Charles Brady – BMO Capital Markets: Hey, could you just remind us in the Special Apps segment, the mix between the membranes and the hard disk drives, is it still around 50%?

Charlie, Bill. The hard disk drive business is probably about 60% of the total Special Apps. Charles Brady – BMO Capital Markets: On a normalized basis, correct, though obviously, lower than that recently?

Right.

Charlie, Rich here. Membranes would be 25% to 30% of the balance of Special Applications, and then some of our more niche businesses in semicon, imaging and then venting solutions make up the balance. Charles Brady – BMO Capital Markets: Okay. Thanks. That’s helpful. I just want to ask, on your guidance as it relates to your assumptions for currency on the euro and the yen, specifically on the yen, you’re now assuming a 76 rate on the yen which is where it was at the end of your quarter but it’s trading at 80. And I’m just wondering, I mean, the impact that that could have potentially, if we were to stay at the current level, on fiscal 2012 revenues and EPS. I guess basically, how much of your business really gets denominated in yen?

Hey, Charlie. It’s Rich again. Well, our subsidiary in Japan is our largest single subsidiary we have globally today at $100 million, $120 million of annual sales. The impact of that moving a couple of percent might be $1 million or $2 million on the top line, and by the time it gets to the bottom line, it’ll be a pretty small impact.

Charlie, this is Jim. The one that impacts us to a much higher degree is the euro. Charles Brady – BMO Capital Markets: Right, okay. And just one more from me. Can you just maybe give some more granularity on what you’re seeing in the South American markets, particularly like Brazil?

Charlie, Bill. We see very strong growth in Brazil and throughout the rest of South America. In fact, we just opened up a distribution center this past year in Chile to help serve the market down there. So part of the investment that I was talking about in Aguascalientes is directly focused on, not just serving Mexico, but the growing South American market as well. So we see very good prospects there. Charles Brady – BMO Capital Markets: Thank you.

Thank you. The next question comes from (inaudible) from BB&T. Please go ahead. Kevin Maczka – BB&T: Hi. This is Kevin Maczka from BB&T. Good morning.

Hi, Kevin. Kevin Maczka – BB&T: Hey Bill. Can I ask the incremental margin question in a little different way? I think we understand that at this point in the cycle we shouldn’t see the big outsized incrementals for the total company. But in Industrial in the first half and again here in Q2, we did see that very strong incremental margins even with this underabsorption from the disk drive issues. So are you saying for Industrial as well that that’ll settle out to a more normal incremental kind of in line with this 15% margin where we are now?

Kevin, I’ll start and then I’ll turn it over to Jim. We don’t give operating margin guidance by segment. We only do it for the company and there are pluses and minuses in that. And I’ll sort of point back to our full-year guidance and the comments I made earlier about the longer term. We do see the opportunity to get to a 15%-plus OP margin, but as Jim mentioned, we made a pretty good step-function jump the last couple of years. We don’t see repeating that because that was the advantage or the benefits of some of the restructuring that we did coming through the recession and we’re not planning to repeat that. And we’re also, as Jim mentioned, we’re balancing operating margin expansion with focusing on investing back in the business, so we can get that 8% organic growth I mentioned a minute ago.

This is Jim. I think the other thing, too, is when you step down from the company level to the segment level, the mix of products from one quarter to the next can play into that as well. So we talked first quarter about having a real good start on the margin within Industrial, but that can fluctuate depending on project sales and the like. So I wouldn’t call it a trend yet, but we’re certainly happy with where it’s at. Kevin Maczka – BB&T: Got it. Okay. And if I can shift gears over to what you’re seeing in engine aftermarket. That step down a little bit here, in terms of revenue sequentially, looks like it grew on a year-over-year basis about 10% in the first half, but you’re now calling for moderate growth for the year as a whole. Can you kind of describe a little more about what you’re seeing in terms of incoming order rates and are you suggesting that that may even turn negative in the back half on a year-over-year basis?

No, we’re not suggesting it’s going to turn negative. So I think it’s just moderating is really what we’re seeing. We saw, coming out of the recession, there was probably some restocking by parts of our distribution channel that helped with higher numbers and we’re seeing, maybe, a more normalized type of growth rate there with the addition of the fact that we’re adding more products in our product line and more distribution. So we still feel, as I tried to say in my comments, that we’re growing faster than the market but the market rate has moderated. Kevin Maczka – BB&T: Okay. Got it. Thank you.

Thank you.

Thank you. The next question comes from Laurence Alexander from Jefferies. Please go ahead. Laurence Alexander – Jefferies: Hi. This is Jeff on for Laurence. Can you guys provide any initial color, post the Chinese New Year, of demand trends in Asia in the auto market and, also, if you can update us again on any order trends in the aerospace market?

Hey, Jeff, Bill here. I think, first off, you mentioned the auto market and we’re really not in the auto market. So we’d be talking about heavy trucks and construction equipment and ag equipment on the Engine side. I think what we saw before Chinese New Year was some of the moves that the Chinese government was making to sort of loosen things up a little bit to facilitate building more momentum in the economy that we’re very hopeful of that second half of our year is we’ll see a recovery. Our team in China just completed a forecast in the last couple of weeks. So our outlook is based on their forecast and incorporates what they’re seeing in ordering trends and from their conversations with customers. So we do see that picking up. And then on the aerospace and defense, it’s sort of a mixed bag. The commercial side is it’s stronger and offsetting sort of the weakness that we’re seeing on the defense side. We are working on some more significant defense programs, but those are going to help us in the out years, a couple years out. So right now, it’s a mix, commercial strong being offset by sort of a weakening in the defense market. Laurence Alexander – Jefferies: Great. Thanks.

Sure.

Thank you. The next question comes from Richard Eastman from Robert W. Baird. Please go ahead. Rick Eastman – Robert W. Baird: Yes, good morning.

Good morning, Rick. Rick Eastman – Robert W. Baird: Bill, could you just split out the Asian growth rate by Engine and Industrial and maybe speak to the 3% non-disk drive impact growth number?

For the 3%, excluding disk drives, split between Engine and the rest of Industrial? Rick Eastman – Robert W. Baird: Yeah. Is it possible to...?

Well. Rick Eastman – Robert W. Baird: On short notice?

So, Rick, this is Rich. In total, in local currency terms, the Engine business in Asia was up a little over 3%. Rick Eastman – Robert W. Baird: Okay.

And as we mentioned, total Industrial was down about 12%. Excluding Special Applications, the rest of Industrial was up between 4% and 5% local currency terms. Rick Eastman – Robert W. Baird: Okay. So the softness was pretty broad-based and, again, one can look basically to the China PMI and then, obviously, the Chinese New Year was in there. So basically as you look to the second half and you expect an improvement in Asia/China, is that pretty much both pieces of the business or does Engine maybe lead that or...?

I think – Rick, it’s Bill here. I think we see it in essentially all pieces of the business. Rick Eastman – Robert W. Baird: Yeah. Okay. All right. Okay, and then can you just give us what China sales were in the quarter or just an annualized rate or...?

Sure.

Two seconds, Rick. Rick Eastman – Robert W. Baird: Maybe, Bill, maybe I’ll just jump to the next question real quickly. The IFG business, that 8% growth rate was I thought a pretty good number. Are you seeing a material kind of measurable impact from the Torit dust collection systems in that IFG number and, also, is there anything – at our conference back in the fall you talked about the baghouse business being a big opportunity for PowerCore cartridges. Is there anything in there that’s starting to be measurable?

Rick, Bill. Yes. Rick Eastman – Robert W. Baird: Okay.

A significant portion of what we’re – on these new Torit PowerCore systems, we’re selling those into applications where we didn’t really have – it was a baghouse product before and we didn’t really have a significant market share. So it’s both a significant first fit opportunity for us as well as what I talked about with the replacement filters. So yes, it’s allowing us to play in some segments where really didn’t have a perfect product before. Rick Eastman – Robert W. Baird: So pure share gains there. Okay.

And then on your China question, Rick, our sales in China in the quarter were $31 million and, for the first half, they were $66 million. Rick Eastman – Robert W. Baird: Okay. And then just one last question, Bill. When you’re talking – I think it was either you or it might have been Jim. But when you were talking about the CapEx and you split out the quarter pieces here, the one piece you mentioned, 25% was for technology initiatives. Is that basically – can you just explain that? Is that tooling or is that just pure research? How does that end up in CapEx or what is that?

This is Jim. What that is is a combination of IT-type technology initiatives to improve the business as well as technology initiatives in our labs and our product development. Rick Eastman – Robert W. Baird: I understand. Okay. So it’s more of systems upgrades or spend?

Systems and labs and equipment related to the lab. Rick Eastman – Robert W. Baird: Oh, I see, I see. Okay. Great. Thank you.

Thanks, Rick.

Thank you. The next question him from Brian Sponheimer from Gabelli & Company. Please go ahead. Brian Sponheimer – Gabelli & Company: Hey. Good morning, Bill.

Good morning, Brian. Brian Sponheimer – Gabelli & Company: I just had a question for you on return of capital going forward. Obviously, dividend policy and tax treatment thereof is an issue on the front page today and you didn’t repurchase any shares in the quarter. So just thinking about, let’s say there’s some sort of major policy change regarding dividends, how does that affect the Donaldson strategy going forward?

Major policy change of the government or at Donaldson? Brian Sponheimer – Gabelli & Company: Well, yeah, if dividends start being taxed at 39%?

So, Brian, we’ll wait and see on that. I’ll say, as of today, our policy remains the same and it’s been very consistent for the past 20-something years. Our dividend policy is to pay out between 20% and 30% of the average of the prior three years’ EPS. Over the last probably half a dozen years, we’ve really targeted to stay in the upper half of that range, 25% to 30%, which would give us sort of an approximate 1% yield, okay? So we don’t promise that, but that’s what we decided we would do. And then on share repurchase, historically we’ve targeted 3% gross, which should result in a net 2% reduction per year. We’ve moderated that a little bit in the last couple of years to say we might want to use more of the cash there for acquisition, so a 2% gross. But we also commit that we’re going to buy enough each year at a minimum that options would never be dilutive. And so, as you know, over the last 20-something years, we’ve averaged a net 2% reduction and share count’s always gone down. So I would say at this point, Brian, we’re going to maintain the course. If there is a significant change in the tax treatment of dividends, we will take a look at that. What we’re trying to do there is deliver a combination of components of value for our shareholders and that’s the way we have been doing it. But we’ll revisit that if something should significantly change. Brian Sponheimer – Gabelli & Company: Okay, great. Thank you very much.

Sure.

(Operator Instructions) The next question comes from Eli Lustgarten from Longbow Securities. Please go ahead. Eli Lustgarten – Longbow Securities: Good morning, everyone.

Good morning, Eli. Eli Lustgarten – Longbow Securities: Kind of just one clarification on China. If, given the size, which is $130 million annual rate at this point, if the Chinese market didn’t pick up for the rest of your fiscal year – because I guess the consensus now is post-July – that really won’t have any material impact on your guidance, maybe $0.01 or $0.02 or something like that. Is that fair?

Eli, this is Bill. We haven’t quantified that, and I’ll point back to the guidance that we gave. We think that it will pick up. So if it didn’t, then we’ll revisit our guidance at the end of the next quarter. But the reports from our people and what we saw before Chinese New Year would suggest that the Chinese government is trying to move the growth rate back up and that’s ... Eli Lustgarten – Longbow Securities: I understand. That’s a macro call. The Chinese PMI for February came out at 49.7 and not much change. And what we’re hearing, all of the economies now have given up the post-Chinese New Year upturn and put it in July. That’s the reason I asked the question. I just want to know if it has any – I don’t know what’s right or wrong, I just think about the magnitude of the impact.

So I’ll leave you with two thoughts. One is that our share in China is very small in many of our markets. So to some extent, the overall economic indicators – we want to grow faster than the markets anyway and we have the share upside to do that. So that would be one thing I would mention. The other thing to your point, though, is if the Chinese economy remained in the doldrums, as you’re suggesting as a possibility, it would impact our business in China and some of the other businesses in Asia because, as I mentioned in my comments, our businesses in, like, South Korea and Japan serve customers that are exporting into China. So there is some rollover effect outside of China given how fast or how slow the Chinese economy grows. Eli Lustgarten – Longbow Securities: But you gave us the Japanese business is about $130-odd million, $120 million to $130 million, the Chinese business running the same annual rate. How much is the rest of the other parts of the Asian business, besides that, what’s total Asia at this point?

Asian total is about 20% of our sales.

Yeah, about 25% of our sales. So Asia, a little over $0.5 billion at this run rate. So you would say that Japan and China on their own make up about 50% of our Asian sales. Eli Lustgarten – Longbow Securities: Now you talked about in the new fluid business winning six OEM platforms. Can you give us the type of platforms? Are those mostly construction equipment platforms, or is it multiple customers or one major customer that’s putting on multiple platforms?

Eli, Bill. It’s multiple customers. It’s around fuel filtration and it’s both the On-Road and Off-Road. Eli Lustgarten – Longbow Securities: Filtration. Do you have any targets set for the next six to 12 months of how many more platforms you think you can do on that?

We do internally, but we haven’t made those public. Eli Lustgarten – Longbow Securities: Okay.

But we’re trying to obviously to win every one that we can. Eli Lustgarten – Longbow Securities: Yeah.

We do have targets which support the growth plans that we laid out in terms of the revenue numbers that I mentioned earlier in the call. Eli Lustgarten – Longbow Securities: And are we seeing anything in the order patterns from most of your markets that would prevent your sight improvement in operating margins in the second half year over year at this point? I mean, that’s sort of what you’ve indicated, you striving for – I mean, I don’t see anything that would prevent that from happening at this point. Is there anything...?

Eli, it’s Bill. I think, I mean, anything could happen tomorrow or next month or next quarter. But right now the guidance that we’re providing is very fresh and it’s based on a forecast from all of our leaders in the businesses and around the world. So I think we’re, as Jim mentioned, that doesn’t mean that we’re not continuing to reassess what’s happening out there. And we are being conservative in terms of which investments are, in terms of head count we’re adding because there is some uncertainty around what’s happening in Europe or, to your question, around China. But the forecast is – the ink on it is just drying, so it’s very fresh and that is our best guidance at this point. Eli Lustgarten – Longbow Securities: And one final one. Can you talk a little about what you’re seeing acquisition-wise and whether that’s taking a little more important priority around the company over the next six to 18 months I guess is the way I would think about it.

Eli, Bill again. We’re still mostly an organic growth story. You’ve followed the company for many years. So we want to get about 7% or 8% of our revenue growth per year through organic growth, and that’s what we’ve done over the past two decades. So we think we can continue to do that with investments we’re making in technology and sales and distribution. That leaves about 2% roughly from acquisitions. So at our current size, that would mean we’d have to acquire a company with sales of about $50 million each year. We’re always looking, but we remain mostly focused on organic. But we do have a small team focused on acquisition looking. But we’re patient, and we have our financial metrics and an acquisition would have to deliver. So we look at a lot and walk away from a lot, but we are always looking. And the pipeline, I don’t think it’s any better or any worse than it was six or eight months ago. There’s some activity, but not a tremendous amount of activity, but we’re always looking to see what’s out there. Eli Lustgarten – Longbow Securities: Thank you very much.

Sure. Thank you.

Thank you. There appears to be no further questions. Please continue with any other points you wish to make.

Okay. Thanks Michella. Now to conclude our call, I’d like to thank everyone for your time and continued interest in Donaldson. I’d like especially thank my almost 13,000 colleagues for their efforts and contributions in creating the wonderful results we delivered in our second quarter. This quarter demonstrates further significant progress in our execution of our strategic growth plan with our objective of building our company into, first, a $3 billion then a $5 billion filter company. Thank you, all, and have a great day. Good-bye.

This concludes the Donaldson’s Q2 FY 2012 conference call. Thanks for participating. You may now disconnect.