Donaldson Company Inc (DCI) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Donaldson third quarter 2003 earnings conference call.

At this time, all participants are in a listen-only mode.

Following today's presentation, instructions will be given for the question and answer session.

If anyone needs assistance at any time during the conference, please press the star followed by the zero.

As a reminder, this conference is being recorded Wednesday, May 28th of 2003.

I would now like to turn the conference over to Mr. Bill Cook.

Please go ahead, sir.

Good morning, and thank you, Stephanie.

So what are our headlines?

Records and lots of them.

We had record third quarter sales and EPS as well as record nine-month sales and EPS.

Before we get into the details, I need to first do a little administrative housekeeping.

As Stephanie said, I am Bill Cook, the CFO.

Joining me today are Bill Van Dyke, our Chairman, CEO and president;

Nick Priadka, Senior Vice President, Engine System and Parts;

Jim Giertz, Senior Vice President, Industrial and Commercial;

Rich Sheffer, Assistant Treasurer and Director of Investor Relations;

Tom Windfeldt (ph), Vice President and Controller; and Norm Linnell (ph), Vice President, General Counsel, and Corporate Secretary.

We also need to review our Safe Harbor policy.

So I need to caution you that statements in this call regarding Donaldson's business that are not historical facts are forward-looking statements and that future results could differ materially from the forward-looking statements made today.

Actual results may be affected by many important factors, including risks and uncertainties identified in yesterday's press release, and in our SEC filings.

Now I would like to switch to a discussion of our record results.

We are obviously very pleased with our results, especially given the continuing weak global economic conditions.

As our press release is quite detailed, I'll start out by summarizing our financial highlights.

Bill Van Dyke will then comment on the business conditions we are facing and expect to see in the near term.

At yesterday's market close, we reported record third quarter revenue totaling $302 million, which is up 12% from $269 million last year.

Year-to-date, our revenue now totals a record $888 million, up 8% from $822 million last year.

Our gross margin increased to 32.5%, up from 31.5% in last year's third quarter.

Included in the 32.5% was the equivalent of 3 cents per share of plant rationalization costs versus no cost in last year's third quarter.

A portion of these costs are related to the two plant closings we mentioned last quarter, one for manufacturing exhaust components in Port Huron, Michigan, and the other for gas turbine air intake systems in Baldwin, Wisconsin.

The balance of these costs is for our ongoing work to consolidate and improve our Japanese manufacturing base.

We are currently expanding one of our Japanese plants, and then we'll sell the other older plant in Omay (ph) outside of Tokyo.

As we have discussed in the past, we record our plant rationalization activities as they occur, no special charges or pro forma results.

One additional note on plant rationalization.

Our new filter plant in the Czech republic is opening with production beginning in June.

This new plant gives Donaldson a low-cost manufacturing site for our entire European market, as well as another presence in the growing eastern European economies.

Operating expenses in the quarter were 21% of sales versus 20% last year.

This increase as a percent of sales is attributable to the addition of Ultrafilter, which as a result of their end user sales model has higher selling expenses than our traditional businesses.

Another factor contributing to the operating expense increase was foreign currency translation, which added $6 million in the quarter.

Without Ultrafilter and the impact of translation, our third quarter operating expenses would have decreased 10% from last year, demonstrating yet again our commitment to effectively managing these costs.

Moving to the bottom line, we reported record third quarter diluted net earnings per share of 56 cents, up 19% from last year.

Through three quarters, our net earnings now total a record $68.2 million, up 10% from $62 million last year.

Year-to-date, EPS is also another record at $1.51, up 12% from last year.

While quarterly results are important, Donaldson continues to take the longer view and place more emphasis on its annual results, while our third quarter EPS came in higher than the Street estimates, we continue to remain focused on achieving our 14th consecutive year of double-digit earnings growth.

We expect that our fourth quarter results should be sufficient to deliver another full year of 10% growth in EPS.

In summary, we are very, very pleased with our record third quarter results.

Donaldson employees around the world have continued to work on a host of initiatives to grow our revenues, enhance our margins, and improve our asset utilization.

After nine months of fiscal '03, the results of these efforts speak for themselves.

Despite the continuing uncertainty surrounding the global economic and political climate, we maintain our commitment to deliver another record EPS year.

Now I'd like to introduce Bill Van Dyke, our Chairman, President and CEO.

Thanks, Bill, and good morning.

The benefits derived from our diversified markets once again carried us through some significant operating challenges.

Absorbing the impact of a rapidly sliding gas turbine business, Donaldson turned in record sales and record earnings, and enters the fourth quarter with good order trends and a healthy backlog.

As expected, our diesel engine sector had another powerful quarter with all three businesses within engine up both domestically and internationally.

Many things are working well in engine, including the strength of our North American heavy truck business.

Market contraction following last year's emissions pre-buy has been modest.

Meanwhile, we've benefited from our strong relationships with the market players who have gained share with their new engine designs.

We're not only selling more air cleaners, but also more catalytic converter mufflers, which increases our content per truck by a meaningful amount.

Forecasts for heavy truck builds predict improvement this quarter with momentum building during the second half of the calendar year.

In support of that view, our third quarter North American transportation orders were at the highest level we've seen in three years, reinforcing our confidence around that sector.

We made good progress in diesel-powered pickup trucks this quarter with our Power Core systems.

Power Core is uniquely suited for this market because it satisfies the high air flow requirements of today's high performance diesel engines at half the size of the traditional cartridge filter, yielding critically needed flexibility for vehicle designers.

Power Core has added nearly $10 million of revenue this year, and demand is ramping up more quickly than we projected even six months ago.

To help give some scale to what we mean by "ramp up," we will double Power Core production capacity later this summer and have committed to double again by this time next year.

Internationally, engine sales continue strong with Europe up 24%, and Asia up 38%.

Japan played a major role, up 30% this quarter.

Off-road equipment sales have been buoyed by sustained export demand for construction projects in China.

We also saw a strong demand for our catalytic converter mufflers in Japan as new emission regulations went into effect.

We're enjoying solid incoming orders and a 40% growth in both 90-day and total backlogs for international engine, so we're obviously optimistic about operating performance going forward.

Regarding another growth opportunity that we've talked about before, this morning we announced that our diesel emissions system has received verification from the U.S.

Environmental Protection Agency.

Donaldson Company is the only company that has gained this EPA approval.

This means that Donaldson's retrofit emission system is now verified nationally to reduce diesel particulates by at least 25%, giving us a uniquely capable solution for school and passenger buses across the country.

Back in November, we received similar certification from CARB, the California Air Resources Board, for the same retrofit emission system, and last week, we received our first significant order for these systems, which will ship early in fiscal 2004.

We'll talk more about it at that time.

The most important aspect for Donaldson is that our success here builds our credibility, our technical base and our optimism about being able to carve out a significant piece of the emerging diesel emissions opportunity.

Some of you will have seen that we received a lot of press coverage during the Iraqi conflict for our pulse jet air cleaners, or PJAC, on the American Abrams battle tanks.

These self-cleaning air intake systems extended the desert operating range of the American tanks by a factor of roughly 10 compared to what they experienced in the 1991 Gulf conflict.

In addition to operating flexibility, there was an immeasurable but invaluable increase in tank crew safety because crewmen weren't outside doing filter maintenance under fire.

Defense orders have shown year over year improvement every quarter for the last year, driving third quarter sales up 37%.

And the publicized success of the PJAC system has created interest from other military platforms that currently use conventional air cleaners, promising future growth for our defense business.

Our industrial air filtration business had its first year-over-year revenue increase in over two years.

This business has stabilized over the past two quarters, and the ending backlogs and order patterns indicate continued stability in the fourth quarter.

A return to growth conditions will occur when capital investment eventually picks up after this now three-year-long drought.

Geographic diversification was again critical to our record performance.

For the first time, international sales provided more than half of total revenue, as we benefited from both real growth and the foreign currency impact.

During the quarter, currency translation boosted sales by about 7%.

Beyond currency, we saw significant real improvements in most of our global locations.

These gains represent meaningful progress in a variety of countries that we normally don't talk much about, like Australia and South Africa.

Balancing the good news, the North American gas turbine market continues to slump.

Partially offsetting the softening in the U.S. were strong growth internationally and good growth in the after-market.

However, the North American turbine producers' outlook remains volatile, as we experienced order delays that pushed scheduled deliveries beyond this fiscal year-end.

We now expect that our full-year global gas turbine revenues will be down between 40 and 45%.

Next year, we see a continuation of the gas turbine contraction before the market stabilizes at its late 90's level.

However, we expect that we can absorb this market contraction as we've demonstrated to date through improving performances in most of our other businesses.

The comment I just made about the outlook is perhaps important for perspective.

This will still be our third best year ever in gas turbines.

The sharp contraction we're seeing follows three years of 40% compounded growth, so it isn't as though the gas turbine business is disappearing.

We expect this contraction to bottom out for us with our gas turbine sales near the pre-bubble level of 98, 99.

Our recently acquired Ultrafilter business continued performing well in its third quarter with Donaldson.

As we mentioned in yesterday's press release, operating margins have increased to nearly 10% from essentially break-even when we acquired Ultrafilter.

It's premature to predict the ultimate potential of the margins, but we're optimistic based on what's been accomplished so far.

In summary, Donaldson's ability to once again deliver record results despite a sharp contraction in a major business sector clearly underlines the power of our diversification model.

As I mentioned, we now expect the North American gas turbine contraction to take a big bite out of last year's sales numbers.

With new markets, the strength of our various engine businesses, stability in industrial air filtration, and continued strong international growth has offset most of the gas turbine contraction.

The successful integration of Ultrafilter has provided the additional lift needed to allow us to approach another year-end with the confidence to affirm our outlook for another year, our 14th consecutive year of double-digit earnings growth.

That concludes my prepared comments.

Stephanie, we can now open the call up for questions.

Thank you, sir.

Ladies and gentlemen, at this time, we will begin the question and answer session.

If you have a question, please press "star 1" on your push-button phone.

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Your questions will be polled in the order received, and if you are using speaker equipment, please lift your handset before pressing the numbers.

The first question comes in Kevin Monroe.

Please state your company name followed by your question.

Hi, with Thomas Weisel Partners.

Good morning.

Good morning, Kevin.

Couple questions.

First, can you break out what the revenue benefit from foreign exchange was by revenue line?

Kevin, this is Rich Sheffer.

In the quarter, we'll start with the engine businesses first, transportation- translation benefited the revenues there by $2 million; off-road, $5 million; and the after-market by $3 million.

On the industrial side, translation benefited gas turbine by 1.8 million; industrial air filtration by $3.2 million; essential applications by $1.1 million; and Ultrafilter by $4.3 million.

That should give us a total of $20.5 million for the quarter.

Ok.

Thank you.

Also in your press release, you kind of refer to for the after-market in the engine business, you know, kind of, you know, you're expecting to grow from anticipated increase in economic activity.

What kind of gives you the confidence that we're going to see that increase in economic activity, and what if it doesn't happen?

This is Nick Priadka.

We're definitely seeing an increase in utilization rates of over-highway truck business, and that's an important segment to us.

We've actually gained in certain segments, particularly in the international segments, we've gained share, continue to do so.

And we've got a pretty positive outlook.

The economy here has been relatively flat, but we see a slight increase in economic activity, and we've benefited from that along with market share gain we've had overseas.

Ok.

Another question on the industrial air filtration business, kind of encouraged by the comments -- the tone of your comments there that things aren't getting worse, it sounds like.

Have you guys made any progress in terms of your efforts to diversify away from your exposure to the metals industry?

Do you have any new products or anything coming out that will take you away from that business, or bring you into other market opportunities is probably a better way to put it?

This is Jim Giertz responding.

The answer is that we have done a significant amount of work on developing these new market opportunities outside of the metals industry.

The reality of the situation is that it takes a long time.

It's a long cycle.

We basically have the products that are required to enter these new markets, these new market segments for us, so new products are really not required.

It's really just taking the time and the energy to direct the sales organization to go after these opportunities, and we are making progress, but it's going to take some time.

Ok.

So nothing that's kind of a fiscal '04 opportunity, it's just more longer term?

When I say it's going to take some time, I'm hoping that we're going to be making significant progress in fiscal '04, but we've been working on this for a while.

Ok.

Last question, this new product that I guess - the approval you got this morning, the DOC muffler, I guess, what's kind of the market opportunity there?

Can you quantify kind of the -

This is Nick Priadka.

The diesel oxidation catalyst or DOC muffler and Spiracle crankcase ventilation filter is a system that we apply to engines, and in particular, these are engines that are in the process of being retrofitted in certain market areas, urban settings.

California is probably the most notable, where we are able to reduce tailpipe or overall particulate emissions coming from both the tailpipe and the crankcase by anywhere from 25 to 50%.

That opportunity is starting to gain some momentum in California, as Bill indicated, we saw our first significant order.

These early opportunities will be primarily centrally fueled fleets such as school buses, Transit Authorities, Waste Management and so on.

This will begin to grow in terms of momentum as more and more examples of retrofitting results become apparent and as we get closer to 2007.

The overall market opportunity is estimated to be, in terms of emission products in general on a worldwide basis over a billion dollars, numbers as high as 1.5 billion.

The retrofit market, we've heard numbers as high as 100 million or more, and we certainly will be looking for a fairly significant part of that.

Ok.

Thank you.

Thank you.

The next question comes from Alan Fournier.

Please state your company name.

Pennant (ph) Capital Management.

Just have a housekeeping question on the cash flow statement.

The other item looks like it was about negative $17 million for the quarter.

Could you give some detail behind that?

Alan, this is Rich Sheffer again.

The big driver of that item would be pension contribution that was made in the quarter of approximately $18 million.

Great.

Thank you.

The next question comes from Richard Eastman.

Please state your company name followed by your question.

Robert W. Baird.

I just wanted to explore for a second the transportation business, the 30 million number that we posted in the quarter. 2 million of that was currency, and I'm curious, that leaves us with about 19, 20% growth if I round up a bit.

How much would you say unit volume was up, which would leave us with a content number?

Is there a way to strip that out?

This is Nick Priadka.

Actually, I would say that unit volume was up a bit more than we anticipated, but that was not the major driver of our growth.

While we've seen an increase in demand, I think that's one factor.

The other two factors are even more important.

They are new products, particularly the Power Core system, which contributed heavily, as well as market share gains we've seen overseas and obviously the market or content increase that we see domestically.

All of those factors have contributed.

Yeah.

Ok.

So from a modeling standpoint, the content and market share gains were more important than just unit volume growth, if you were to weight them?

Yes, that's true, plus the additional new product.

We do anticipate that the truck market will continue to grow this calendar year.

We anticipate further growth in this segment.

Ok.

And then can I ask you, in terms of the gas turbine business, just trying to get a sense of the business in this quarter at about $30 million, there's a parts component, an international component, and then there's a North American component.

I'm curious, if we were to be extremely conservative and scrub the North American component out of that 30 million number, what would we be left with?

Separate out North America entirely

If I took North American sales out of the $30 million, what would be the run rate of that business?

Hang on a second.

It would be about half of that.

Ok.

So about a $15 million quarter?

If I understand your question correctly, you want to divide the 30 million into its domestic component and its overseas component?

Yeah, and parts -- again, I'm going to assume parts continue and international continues, and if I wanted to get very conservative and say, you know, that North America is going to zero, then we would be looking at about a $60 million business for a year?

North America wouldn't go to zero because there's a strong replacement parts component of that.

So that's the more stable part.

Ok.

Because can you-- do you have a sense right now - we'll assume GE is the big customer, if I look at the gas turbine numbers, I think the last time I saw build rate assumptions, they were saying perhaps 125 units this year down to 25 to 50 next year.

Do you believe they've cut those estimates or have they just pushed them?

Rick, this is Jim.

I would say those GE numbers are pretty good.

We don't know any -- we have no information that would give us a better number than that.

Obviously we talk to GE on a regular basis, so we have a pretty good feeling for what they're telling their suppliers their demand for next year.

Ok.

So it's a matter of pushing it out past July is where we see the little bit of a trail-off in your fourth quarter?

Right.

The change from what we were seeing at the end of last quarter is a result of the push-outs, right.

Ok.

Thank you.

The nature of that business, Rick, is that an awful lot of the volume happens in the summer, as does our year-end, and so a 30 or 60-day delay in a project can flop it from one year to the next.

And your comment earlier, Bill, if I go back to the 98, 99 level, we should hit bottom at about an $85 million business for all of gas turbine?

That's a good ballpark, I think, Rick, based on our current outlook.

Ok.

Thank you.

Thank you.

The next question comes from Lincoln Werden (ph).

Please state your company name followed by your question.

HG Wellington.

I just wonder, boosted by that 20.5 million and so forth, what was the actual reported level of foreign sales versus a year ago, and net earnings verses a year ago?

Link, this is Rich Sheffer.

As far as foreign sales in the quarter, this quarter was about 153 million versus 104 million last year in the third quarter.

We generally don't report net income on a domestic versus international basis, however.

Ok.

But that was what the foreign sales were.

Can you indicate how much was Europe verses Asia?

Europe in the quarter was approximately $86 million.

Asia was approximately $59 million.

And then the balance would be other smaller parts like South Africa, Mexico.

Right.

Right.

Ok.

Thank you.

You bet.

Thank you.

The next question comes from Dana Walker.

Please state your company name with your question.

I'm with Calmar (ph).

Good morning.

Good morning.

Would you take talk a little bit about how, if at all, the spares business that would come from the much more meaningful install base in the gas turbine engine market would not lift your sense for what the ultimate bottom would be?

This is Jim Giertz responding.

The after-market opportunity in North America is significant now.

I don't have the detailed numbers at my fingertips, but the install base in the gas turbines in the U.S. has probably doubled over the last couple of years, so over the long run, we just say the after-market opportunity has probably doubled in North America.

Our after-market business in North America is up significantly this year.

There's some counterbalancing forces.

There's a long cycle.

A filter element, when it's first installed, can last as many as three years, so it could take as much as three years after the bubble to see the full after-market potential, and the other issue is how often the turbines are actually run.

Obviously there's a lot of turbines out there but they're not all running, so that tends to mitigate the after-market opportunity.

But there's a significant opportunity out there, but it takes some time to develop it.

It is growing, you know, from the base that we had, it is growing in the double-digits so far this year, it's up 36%, replacement parts globally for GTS, for gas turbines over last year.

Are you looking, though, where you think your business might bottom out adding and changing the complexion of what that revenue contribution from spares verses original equipment looks like?

Well, the percentage or the mix between spare parts and hardware is obviously going to change dramatically, but when Bill said maybe you could use $85 or $90 million as our bottom, we're already accounting for what after-market opportunity is available to us at this time when we state those numbers.

Is that what your question is?

That is my question.

So I guess you're supposing that the original equipments business will be lower at the time when you expect the market to bottom?

Absolutely.

The original equipment piece of our business particularly in North America is going to be significantly lower next year than it is this year.

But you're also expecting that level of contribution from original equipment to be lower than when the business first troughed four or five years ago?

Oh, yes.

I think the mix will be different than the pre-bubble, right.

There will be more spares and less equipment.

If your negative delta this year appears to be $100 million in revenue from GTS, are you supposing that it will take a couple of years to go down the next 40 or 50?

I think we've been guesstimating that the bottom is going to be either in our fiscal 2004 or fiscal 2005, around the number that William Van Dyke mentioned earlier, say roughly eight $85 million will be where we'll bottom out.

One final question.

If you would talk about any more recent updates as to the power core opportunity.

You mentioned that you've done $10 million year-to-date that you're planning to double capacity.

Can you talk about what your present capacity is and perhaps your sense of broadening for the applicability of the product?

This is Nick Priadka.

Power Core is going to play a very major part of our growth in the transportation segment both in the fourth quarter as well as next year.

Just as in the start of the fourth quarter, we're shipping major contract recently acquired, and we anticipate additional contracts that will begin next year.

So as a contributor to transportation market, it is probably one of the more important new product drivers along with our DOC that I talked about earlier.

So you would view your Power Core revenue opportunity in 2004 as looking like what?

It will be up substantially as I think our announcement indicated.

We will be doubling our capacity later on this summer, and we anticipate within nine months to a year of that, doubling that capacity again.

Very well.

Thank you.

Thank you.

Ladies and gentlemen, if there are any additional questions, please press the star followed by the 1.

As a reminder, if you are using speaker equipment, you will need to lift your handset before pressing the numbers.

One moment, please.

The next question is a follow-up from Richard Eastman.

Please go ahead.

Yeah, just two things.

I just wanted to follow up on Dana's question on Power Core.

In the past, when you've pursued light-duty or automotive, it's been very opportunistic depending on the margins.

Obviously, you know, this product line, you know, there's a change in the tone here.

I mean, obviously this is a longer term permanent kind of strategy to expand that business.

Is that a fair comment?

This is Nick Priadka.

Yes, it is.

And what's driving that strategy is the change in the percentage of diesel engines now found in this light vehicle segment.

The outlook for diesel engine utilization in that light duty segment is for major growth over the next five years, more than a doubling of the percentage, I believe, of diesel engines in that segment.

And the important thing to note is that the diesel engines being put into that segment are very similar if not identical to the engines that we find in the class 6 and 7 vehicles in the higher categories.

Do you have any penetration in the European diesel market, where obviously the market opportunity would be much larger?

We are rolling out new applications primarily in heavy duty in Europe.

Obviously we're looking, as you indicated, opportunistically into that light vehicle segment in Europe as well.

There, the diesel engines tend to be much smaller.

If you look at the diesel engines found in the automotive segment, they tend to be designed for the automotive segment.

In the U.S. in the heavy duty or the heavy duty portion of the light duty market, they tend to be very similar to what we would consider heavy duty diesels.

Ok.

And then just a last question on Ultrafilter, given the tremendous job that we've done to date on the OP line, is there a contribution margin target for 2004 that you could share with us?

There is, and no.

The guidance we've given is that we just -- we don't break out the operating margins of our various segments.

I assume it's higher but I didn't want Jim Giertz to relax.

Thank you.

Rick, one other point, Nick talked about the light-duty diesel and the heavy-duty on the transportation market, but the Power Core opportunity for us is in almost all of our other segments as well, and we're applying it in off-road segments, we'll be applying it in gas turbines, so it's beyond just the transportation segment that we look at applying Power Core.

Ok.

Very good.

Thanks.

Thank you.

The next question is a follow-up from Dana Walker.

Please go ahead.

I thought I'd ask, given the change in the rate of change in your after-market business, I haven't figured out whether that is solely from currency or not, but maybe you might talk about whether you think there is a substantive change at work and what initiatives might be driving that.

This is Nick Priadka.

As I indicated earlier, I think in my response, we have seen a fair amount of market share gain particularly off shore.

This is both in the Asia-Pacific and Europe.

We've gained share in the independent after-market as well as after-market through the OE.

In North America, we actually grew this year more moderately, but our focus has been more and more on the end user, and as we focus on the end user and move more to a pull-through marketing approach as opposed to a traditional push-through distribution approach, I think what you'll see is a higher performance for the after-market group in North America as well.

We're pretty optimistic about that.

Dana, if you strip out -- we strip out the translation of the currency impact in the engine after-market, it's up 4-1/2% in the quarter and about the same year-to-date, so that's real growth excluding the impact of the currency.

There's one other point to add, that Power Core, as it moves into the automotive segment or the light vehicle segment, will be a greater and greater portion of the after-market growth engine.

We will see Power Core making a major contribution in replacement part sales.

Is there something, though, about the nature of your discussions with particular end users where you believe that your progress with end users is understated by your present quantitative progress in after-market?

No, there's nothing particular about anything I can tell you about our end user base.

I do know that as we look at our various market segments, utilization rates will play a part, and we definitely are seeing an increase in utilization rates in the truck market.

We are expanding our product offering in the after-market.

That plays a part.

New product also plays a part.

The up-tick in demand plays a part.

So all those factors are contributing.

A question about plant rationalization.

You've been quite busy this year and a continuous improvement-type culture like yours, I suspect you're never done, but would you suspect that 2003's activity levels will dampen in 2004?

Dana, Bill Cook here.

I think probably - this has not been our strongest year, 2003, in terms of plant rationalization.

We had a bigger year two years ago.

But I would say probably the pace would be similar next year as to this year.

Right.

There are several reasons why we are undergoing plant rationalization.

One of which I think was covered in earlier remarks.

But we have made a concerted effort to rationalize our product-line, and we've come down a significant number of SKU's, plus our mix is changing away from some of the typical metal engineering materials, classic engineering materials, and so that causes us to rationalize products, and, therefore, plants.

I've got to give an awful lot of credit to our marketing product, and in particular the operating groups and the plant groups for the work that they've done in 2003.

In 2003, we have seen a major shift of transfer of product from different plants to lower operating areas and a consolidation of part numbers, so we're going to see the benefit of that work going forward.

We anticipate as Bill indicated the same level of effort for next year, and as we've probably talked about previously, we put a large focus on this.

We call it an ROI initiative for lack of a better term, but we are working this issue for the last couple, three years, and we will continue to work it in the future.

Perhaps you've just answered my follow-up, but would you see the scope of the benefit from what you're doing now as being in a different ballpark than prior benefits from prior programs?

I think the scope would probably be similar to the past, Dana.

I mean, we're doing a lot of this just because of the conditions that are changing in our market, to stay ahead of it, so we don't comment or we don't forecast an improvement in our gross margin.

We're doing all this stuff to protect the margin that we've achieved.

One final question.

Perhaps you can talk about some of the market opportunity within Ultrafilter and what, if any, you're able to do in providing resources or greater credibility to allow those folks to more rapidly grow their business.

This is Jim Giertz.

Ultrafilter has many opportunities in front of them.

They've done a very nice job over the years, and also the years that they've been partnered with Donaldson Company.

But they have many opportunities on their own.

They can continue to expand their business in Europe where they've been very successful, but the more significant opportunity is to export their business model into the United States and also into Asia, and we've been doing a lot of the planning work for that over the last number of months, but now we're preparing to do the execution of that in the coming fiscal year, so that's a big opportunity for us.

We also have some opportunities to have Ultrafilter and our other historical or heritage businesses at Donaldson work together to go after market opportunities.

After compressor OEM's, with the comprehensive package of filtration purification products, go to the after market in Europe particularly with a joint product offering, so there's both.

Ultrafilter has growth opportunities on their own, and Ultrafilter in combination with some of our existing business units have some additional opportunities for market growth.

How much sensitivity would you say that business has to a broader economic improvement worldwide?

Well, the interesting thing about the business model in Europe that we've noticed is that they tend to -- or they have been, up to this point, been able to do fairly well even in difficult economic conditions because the product offering that they sell allows customers reduced cost and improved productivity, which always sells in difficult economic conditions.

So they've had that benefit.

Now, when the economy turns, they get additional benefit, they could still sell that, but obviously there's also business opportunity that comes with capacity and capital investment programs, so there should be additional benefits in good economic conditions.

Ok.

Thank you.

Thank you.

Gentlemen, that was your final question.

Please continue with any closing remarks.

Ok.

I'd like to thank all of you for your participation in our call today, and I would especially like to thank all of my fellow employees at Donaldson for their continued efforts and support and a truly terrific performance.

Thank you, and good day.

Thank you, sir.

Ladies and gentlemen, this concludes the Donaldson third quarter 2003 earnings conference call.

If you would like to listen to a replay of today's conference, please dial 1-800-405-2236, or 303-590-3000 with pass code 539003.

We thank you for your participation.

You may now disconnect.