Good day everyone and welcome to the Donaldson’s Second Quarter Webcast and Conference Call. As a reminder, today’s call is being recorded. And at this time, I’d like to turn the conference over to Mr. Jim Shaw, Vice President and CFO. Please go ahead sir.

Thank you, Aaron, and welcome to Donaldson Company’s fiscal 2015 second quarter earnings conference call and webcast. Following this brief introduction, Bill Cook, our CEO; Tod Carpenter, our Chief Operating Officer; and I will review our second quarter earnings and our updated outlook for fiscal 2015. But first let me 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 Jim and good morning everyone. In a few minutes, Tod and Jim will cover the details of our second quarter results and our updated outlook for fiscal 2015. But, first I would like to offer some summary comments. As noted in our release, conditions in our various end markets around the world remain very mix. Demand for replacement filters in our engine and industrial after-market businesses continue to be very strong. Our gas turbine business also performed well this quarter as we’re able to ship both the projects that were delayed from our first quarter and all of the scheduled projects for Q2. And in our Engine OEM end markets on-road trucks and our North American based construction businesses continue to perform well. However, our Engine OEM markets including the North American and Europe ag equipment markets and mining end markets worldwide continue to face significant challenges. In addition, the effects of foreign currency translation headwinds from a very strong U.S. dollar impacted us significantly during the quarter. So while we were able to deliver 7% local currency sales growth in Q2, due to the strong U.S. dollar this translated into U.S. dollar sales growth of only 3%. Now, obviously we can’t control the exchange rates and it would be fair we benefited when it was going the other direction. But this very recent and rapid change in the U.S. dollar has masked our underlying sales growth. Jim will provide more details on the impact of FX in a few minutes. Last quarter, we announced adjustments in our discretionary spending to ensure that our cost structure was in line with our projected level of sales growth for the year. These discretionary spending reductions helped us to meet our expected bottom line performance for the quarter. However as we look…

Thanks, Bill. Before I begin with our business review, I would first like to take this opportunity to thank our board of directors and Bill for the trust they have shown in me by appointing me as the next CEO of Donaldson effective April 1st. I want to especially like to thank Bill for the mentoring he has given me during his 11 years as our President and CEO. He is well respected by our employees, customers, shareholders, distributors and suppliers. I look forward to continuing our work together as Bill transition to his new position as Chairman of our Board of Directors. Thank you, Bill. Turning to our business review, our second quarter sales were $597 million, up 3% from last year’s second quarter, but up 7% in local currency. The remainder of my remarks today will focus on our local currency second quarter results. As a reminder, you can find a detailed analysis of our currency translation by business unit and region on the Investor Relations homepage of our website. First let me begin with a review of our business segments then I’ll provide more color into specific product line. For the second quarter, sales in our Engine Products segment increased 1% over the prior year. Within Engine Products, our engine aftermarket sales increased 5%. As a reminder, we sell aftermarket or replacement filters through both our OEM and independent distribution channel. In our Engine Aftermarket business, we saw solid growth in most of our geographies. We attribute this growth to the combination of our sales growth initiatives and improving equipment utilization by end-users in the field. Our engine aftermarket growth was led by Latin America, growing 24% in the quarter. Our sales growth in Latin America is an excellent example of our strategy to broaden our distribution…

Thanks Tod. Good morning everyone. As you’ve listened to or read recent earnings reports from U.S. based multinationals, you’ve consistently heard the significant impact of the dramatic strengthening of the U.S. dollar and resulting foreign currency translation is having on their results. We are no different. On a worldwide consolidated basis, this foreign currency translation impact had a $27.5 million, or 4.8%, negative impact on our quarterly revenues, and a 3.3% negative impact on a year to date basis compared to fiscal 2014. It also reduced our reported earnings by $2.7 million, or $0.02. The most significant strengthening of the U.S. dollar hit us in late December and continued into January. So as I will comment on later if the U.S. dollar stays at this level, this will also significantly impact us during the remainder of the fiscal year. While the weaker Euro has had the most impact to our results, the dollar also strengthened against most currencies including the Japanese Yen and the Australian dollar where we also have significant operations. This quarter we included additional information in our earnings press release that shows our FX has impacted our consolidated and business segment results. Switching to our gross margin, this quarter it was 34.4%, down 30 basis points from last year’s second quarter. As we noted in our press release, there were a few items impacting our gross margin this quarter. We experienced lower fixed cost absorption due to production volume decreases in a number of our manufacturing plants as compared to last year. This along with some product transfer costs resulted in a negative 30 basis point impact. We also had negative mix impact due to the large increase in first-fit gas turbine project shipments, which had a negative impact on margins of 30 basis points. We also…

Thank you. [Operator Instructions] And we’ll go first to Charlie Brady with BMO Capital Markets.

Hi, guys. This is actually Patrick Woo standing in for Charlie. How are you?

Good, good morning.

Good morning.

Good morning. On the road side of the business, I was just wondering what are your expectations of – well I guess what are your expectations of – well I guess what estimates are you guys building in for truck build rates in the U.S and Europe for 2015?

U.S. and Europe?

Yes.

So, Patrick, specifically – this is Tod. As we look to the U.S., we’re feeling good strength between roughly 9% to 11% increase is our OE build rate look. ACT data would support that with roughly about 340,000 trucks this year through the calendar year 2015 that’s what we have put in our forecast. Within Europe, we see a little bit less about 5% to 6% increase, however still stronger rates than last year.

Okay. I just want to go over to filtration side. What are your expectation I guess again geographically in Europe and U.S going forward? Given the – I guess given the decline in the items mentioned?

Repeat the last part, we lost you there.

Given the decline guidance, I just wanted to get a better understanding, I guess better color on how that has shifted in terms of geographic expectations in the second half of the year?

Yes, so for the overall business, obviously, there’s differences in each of the end markets slightly, but as an overall blanket statement I think in the Americas, including Latin America, Mexico, we continue to see pretty good signs in terms of a slow, but steady recovery and improvement in our businesses, the on-road truck is heavier in the Americas, so that obviously helps a little bit. Europe has been I’d say – we get mixed signals, so we see some indications that things are improving and then it takes a step back. So Europe has really not changed since our last quarter. I think where we have seen change which is reflected in our guidance is Asia Pacific, particularly China. The things do seem to have weakened a little bit there that’s reflected in some of the news reports you see and it seems the credit situation has impacted some of our larger capital spend and our customers willingness to launch new programs. So I’d say the biggest difference has been what we’ve seen in slowdown in Asia Pacific.

Great, great. If I can squeeze in one more, I think last quarter you mentioned that the ag business was down 25%-ish, 35%-ish. Has that deteriorated even more? Is that what you’re seeing or is that still a general guideline?

Yes. Patrick, it’s Bill here. Just – I think what we’ve seen is that it’s probably continued to deteriorate on the first-fit side. We look at the announcements like gears [ph] last week so that we’ve incorporated that into our guidance, our new guidance.

Got it. Okay, thank you.

And we’ll go next to Laurence Alexander with Jefferies.

Good morning, a couple of questions. First, with the downturn you’re seeing in Asia, can you just talk a little bit about the share gains you’re making in the region? And are their share gains going to be a fairly steady tailwind to sales growth over the next few years? Or should we see it as a sort of steadily increase in kind of tailwind as new platforms come on the stream?

So, Laurence, this is Tod. So in Asia, if we just take the industrial business first, the industrial side of our company, we’re making nice gains in our IFS business across the Asia that would give us some – some real positive outlook there and as we continue to expand our strategies there for growth. And then on the engine side, specifically, we’re focused on winning more shares because we have a very small share on the OE portion especially in China and also increasing and implementing our strategies, our successful strategies and aftermarket. So we believe that we’ll get some tailwind as we continue to look forward in China over the time ahead.

And then specifically to China, can you characterize what you’re seeing in terms of regulatory tailwinds from tighter environmental standards and also – are we seeing any impact from the governments are encouraging sort of buy local strategy rather than multinationals?

So, Tod again. No, we’re not seeing that nationalism if you will. What we are seeing is the effects of the regulations especially as they bring on in 2017 Euro VI. So they are focused specifically on cleaning up their 2.5 if you will is what they call it PPM in China. So there is some regulatory positive change that can help us as they look to increase the technology within that market. We are not seeing a nationalistic behavior however.

Okay, thank you.

And we’ll go next to Richard Eastman with Robert W Baird.

Yes, good morning.

Good morning, Rick.

Tod, could you just may be address the Europe aftermarket business being up just modestly if not flat in local currency? Is that just some inventory destocking distortions or is there – why is that flat?

So, overall, we have been looking to Eastern Europe in order to try to help gain momentum. We’re feeling the effects of the geopolitical Eastern situation that’s really pressing negatively on the gains that we’re making in the Western portion of Europe. Last year, we had double-digit gains in our aftermarket and it was really very broad based all across Europe, but specifically the geopolitical activity is making us flat at this time.

Okay. And then just – and may be one for Jim or two for Jim. Let me drag him into this. The working capital number – I guess you addressed this, but the $700 million use of cash in working capital and that is the receivables on the large gas turbine shipments in the quarter? And…

There is a company – go ahead.

And then you’d commented that there’s still some gas turbine business in the backlog or?

Yes, that’s right, so a couple of things with working capital. I think, one, we see some opportunity for improvement on that. So a number of the large projects that we shift – shift towards the end of the quarter, middle of the quarter, so we haven’t yet collected the receivables on that, so those project – we had a very significant 60 million plus quarter in terms of shipments. So that’s sitting – a fair amount of that is still in receivables, so that’s impacting us as well as just the higher growth in our gas turbine business since the start of the year has impacted our inventory to some extent. There’s also a couple of other things with regards to inventory. So, we have increased our inventory as a result of our distribution center expansion, so we’re expanding a distribution center in Europe, as Tod mentioned, a couple of new distribution centers in Latin America. That’s an investment we want to make because that business is growing. Our aftermarket business is growing nicely, so just to keep up with the sales and even keeping turns level, there is an investment there. I think the couple opportunities we see are the West Coast ports added a couple of million dollars of inventory as we built some safety stocks that – now that that’s resolved. We can begin to address. We also had some product moves where we are moving production lines from one of our facilities to another and we have built up some inventories. So I see some opportunity to reduce inventory here over the next quarter, but those are kind of all of the factors that combined for I’d say a less than stellar working capital quarter, but we’re going to address that going forward.

And then just when I look at the gas turbine business and I was actually under the impression that some of that business in the first fiscal quarter would ship in the second half of the year. But it does seem like you turned quite a bit of that, so if the back half of the year then effectively kind of flattish or down modestly in gas turbine shipments?

Yes. So we shipped mid $90 million in the first two quarters of the year and we’re expecting a similar amount to ship in the second half just not as lumpy. So how we shipped double second quarter than first quarter as we move roughly the mid $90 million that’s in the second half of our forecast about 40% of that we expect will ship in the third quarter, about 60% of that in the fourth quarter. So, it will be down a little bit from our second quarter and then third to fourth will increase a bit.

Sure, now okay, I understand. And then maybe just the last question. Again, when I look at the midpoint of the EPS guide, it’s down about $0.12 and again my math says the incremental currency impact is maybe $0.06 of that. And so the other kind of $0.06 here is essentially you’re suggesting the dust collection business maybe as a little softer and then the gas turbine outlook seems like its coming a little and then maybe some modest incremental weakness in the off-road. Is that kind of defining the other half of the earnings reduction?

Yes. And maybe on the first point, as we calculate it we get a little more than half in terms of the FX, so maybe about 60% plus of that change is just due to FX. But then the other factors you mentioned are right on. Just general softness in Asia Pacific, the ag, a little bit of slowdown in mining first-fit.

I see, okay. Okay, thank you.

And we’ll go next to Eli Lustgarten with Longbow Capital Markets.

Good morning everyone.

Good morning, Eli.

Good morning.

Congratulate Bill on what’s been a great tenure and knowing exactly when to put Tod under fire I guess.

Thanks, Eli.

You’ve got to have a little fun. It’s a tough environment and you’re executing very well. So let me ask you the regulatory, can we talk a little bit about oil field impact that you’re seeing? I know – you don’t have much measure directly which maybe measuring what have you or indirect but filtration [indiscernible] engine and oil rigsoil rigs and stuff like that will be impacted, so do you have any feel or are you seeing any impact from the oil field overall is that sort of negligible that we don’t worry about it?

Eli, this is Tod. So we are not seeing any impact at the moment. And we are continuing the top two - our customer base that would be what we would call our small turbine business. We are not really prepared to give any outlook or guidance at this time, due to the situation.

Eli, it’s Bill I’ll add to that.

[Indiscernible] business isn’t it?

It is- but and I will add to what Tod said, I mean you were looking at our customer announcements as Tod mentioned and I think there is an anticipation that some of that impact in the oil field is still to be felt. So we’ve incorporated that into our guidance announced this year. That there is probably some of the projects we are underway we’ll continue. But probably they won’t be replaced with new projects, if oil prices stay where they are.

And this will be low single-digit kind of impact in sales, isn’t it?

It’s pretty small for the fiscal.

This is Jim, Eli. For this year it looks pretty small. We see a little bit of impact in some of our aftermarket businesses, for the fracking fields in the life. But again very small as a percentage of our business this year, I think the unknown is, as we look forward what it does to the bigger projects in the subsequent years.

Okay. And in your comments, you talked about ag being soft for the end of your fiscal year and mining as being soft. Is that based on the visibility that they have given you? Have you gotten visibility past July most from the ag guys or so or is that little bit you’re willing to talk about at this point. Because it looks like the ag business will continue down, not just for July but for most of 2000 - the calendar year. And BHP just made comments today about cutting more spending. So as we suspected it doesn’t stop in July.

So Eli, this is Tod. We baked in as we talked about last time 25 to 35 on the down. We’ve taken that now internally in our models to closer to 40% down. So that’s baked into the guidance, we do have a good visibility over the next 90 days and we have been talking quite a bit with our customer base. As it gets a little bit later into the calendar year, our visibility gets obviously a little bit more clouded. But we baked in additional decline from last time.

Yes, and your customers sort of saying that the business will stabilize as we get to the summer or is it uncertain at this point?

On the first-fit large tractors that they believe that there will be a continuing softness, aftermarket will be fine, but then it will continue to be fine on what’s called the feedstock or the smaller forms dairy, those type of smaller vehicles at the current low levels, so that’s how we bake it in.

All right. Thank you very much.

And we’ll go next to Brian Drab with William Blair.

Good morning.

Good morning, Brian.

Tod, congratulations on the promotion and Bill we’re happy to see that you’re still sticking around.

Thank you.

Thank you, Brian.

So the first question just – maybe just see that number, that last question. We heard from Pall Corporation this morning that they heard from customers in the machinery and equipment markets that there is a destocking is occurring and that’s supposed to take place they are hearing from the customers or I think they said the next six to seven months and that will level out. Is that similar to what you’re seeing in I guess the off-road aftermarket?

This is Tod. In the aftermarket portion we’re only seeing destocking in the ag markets, we’re not seeing any construction or transportation or mining and that destocking came on at the end of last calendar year. We expected to continue slightly into the spring planting season, but we should be through the majority of that.

Okay, okay. And then another question on related to oil and gas and I asked this question of Pall Corp this morning as well. But I think about 50%, 60% of your cost of goods is associated with raw materials and I would imagine significant portion of that is petroleum based resins for manufacture [ph] filtration media. Is this a possible tailwind benefits to margins in the back half of the year?

This is Jim. Maybe just to clarify that comment about 65% of our cost of sales are material, the biggest piece of that is steel, so that’s about 25% of materials, the next one is media that’s about 20% and then the third biggest is the petroleum based product. We haven’t seen the impact of that yet it is generally takes some time to work through the channels. It’s possible we’ll start to see that here over the coming months and that potentially could benefit us, but we do have with many of our OEs cost sharing agreements in terms of price downs over time. So, yes it could, but we don’t see it very significantly over the next several months at least.

Okay, thanks for that clarification, Jim. And then just one last one for you Jim, I think in the prepared remarks, you said that you – if the dollar stays at this level and have significant impact on 2015. I don’t know if you quantified in terms of the top-line and in terms of EPS just what exactly the impact you’re expecting from FX for the full-year of 2015 at this point?

Yes, the full year year-over-year is $136 million to our top-line if rates were the same as last year to this year year-over-year. And then I didn’t quantify the bottom line, but generally that that follows at a same percentage because our costs are generally matched up overseas. The one difference and slight impact is as sales go down, say 5%, generally our profit goes down a little bit more and that’s because many of our headquarters and corporate costs are denominated in dollars. So we have a higher percentage of our costs in the U.S. versus overseas. So generally if our costs – if our revenues go down 5%, our profits go down a little bit more than that.

Okay. And then just to clarify, the $136 million that assumes just constant exchange rates from this point on through the rest of the year?

That’s correct. So…

Okay.

In our guidance, we were using the Euro at 113 and the Yen at 117.

Okay, thanks a lot.

And we’ll go next to Larry Pfeffer with Avondale Partners.

Good morning gentlemen. Congratulations, Tod.

Thank you.

So just a quick question, I know that the gas turbine business is lumpy and the outlook is inherently uncertain, but do you have any general thoughts on how the business should trend into the back half of the calendar year?

I missed the first part. The…

So, you know, I know the gas turbine business is lumpy and inherently uncertain outlook, but just wondering if you have any kind of outlook on what the back half of the calendar year looks like there.

Sure, sure, sorry about that. The first half and the second half in terms of dollars are relatively similar. So mid $90 million, maybe upper mid $90 million dollars the way we see that 95 plus million dollars playing out in the black half of the fiscal year is about 40% of it in the third quarter, about 60% of it in the fourth quarter.

Okay, so and then calendar second half? Do you have any outlook there?

Yes, we are just not until we get through the next couple of quarters we are not prepared to talk about our next fiscal year at this point.

Okay. I understand and I know we’ve talked a lot today about the off-road side of the business. But just wondering, where do you see inventory levels at in the on-road aftermarket. I know last year, you benefited from some restocking. How do you see that trending right now?

This is Tod. We see us of having a very nice strong transportation aftermarket business, no destocking its just kind of businesses, business as usual and continued with nice growth and executing our growth strategies.

Okay. Thank you, gentlemen.

Thanks.

Thank you.

And we will go next to Jim Giannakouros with Oppenheimer.

Hi, good morning, thanks for taking my questions.

Good morning.

And trying to calculate organic growth components, you touched on new product introductions earlier in your prepared remarks. But can you quantify how much of a positive contribution you’re seeing or expecting from new products, both in engine and industrial over the coming quarters? I mean adding a point or two from organic perspective or less than that?

Yes. It’s really hard to quantify sort of a vitality factor, because as we introduced products, they are sort of slower introductions and small win by small win. But we do continue to win in terms of new products Tod talked about. What we have been able to do with regards to the new applications we launched in our dust collector business. We feel we are definitely taking share there, as we expand in some of our geographies, our Latin America business for example is growing at significant rates that’s not necessarily new product, but new markets for us, where we are able to grow our organic rates. And then we do have a couple of new programs that are just in the early stages with our power fleet technology. We just started shipping last year this quarter, so wasn’t a significant amount of revenue. But that is something that is going to going to add, as we move forward. So I don’t have a specific number for you, but that is part of our just our culture in terms of how we are, a point to a couple of points every year needs to come from new products.

Okay, I understood. And one more if I may. As far as your restructuring or your cost containment actions that you plan and I’m sorry if I did missed it, but did you quantify or can you quantify how much in costs you are looking to take out or from a margin perspective how many basis points we should be expecting as it benefit from these actions on a normalized basis?

Jim, this is Bill. We haven’t quantified that yet, the stuff we’re working through right now. We have quantified what we’re doing related to the Grinnell and that’s in the release. So that part has been quantified, the rest is in process.

Okay, thank you.

Thanks.

[Operator Instructions]

And with no questions holding, I’d like to turn it back to our speakers for any comments and closing remarks.

Okay, thanks Aaron. And just to conclude our call, I’d like to thank everyone today for your time and continued interest in our company. I’d also like to thank my fellow employees for their efforts during our second quarter. So, thank you all and have a great day. Good bye.

This does conclude today’s conference. We thank you all for your participation.