Donaldson Company Inc (DCI) 2007 Q2 法說會逐字稿

Good morning.

My name is Page and I will be your conference operator today.

At this time I would like to welcome everyone to the Donaldson Company second-quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

Mr. Sheffer, you may begin your conference.

Thanks Page and welcome everyone to Donaldson's 2007 second quarter conference call and webcast.

Following my brief introduction Tom VerHage, our Vice President and CFO will give us a brief overview of our record second quarter operating results.

Tom will then turn the call over to Bill Cook our Chairman, President and CEO who will discuss our positive outlook for fiscal 2007 and the business conditions shaping that view.

Following Bill's remarks we will open up the call to questions.

Before I turn the call over to Tom I need to review our safe Harbor statement with you.

Any statements in this call regarding our business that are not historical facts are forward-looking statements and our future results could differ materially from the forward-looking statements made today.

Our actual results may be affected by many important factors including risks and uncertainties identified in our press release and in our SEC filings.

Now I would like to introduce Tom VerHage.

Tom?

Thanks Rich, and good morning everyone.

Well as you saw in our press release late yesterday we recorded another quarter of record earnings, thanks in part to the continued strength of many of our end markets.

Bill comment in a few minutes on the market conditions in our major product lines and I will provide you with some thoughts to consider as you adjust your models for the remainder of our fiscal year.

Our press release contains our full-year sales growth guidance of mid single digits for our engine segment and low to mid-teens for the industrial segment.

For some time we have predicted the drop-off in sales of $30 million to $35 million in our second half due to the lower NAFTA heavy truck build rates and we are maintaining this guidance.

Our robust sales guidance for the industrial segment reflects the healthy demand for our industrial filtration products globally with particular strength in Europe and Asia.

Our guidance of an increase in gas turbine sales of 20% to 25% reflects the ongoing industry improvement in the power generation and the oil and gas markets.

As our press release indicates our margins were affected in the second quarter by higher than expected distribution costs and a sales mix that was more heavily weighted toward lower margin products.

These factors caused our operating margin to drop to 9.2% from last year's 9.6%.

As you know we have ramped up capital spending over the past year on new distribution capacity to better serve our customers needs and to meet our projected sales growth.

Our present level of distribution costs including freight and labor is greater than we planned and we see opportunities to optimize this new capacity with both process and technology improvements.

Plans are in place to make the necessary investments that will improve productivity and better control our expenses.

Operating expenses were in line with our expectation at 21.2% of sales, down from 22.1% last year.

Approximately 70% of our annual stock-option charge or $2.5 million was expensed in the second quarter when the majority of our grants take place.

Although our sales mix will continue to fluctuate each quarter and we will continue to make necessary investments in both product and technology and the optimization of our distribution capabilities, we are maintaining our operating margin goal for the year of at least 11%.

We have said in the past that our tax rate will fluctuate on a quarter to quarter basis as discrete events occur.

That happened in the second quarter when the research and development tax credit was reinstated retroactive to January 1, 2006.

This reinstatement and a couple of smaller discrete events reduced our tax provision in the quarter by approximately $2 million or 4.8 percentage points.

We now expect our annual tax rate to be in the range of 28% to 30%.

We are maintaining our capital expenditure guidance in the range of $60 million to $70 million and expect depreciation and amortization to be $40 million to $50 million in '07.

We did report negative free cash flow of $16 million for the first half of the year.

One of the drivers of this use of cash is inventory which is up $22 million from the beginning of the year.

As we stated on the first quarter webcast we are increasing inventory in the new capacity added at our distribution centers to facilitate high levels of customer service.

Also gas turbine inventory is ramping up due to the increased order activity.

Receivables increased $11 million commensurate with our sales growth while current liabilities decreased in the first half of the year primarily due to the payout of both fiscal year incentive compensation and payables for fourth quarter capital expenditures and other projects.

Capital expenditures for the first half of the year of $36 million included $12 million of carryover from projects that began in 2006.

We now believe that free cash flow will improve in the second half of the year and end up the year in the range of a positive $70 million to $90 million.

So just to sum up, thanks to our solid sales growth we were able to produce another record quarter and our EPS guidance for 2007 remains $1.72 to $1.82 per share, which would provide yet another year of record earnings.

So with that I will pass it over to Bill who will provide more background on our outlook.

Bill?

Thanks Tom and good morning everyone.

There are four things that I want to cover with you this morning.

First I want to offer some perspective on our second-quarter highlights and then I will give you some of our thoughts on the outlook for the balance of the year.

Then I will give you an update on our PowerCore technology and then finally I will summarize some conclusions around our performance.

So starting with the highlights we are halfway through the year and our sales and earnings are up 14%.

EPS up 17%.

And looking at our incoming orders our business has significant momentum as we enter our second half and we believe we are on track for another record year in both sales and earnings.

I will talk about each of the businesses and I will start first with our engine products business.

In Europe our engines business had 31% sales growth in the quarter as our truck off-road and aftermarket segments all delivered solid growth.

In Europe we see local market conditions being very good and we also continue to pick up market share.

In Asia our engine business posted a 12% sales gain based on strong performances in the off-road and aftermarket segments.

And finally in NAFTA our engine business was up in the mid single digits in the quarter.

As expected with the new emission regulations Tom mentioned, new truck production is down and our truck related sales flattened out during the quarter.

On the other hand our engine aftermarket in NAFTA had a good quarter, up 9% driven by the continued strong equipment utilization for both on highway and off-road equipment.

Now I will switch to our industrial products segment.

Industrial products in aggregate was up 27% in the quarter with strong growth coming from all three product groups.

IFS was up 22% with particular strength in Europe and Asia which were up 36% and 19% respectively.

Our gas turbine business was up 53% in the second quarter with strong shipments globally.

And finally our special application business was up 17% in the quarter led by strong growth in our membranes business.

Now I am going to switch gears and talk about our outlook for the balance of the year.

Our sales forecast remains good for full-year fiscal 2007.

As noted in our press release we continue to expect our engine product sales to be up in the mid single digits for the full year and we just increased our growth forecast for our industrial businesses to be up in the low to mid-teens.

Looking first at the engine side of our business the end markets for off-road remain strong, both construction and mining sales continue to grow globally and as our major off-road equipment OEM customers have noted, overall conditions remain solid globally despite the current softness in residential construction in North America.

Non-residential and highway construction remain strong in the U. S. and overall market conditions are strong across the rest of the globe.

And then finally in the engine business the OEM business, the outlook for our Ag equipment OEMs has recently improved.

Our replacement parts or aftermarket business for existing fleets of trucks, construction and Ag equipment should remain solid as utilization rates for these types of equipment are good.

And as we mentioned before equipment utilization causes a need for regular maintenance and that drives the need for our replacement parts and filters.

As Tom mentioned one area we have been forecasting to have a tougher second half is our first fit truck business, the new EPA emission regulations went into effect in January, and we expect to begin seeing the impact from last year's pre-buy in our third quarter.

Our North American truck parts sales were up 5% in the first half, however as Tom mentioned, we expect them to be down $30 million to $35 million during the second half.

The good news is that for the year, despite the second-half decline in our North American truck business, we still expect our global engine sales to grow in the mid single digits for the full year as our off-road equipment and aftermarket sales will more than make up for this.

And I will talk to you about our industrial businesses.

We see all of the major business groups to be up in the low to mid teens this year, as the industrial economy is healthy across most sectors and especially internationally.

In our IFS business which includes our industrial dust collectors and compressed air filters we expect to see continued solid growth through the balance of the fiscal year.

In our gas turbine business we see considerable strength in the orders already in hand, so we have confidence in our outlook for our gas turbine sales to be up approximately 20% to 25% over 2006.

Based on our customers' activities we continue to see gas turbine conditions strong in the Middle East, Asia and parts of Africa.

And finally we expect to see approximately 10% growth in our special applications businesses which includes both our disk drive filter and membrane businesses.

Now I am going to talk about our PowerCore technology; and we had a big quarter adding another 13 equipment platforms with our OEM customers.

Those 13 wins brings our total wins to 79.

During the quarter 17 more PowerCore platforms went into production, so 46 of our total wins are now in production with the majority of the remaining 33 expected to go into production over the next year or so.

PowerCore sales were up 23% in the quarter mainly from replacement parts growth of 45%.

Another note on PowerCore we still have another 70 plus platforms in the proposal stage with our OEM customers and with our win rate of over 90% we remain very confident of the continued growth of PowerCore.

Finally, I want to offer some concluding comments.

So at the midpoint of our fiscal year we have sales earnings and EPS all up in the mid-teens and based on our open order backlog our sales outlook for the balance of the year remains solid.

As many of you know we significantly started changing our business model 20 years ago.

Over time this model change has fundamentally transformed our company into what it is today and that is a portfolio of diversified filtration businesses around the world.

We have and continue to focus on growing internationally, growing our replacement parts and growing our industrial businesses.

The objectives of our new model include not only growth in revenue and earnings for our shareholders, but also the reduction of the impact on our company of any single end market cycle.

We see the proof that this has worked in our track record.

We have delivered 17 consecutive earnings records through a variety of end market cycles.

The strength of our business model will be evident again this year as the decline we have talked about in the North American truck business during the second half of our fiscal year, will be offset by strength in our other engine businesses around the world and by solid sales growth across our industrial businesses.

As Tom mentioned we experienced higher than expected distribution costs in our second quarter and first half.

And I think we have to admit to some extent a perfect storm hit us.

We were suddenly faced with an unexpected surge in customer demand, while trying to integrate our new distribution capacity in North America and Europe.

And while I am happy to say that we are able to take care of our customers and satisfy this increase in business it did cost us in extra distribution expenses.

It will take us time to complete the improvement process as Tom talked about in our distribution centers to reduce and optimize these costs but we are confident that we will get there.

So cutting to the bottom line, we expect our full-year operating margin for fiscal '07 will be consistent with our long-term target of 11%.

We also expect to deliver another record year of sales and earnings making this our 18th consecutive earnings record.

That concludes our prepared remarks page.

Now we would like to open it up to questions.

(OPERATOR INSTRUCTIONS).

Jeff Hammond, KeyBanc Capital Markets.

I just wanted to try to get a little more granular on how much these ramp costs were, the added distribution costs in the quarter.

And then Bill, you mentioned the order rates give you confidence of strength but you also mentioned a kind of perfect storm; so maybe just give us a better sense of where you maybe thought in the quarter there were some aberrations where the growth rates may be a little unsustainable and where conversely some of that robust growth continues?

Jeff, this is Tom.

I will first comment on the margin and the distribution costs and then if Bill has any other comments he can chime in.

About half of the gross margin reduction from last year relates to distribution costs so that is roughly $3 million, about 6/10 of a point, and that will continue for a while.

I mentioned some investments that we are going to be making but we do think that some of the extra freight costs are behind us, labor costs, but we aren't going to be making some investment in that area.

Then the other half of that gross margin reduction is really in mix as I mentioned in my comments.

Jeff, this is Bill.

What happened there is I talked about the percentage increases say in our engine business in Europe; we weren't expecting -- we knew we were going to be growing -- we didn't expect to be growing that much.

And my perfect storm comment really relates to the fact that in the midst of trying to make this transition in our distribution capacity that hit us, and we weren't prepared for it.

So as Tom talked about how much it costs, we know we have got our arms around it and it will take us a little time to get it back to where we want to but we are confident that we can do that.

I guess my question is are any of the growth rates that you experienced in the quarter either geographically or in any of the individual businesses based on the order rate was that an unsustainable level or is that kind of trend?

Jeff, we don't have perfect visibility.

Probably our gas turbine business is the one where we have the most visibility because of the size of the projects, in terms of visibility how far out they go.

We have the capacity to do it.

In our two distribution centers it caught us a little bit short and we had, as Tom mentioned, we had to put extra expense to handle it.

But we do see given our incoming orders generally or in aggregate across our company, very strong conditions for the second half of the year.

With the exception that we talked about the first fit on road truck business in North America.

And then final question back to the mix issue can you just explain that a little bit better, where you saw the unfavorable mix?

And then should we expect that mix issue to continue or not going forward?

Jeff, this is Tom again.

It is not easy to predict mix going forward because it is going to vary on a quarter-to-quarter basis.

But where we saw the mix was primarily in the industrial side of our business with as we mentioned in our press release, and in my comments, system sales, first fit sales ramped up more quickly than aftermarket sales.

Gas turbine, Jeff, would be an example of that.

Perfect.

Thanks guys.

Bill Benton, William Blair.

Just in terms of I guess some of the pre-buy impact did start to hit this quarter and I guess it was noticeable on a sequential basis even though you only had about a month of it there.

Do you feel as confident in the 30 to 35 as you did before?

Or is there any change in that level of confidence when we go into that back half relative slowing?

Bill here.

We recalculated it based on all the latest available information this week in preparation for this call.

And we are as Tom said, we are very confident that that is our best forecast of how it is going to impact us.

Okay.

And then just in terms of the inventory you said you guys are holding a little bit more inventory.

I guess I thought it might have come down with the gas turbine shipments this quarter but I know you guys have added some distribution, and you noted that you are doing that for customer service reasons.

Was there a specific maybe a level of complaints that had gone up with regard to customer service that had driven you to make this move or was there something else that was driving that?

No, Bill.

This is Tom.

There wasn't any specific issue but rather just moving into increased distribution capacity required us to increase inventory levels.

And then with respect to gas turbine that was a relatively small portion of the inventory increase.

The majority of the inventory increase is related to our additional distribution capacity.

Okay.

And then on the IFS side, I mean obviously I saw a nice acceleration there and I am just trying to get a general sense;

I know you talked about Asia and Europe.

Is there any more granularity that you can offer us in terms of the sustainability of some of those system sales that it seems to be you are talking about outside of gas turbines?

Maybe some OEM I should say, type sales, (multiple speakers).

Bill again here.

We don't have tremendous visibility there but what we look to is say investments in manufacturing capacity.

And we see as I pointed out in my comments conditions very strong with the rebound in the industrial economy in Europe.

So conditions in Europe are very strong and then we see the growth in the industrial base in Asia the same type of thing.

Okay.

So it is continuing then?

Right.

Great, guys.

Thanks a lot.

Charlie Brady, BMO Capital Markets.

Can you just on the European strength, can you just drill down into that a little bit more and what exactly do you see driving that and was it completely broad-based or were there some pockets that might have been a bit stronger than others?

Charlie, this is Tom.

Actually it was pretty evenly spread across the engine and industrial product lines, so there was not one specific pocket of strength nor anything really noted of weakness in Europe.

So pretty broad-based.

And in terms of geographic region?

Within Europe?

Yes.

Within Europe really no specific change in geographic mix or again pockets of strength to relative weakness.

Andrew Obin, Merrill Lynch.

Just a question about your outlook, I just want to make sure looking at your high revenue projections and lower tax rate, and given where we are year-to-date, it seems that we ought to be towards the upper end of projection even with operating inefficiencies.

Yet you did not raise your outlook.

And I am just wondering does this sort of reflect the inherent conservatism of Donaldson or are you saying the things might still in terms of inefficiencies that those will persist at a fairly high level in the second half of the year impacting margin pretty badly I guess and you just want to be conservative.

So is it just conservatism or do you think operating inefficiencies will stay at pretty high levels towards the second half of the year?

I just want to make it clear.

Andrew, this is Tom.

Good question.

You are right, we did move up industrial guidance a bit.

And in the tax rate guidance we moved down a bit.

But we are still comfortable with the range that we provided and we may narrow that down a little bit for the fourth quarter but at this point that is the range we are going to stick with.

And just a follow-up question maybe about your end markets.

There was a lot of talk recently about high commodity prices having a potential impact on demand, and agricultural equipment sector which is important for you.

Beyond sort of I guess replacement demand are you seeing extra demand for coming for new equipment in this area?

Andrew, this is Bill.

Yes, I think in the last maybe month or so what we have seen from our farm equipment or Ag equipment OEMs is an uptick in their outlook.

So we expect in fiscal '07 new equipment purchases or production is going to be better than maybe had been estimated a couple of months ago.

But does that mean better as in could you have quantified by any chance?

Are they telling you sort of double digits or single digits, just ballpark.

I would say it is probably the single digits.

I actually read your reports to get my information so, but I think what we have seen as you see with some of the large Ag equipment OEMs that they have, they ticked it up, their estimates for the year.

And a lot of that seems to be based on as you said corn prices related to what is happening with ethanol.

And they think that is going to drive new equipment purchases and production for them.

James Gentile, BB&T Capital Markets.

I have just a couple of questions.

One, I noticed earlier in the year you put out kind of a longer-term sales forecast I guess in communication with some of your employees, articulating a $5 billion sales target for 2016.

That equates to about 9.5-ish% long-term top-line growth CAGR.

And I was wondering if baked into that expectation are there any acquisitions that could propel you toward that $5 billion long-term target?

Bill here.

Maybe just to cover that announcement; we in the past year we did a review of our overall strategy for the company and one of the products of that was we set long-term targets, revenue targets and other targets as well.

But on the revenue targets we said we want to be a $3 billion filter company in 2011 and as you said $5 billion in 2016.

And actually when we calculated those numbers it was about a 12% per year growth rate; it really depends on where you start with.

Where I'm starting it.

Okay.

But those numbers were consistent -- the 12% was consistent with the top end of the range that I have talked about the last couple of years which is what we want to try to do each year is grow our revenues at 10% to 12% on average, per year.

And we want to try and get of that 10% to 12%, about say 7%, 7% or 8% organically.

So that is entering product line extensions, it is market reach extension, distribution extension, so in our current markets.

And then the other 3% to 4% with acquisitions.

So it is mostly an organic story but we are looking for acquisitions and we are looking all the time.

But right now it is probably a tough market given the pricing on acquisitions so we are patient.

Got you.

And how many more shares do you have left on your repurchase authorization or dollar amount?

James, this is rich.

We have 4.4 million left on our current authorization.

Do you have any timing in terms of when you would like to complete that or when does it expire?

It doesn't have an expiry date.

We don't comment specifically when we will be in the market though.

James just as a reminder our goal is on average, we don't commit to doing this each year, is to try and repurchase 3% per year, which after new option grants would result in a net 2% reduction.

And I think as we talked in other presentations if you look back over the past 16 or 17 years, that is actually what we have averaged is a net annual reduction of 2% per year.

Okay.

And then finally you mentioned that PowerCore sales are up 23%.

In prior calls you actually disclosed a dollar amount at which that product line or product lines are contributing to the total company.

At what revenue level are we at at PowerCore right now?

James, Rich again.

Roughly 10 million a quarter.

Did you get that, James?

Yes, thank you.

Anything else, James?

Hello?

Scott Graham, Bear Stearns.

Scott?

Hello?

Page, I think we are having some technical difficulties.

Yes, sir.

I apologize.

Mr. Graham, please press star one on your telephone keypad again sir.

Mr. Graham your line is open.

Yes, hello.

Yes Scott.

Yes, silencing a sell side analyst, always a good thing, I guess.

Just a couple of questions really, a couple across the board.

The IFS sales growth was really solid and I was just wondering if you could kind of maybe unbundle that a little bit end market specifically.

Not necessarily even regionally but more end market specifically, where are you penetrating more, what end markets are you seeing maybe bigger demanders right now.

Scott, I don't think we really comment specifically on end markets.

With our dust collection product it is going into a variety of different industrial end markets.

So it could be grain processing to welding fume.

And it is hard to give you any more granularity than we gave you in the press release because there are different numbers for each one of those segments.

But I will pick the European example as or Europe as an example; as we mentioned in our comments just very strong growth there driven we believe by the recovery in the industrial economy in Western Europe and Germany.

And new investment which then calls for dust collection and compressed air filtration equipment.

Got you.

A question about the margins.

Understanding of course the impact of the $3 million; first of all if you were able to tell us if you thought that that is a number that goes down from here, disappears from here, that would be helpful.

But I think more important to the heart of my question is you had strong aftermarket sales in engine products.

And you had strong gas sales which at least historically has proven to be a margin winner for you.

And I am wondering perhaps why we didn't see more of that read through even ex this $3 million?

Scott, this is Tom.

On the $3 million I mentioned that we are going to be making some investments in our distribution capacity in systems and in process improvement.

So while some of the components of the $3 million might go down like incremental freight and incremental labor, we may be substituting that for investment dollars.

So we are going to be continuing to incur some costs for a while in that area.

And then on margins we really don't comment specifically on gross margins by product line.

So again I think with respect to mix, I commented on the fact that in the industrial segment our system sales, gas turbine sales ramped up and that growth exceeded the aftermarket in the industrial side.

That's fine.

Additionally the cash flow this quarter you went through some of the explanations for why cash flow has been maybe a little bit below where it used to from you folks.

What is going to be out there in the second half of the year that is going to reverse that?

Because the last couple of quarters have been really kind of below Donaldson standard and the next, is the second half of the year -- I know you threw out a number there in terms of some guidance but what have you -- is there going to be any kind of a release of working capital that might kick in here that will help the conversion of your net income?

Scott, this is Tom again.

One point if you annualized the capital expenditures number that I gave you, you will see that our capital expenditures in the second half should be down a little bit from the first half.

And outside of that it is really within working capital where we just expect in a number of areas both on the asset and the liability side of the balance sheet, that there is going to be some improvements that are going to contribute to that improved cash flow in the second half.

So there is no one item, it is really a number of smaller items.

This is my last question, I promise.

The 10-Q from last quarter indicated that you benefited a little bit from a very small acquisition.

And I was wondering was there an acquisition benefit this quarter to sales?

Again this is Tom.

No, there was -- I am trying to recall Scott but there was a very small acquisition in December or January of last year.

And so we had those sales in the first half, but again that is really only a couple million dollars.

That's IFS?

Right?

Right, in IFS.

(OPERATOR INSTRUCTIONS).

Jeff Hammond, KeyBanc Capital Market.

Just a quick follow-up.

I caught on I guess in your prepared remarks you mentioned a couple of times you are confident your margins will be in your targeted range of 11%.

Which I guess you could think of -- low or high of 11%.

But I didn't know if that meant to kind of direct people in terms of some of these added costs suggesting that margins would actually be down year-on-year since you put up an 11.4% number in '06?

Jeff, this is Tom.

You are right, the operating margin was 11.4% last year.

And in our comments I mentioned that we expect margins to be at least 11% this year.

So that is viewed as kind of a range?

Yes, yes.

We believe margins should be at least 11% and that is pretty close to the 11.4% that you pointed out for last year.

(OPERATOR INSTRUCTIONS).

Richard Eastman, Robert W. Baird.

Just a couple of questions.

Bill, when you had given your engine commentary you had mentioned that Europe was up 31% year-over-year and then you basically tucked in strong market, but commented on some share gains.

Right.

Just give a sense of are the share gains coming on the OE side or the aftermarket side?

Both, Rick.

Okay.

Are they coming at complements of PowerCore?

PowerCore is helping in a small way so far because you know the PowerCore numbers are -- they are building, but it isn't a huge impact yet.

But it is with our other products and technologies both on the first fit and replacement parts.

I guess where I am going is PowerCore had any acceptance; these platform numbers that you throw out again kind of suggest they are smaller platforms.

But has PowerCore had any content wins on diesel automotive in Europe?

And is there anything teed up?

There is supposed to be a fair number of diesel introductions on the auto side in the U. S. in '08 and beyond.

Have we had any success on those platforms?

Rick, Bill again.

On the automotive side, the diesel automotive, the answer is no.

Although in the U.S. we have had some significant wins on the pickup, the diesel pickup truck platforms and that has actually been very good business for us.

PowerCore we look for applications where that technology is critical to the performance of our customers' equipment and the customers are willing to pay for it.

And so the automotive market for us, the car market we haven't seen that as a generally as an opportunity because it doesn't fit both of those parameters I mentioned.

But generally Rick, the PowerCore numbers are starting to build.

I think we shipped about 3.4 million PowerCore elements so far.

And maybe your point is around well, it seems like it's taking a long time to build.

And it is, because there is a gestation period between when we win a platform and when it actually goes into production.

But as I mentioned in my comments there were a number of platforms that actually went into production this quarter.

We had the last couple of quarters have been pretty quiet, where we had wins that hadn't been launched.

And so we remain very optimistic about this over the next couple of years and we are working on the next generation of this technology to raise the bar again.

And I noticed you have started to maybe formally or aggressively market this XLR product so PowerCore for the air gas turbine side?

Bill again, we started a couple years ago; we have had some good success with that.

That is another one where I would say our customers are interested but they don't -- no one really wants to be first.

We have orders -- these are gas turbine systems are large systems.

We have orders for 16 of these XLR systems to ship as part of our gas turbine backlog in fiscal '07, so we are very encouraged on the industrial side as well.

Same advantages for the customers.

And then just listening in to one of your bigger customers commentary recently, they had talked about working down their global inventories and taking about $1 billion out of the channel.

And that is on the heavy-duty truck side, both on road and off-road I think.

But have you seen or have you seen that in your kind of sequencing to that customer?

In terms of orders?

Yes.

That is a lot of inventory to come out of the channel and I would think it would come out of production rates.

We have not.

And then last question, were there any specific business realignment expenses in the quarter?

When I say specific, to dollar number?

This is Tom.

We do identify each quarter startup and restructuring and rationalization expenses.

And in the second quarter that dollar amount was about $1.1 million compared to about $1.7 million last year.

And is most of that then obviously is in that cost of sales line?

It is essentially all in cost of sales, yes.

We have no further questions.

I will now turn the call back over to Bill Cook for any closing remarks.

Thanks Page and to all of you for participating and listening I'd like to thank you for your time and interest.

To my fellow employees I want to thank you again for delivering another record quarter in both sales and earnings.

Thank you all and have a great weekend.

Goodbye.

Thank you.

This does conclude the Donaldson Company second-quarter earnings conference call.

You may now disconnect.