Good day, everyone, and welcome to today's Donaldson Fourth Quarter Call and Webcast. Just a reminder, today's call is being recorded. And at this time, it is my pleasure to turn the conference over to Rich Sheffer. Please go ahead sir.

Thank you, Lori, and welcome to Donaldson's fiscal 2014 fourth quarter earnings conference call and webcast. Following this brief introduction, Bill Cook, our CEO, Tod Carpenter, our COO and Jim Shaw, our CFO will review our fourth quarter earnings and our initial outlook for fiscal 2015. 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. In a few minutes, Tod and Jim will cover the details of our fourth quarter results and our initial outlook for fiscal 2015. But, first I would like to offer some summary comments. I'm very pleased with our strong fourth quarter finish. While there is still some challenging conditions in many of our end markets, we delivered 6% organic revenue growth and record earnings. Our fourth quarter performance was a great conclusion to our fiscal 2014 in which we delivered a new EPS record of $1.76. Having said all of that, I want to add that it wasn't easy as we faced declining conditions in some of our end markets and higher purchase commodity costs, we also continued to make significant long-term investments in our business, especially in the areas of technology advances and new growth initiatives that will pay big dividends down the road, but not today. So fiscal 2014 is a testament to our company's long-term focus on creating shareholder value and our culture of excellence in all aspects of execution and continuous improvement. I'm deeply grateful to the efforts and contributions of my fellow 12,600 colleagues, each of whom played a role in our successful year. Now, those of you who have followed our company over the past 25 years know that we have very deliberately and consistently used our technology and international beachheads to build out a portfolio of technology based filtration businesses around the world. This conscious diversification plan has created a filtration company where the individual businesses are linked via our technology and operational investments but provide different end market and regional cycle exposures. In aggregate, our diversification model has worked. Each year some of our end markets or regions are cycling up and others are not but…

Thanks Bill, and good morning. Our fourth quarter sales were a record $668 million, an increase of 6% from last year's fourth quarter. Foreign currency translation had a 1% positive impact at the consolidated level, however, the impact of FX varied by region. For example, our European businesses had 4% benefit from translation, while our Asian businesses had a 1% headwind. As a reminder, you can find a detailed analysis of currency translation by business unit and region on the Investor Relations homepage of our Web site. The rest of this review will discuss local currency fourth quarter results. Sales in our engine product segment increased 6% over the prior year. Our on-road OEM sales increased 8% as build rates of new trucks increased globally, our growth was led by Latin America, which grew 21% and Asia Pacific which grew 6%. Our off-road OEM sales decreased 11% due to a slow down in end market demand for new agricultural equipment in both Europe and the Americas and continued soft mining and construction equipment demand in Asia Pacific. Based on our customers forecast, we believe the mining equipment market will remain at the current low level until some time next calendar year and that demand in the agricultural equipment market will continue to soften through our fiscal 2015. The much better news is that we continue to see strong conditions in our engine aftermarket, where we supply replacement filters to both our OEM and independent distribution channels. Our engine aftermarket sales increased 16% in the quarter with strong sales in all of our major regions. We attribute this growth to the combination of improving equipment utilization in the field and our market growth initiatives. We are continuing to see strong replacement filter sales growth in developed markets from our OEM customer…

Thanks Tod and good morning everyone. Our gross margin was 35.7% comparable to our third quarter, but down 40 basis points from last year's fourth quarter. As we noted in our press release there were a few items impacting our gross margin this quarter. One of the favorable items was the lower number of large gas turbine shipments in the quarter; these shipments typically have a lower gross margin than our company average. We also benefited from a higher percentage of replacement filter sales which were 56% in the quarter compared to 53% last year. In many of our end markets, the utilization of existing equipment in the field is good and that helps our replacement filter sales which carry a higher margin. Overall, product mix had a positive 30 basis point impact on gross margin. In addition, our ongoing continuous improvement initiatives benefited our gross margin by approximately 50 basis points compared to last year. Partially offsetting these benefits was 70 basis points impact on margin from higher compensation and indirect cost as we made additional investments in engineering and incentive compensation – costs were up compared to last year. We also experienced higher material cost in the quarter primarily steel, which negatively impacted gross margin by 50 basis points. Our operating expenses increased by $11 million compared to last year's fourth quarter. As a percentage of sales, operating expenses increased by 50 basis points. Higher incentive compensation expense, incremental expenses related to our global ERP project and higher travel expenses associated with our global growth initiatives and increased customer visits, increased operating expenses by 100 basis points. These increases were partially offset by lower warranty expenses and operating leverage from our sales increase, which lowered our operating expenses as a percentage of sales by 50 basis points. Our…

Thanks Jim. As Tod and Jim have already noted, we have continued to make the investments needed to support the long-term objectives outlined in our strategic plan. Our plan is a compilation of the very detailed plans by business unit and region that when aggregated add-up to our sales targets of $3 billion and $5 billion. We have a number of very focused initiatives underway that will help us grow over time regardless of the economic environment. I would like to take a few minutes to highlight several of these initiatives. The first is with emerging economies such as Latin Americas, Southeast Asia, India, China and Eastern Europe. Each of these regions offers us significant organic opportunities for growth. In these targeted emerging markets, we are continuing to add sales resources, parts to our product line, distribution capabilities, distributors and OEM customers. For example, in our engine aftermarket business, we added 58 new distributors and over 460 new part numbers in the quarter. Another example is our continued investment in our distributor capabilities. We just had the grand opening of our newest distribution center in Peru last week and work continues on another new distribution center this one in Slovakia, which will open up this fall. Both of these will support further growth of our replacement filter businesses. By having more of our product offering available locally and supported by local distributors and our sales people, we have shown time and time again, that we can grow our business. Another of our key growth initiatives is the utilization of our technologies to help better solve our customers' filtration issues on their new equipment, while also protecting their replacement filter business. As we have discussed in the past one of our most successful air filtration technology introduction is PowerCore. It is…

Good morning. Thank you. The first question is on M&A, I realize you are buying back more stock and primarily as a result of not finding any deals out there, I assume that's because of a higher degree of discipline because it seems like a lot of your competitors are doing a significant M&A, maybe if you could give us an update on, are there any product gaps within the portfolio currently that exist where you really do need M&A to fill those or can we expect you to do that organically? Just trying to get a sense of -- given that there has been a lack of M&A, does the portfolio get hurt longer term? Thanks.

Hamzah, it's Bill, I will start. So as we've talked about in the past, we are mostly focused on our organic growth and we see plenty of opportunities to do that. But we do use M&A – have used M&A over the years to supplement that. And as you probably have seen, we did announce pending acquisition of Northern Technical, which will complement and add product line breadth in our gas turbine business. And I will ask Tod to update us on that in a minute. But, it's an organic growth story with M&A adding say roughly 2% of our revenue growth per year as our target. So organically, we will like to grow 6% to 7% and then M&A would be the additional 2. We do have a team focused on M&A but we are – we are very disciplined in terms of how we approach those and look for the right value for our shareholders. As you noted over the past year when we have not closed any deals, we have ramped up our share buyback and dividends also as another way to return value to our shareholders. Tod, do you want to give us an update on Northern Technical?

Sure. So Hamzah, as we talk about growing our company first becoming $3 billion and then $5 billion, we talk about four strategic imperatives though we want to have more international, more replacement parts, more industrial, and more liquid, the acquisition of Northern Technical addresses three of those four strategic imperatives. It gives us obviously more international, more replacement parts and more industrial. And so that's from a company perspective as we get direct into our gas turbine business specifically, the gas turbine market really the number one worldwide market is the Middle East and Northern Technical is located in Abu Dhabi. So this really strengthens our presence in the number one gas turbine market in the world, additionally what Northern gives us is more replacement parts, it helps us fill out our replacement part portfolio to address static turbine applications. So you put those two together that's why we feel it's a strong addition to our company and we look forward to closing it in late September.

Great. And just a follow-up question, you spoke about the timeline associated with the ERP rollout, could you give us a sense of how we should think about the benefits post the ERP system having been rolled out whether you can do that qualitatively or quantitatively, any color there would be appreciated? Thank you.

Hey, Hamzah, it's Jim. In terms of where we are at with the project as I mentioned in my prepared comments, we are wrapping up the Americas here this calendar year then moving to Europe next calendar year with then the efforts once we complete the project in Europe shifting to Asia Pacific. So this project will take us through the end of fiscal 2016 maybe a little bit into 2017, but I think our goal is to wrap it up by the end of 2016. So in terms of the benefits there, there's two things. One is obviously the lack of the incremental thought that we are experiencing today. So for this fiscal year we had – we have spent a little over $8 million of expense which once the project is completed that will end. In terms of the benefits obviously, these are always hard to measure specifically, but we have identified a number of benefits in the double digits of millions once for life. But timing wise, we are not going to start seeing some of those benefits until we get a full region. So once we get the Americas live this fiscal year, we'll start to see some of those. I think where the bigger benefits come in is towards the end of next fiscal year, into fiscal 2016 where we have all of the Americas and all of Europe on a single system. Some of the intangibles with that or the ability to transfer our people have processes, the same way in multiple locations, but then there is also a lot of transaction related costs savings in terms of how we transact our intercompany transactions, a lot of automation that we don't have today. So once this is fully rolling in terms of four regions on board, we expect to see double-digit million-dollar type savings.

Very helpful. Thank you.

And moving on, we'll go to Eli Lustgarten with Longbow. Eli Lustgarten – Longbow Research: Good morning, everyone.

Good morning, Eli. Eli Lustgarten – Longbow Research: Can we get some commentary insight into the operating margins that we saw for the two sectors? I understand a bit of the weakness in engine, but I thought the industrial number was permanent. Was that just all aftermarket mix or is there anything else that you can help us because that was probably a big surprise.

Sure, Eli. This is Jim. As you mentioned, engine was somewhat similar to last quarter and it's really the same types of things in terms of the year-over-year decrease we're seeing in operating margin, which is some of the investments I mentioned in my introductory comments in terms of engineering and a lot of those are focused on full market development and new product launches on the engine side. And then, engine also does get higher shares some of the investments that I mentioned as well as incentive compensation that the year -over-year incentive compensation is skewed more to the engine side as they had higher year respective to their goals than the industrial side. So turning to the industrial side, in terms of the improvement, you'll recall from last quarter, this wasn't so good. And part of that was just a function of the sales leverage. We had some very strong finish on the industrial side with both gas turbine improving and some of our IF aftermarket. That's really helped from a leverage standpoint because we didn't add to the business in terms of operating costs. And then the other factor is mix. So we did have a number of larger gas turbine projects that maybe we're a little bit below our typical margin last year just given their size. And now the mix has improved with more aftermarket and the lack of those larger gas turbine projects. So if you look back maybe two years, the 17% it's kind of right in line with where we ended fourth quarter of 2013. So those are the main factors there. Eli Lustgarten – Longbow Research: And then you might guess where I am going because as we look out to 2015 with gas turbine up 25% or so, can you give us some insight of what we should expect, it sounds like this 17% might not reoccur so readily next year. So just trying to get a picture of how to model this thing out?

Yes, I think it's probably somewhere in between. It's not – we're making investments because we are targeting a lot of growth opportunities within industrial. So that will be a little bit of it. But at the same time, we don't expect so maybe we don't have any of those large GTS projects of that size of $20 million or so that we'd bring it down to the level it was last year. So I think probably a reasonable assumption is, is somewhere in between there where we see it going forward. Eli Lustgarten – Longbow Research: Okay. Is there any skewness to the shipping schedule for the 23% or is it uniform and will Northern Technical, which I guess is about $22 million in revenue. Should we -- we are happy with the revenue, but does it have any impact on the profitability? Hello? Hello?

Hello, operator?

Operator? Eli Lustgarten – Longbow Research: Can you hear me?

Lori?

Yes, it's fine. I'm not sure what that noise was, but go ahead. We can hear everyone fine. Eli Lustgarten – Longbow Research: Could you hear the question I just asked? Hello? Hello?

Lori?

One moment, everyone. One moment, Mr. Lustgarten, hold the line and just double-check on it. Eli Lustgarten – Longbow Research: Okay. Thank you. Oops.

One moment, we will reconnect them. Hold on just a moment everyone. Eli Lustgarten – Longbow Research: Hello.

Hold on, we are reconnecting them. Eli Lustgarten – Longbow Research: Oh, well.

And ladies and gentlemen, please standby as we connect our speakers. And ladies and gentlemen, once again please standby as we reconnect our speakers. Once again, ladies and gentlemen, thank you for your patients today, we will be reconnecting our speakers shortly. And once again, ladies and gentlemen, thank you for standing by. We are reconnecting our speakers shortly. Once again, ladies and gentlemen, thank you for standby, we will be reconnecting our speakers shortly. And it looks like Mr. Sheffer is back. Mr. Lustgarten, please go ahead. Eli Lustgarten – Longbow Research: That's what you get to having better margins than anybody else this term, right, this quarter, I guess. Hello?

Yes. We hear you. Eli Lustgarten – Longbow Research: What I was just asking about your shipping schedules to gas turbine and putting the Northern Technical acquisition in starting September is $22 million is not a big deal. So does it have any impact on the profitability earnings that we should know about?

Yes. Eli, it obviously depends on when we are able to close that but we think it will be mildly accretive but again it depends on the closing date. Eli Lustgarten – Longbow Research: And the 25% gain registered pretty uniform for the year or skewed to the second or third quarter or is there anything we should know about that?

It's fairly ratable. The only variable would be the date of the close. Eli Lustgarten – Longbow Research: Well, I was talking about; I guess the 25% gain in gas turbine fit here?

I'm sorry. I'm sorry. Yes. It is a little bit more towards the backend. I think we are projecting roughly 10% up in our first quarter. And then that increases probably second quarter into the third quarter. So sort of a ratable increase all throughout the year with each quarters sequentially being larger. Eli Lustgarten – Longbow Research: And one final question. The $10 million expenses incrementally that you cited in the press release, is that going to be reported in the segments or corporate – and how it's divided, or is that reported in the corporate number?

Yes. That gets put into the segment essentially in proportion to their sales. Eli Lustgarten – Longbow Research: Okay. All right, thank you very much.

Thank you.

Thank you.

We go next to Kevin Maczka with BB&T Capital Markets. Kevin Maczka – BB&T Capital Markets: Thanks. Good morning.

Good morning, Kevin.

Good morning. Kevin Maczka – BB&T Capital Markets: Jim, can I first just clarify something I think I heard you said on the margins, you are looking for operating margins for the consolidated basis 13% to 14% in Q1 and then improving from there is that correct?

Yes. That's – 13% to 14% in Q1 second quarter about the same as last second quarter and then improving third and fourth quarter. Kevin Maczka – BB&T Capital Markets: And so in terms of Q1, is some of the investment timing impacting that or is it gas turbine mix that's – what are some of the puts and takes that are pressuring that so much in Q1?

I think it's a couple of factors; one is, in terms of the revenue growth, it's going to be lower year-over-year in Q1. And then as we ramp that up with the sales growth that we are forecasting is higher towards the back half of the year, which is what gives us that additional leverage. Some of the expense is a little bit higher in the front-end as we move the first two quarters of our fiscal year with regards to the ERP project, the biggest piece of that is going to be the first half where we are finishing deployment in the Americas well at the same time we are implementing in Europe. So there is a little bit of that front-end loaded as well. Kevin Maczka – BB&T Capital Markets: Okay. And then I could just shift over, in terms of the cash flow outlook being lower in 2015, you mentioned some working capital investments in there. Can you maybe give us a little more granularity there and talk about – you are always pursuing different continuous improvement type initiatives, are there some offsets there that may help us do better on that working capital line?

Yes. We're obviously always looking for opportunities for improvement. And this year is no different. So our goal is to find ways to exceed that, but what we've modeled in with the larger growth in our gas turbine business and some of the other OE business is picking up. Generally that growth does – is a use of working capital, especially the two I mentioned OE and gas turbine. Kevin Maczka – BB&T Capital Markets: Okay. And just finally from me on the gas turbine, can – it's been so lumpy and I think we understand why last year and this year, but can you just say a little bit more about your view longer term there? Are we still kind of early in a multi-year cycle and we just had a one year anomaly here or is it more of an excess capacity situation where we may have years like this -- like 2014 more often than not?

Kevin, its Bill. It is lumpy. I think that's a technical term we've always used for it. I think what we saw is sort of a pause this past year after a very strong period as sort of – a lot of that new capacity that was brought on by sort of absorbed into the system. Longer term, we are very bullish on the gas turbine business just because the cleaners – fossil fuel for power generation and there is a lot of it in many parts of the world including our country. So we see longer term that the gas turbine business is going to continue to grow. But I don't think it's going to be a linear growth line for the next half a dozen years. There would be some – probably some a little bit up – some ups and maybe some downs. But, we drew our lines through that, we think it's going to be – it's going to continue to grow very nicely. And that's one of the reasons back to Tod's point about buying Northern Technical. A lot of that growth is going to be in the Middle East and this really gives us a very strong position in that very – one of the largest gas turbine markets. Kevin Maczka – BB&T Capital Markets: Okay, makes sense. Thank you.

And moving on, we'll go next to Jeff Schnell at Jefferies. Jeff Schnell – Jefferies: Hi. You are seeing very strong Latin American trends. What are the trends you're seeing into 2015 and if you could help me understand what's driving that mix?

Yes. This is Tod. So we had a lot of success within Latin America with our growth initiatives. We – all the way from Mexico with our aftermarket opportunities by adding new distribution as well as parts in our engine business. All throughout Latin America we have had a lot of success growing our share. We expect that to continue as the equipment utilizations really continue at nice levels. Also, what's helping drive our growth is just our strategic plan that we have put together and really attacking lower market share opportunities to be able to grow across that market. So we see good opportunity and we have a growth plan across Latin America. That is again in the double digits. And we would expect given our strategic outlook and the plan that we have in place to be able to deliver that. Jeff Schnell – Jefferies: Great. Thank you.

(Operator Instructions) Moving on to Charley Brady at BMO Capital Markets.

Hi, this is actually [Patrick Wu] (ph) standing in for Charlie. On the industrial side, how much of special application is circulated today and also what are the growth place that you guys are making in agriculture fiscal year adjustment guidance?

Maybe I will take the – I will start. This is Tod and talk a little bit about how view ag. So the way we are taking a look at ag and what we have put into our guidance for fiscal 2015 is we have experienced a bit of softness within the agricultural market currently as we ended up our fiscal 2014. And we have the ag market as supported by our customers commentary customers like Deere and CNH and ADCO for example all have it continuing to soften somewhere between 0% and 5% throughout our fiscal 2015 and that will be a slow softening led by softening across the Americas as well as in Western Europe. So that's what we put into our forecast and maybe I will turn it over to Jim on the second part of your question.

Yes. In terms of the special applications, what that's been running here over the recent quarters, it's been about half the disk drive represents about half of the special applications sub-segment.

And then on the engine side, what end markets, do you see the greatest strength this past quarter in, what are your expectations for Class B trucks builds in your fiscal 15?

Yes. This is Tod again. When you take a look at Class A truck, for example, ACTs latest forecast as 2014 at about 294,000 Class A truck and calendar year 2015 at 312. So there is a gradual increase from the current levels that we have experienced growth in. Overall, what we have put into our forecast is additional growth this year into fiscal 2015 between that 2% to 5% across our on-road market and that's really led by North America and then also into Latin America the other parts of the world where a bit more guarded about.

Great.

So if you – the last time we talked about agriculture and then now on-road, if you – a little commentary on construction, we see construction really driving a bit of growth for us from a market standpoint of view, we see it up between 2% and 5% is what we put within our forecast. And that's really across the Americas and Europe, it's obviously softer in Asia Pacific and we have made that a bit more softest and modest flat to make down to 2% or 3% across the construction markets in Asia Pacific that's what we baked in within our forecast. So you rolled that altogether in construction, it's about 2% to 5% increase. And then lastly would be mining. Within engine and if you really look at our mining opportunities are supported by really our customer base by CAT and Komatsu and Liebherr. There has been more positive commentary about the potential to have a stronger market or some pick up in calendar 2015. However, we have not seen that. We have seen a little bit more positive within the replacement parts opportunities there. So we would say that that wouldn't be – the replacement part section of mining would be more flat to maybe down just a little bit, so slightly up from its current low levels, but overall the mining sector is not one that we have baked to grow into in our forecast for fiscal 2015. We have it more soft down between about 0% and 12%.

Okay. Thank you.

And moving on, we'll go next to Brian Drab at William Blair.

Good morning.

Good morning, Brian.

Good morning.

First question for Jim. I think some of these numbers have come up, but just so I can get all these into the model here. Can you give us specifically how much you spent on the ERP system on the fourth quarter? I know you gave us the $10 million figure, but that was an all ERP – ERP for the fourth quarter and then full year 2014 and what you expect in 2015, the total project cost again?

Yes. So the cost for Q4, and this is the total cost not the incremental cost, was about $2.5 million. For the year, we spent about $8.5 million that's compared to a little over $4 million last year. So about $4 million incremental from fiscal 2013 to fiscal 2014. Now for fiscal 2015, we are looking at another incremental $ 5million. So about $12 million to $13 million of spend for next fiscal year. And as for – that's – as I mentioned earlier, that's the year where we are really doing two regions at ones. So that should start to tail off then as we move into fiscal 2016.

Okay. Great. In that $12 million to $13 million in 2015, again, will be divided across the segments relatively, proportionately with sales?

Correct.

Okay. Great. And then just looking at the guidance and some of this has already come out, but make a few more comments. Looking at the guidance for 2015 on the margins and I think you have some things that are working in your favor in terms of margin, the aftermarket business is strong and maybe some more higher proportionate sales from liquid filtration, but the margin guidance is basically flat, I guess, up 10 basis points. Is it gas turbine or what is there that – what are the main offsets to those positive factors?

Yes. I think one; we are running very well right now. So from a company standpoint, we are running well. I think the mix is the primary factor there as we look to next year. Gas turbine is going to be accelerating. So that – it's a good business, but it carries a little bit lower margin than our, say, our replacement part sales and those are first-fit projects. And then we are forecasting our OE business to increase, Tod talked about heavy truck and maybe some opportunity in construction. And those – again, that's a good business, but it's a little bit lower margin. So those factors as well as some of the investments in terms of the operating margin would include the ERP cost as well as – there is about $5 million of additional investments that we're making as we really focus on growth. Couple of million dollars of that is associated with the distribution centers that Bill mentioned to really facilitate more aftermarket growth. And then we have additional investments in technology and growth initiatives as we really look forward to the opportunities in front of us and controlling what's within our control because we can't control the overall economic environment. So those are some of the offsets in terms of we really get some leverage, which will help, but we are continuing to invest.

Great.

Brian, I would add a little bit, I would add to what Jim said that we are not trying to maximize our operating margin. We are trying to optimize some of the revenue growth. And to get that revenue growth especially with the organic revenue growth and taking share or we are ready to make investments that Jim mentioned. We also are opening up another plant in Poland next spring. So in addition to the DCs, we've got other investments we did mention, but they're all about sort of the long-term investments we need to support our growth.

Okay. Great. It's good to understand all those and that incremental $5 million in the ERP project helps make sense of that too. So maybe just one more question. On the longer term targets, we're getting closer to fiscal 2016, and we can see the midpoint of your revenue guidance for 2015. Is $3 billion sort of a round figure that we are targeting or is that – it just looks a little more aggressive today and I'm wondering if we'd have to do some acquisitions to get to that $3 billion figure because I think it represents about 15% growth from the midpoint of your 2015 guidance?

Good question, Brian. I'll take it. Yes, I think over a couple of years ago we were ahead of the pace, in last couple of years with the economic conditions we've been off that, fallen off of the pace to get to $3 billion. But we're not giving up. And we've had -- it might be – we hopefully – we hope for stronger organic growth that's where in making the investments that Jim and I just talked about. And we're also looking at acquisitions, as Tod mentioned, with Northern Technical, that's not a big one, but we're looking at those types of bolt-ons to help. If we get to $2.95 billion, I think I'd still be pretty happy, okay. And that's an intermediate point to still getting to $5 billion. We see the opportunities to do that, but what's going on in the filtration market and the changes in the market that really – in many aspects of the market that play to our strengths. So whether we get to $3 billion exactly at 2016 or not, we still see the opportunity to get to $5 billion and beyond. So – and we're in the process of completing our first 100 years and now looking forward to the next 100 years and we're looking at – we're trying to make sure in making the right investments to get both $3 billion and $5 billion over that period of time.

Okay. Thanks for those comments. I mean it's obviously impressive that you're getting close to that $3 billion target even in the – given the environment that you've been operating in. So thanks very much for taking my questions.

Thank you. Thanks.

We'll go next to Stanley Elliott at Stifel.

Good morning, everyone. Quick question on the inter-mobile margin. I think you kind of talked about a little bit. But the kind of the decline on both the sequential basis and the year-over-year basis is that due more to the additional investments you're making? And I guess just for point of clarification with higher aftermarket mix within that business currently, I would have expected it to be a little bit different, but just any color or thoughts around that would be helpful.

Yes. This is Jim. With regards to the engine business, there is a couple of factors there. It's – I think Eli asked a similar question in terms of the operating margin and it's really related to the investments we're making and engine share of those, so the incentive comp is skewed more towards the engine side, the year-over-year – last year we had very favorable adjustments from incentive compensation adjustment because we didn't have the year we targeted. And now this year, the Engine Group is performing well. So the year-over-year incentive comp is hitting them just proportionately higher than the industrial side. And then, these investments I talked about are hit – are this quarter more on the engine side, specifically a lot of engineering expenses as we were in the process of rolling out new programs and developing additional test capabilities to support our growth. So it's a combination of incentive comp and investments that are being made at least currently more so on the engine side, but like I talked about, we have growth plans that we're investing on, on the industrial side as well.

That's great. And then, from the leverage, it's kind of tweaked up a little bit, interest expense up a little bit next year. Is there a kind of a dead target that we should start thinking about? And I guess is this going to be something that will gradually move towards that these targets or is this something kind of more opportunistic as far as what's happening right now.

Yes. I think as we've looked at our leverage over the last year-and-a-half, we did a couple of years ago dialed down our share buyback as we looked to pursue additional acquisitions and the right ones just didn't present themselves. So this year, we consciously increased the share buyback with the ultimate goal, I think, it's not seven stone, but I think we informally sort of targeted at 1.5x EBITDA leverage ratio, I think that's where we think we would idea. We don't want to create extreme leverage because that's just not who we are, but I think 1.5 is our informal target.

Then as far as for the share repurchase for next year should we think of that 2 to 4 more opportunistic or we looking at kind of a similar dollar type level from this year? And then lastly, and what was the final share count at year end, if you could help us out with that?

I will start on that. If you take a look at our share buyback we have for over the past 20 plus years really two tranches. The first is that we are always going to buyback enough shares so that new option grants would not be dilutive. And so that would be – say roughly 1%. And above that we are more opportunistic in terms of other uses of the cash whether it's CapEx or M&A. And so we take a look at it in two pieces. And so the range of 2% to 4% that we talked about, that Jim mentioned is our guidance, it's not really that much different than what we have been historically although we have operated within a range – probably between 2% or over 4% over the past 20 years. Always getting at least 1%.

Right.

Go ahead.

Obviously going to say the share count at the end of the year?

The share count at the end of the year we ended just over 143 million.

Great. Congratulations and best of luck guys.

Thank you.

Thank you.

(Operator Instructions) We will go to Rob Mason at Robert W. Baird.

Yes. Good morning.

Good morning.

I wanted to ask about what is embedded in your to the extent we do 10 basis points of operating margin improvement. What's embedded within that around the gross margin, I know Jim you called out some of the headwinds mix and the like gas turbine that might impact that but you didn't speak to the raw material cost that were up 50 basis points in the quarter. And if you could comment around that as well.

Yes. I think as we look to the sales growth, we do have an opportunity for some leverage in terms of the – maybe the first 10% of our sales growth especially on the industrial side where our first-fit where we are running lower than historical capacity in terms of where we would ideally run those plant. So we have some opportunities within our industrial plants to – if we were to get some volumes to pick up some incremental margin pretty quick and may be the first 10% or so sales. So we built some of that leverage in, but to your point we are seeing commodity cost pressures right now, specifically steel, but we are also seen it with some of the petrochemicals and paper-based products as well. So we have factored that in, it's – maybe roughly 5% to 10% increases where we are looking at right now if those prices hold. I think – any – there is a lot of speculation as to what they are going to do here going forward. But, we factored in some of those increases that is also affecting in addition to the investments that I mentioned why or maybe not forecasting of the historical 30 basis points that we targeted.

Is your ability now that the your aftermarket mix as drifted higher, is your ability to capture price or capture price more quickly, is that noticeable externally?

This is Bill. We really take a look at offsetting commodity price increases like Jim mentioned really in two ways. One is through our continuous improvement efforts, really taking cost out of our process and products and we need to do that because contractually many of larger OEs are committed to either stable prices or price downs. And then selectively we do price increases and you are right that in the aftermarket we typically have more flexibility especially on the independent aftermarket. And some of our industrial business is like dust collection we do as well. So it will be a combination of both our internal cost reduction efforts and selective price increases. But just to Jim's point, there is usually a lag in terms of when it hits us and we can recover coming into those two initiatives and that's part of what we have baked into our operating margins.

Okay. And just last question, you commented on the engine aftermarket outlook, the expectations for strong growth globally. Given that business was up, I think 12% for the full year, is that suggestive that we could still settle down to maybe mid-single digit or is double digit still a prospect, double-digit growth?

Yes. This is Tod. So as we look at our engine aftermarket opportunity, we believe we have strategic plan in place specifically we continue the presence and take share as well as really globally take share. And they really start with as Bill mentioned early on in his commentary, really two main things, which is expanding our distribution and strengthening our distribution network globally particularly in Asia Pacific where we are under represented as well as in Europe and Latin America and then also expanding our product portfolio. So in the quarter we added 58 new distributors but also almost 460 new part numbers available across our networks worldwide. And those strategies have a lot of runway ahead of them as we continue to look out and press again share within the engine market. So we believe that as we look forward, we have really high single digits to double digit opportunities within our engine aftermarket for growth. We are really quite bullish on the success that we are having worldwide.

Okay. Thank you.

Thanks.

And gentlemen, we have no further questions at this time, Mr. Cook, I would like to turn the program back over to you for any additional or concluding remarks sir.

All right. Thanks Lori. Now to conclude our call, I apologize again for the short interlude there where we lost our telephone. But, I would like to first thank again – recognize and thank my fellow employees for their contributions to a record fourth quarter and fiscal 2014. And we look forward to another great year in fiscal 2015 and celebrating our 100th anniversary. And I would like to thank everyone on the call today for your time and continuous interest in our company. Thank you. And have a great day.

Ladies and gentlemen, once again, that does conclude today's conference. And again, I'd like to thank you for joining us.