Donaldson Company Inc (DCI) 2008 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Donaldson Company first quarter fiscal 2008 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) Thank you.

Mr.

Sheffer, you may begin your conference.

Thank you, Tina.

This is Rich Sheffer, Donaldson's Assistant Treasurer and Director of Investor Relations.

And I welcome you to Donaldson's 2008 first quarter conference call and webcast.

Following my brief introduction, Tom VerHage, our Vice President and CFO will give us a brief review of our record first 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 the balance of fiscal 2008 and the business conditions shaping that view.

Following Bill's remarks we'll 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'd like to introduce Tom VerHage.

Tom?

Thanks, Rich, and good morning, everyone.

As you saw in our press release late yesterday, we are starting off fiscal '08 with a fine quarter thanks to our continued strong top line growth, particularly outside of NAFTA.

Strong foreign currencies boosted our sales by 4.6%.

Just to give you a sense of the strength of our business globally, year-over-year sales increases in our three regions in local currency were 25% in Asia-Pacific, 17% in Europe, Middle East and Africa, and 6% in NAFTA.

As you know, heavy truck build rates are down considerably in NAFTA, which resulted in a $22 million year-over-year decrease in sales to that portion of the market.

Bill will comment on global market conditions across our major product lines in just a few minutes.

Our operating margin for the quarter was 12.1% compared to 12% last year.

As you know, we target a minimum operating margin of 11% for the year.

Gross margin of 32.9% compares favorably to 32.2% last year and operating expenses of 20.8% are up a bit from last year's rate of 20.2%.

The operating expense ratio is impacted by investments to capture growth opportunities and the higher mix of Industrial segment sales, which generally have both higher gross margins and operating expenses than Engine segment sales.

Our gross margin and operating expense ratio will fluctuate each quarter and be impacted by such factors as product mix, investments in new product development and various other factors.

Our tax rate of 27.1% for the quarter compares to a prior year rate of 31.2%.

In our year-end webcast, we mentioned that our first quarter tax rate would be lower than our annual projected rate due to a lower tax rate that was signed into law in Germany that allowed us to reduce our German deferred tax liabilities and the expiration of the statute of limitations on certain matters that were previously reserved.

Now, I'd like to provide you with some further detail on a few matters for you to consider in your analysis for the remainder of 2008.

We have not changed our annual margin outlook which is for gross margin to exceed 32%, and operating expense to be in the 21% range.

If we achieve these targets, our operating margin should be at a minimum of 11%.

We expect operating income to grow by 13% to 18% this year compared to last year's $211 million.

Interest expense should increase by $2 million to $3 million, with the primary driver being the full-year of debt related to our acquisition of AFS this past March.

Our tax rate will continue to fluctuate by quarter and we are maintaining our annual guidance of 29% to 32%.

You are all probably aware that we have adopted the new income tax accounting rules required by FIN 48 in fiscal '08 and this new rule did not have a significant impact on our first quarter financial statements.

Our Cap Ex outlook is in the range of $60 million to $70 million.

And we expect depreciation and amortization in a range of $51 million to $55 million, which includes $2 million of amortization related to the intangible assets of the AFS acquisition, and we are maintaining our free cash flow outlook for the year of a range of $100 million to $140 million.

As you consider your quarterly earnings estimates for the remainder of the year, we want to remind you that our second quarter is impacted by the significant number of holidays, which results in more days that both our customers and our plants are closed making this our weakest sales quarter of the year.

Also due to the timing of our annual stock option grants, approximately 75%, or $3 million to $3.5 million of our annual stock option expense is recorded in the second quarter.

One other reminder is that last year contained an extra week of domestic sales in our fourth quarter, which provided a one-time boost of approximately $16 million.

So thanks primarily to our robust sales growth in the first quarter, we have increased our EPS outlook for the year to a range of $1.97 to $2.07.

And with that, I'll pass it over to Bill who will provide more background on our outlook.

Bill?

Thanks, Tom, and good morning, everyone.

Our first quarter results proved again the power of our diversified portfolio of filter businesses around the world.

So although we saw some weaker end markets in NAFTA including on-road heavy truck and residential construction, these were balanced by strong growth in Europe and Asia in both our Engine and Industrial business segments and in addition, with our strong international presence we benefited from the weaker dollar.

Now I'd like to briefly cover some highlights by segment and I'll start with our Engine business in Europe.

In Europe our off-road and on-road businesses both grew over 20% and our Engine aftermarket grew by more than 30% in the quarter.

European business conditions for us continue to be good due to the combination of general economic growth, together with new business we've won at both existing and new customers.

And with our aftermarket growth in European emerging markets, which we include eastern Europe, Middle East and North Africa, this has been a priority for us as we've added more distributors throughout these developing regions.

In Asia, our Engine off-road and aftermarket businesses also had a strong quarter as strength was seen across the region.

Japan we saw a continued strong construction market.

In China we added new off-road customers and increased our aftermarket distribution and in Australia we saw good growth as a result of the mining boom.

Now switching to NAFTA.

As expected, our NAFTA Engine businesses were a mixture of different stories this quarter.

In off-road, the small construction market and our sales to it remained weak due to the much publicized residential housing crisis.

However, this was offset by the ag equipment sector which was fueled by strong farm and crop conditions.

Our aerospace and defense sales were up on strong military demand, particularly for filters for the new MRAP vehicles and replacement parts for existing military equipment that needs overhauling.

In addition, our acquisition last year of AFS also added about $4.4 million to quarter one sales.

In our replacement parts, or aftermarket business, truck ton miles in NAFTA moderated as the economy has slowed and general equipment utilization rates are mixed.

Better for large equipment and ag, but slower or less for small construction equipment resulting in a good quarter for our aftermarket which ended up 9%.

And finally, the heavy truck downturn was about what we expected.

Our NAFTA on-road sales were down 56% following last year's big prebuy in front of the January 2007 new emission regulations.

Now I'm going to switch to our Industrial businesses and I'll start with our industrial filtration solution business which had a great quarter internationally, up 20% in both Asia and Europe.

In Asia our sales in China were very strong, reflecting the continued strong manufacturing investment climate there.

In Europe we also benefited from the continued capital investment across the continent as Western Europe continued adding capacity and Eastern and Central Europe continued to make new investments.

And in NAFTA, our sales were up 6% as we continue to see good demand for both our systems and replacement filters.

In our gas turbine business, we started the year very strong but I should remind everyone that these are typically large systems, in fact the largest we make, and the result our shipments to our customers by quarter are volatile and tend to bounce around a bit.

But overall, the gas turbine market we serve continues to enjoy a strong up cycle in both the power generation and oil and gas markets.

And then finally, our special application sales were good in quarter one as we saw solid growth in both our disk drive filter and PTFE membranes businesses.

Now, switching to our outlook for the balance of the fiscal year, it's good for fiscal '08.

As noted in our press release, we have just increased our full-year sales expectations for both business segments.

Our Engine business sales are now expected to be up between 7% and 9%, up from our previous forecast of 5% to 7%, and our Industrial business segment should be up between 11% and 13%, and we'd previously forecasted that to be up between 8% and 10%.

So we picked up both of our forecasts for both the Engine and Industrial sides of our company.

Now, many of you may be thinking after an 18% revenue increase in quarter one why our full-year numbers aren't higher so let me briefly explain.

During quarter one we did receive a benefit on the revenue line of about 4.6% due to foreign exchange, as Tom mentioned, and we don't expect to see a similar size benefit during the second half of this year.

The second reason is, as I mentioned, our GTS shipments by nature bounce around by quarter.

We had an outstanding quarter one but we don't forecast the next several quarters to be quite as large.

And then third, remember we had a strong second half last year with our first $500 million quarter in the fourth so our comps will be getting tougher.

But having said all that, we are looking at another good revenue year with total sales up approximately 11% and our first $2 billion sales year ever.

Now, looking at the outlook conditions by segment starting first with our Engine business, despite some current weakness in NAFTA, both the construction and mining equipment sales continue to grow internationally.

In the ag equipment sector we see strong growth there globally.

The latest reports forecast both good crop prices and farmer incomes to be up which is positive for the ag equipment market.

We expect demand to continue growing in our aerospace and defense business and in addition, last March's acquisition of AFS will continue to benefit our sales line.

We expect our aftermarket sales to continue to grow strong internationally as we focus on continuing to develop new markets and adding distribution.

And finally, as Tom mentioned, we continue to see the NAFTA truck business being down about $30 million to $40 million this year through our third quarter before starting to pick up in the fourth quarter of fiscal '08.

In our Industrial businesses, we see all of the major business groups up in fiscal '08.

In IFS, which includes our Industrial dust collectors and compressed air filters, incoming orders remain good for both equipment and replacement filters so we've increased our sales growth guidance up to 10% to 15% for fiscal '08.

In our GTS business we have significant orders in hand already for fiscal '08 and we're expecting a 15% to 20% sales growth for the full-year as we continue to see good conditions in the Middle East, Asia and parts of Africa.

And finally, we're expecting 5% to 10% revenue growth in our special application business this year.

As Tom mentioned, we expect our fiscal 2008 operating margin to be a minimum of 11%.

We have now increased our full-year EPS at a range and expect EPS to be between $1.97 and $2.07 per share and which would be our 19th consecutive year of record earnings.

Now, as our habit, I want to give you an update on two of the new platforms that we talk about.

One is PowerCore and then the other is the diesel emissions.

And I'll start first with PowerCore.

We have now won 93 equipment platforms with our OEM customers.

73 of these are already in production and another dozen are expected to go into production during fiscal '08.

Our PowerCore sales in the first quarter were up 20% to $12.5 million.

And we still have another 80 plus platforms in the proposal stage with our OEM customers so with our current win rate of over 90%, we are confident of the continued growth of PowerCore technology.

And finally, we will be releasing our next generation PowerCore technology in 2008, which utilizes the latest advances in Donaldson technology which will allow us to further reduce the footprint of the filtration systems by about one-third.

Switching to emissions.

While we continue to be positive regarding the long -- our long-term participation in the diesel emissions market, we have now reduced our estimate for our on-road business to $80 million by the end of 2012.

So why make this adjustment?

Well, based on our current expectations of platform wins for 2010 coupled with current volume projections for those wins, we feel that $80 million is our best estimate today.

In addition, we believe that it will take approximately two years from the implementation of the 2010 EPA regulations for the industry market volumes to recover to normal production levels.

We will continue to support our existing on-road emission customers while we increase our focus to the retrofit and off-road market which we now believe are a better fit for our product development skills.

So the bottom line around this emissions opportunity is that we continue to see the on-road and off-road diesel emissions as a good growth opportunity for Donaldson, although not quite as large as we had first hoped.

Now, I want to offer some wrap-up comments on the quarter.

We are off to a very good start in fiscal '08 with strong sales, a new record and a 12% operating margin.

Our overall sales outlook for fiscal '08 is good for both the Engine segment and the Industrial segment.

The strength of our business model, which is a portfolio of diversified filtration businesses around the globe, continues to work, as the weakness in those end markets in the midst of cyclical downturns, like heavy truck, has been and will be offset this year by the strength in our Industrial businesses globally and our international Engine business.

In addition, in the spirit of continuous improvement, we have been and remain focused on improving the long-term profitability of our business.

As Tom reported, we made good progress this quarter, specifically one of the areas of immediate focus for us is that we will be continuing to improve our distribution efficiencies by investing in people, processes and systems, to yield a long-term, sustainable improvement.

The bottom line with all this is that we expect to deliver another record year of sales and earnings, making fiscal 2008 our 19th consecutive EPS record.

Tina, that concludes our prepared remarks.

Now we'd like to open it up to questions.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Charlie Brady with BMO Capital Markets.

Hi.

Thanks.

Good morning, guys.

Good morning, Charlie.

Great quarter, by the way.

Your gas turbine business, and I know it's lumpy, but, clearly, the expectation for that business relative to where you were at the end of the year, you really ratcheted that up a lot.

I'm just wondering, is that just being driven by a more near-term influx of customer orders that have come in or projects that maybe were in the pipeline that were possible but a little more uncertain and now the certainty there is increased such that the orders have come in or they're much more highly probable?

I mean because the outlook for that business is up significantly from where you previously thought it was going to be.

Charlie, this is Bill.

It's mostly around, I think, the second point which is orders firming up so we can see the projects but what we see now is the orders firming up so that's why we've increased our guidance.

Okay.

And switching gears, on the special applications business, how much of that business is disk drive business now?

Charlie, this is Tom.

Approximately two-thirds of that business is disk drive.

And the performance in that business in the quarter was also pretty strong and I'm just wondering given the strength in Q1, why the rest of the year, if you add it all together, why the overall year performance wouldn't be a little bit even stronger than kind of what you're projecting right now?

Charlie, this is Bill.

I think we're -- we don't have a tremendous amount of visibility in the disk drive business.

What we mostly rely on is sort of industry estimates of hard disk drive shipments and that's what we factored into our guidance.

Okay.

Thanks.

I'll get back in the queue.

Your next question comes from the line of Brian Drab with William Blair.

Hi.

Good morning.

Good morning, Brian.

First question, just around working capital, it looks like there is a slight uptick in accounts receivables and inventory days.

I'm wondering if you could talk a little bit about that?

Brian, this is Tom.

Receivables are up actually quite a bit less than sales.

I think receivables increased in the first quarter about 10% and, as you know, our sales growth was up 17% to 18%, so we're fairly comfortable with where receivables are.

I'd say also on receivables, as you know, a lot of our sales growth took place overseas and generally overseas customers get longer terms than domestic customers.

Then on inventories, inventories were up, I believe, about 7%.

Keep in mind that about half of that's currency with the stronger currencies.

Right.

And then, you know, consistent with our growing aftermarket model and having enough inventory and distribution centers to supply our customers as they need them, that would be another reason why inventories are up a bit.

Okay.

And then thanks for the update on PowerCore.

I was wondering if you could just talk a little bit about the dynamic -- competitive dynamic between PowerCore and channel flow and how you're seeing that develop?

Brian, this is Bill.

I think as we've talked about this the last couple of years, you know, we knew or expected that if PowerCore was successful other people would try and copy it.

And so maybe in the spirit of imitation being the most sincere form of flattery, other people are trying to copy it.

That's really why we had started a couple of years working on the next generation and why we're going to be releasing this year.

So we're going to raise the bar again with the next generation PowerCore and offer our customers improved value in a smaller size.

That's the way we're dealing with that.

So we do see competitors trying to copy our first generation technology.

We're going to release the next generation.

Okay.

Great.

Thank you.

Your next question comes from the line of Richard Eastman with Robert W.

Baird.

Good morning.

Good morning.

Bill, I just wanted to clarify, the sales growth rates that you're providing, the boost 7 to 9 for Engine and 11 to 13 for Industrial, is that in local currency for the full-year?

That's in dollars, Rick.

Okay.

So that's in reported dollars.

Okay.

And then you had referenced the defense and aerospace business as part of the Engine segment, which I understand, but could you size that for us?

How big a piece do you talk to when you think of aerospace and defense and is that in the off-road piece or is that kind of the whole -- in the whole Engine segment?

Rick, it is in the off-road piece.

That business is between 3% and 4% of our total sales.

Okay.

And then the last thing is, and I struggle with this just a little bit.

But the leverage in the business, given the sales growth we've seen, and I know you have made investments which may explain this, but if I try to adjust the sales and op profit for currency impact, my incremental op margin is around 10%.

And by your segment disclosure, it would look like the greater incremental margin is coming out of the Industrial business than the Engine business.

And I'm struggling a little bit as to why, are we intentionally absorbing some of that leverage with what you might think of as growth investments or why are we not showing a bit more incremental profit on the sales growth?

Rick, this is Tom.

Actually, I anticipated your question.

I must ask it too much.

I think you did notice year-over-year that our Industrial products margins did improve and, you know, that's going to fluctuate quarter-to-quarter.

Last year, as you might recall, we were opening up a new plant in the Czech Republic for dust collectors and that had some plant start-up costs and the like.

You know, as far as growth investments, there's no question, we're going to continue to do that and I think that's paid for itself, if you look at our growth in the first quarter.

We wouldn't have had that growth if we wouldn't have made some of those growth investments.

So there's a lot of new product platforms coming out, particularly on the Engine side that we're investing in.

We're investing in sales and marketing folks, especially outside the United States.

So I think it's primarily the growth opportunities that we see and we're just going to need to continue to make those investments.

Okay.

And do you feel that exports up significantly for you or is, again, the international growth coming in product that's manufactured there, but has the weaker dollar helped you in terms of exports?

Rick, this is Bill.

You know, we do supply from our plants in the U.S.

outside of NAFTA, but primarily most of what we sell outside of NAFTA we make in the regions and that actually helps us in terms of being naturally hedged.

So from a weaker dollar perspective, we haven't seen a big gain because we export a lot.

I understand.

Okay.

Great.

Thank you.

Your next question comes from the line of Scott Graham with Bear Stearns.

Hey, good morning.

Good morning, Scott.

Couple of questions.

One of the margin, one on the sales.

We were -- you indicated to us that sort of during the middle two quarters of last year that you had this organizational spending to improve service rates, to help out some of the newer facilities with logistics and what have you.

That number, I think, raced all the way up to as much as $4 million and I think it was the second or third quarter of last year and then came off a bit in the fourth quarter.

I was just kind of wondering if you would maybe call out what that number was this quarter.

Scott, this is Tom.

I think what you're referring to is the third quarter last year when we did see that spike and identified the need to make some significant investments.

We had two projects, key projects underway, one was in Belgium, where we converted a manufacturing plant to a distribution center.

That project is pretty much behind us and now we're working on our distribution center in the United States, on some important technology and process and organizational initiatives.

So that spending will continue for a bit yet.

And perhaps later on in the fiscal year we'll hopefully start to see some of those benefits.

But that's going to be a long-term game and we're going to see the benefits in the future.

It doesn't, though, appear as if it was as high this quarter as it was in that quarter that you indicated that it was $4 million.

Is that a fair statement?

The $4 million back in the third quarter of last year included both of those distribution centers.

Yes.

We're still incurring some extra expenses in the first quarter of this year and on a year-over-year basis those extra expenses are approximately a couple million dollars.

Thank you.

On the sales growth, five of your six segment sales growth were really terrific and I was just wondering, two of them in particular, off-road and aftermarket, those sales looks like they accelerated this past quarter.

Maybe I'd even lump into that the IFS.

And I'm just wondering if you could call out what, other than strong international, was it more of a new customer, new distribution bent to that?

And also, with the IFS being up 15, we had slower factory activity in the United States and Europe, yet those sales also were quite strong.

I was just maybe wondering if you can give us a little more color on off-road, aftermarket and IFS?

Scott, Bill here.

First, on the off-road, I think there we are getting a benefit within that, as we mentioned earlier in response to Rick's question about -- that our defense business is up and it's a small portion of that but it's up a lot.

It's up for two reasons, stronger sales to military customers and then the second is the inclusion of the AFS acquisition which we didn't have this time a year ago.

So that helps.

But aside from that, we see very strong off-road conditions internationally and we also see very strong ag equipment conditions both in the U.S.

and internationally.

So it's a combination of those positive factors in off-road are more than offsetting what we see as some weakness in, say, residential construction equipment, smaller construction equipment than some of our customers have talked about in their releases.

The positives are more than offsetting that in the off-road.

In the aftermarket, I think it's to your point, as we discussed in our comments, it's around new distribution, more proprietary products, and expanding internationally.

It's a combination of those factors.

We saw in the emerging markets in Europe that I referenced, we saw very significant growth as a result of those efforts.

And so that's -- those are the types of things that add up to good aftermarket growth globally.

And then the last one in IFS, we see stronger growth there in Asia and Europe than we do in NAFTA, although as I mentioned, our NAFTA business is up, but it's up a lot more in Asia and Europe.

We really haven't seen, what you referenced, a slowdown in Europe in that business so we see that continued strength at least through the first quarter there as well.

That's very helpful.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Eli Lustgarten with Longbow Securities.

Good morning.

Good morning, Eli.

A couple of quick, just wanted to make sure I understood, you said aerospace and defense was 3% to 4% of total corporate sales or the total Engine sales?

Total corporate sales, Eli.

The corporate sales.

Okay.

And you also indicated in the prepared remarks that (inaudible) $3 million, $3.5 million of option expense in the second quarter that's coming or so.

Do have you an idea what the share count change will look like over the year or are you expecting to buy back most of the (inaudible) what's going on with share count based on the options?

Eli, I'm going to go back to history on the share count.

I think you might be aware that we bought back on average about 3% of our shares per year over the last 18 years and then that's resulted in a net reduction of 2% after stock options and grants, employee plans.

We really don't comment prospectively.

I think our press release indicated what we bought back in the first --

In the quarter, yes.

So what we do in the future will just depend on market conditions, share price and --

But the game plan hasn't changed to make sure that, you know, to continue the process of hopefully offsetting share (inaudible).

Over the long-term, Eli, that would continue to be our plan.

And what percentage of our off-road business is North American residential construction?

Eli, this is Rich.

North America is about 55% of our off-road business.

And you said residential?

Yes, how much of is the small stuff versus the medium and large?

We look at the mix within off-road, 20% to 25% is related to construction.

Less than half of that would be related to residential.

Okay.

And the rest of it's mining and aerospace is that how you're defining off-road?

(Overlapping speakers) Residential construction.

(Inaudible) That too, right?

Right.

Same question in the aftermarket business, what percentage is North American construction in the aftermarket business?

In Engine?

Eli, this is Bill.

I don't think we break that out, typically.

Yes, the way we report our aftermarket sales is a combination of both off-road and on-road replacement.

I realize that.

Yes, if you look at, you know, North America aftermarket is about 50% to 55% of our total aftermarket.

So you're looking at a pretty small fraction once you get down to residential construction.

All right.

Thank you.

You have a follow-up question from the line of Charlie Brady with BMO Capital Markets.

Thanks.

Could we just get back to the diesel emission opportunity and sort of the ratchet down in your expectation.

It was a fairly significant downtick in your expectation.

Can you just give a little more detail into what sort of played into that over the past, I guess, three months relative to where you were thinking before?

Charlie, this is Bill.

I think what we saw happen is as the business started to be awarded for the next couple of years, that we didn't win some of the platforms that we expected so that's why we updated our guidance and provided it.

We still think that that's a good growth opportunity, you know, it's not going to be as large as we had hoped on the on-road side but there's a growth opportunity there for us and we're still pursuing it.

And then in the next decade around the off-road regulations, which come in in 2011 and 2014, we think that there's going to be maybe an opportunity that we're better suited to go after.

So we're going to be a long-term player.

We just wanted to update the guidance based on what we see happening now.

Are there still platforms yet to be awarded?

For the on-road for 2010 most of those have been awarded at this point.

When would you expect the off-road awards to start coming out?

Bill again here.

The off-road would probably over the next couple of, say, year to two years, okay.

They're going to be in advance of the 2011.

So it'll be 2008, 2009.

Thanks very much.

Sure.

Your next question comes from the line of Andrew DeAngelis with KeyBanc Capital Markets.

Hi, guys.

Good morning.

My first question is a follow-up from a question asked earlier as it relates to PowerCore.

Was just wondering what percentage of the aftermarket you currently expect that you're capturing as it relates to PowerCore sales?

Which percentage of the systems that we put out there are we capturing?

From an aftermarket perspective, yes.

Of the PowerCore systems that we put out there, we're capturing maybe not 100% but pretty darn close to 100% of the replacement parts for those systems.

Okay.

That's helpful.

And then I wanted to focus [not] specifically on your GTS business.

I know you don't provide margin by unit, but was just kind of curious as to the margin trajectory of that business over the last several quarters and what we can expect going forward.

Andrew, this is Tom.

You are right in your earlier comment.

We don't provide margin guidance by product line like that.

So I guess we won't be able to answer that question.

Well, I mean, can you talk implicitly, though, as to what the margins in that unit have done over the last several quarters and what you'd expect from the profile going forward?

Sure.

Andrew, this is Rich.

I think what you're referring to is last year we had one or two issues with some large systems.

I think it's safe to say since we didn't call anything out, that we did not have a recurrence of that this quarter that caused a downdraft in the margins.

So I think things are operating fairly normally there.

Okay.

And then my last question relates to your transportation products group.

There's an ongoing share shift in the on-road segment in terms of the engines.

And you know, I know your guidance hasn't changed in terms of the revenue growth profile of that unit over fiscal '08.

But was just wondering what part of that $30 million to $40 million fall off in the first three quarters is kind of related to the market and what the impact of the share shift in that segment of the business might have to play into the expectations over the next three, four quarters?

It's essentially all market, production volumes being down.

So you're not seeing a notable impact from the ongoing share shift there on the Engine side?

No.

Okay.

That's helpful.

Thank you.

At this time there are no further questions.

Are there any closing remarks?

Yes, Tina, thank you.

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

To my fellow employees, I want to thank you for your efforts and support in our achievement of another record quarter for both sales and earnings.

Happy holidays and thank you all.

Good-bye.

Thank you.

This concludes the Donaldson Company first quarter fiscal 2008 earnings conference call.

You may now disconnect.