Donaldson Company Inc (DCI) 2008 Q2 法說會逐字稿

Thank you for joining the Donaldson Company second quarter fiscal 2008 conference call.

Hosting the call today is Bill Cook, Chairman, President and Chief Executive Officer, and Tom VerHage, Vice President and Chief Financial Officer.

During today's presentation all parties will be in a listen-only mode.

(OPERATOR INSTRUCTIONS).

This conference is being recorded today, Tuesday, February 26, 2008.

I will now turn the conference over to Rich Sheffer, Donaldson's Assistant Treasurer and Director of Investor Relations, to begin the call.

Thank you, Vince, and welcome, everybody, to Donaldson's 2008 second-quarter conference call and Webcast.

The order of business today is following my introduction, Tom VerHage, our Vice President and CFO, will give us a brief review of our 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 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.

Thanks, Rich.

Good morning, everyone.

As you saw in our press release late yesterday, we reported another quarter of record earnings, thanks in part to our continued strong top-line growth, particularly outside of NAFTA.

Stronger foreign currencies boosted our sales by 5 percentage points.

The sales growth was once again broad-based, with each of our regions participating, and for the most part, all of our product lines, with the exceptions being our gas turbine business, which as you know can fluctuate greatly on a quarter-to-quarter basis, and our NAFTA heavy truck business, which, as expected, had a $15 million decline in the quarter.

Given the top-line growth we have now seen in the first half of our year, and the continuing strength in a number of our end markets, we have increased our full-year sales growth outlook in our engine segment to 10 to 12%.

And in our industrial segment, our sales growth estimate is now 14 to 16%.

So, while we had a good quarter, it could have been a better quarter.

We have talked for sometime about our efforts and investments to enhance our distribution capabilities on a global basis.

You may recall last year that we converted a manufacturing plant in Belgium to a distribution center and implemented a new warehouse management system.

After some initial start-up inefficiencies, that project is proving to be a success.

In January of this year, we went live with the same warehouse management system at our distribution center in Indiana.

Despite our efforts to properly plan and test this implementation, issues quickly arose in order management, shipping, and document processing.

This led to inefficiencies and delays in processing customer orders, and our press release discloses the $2.1 million cost impact of these issues and the deferral of sales of approximately $5.5 million.

The good news is that we are catching up quickly on our late deliveries, and in our press release, we say that we will be caught up early in the third quarter.

Having said that, we have increased our cost base for a period of time by increasing our workforce and moving a portion of our inventory to third-party logistic centers to enable our distribution and IT management, to refine processes and modify the system design, so that we can fully optimize the functionality of this new system and earn an acceptable return on our investment.

Our current projection is that these incremental costs will be approximately $7 million for the second half of the year.

Despite the distribution system start-up problems, our gross margin improved by nearly 1.5 points, as we continue to benefit from our ongoing cost-reduction efforts and the leverage resulting from the strong production volumes.

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 margins should be a minimum of 11%.

And we expect our operating income to grow by 14 to 19% this year, compared to last year's $211 million.

Our tax rate for the quarter was 30% compared to 25.6% last year, when we recorded the impact of the retroactive reinstatement of the research and development tax credit.

Our tax rate will continue to fluctuate by quarter, and for the year, our guidance is a range of 28 to 31%.

Interest expense should increase by 2 to $3 million this year, with the primary driver being the full year of debt related to our acquisition of AFS in March of 2007.

Our CapEx outlook continues to be in the 60 to $70 million range, and our projection for depreciation and amortization for the year is a range of 55 to $58 million.

Our free cash flow outlook is a range of 70 to $110 million, and this is $30 million lower at both ends than last quarter's outlook, in part due to higher inventory levels, which result from the growth in our gas turbine business, and inventories in our distribution pipeline.

Inventory turnover improvement continues to be an opportunity for us.

So when you add it all up, thanks in large part to our continued robust business conditions, we have increased our EPS outlook by $0.03 to a range of $2 to $2.10.

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

Thanks, Tom.

Good morning, everyone.

I think there are two takeaways from our second-quarter release.

The first is that our model of continually building upon and expanding our portfolio of filter businesses really does work.

And the second is that despite the operational challenge Tom discussed, and which we are working through, we had a good quarter, with both sales and earnings records.

Now I would like to briefly review a few of our second-quarter highlights.

We saw continued growth in NAFTA, with sales up 4%.

I should also add that this was despite and including the downturn we are still experiencing in the North American heavy-duty truck market.

This 4% overall increase in NAFTA was driven by strong performances in our filtration systems for ag equipment and defense applications, and our engine aftermarket business.

Our international businesses also had a good quarter, with revenues up 5%, excluding the impact of foreign exchange.

Here are a few of our highlights within our international numbers.

In our European engine products business, we saw strong performances in both our OEM truck and off-road equipment businesses, as well as our aftermarket or parts business.

In total, our European engine revenues were up 9% over the prior year, and this is in euros, excluding the foreign currency impact.

In our European industrial products business, we saw strong performance in our industrial dust collection business, with our euro revenues up 10% over the prior year.

In Asia, our engine OEM off-road business and our aftermarket businesses both had strong quarters, with sales up 31 and 10%, respectively.

Our significant Asian off-road sales increase was driven by strong construction equipment demand for our customers across the Asian region.

Our industrial filtration solution business in Asia had a good quarter, with sales up 6% excluding currency.

This business in China was particularly strong during the quarter, reflecting the continued high level of general manufacturing investment there.

During the quarter, our global gas turbine business was down 5% from the prior year.

As we've mentioned in the past, our quarterly sales results for gas turbines are lumpy, as the timing of these shipments of very large projects can and does vary dramatically from quarter to quarter.

Finally, our worldwide special applications sales were good again in the quarter, as sales for our filters from our Chinese and Thai plants to our disk drive OEM customers were very strong.

Now I'd like to switch gears and talk about our outlook for the second half of the fiscal year.

First, as noted in our press release, we have again increased our full-year sales guidance for both businesses.

Full-year sales for our engine business now are expected to be up 10 to 12% from our last forecast of 7 to 9%.

And our industrial business in aggregate is now forecast to be up 14 to 16%, versus our last guidance of 11 to 13%.

A few more comments on our outlook, and I'll start first with the engine business.

Our guidance is based on our forecast of continued good conditions for heavy construction and mining equipment, especially outside of NAFTA.

We also expect the sales of agricultural equipment by our customers to remain strong globally due to higher crop prices and farm incomes.

We expect to see continued growth in our defense and aerospace business due to the combination of increased equipment utilization and replacement, and also the acquisition -- our acquisition last year of Aerospace Filtration Systems.

Our replacement parts or aftermarket business should continue to grow based on the utilization rates of equipment in the field, as well as our focus to continue to develop new markets internationally.

And finally, while we are currently in what appears to be the bottom of the NAFTA heavy-duty truck cycle, we do expect that NAFTA heavy-duty truck builds will begin picking up year-over-year in our fourth quarter.

Now switching to our industrial businesses, we expect our IFS business, which includes our dust collectors and compressed air filters, to grow approximately 10 to 15% for the full year.

This is due primarily to increases in our sales of replacement filters, as well as new equipment sales, especially internationally.

While I mentioned earlier that our gas turbine filter sales were down slightly in the second quarter versus last year, we are looking at a very strong second half based on orders in hand.

We continue to see gas turbine business conditions strong in the Middle East, Asia, and parts of Africa.

And as a result, we have increased our sales outlook for the full year to 20 to 30% over last year.

This means that our full-year gas turbine sales should be between 190 and $205 million.

Tom already mentioned that we expect our full-year fiscal '08 operating margin to be a minimum of 11%, and that our operating income should be up 14 to 19% over last year.

Now I'd like to take a minute to update you on a few of our growth initiatives, and I'll start first with PowerCore.

We continue to make great progress with our innovative PowerCore technology.

We have now won 119 equipment platforms with our OEM engine customers.

This represents an additional 26 wins in the last quarter.

86 of these 119 platform wins are already in production with our customers, and another 11 are expected to go into production later this year.

Our PowerCore sales were up 45% in the quarter to $14 million.

And looking forward, with PowerCore, we have another 75 platforms in the proposal stage with our OEM customers.

And with the high win rate that we have experienced in the past, we are confident of the continued growth of PowerCore.

Finally, as I mentioned last quarter, we're in the process of releasing our next-generation PowerCore technology this year.

This next-generation technology utilizes the latest advances in our technology, and allows us to offer our customers additional benefits.

The second growth area I'd like to briefly update you on is our expansion projects.

As Tom mentioned, we expect our full-year CapEx to be in the range of 60 to $70 million.

This is down from last year when our CapEx was 77 million.

Within our current CapEx budget, we have a number of expansion projects underway to support our growth and market penetration plans.

In the Czech Republic, we have run out of capacity in the engine filter plant we opened four years ago.

We are now in the midst of a significant expansion of this facility.

This additional capacity should come online later this fiscal year.

About a year ago, we announced our plans to expand our engine filter plant in India.

We have since broken ground, and expect to be completed and into production by the end of this calendar year.

Last month our Board approved an expansion of our disk drive filter plant in Thailand.

We expect that this additional capacity will be available later this calendar year.

Finally, two years ago we reentered Brazil.

This year we will further ramp up our presence and capabilities to better support our global customers who are moving there.

So in conclusion, I want to offer a couple of final thoughts.

We completed the first half of fiscal '08 with good sales growth and an 11% operating margin.

And yes, on the plus side, we did have some help from exchange rates.

However, on the flip side, we also had to deal with the cyclical downturn of the NAFTA heavy-duty truck market.

Remember, in aggregate, it is really the power of our diversified business space that has provided the foundation to deliver these results.

Looking forward, we anticipate a good second half.

While there are some pockets of weakness in some end markets, we see solid strength in others.

Overall, the positives more than offset the negatives.

Again, this is the power of our diversified business model.

As Tom mentioned, we will continue to make progress on improving the operational effectiveness of our main US distribution center.

While I am very disappointed in the temporary inconveniences we have caused our customers, I am confident that we will resume providing our customers with best-in-class service soon.

The bottom line is that we expect to deliver for the year sales between 2.1 and 2.2 billion, which would be up 11 to 14% over the prior year.

Not only would this be another sales record, this would also be our first revenue year over $2 billion, a key milestone which we have been shooting for for sometime.

The second point is that earnings per share should be, as Tom mentioned, between $2 and $2.10, which would be up between 9 and 15% from our prior record, which we achieved last year.

This should be our 19th consecutive EPS record, further extending a track record of which we are incredibly proud.

That concludes my prepared remarks, Vince.

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

(OPERATOR INSTRUCTIONS).

Jeff Hammond, KeyBanc Capital Markets.

Can you just speak to, as you look at second half, how you're thinking about organic growth, if you take into account FX within the forecast?

We don't forecast any change in the exchange rates from where they are today.

And then, organic growth versus maybe acquisitions, [if that is where we're headed], we can't forecast acquisitions, so we don't have any of those included.

If we did happen to do something in the second half, that would be incremental.

And then specifically in special applications, that business has been up around 20% in the first half.

You're looking for 10 to 15 for the full year.

What's driving the significant deceleration there?

I wouldn't probably call it significant deceleration.

We don't have an incredible amount of visibility in that business in the disk drive market.

So just based on what we see, that's what we're forecasting at this time for the full year.

On the working capital management, how much of this is a function of this warehouse management system?

Working capital has been a little bit on the challenging side in the last year and into the first half of this year.

I'm just trying to get a better understanding of what's really driving that, and where do you see the improvement coming going forward?

As I mentioned in my comments, we think inventory turns are an improvement opportunity for us.

So as you look at inventory level increases on a year-to-date basis, there's really three categories there.

One is our gas turbine growth, and there's about $8 million of additional inventory in gas turbine.

Foreign currency represents about $7 million of that growth.

And the rest is all distribution related.

Now, of the remainder, we are sending more product around the world.

So international shipments are accounting for a portion of that, maybe about 6, $7 million.

We have ramped up some inventory levels in our DCs.

Around the world, as you know, we added quite a bit of distribution center capacity to serve our aftermarket customers; there's some additional inventory related to that.

And then we're guessing at this point that there's maybe about $8 million of that increase related to our distribution center in Indiana, where we got some temporary excess inventory.

So we are hopeful for inventory turns to improve a bit this year.

We're looking for inventories to come down a bit between now and the end of the year.

But keep in mind, too, as we ramp up our gas turbine business, that we might be increasing inventories there.

Final question.

As you look at your expansion plans, and just given some of the issues you've had on the distribution side over the last four or five quarters, is there anything on a go-forward basis over the next 12, 18 months that suggests that there's potential issues down the road of a similar magnitude?

No.

There's nothing that we see that there would be any repeats of what we're experiencing right now.

Thanks.

Eli Lustgarten, Longbow Securities.

A couple of quick questions, just clarifications.

The 2.1 million charge is in the engine business, or is it spread out between the two sectors and the operating profit numbers?

It's allocated between both segments, but the engine segment gets the lion's share of that $2.1 million.

I'm looking at the profitability levels of engine, and the difficultly (inaudible) maybe you can make some comments on what's going on in the overall profitability of the divisions.

(inaudible) industrial products, but engine is -- it's sort of like given the level of probability that's going on in most of the markets except truck, I'm just surprised to see so much difficulty in the operating margin pieces there.

I think you're looking at our segment detail.

And if I've done the math right, for the quarter, the earnings before taxes last year was 10.9%, and this year is 10.4.

So you're probably referring to that half-point reduction.

Certainly a good portion of that half-point does relate to the increased distribution costs.

And then, over and above that, every quarter we're going to have some mix issues within the segments.

In some quarters they're going to be slightly positive, some quarters slightly negative.

So that's going to account for another couple of tenths of that half-point.

During your comments you talked about the truck business.

Can you update us -- has anything happened for 2010 emissions?

We're starting to get a bunch of announcements.

And when you (inaudible) '09, we're now really beginning to look at the new engines and [philosophies].

Has anything happened in your business outlook for the 2010 emissions for the truck sector at all?

Nothing new for us, and I'd go back to the comments that we had in our last Webcast.

(inaudible).

And then finally, have you seen any change in international business conditions at all?

We keep hearing all these worry factors at this point.

Has there been any change in international business market conditions at all anywhere?

I'd just point to our guidance.

We see the international markets generally as being pretty robust.

But you haven't seen any recent [stuff].

And cost price pressures are not hurting you at any great degree at this point?

No.

Thank you.

Charlie Brady, BMO Capital Markets.

To kind of follow-up on what Eli's question was with regard to the pre-tax margins in engine, as that NAFTA starts improving, would you expect we should get a natural lift (inaudible) year-over-year increase starting in Q3?

No, I don't think you'd expect an increase in that margin percent from that mix issue.

So I think you should expect margins comparable with last year.

And on the PowerCore, as you introduce the next generation, are you anticipating, or how are you planning for, potential cannibalization of existing technology, as far as delays on waiting for the next technology to come out?

We don't really see any delays.

The introduction is really dependent on our OEM customers' launch -- design and launch schedules.

And this is an advantage for them, this next generation, because it reduces the amount of space and weight that the system requires, in addition to other advantages.

So it's a big deal for them.

The new technology, actually, the response has been very encouraging.

So there's sort of a pull.

It's being pulled into the market as we're offering it.

Final question.

On your segment guidance for engines and industrials, the 10 to 12 and the 14 to 16, how much of that is pure organic non-FX, non-acquisition related?

The only acquisition in there is the one we did last year about this time, AFS.

So the year-over-year impact of that is probably about $20 million, or something like that.

Actually, we did -- we closed on AFS last year on March 1st.

So during this quarter, we'll have reached that one-year anniversary.

AFS will still provide some lift because it is experiencing growth this year.

We also closed at the beginning of February on a small dust collection acquisition, LMC West.

It's about a $10 million run rate business that will help a little bit in the second half of this year.

From a currency standpoint, baked in our guidance is that the rates stay about where they have been here for the last month, which as we move further out into the year will create less benefit.

So the assumption can be made that organic is providing a little more lift in the second half versus currency.

Just to round it out, AFS generates 4 to $5 million of sales a quarter.

So essentially, pretty much all -- all pretty good, solid organic growth is what it looks like.

Thanks.

Scott Graham, Bear Stearns.

I know and I can hear in your voice your frustration with this technology stuff going on in the distribution center.

How do you -- why does this keep happening?

This is kind of your second go-round with this, and I know how terrific a planner you guys are.

What is sort of -- maybe give us the next layer of detail here as to why this would have occurred.

And maybe in answering that question, $7 million of second-half cost, to the same end, is that a number you can really draw a circle around and be comfortable with?

I'll start and maybe Tom will add some comments.

I think what happened last year in our Bruges facility in Belgium was not exactly the same thing that we're experiencing in Rensselaer.

What happened in Bruges is we got ready to do this, and it was a very complicated move; we were moving production out of this facility at the same time we were converting it into a warehouse.

And then the business took off, and that we had not planned for.

So it wasn't the technology thing, it was sort of a combination of maybe sort of Murphy's law factors.

The technology works.

As Tom mentioned, the system we put into our Rensselaer facility is the same as the one we put into Bruges.

The Rensselaer operation is a very large operation; it's a lot larger than Bruges.

And we ran into -- I would say there was a planning issue there.

We didn't cover all the bases.

So it's not a second one of those, it's maybe the first one of those from a technology side.

I'll jump in.

We wanted to give you some guidance on what the impact would be in the second half of the year.

The $7 million that I mentioned is an estimate, and it's simply that.

It's an estimate for an increase in temporary labor.

We have more employees at this distribution center right now then we will in another five or six months.

We're also going to be making some revisions to the software so we have some internal IT effort, incremental effort.

We're also going to be using some consultants to help us tweak the software a bit.

We're using some 3PL's, third-party logistics centers, on a temporary basis.

So there's maybe a bit of extra freight.

And then, employees are traveling as well.

So you add it all up, our guess is approximately $7 million.

Final number is going to be more or less.

And stay tuned; we'll update you next quarter.

And on that, Tom, if you would, you commented in the press release that you are comfortable or confident in that you'll be able to put -- get a lot of these shipments out early to catch up early in the third quarter.

Does that suggest that most of that 7 is in 3Q and stays mostly in engine, or is that more of a steady-state next two quarters?

What that comment suggested is that we are going to be caught up from a late delivery standpoint very quickly.

However, the extra costs that we're incurring will certainly run into the fourth quarter.

So slightly more of -- slightly more of that 7 million should be in the third quarter than in the fourth quarter.

And in addition, engine will continue to get more than half of the allocation of those costs.

Very good.

On the sales side, the IFS business and the gas turbines business -- two really different questions here.

IFS in the domestic market has -- have you seen any slowdown in that business because of its factory nature?

And conversely, that was still a really good number on a very difficult comparison.

How much of that, I think it was, about 9% growth was currency related in IFS this quarter?

Rich is looking up the currency part of that.

I'll start on the -- the growth rates, I guess, we talked about in our comments and in the press release.

We see IFS growth rates higher outside of North America than in.

But we still see some pretty good opportunities in NAFTA as well.

On the currency, Rich?

Currency, Scott, IFS benefited by 8.8 million.

We do -- for all the listeners on the call, we do have a currency schedule that you can download off our Web site on the IR page that will give both the quarter and year-to-date by business unit.

You're saying IFS specifically was (multiple speakers)

IFS 8.8 million benefit in the quarter.

Which suggests that the real growth was nominal in that business.

It was a few percent on a consolidated basis, right, excluding currency.

Okay, (inaudible) or comparison.

Okay.

The gas turbine business, I know that shipments move around a lot, what have you.

Would I be correct in saying that the second half shipment activity would be a benefit to mix?

From a mix perspective, I don't think it's going to provide anything.

In terms of if you're looking for a margin expansion or something like that, it's not -- it's close to the average on an operating margin basis.

That's our objective for that business.

We're going to have a lot -- but your first part of your question is yes; second half is going to be a lot stronger than the first half.

We shipped -- in the first half of our fiscal year, we shipped $90 million.

And we're talking about a range in the second half of between 190 and 205.

So that means we're going to have a very strong second half, and we can see that based on the orders we have in hand.

Last question.

In the current quarter, was mix positive or negative at the Company overall?

It was slightly positive.

Thank you very much.

Brian Drab, William Blair.

First, in the transportation segment, you were previously talking about a range of 30 to 40 million decline in revenue for the first three quarters.

And we're at about 35 now, and you said you're expecting a slight decline in the third quarter.

Could you make a comment on whether you think we'll still fall within that 30 to 40 range?

Yes.

We think we will.

And then in the aftermarket segment, it looks like still relatively strong growth.

I imagine that it's, obviously, much stronger in off-road than on-road.

Could you break that out for us, what you're seeing in aftermarket filter sales for off-road versus on-road?

We don't break it out between whether it's off-road or on road.

Any perspective from you guys on the outlook for truck utilization for the balance of the year, maybe some help in how you forecast that?

Looking at the published data that we get from ACT Research as they're forecasting ton miles, which would correlate really well with truck aftermarket utilization rates for trucks, it was down in calendar year '07 over the prior year, to frame it.

Right now the forecast is for calendar year '08 it's going to be up, but I think their forecast is a little bit weighted to the second half.

So I think we're probably, in the second half of our fiscal year, going to see similar conditions.

Maybe a slight benefit, but probably not a lot until we get about mid calendar year.

Last question.

Within off-road, in the first quarter you had a pretty solid benefit from military orders.

Did you see that same -- did that help you get to this 33% growth number in the second quarter?

And what are you expecting as far as these military orders for the balance of '08?

We see very strong conditions for our military business.

It's the MRAP vehicles we talked about last quarter, spare parts and new programs.

Can you help us at all understand what that contributed to growth in the second quarter?

Our aerospace and defense business was up just a little under 9 million in the quarter.

Part of that was due to the AFS acquisition as well.

So about half of that was due to AFS.

The other half was growth.

Thank you very much.

(OPERATOR INSTRUCTIONS).

Richard Eastman, Robert W.

Baird.

Bill, a couple things.

On the aftermarket business, should we think of this 5.5 million of delayed sales being aftermarket, or is that distribution center pretty much run through everything, OE business and everything?

It's primarily engine aftermarket.

You're right.

And there isn't any risk there of lost share, is there?

Are these going to your kind of captive dealers, exclusive dealers, and they will just wait for the filters?

Or would they go somewhere else with the delay?

It's a function of how long the delay is.

In an aftermarket or parts business, the customer usually needs it pretty quickly.

Typically we're selling to distributors who have some inventory.

But they don't have a lot of inventory, so a lot of our focus has been to Tom's comments, really, on trying to restore the service as quickly as possible.

That's one of the reasons it's driven this cost issue that Tom was talking about.

It's really -- paramount for us is restoring customer service.

So we're throwing some dollars at it to restore the customer service to minimize, to your question, any possible losses.

(multiple speakers) would there be some?

There probably would be.

If somebody needs a filter today and they can't -- we can't get it to them, or I'd say (inaudible) be, say, a couple of weeks ago, because today we can.

But I think longer-term, we're doing everything that we can to maintain the relationships that we have.

Understood.

And is there -- when I look at the aftermarket business, could you just remind me approximately how much of that is NAFTA and how much is international?

We're looking right now to make sure we're not guessing.

It's about half an half.

Half and half, right.

I just wanted to circle back for a second on the IFS business.

The local currency growth rate, again, was a little bit modest in the quarter.

How did the book-to-bill look there?

I know you guys don't like to talk to orders, but was it better than 1?

Was there any -- I presume there were fewer shipping days here in the quarter, but --

Just approximately, incoming orders approximated shipments.

So book-to-bill was fairly flat.

Okay.

And you're comfortable that you're not feeling a macroeconomic impact on that business?

Certainly not globally.

As I think Bill mentioned in his comments, there continues to be a fair amount of strength, particularly outside the United States.

To add to what Tom said, because we've been talking about sort of what's happening in the industrial marketplace for a good year now, I think I would go back and point to the fact that our industrial business and NAFTA has outperformed sort of the industry factors for the last year or so.

We haven't really seen what we have been reading about.

Although again, the strength isn't as strong as what we see internationally.

Correct me if I'm wrong, but again, I'm going back to maybe the guidance that was provided.

And again, when the original guidance was given out by segment -- and this goes back to September, because I think we didn't necessarily change the guidance with the first quarter -- but we were using about a 1% FX benefit.

And now, as we recalibrate off of FX rates, we would probably be showing more like a 4% benefit this year.

Is that a fair way to characterize it?

Yes, that's fair.

I think just a point of clarification.

We have increased our guidance twice already since September.

So we increased it at the end of the first quarter, and we just increased it again.

And you're right; some of that is the added lift we're getting from currency.

Just one last question.

If we look at through six months -- and maybe it would be even helpful just to look at the quarter -- but when we look at price versus cost, is there any positive or negative variance there at the gross margin line?

We look at gross margins pretty carefully.

And I don't think -- particularly companywide, there is nothing there to speak of.

So (multiple speakers)

Very good.

Thank you.

Eli Lustgarten.

Very quick question.

In the tax rate guidance, you don't have anything for an R&D tax credit this year, I assume.

We do not, Eli.

That would be a 1% benefit, or something like that, to you if it does get reinstated, which we assume it will?

We haven't really calculated that number.

It's comparable to our R&D tax credits from previous years.

But at this point, it is not in our projections.

A longer-term follow-up.

With emissions in 2010, and sort of -- is there any threat to your existing business with the truck sector from the change of emissions if you don't participate significantly?

I assume (inaudible) just loss some incremental opportunity as opposed to existing business that would change.

Over time the muffler business will go away, and we participate in that.

So that's maybe on the negative side.

On the positive side, whether we win the emissions business or not, the whole changes around this technology are actually (technical difficulty) opportunities around -- for us around air and liquid filters, because the engines have to run differently and they need better filtration.

So a little bit on the muffler side; there's a risk there.

But a positive on the air and liquid side.

But you're expecting most of the muffler business (inaudible) stuff to disappear anyway, weren't you?

Over time, right.

Yes.

Thank you.

Thank you.

At this time there are no additional questions.

I'll turn it back to Bill Cook for any closing remarks.

Thanks, Vince.

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

To my fellow 13,000 employees, I want to thank you for your efforts.

I recognize that this hasn't always been easy, although you make setting new records look like it is.

We are on track to deliver another great year, our 19th consecutive EPS record.

Congratulations and thank you all.

Good bye.

This does conclude the Donaldson Company second quarter fiscal 2008 conference call.

If you would like to listen to a replay of today's conference, please dial 303-590-3030, or 1-800-406-7325, using the access code of 3843469, followed by #.

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