Donaldson Company Inc (DCI) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Donaldson Company, Incorporated second quarter fiscal year 2011 conference call.

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

Following the presentation the conference will be open for questions.(Operator instructions)

This conference is being recorded today, Wednesday, February the 16, of 2011.

I would now like to turn the conference over to Mr Rich Sheffer, please go ahead sir.

Thank you, Alisha and welcome to Donaldson's fiscal 2011 second quarter conference call and webcast.

Following this brief introduction, Bill Cook, our Chairman, President, and CEO, and Tom VerHage, our Vice President and CFO, will review our second quarter earnings and our updated outlook for the balance of fiscal '11.

Next 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 turn the call over to Bill Cook.

Bill?

Thanks, Rich, and good morning, everyone.

As you saw on our release issued earlier this morning, we had a very strong second quarter and have now delivered a record first-half performance in sales, net earnings and EPS.

Given the strong momentum we have with our current operating performance and our projected business levels, we are well positioned for the second half of our fiscal '11 to deliver record full-year results.

First, to recap a few of our highlights from the quarter, sales were a second quarter record of $537 million, up 23% year over year.

Our new sales record this quarter is further evidence that many of our end markets have now recovered from the recession.

Our second quarter operating margin of 12.6% was the second quarter record, and resulted in operating income being up 73% from last year.

The combination of our sales and operating margin performances delivered a net income increase of 44%, and an EPS record of $0.56.

Now I'd like to review each of our reporting segments, and I'll start first with the engine.

Local currencies -- local currency sales in our engine products segments increased 30% over last year.

Within engine, our after market or replacement filter sales were up 28% as utilization rates of existing trucks and off-road equipment fleets continued to improve.

We've also continued to add more distribution, more products, more new customers and consequently, we also believe that a portion of our sales increase in after market is the result of increased market share.

Our two engine OEM businesses are also both up strongly in local currency terms.

Our off-road products sales were up 53% as the construction, mining and ag markets have continued to strengthen and increase the demand for our customers' new equipment upon which our filtration systems are installed.

Our on-road product sales are up 50% as the North American and European heavy truck build rates at our customers continued rebounding.

Now I'll switch to our other reporting segment, industrial products, where local currency sales increased 16%.

Revenues of our industrial filtration solutions products increased 23%, as sales of new dust collection equipment continued to grow and sales of replacement filters for dust collectors remain strong.

Our gas turbine systems sales increased 16% over last year as we're seeing increased demand for the systems used in the oil and gas industry.

Looking at our sales by region, we also see evidence of how broad-based our sales increase was as in local currencies.Sales in the Americas were up 31%, sales in Europe up 20%, South Africa 21% and 18% in Asia Pacific.

We have talked in the past about our efforts to continue build -- continuing to build and expand our customer relationships, especially in our targeted emerging markets.

Our sales outside of the US represented 59% of total sales during the quarter, so we are truly a global company.

Our sales to just to brick countries now represent 9% of our sales and we're up 18% during the quarter.

We also saw a very strong sales growth during the quarter in South Korea, Malaysia, Indonesia, South Africa, Mexico, each of which were up over 30% from the prior year.

Behind those numbers, here are a few examples of the tremendous progress we're making with our customers in these emerging markets.

During the past quarter, we received the 2010 technology innovation award from Foton, the fourth largest truck manufacturer in China.

We also became a strategic supplier for LiuGong, the fourth largest construction equipment OEM in China, and the biggest wheel loader manufacturer in the world.

And we were recognized by Wuxi Heavy Industry, a Chinese manufacturer of construction and mining equipment, with their best quality supplier award.

These three awards represent just a few samples of the emerging markets successes we have achieved, as well as the progress we're making providing our customers with the best filtration technology and the best service wherever they are in the world

.

I'm going to now turn the call over to Tom for a few comments on our operations before I discuss our updated sales outlook.

Well, thanks, Bill, and good morning everyone.

Our gross margin was 35.3% in the quarter.

The year-over-year increase of 180 basis points from 33.5% last year.

The major drivers of the gross margin improvement were very similar to last quarter.

Better absorption of fixed costs due to improved volumes in our plants, increased gross margin by approximately 80 basis points.

The benefit from improved volumes is back to normal historical levels, as many of our engine filter plants in North America and in Europe are either nearing or have reached pre-recession capacity levels.

Our ongoing continuous improvement initiatives also increased gross margin by approximately 80 basis points.

We have begun to experience purchased material cost increases, which decreased gross margin by 60 basis points.

We will see additional increases in the second half of the year based on current market prices and the pending expiration of our existing steel purchase contracts.

We also experienced increases in petrochemical-based raw materials such as plastics, urethanes and adhesives, and expecting additional increases for these materials as well.

So far we have offset most of the impact of these increases through our continuous improvement initiatives.

But going forward, we will continue to focus on productivity initiatives to offset some of the expected increases to come, but will also implement selective price increases where possible.

Another reduction to our gross margin is due in part to our increasing OE versus after market mix, which had a 70 basis point impact.

And finally, last year's margin was reduced by 60 basis points due to restructuring charges.

Operating expenses remain well under control, coming in at 22.7% of sales, compared to 24.5% last year, due primarily to the increased volumes this year.

Last year's operating expenses included $1.7 million of restructuring expenses, and there were none this year.

We also had $4 million of stock option expense this quarter versus $5 million last year.

And finally, we had $1.8 million in costs related to our subsidiary holdings reorganization project.

The combination of our record gross margin and continued operating expense controls delivered a second quarter record operating margin of 12.6%.

Looking at our operating margin forecast for fiscal '11, we expect the increase in our purchased raw material costs and a less favorable sales mix to reduce our gross margin in the second half of this year compared to last year.

We expect our planned strategic operating investments, which will support our strategic growth plans, to continue increasing through the second half of fiscal '11.

We spent $3 million on these initiatives in the second quarter, and believe we will spend approximately $9 million in the rest of the year.

These strategic initiatives include adding resources for our growth in Asia, Europe and Latin America, a specific growth initiative in China, along with increased investment in technology and product development for liquid filtration, and our global supply chain project.

Offsetting the incremental costs of these investments will be the absence of $10 million of restructuring costs that we took in fiscal '10.

In total, we expect our operating margin for the year to be between 13% and 13.8%.

Our effective tax rate was 34.4% in the quarter, versus 17.5% last year.

During this year's second quarter, we had a $4 million tax charge related to the reorganization of our subsidiary holdings to improve our global business and legal entity structure.

Partially offsetting this were $900,000 of benefits, primarily from the retroactive reinstatement of the research and experimentation credit in the US.

In last year's second quarter, we had $4.1 million of tax benefits from the expiration of the statute of limitations at a foreign subsidiary, along with a few other discreet tax benefits.

Based on our projected global mix of earnings and this quarters tax charge, we now expect our rate to be between 28% and 30% in fiscal '11.

Our second quarter CapEx came in at $14 million.

We approved increased spending for strategic projects during the quarter, such as tooling for new product platforms and capital investments, that will allow us to achieve cost reductions.

Our fiscal '11 CapEx guidance is unchanged at $70 million to $80 million, and we expect depreciation and amortization to be approximately $60 million.

Free cash flow was $16 million this quarter, and this includes a $20 million voluntary contribution to our US pension plans.

We expect free cash flow to be $165 million to $195 million this year.

And at the end of the quarter, our debt to cap ratio was 24.7%, and debt to EBITDA was 0.8.

Both remain well within the financial covenants of our various debt agreements.

We're expecting interest expense in fiscal '11 to be between $12 million and $14 million.

Our balance sheet remains strong with $286 million of cash and short-term investments.

And so now with that, I'll pass it pack to Bill who will provide additional details on our outlook for fiscal '11.

Bill?

Thanks, Tom.

And, now continuing with our fiscal '11 outlook.

We now forecast that our full year sales will be over $2.2 billion, or an increase of between 18% to 20% over last year.

Looking at each segment, our engine segment sales are forecast to be up between 21% and 26%.

As within our off-road product sales, we expect that the continuing increases in global commodity prices that are -- with that our sales to our agricultural construction and mining equipment OEM customers will remain strong, as their production rates continue to increase to match the growing end user demand for new equipment.

We're also seeing a strong recovery in our on-road product sales.

In North America the forecast for heavy truck builds at our customers is expected to increase from 154,000 in calendar 2010 to between 200,000 and 250,000 in calendar 2011.

In Europe and Japan, truck build rates are also expected to grow, although at a slower pace than in North America.

Finally, within our engine segment, we expect that our after market or replacement filter sales will remain strong.

The demand for replacement filters is a function of the increased utilization rates within the existing fleets of heavy trucks and off-road equipment currently in the field.

And in addition, we're working hard to further expand our distribution networks, especially in our targeted emerging markets.

Now switching to our industrial segments, our full-year sales are forecast to be up between 10% and 15% as we expect our industrial filtration solution sales to be up between 14% and 19%.

As customer demand for new industrial filtration equipment continues to improve as new plant and equipment capital spending increases.

We also expect our replacement filter sales to continue to grow, again with the increased utilization by our customers of those dust collectors already installed in their plants or in the field.

And while we expect that large gas turbine power generation market will remain stable, our gas turbine product sales should be up approximately 5% due to strength in the oil and gas markets.

Corporating this sales guidance into our operating guidance that, Tom covered earlier, we expect our full year EPS to be between $2.57 and $2.77, and a new record.

Now, finally a quick PowerCore update before we wrap up our prepared comments.

Over the past few years we've highlighted our PowerCore technology as just one example of how we're continually reinvest back into our business in order to grow our business by introducing new filtration technologies to our customers.

Our first generation PowerCore was a tremendous success and our second generation PowerCore looks like it will be every bit as successful as it delivers a breakthrough filtration technology in a 30% smaller foot print.

We've already won 26 platforms with our Generation 2, 10 on-road and 16 off-road, which is on top of the over 120 platforms won with Generation 1.

Our engine PowerCore sales in the second quarter totaled $17 million, with first fit sales growing 28%, as new OEM programs at our customers are now beginning to ramp up.

On the industrial side of our business we introduced PowerCore technology in our dust collectors, which is allowing us to enter new end markets.

We have two Torit product lines already launched, and plan to launch the next line in May.

In the second quarter we sold another 200 plus Torit PowerCore systems which accounted for $3 million in sales.

As we've discussed in the past, the essence of our strategic plan is to continually generate new filtration technologies to offer our customers improved IU and thereby grow both our first fit and replacement filter businesses.

As we continue to execute our strategy, we will build our Company into first a $3 billion and then a $5 billion filter company.

Now, to summarize our comments, we had another record EPS quarter and a record sales in EPS first half.

So, we're at the 50-yard line with a lot of momentum as we look towards the goal line.

We further increased our sales, our operating and EPS guidance for the full year, and these changes are due to a combination of our current strong operating performance and our increased business outlook for the rest of the year.

When we move down the field and finish our second half, we look forward to achieving our goals and delivering record full-year results.

That concludes our prepared remarks, Alisha.Now we'd like to open it up for questions.

Thank you sir.

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

(Operator Instructions)Our first question comes from the line of Hamzah Mazari with Credit Suisse.

Good morning, this is Chris Parkinson on behalf of Hamzah.

Can you quickly remind us of what percent of the capacity you are running at right now?

What you consider full?

And then also what incremental margins you are currently seeing and what you expect for the balance of this year and into fiscal year 2012?

Okay, Chris.

There are a lot of questions there.

If I skip one or two, come back to me.

Sure.

We're at -- we're at roughly, depending on how you define capacity, we're at 80% maybe up to 85% in a lot of plants, which actually for a lot of plants that is very close to where we were at pre-recession.

You asked about incremental margins.

As you will recall, we had very high incremental margins as we came out of the recession.

But now with our plants operating at about the capacity rates that they were at pre-recession, any incremental margins are going to be at really our normal margin levels on -- at this point.

And there was another one there, Chris?

No, you actually -- you just -- what you expect going forward so you caught that.

And then just a very quick follow-up, you mentioned that you intend to offset some of the increases in raw material costs through cost savings.

Could you break that out a little bit?

And also, what are you baking into your guidance for the remainder of 2011 on that front?

Yes, Chris.

This is Tom again.

So, the bottom line is, we're baking in from first half to second half about a half a point reduction in our margins and that's net of a little bit of pricing.

But what we're finding in some of the specific commodities is that spot prices on steel have increased considerably in the first half of the year.

And a lot of those market prices are up in the 40% range.

But fortunately, our purchasing group has had contracts in place that really run through the end of March.

So, we're probably going to be experiencing roughly -- and I'm talking about the United States here.

Roughly about a 25% price increase in early April.

Our other material commodities, media, will see just a slight increase and there have been ongoing increases, as I think I mentioned, in all of the Petrochemical related areas.

But bottom line, once again, we're baking in about a half a point reduction in the second half of the year.

Perfect.

Thank you very much.

Our next question comes from the line of Laurence Alexander with Jefferies and Company.

Please go ahead.

Good morning.

Two questions.

First, just to follow up on that question, could you flush out the levers driving your gross margin decline in the April quarter specifically?

And secondly, could you comment on early current order trends or patterns that you are seeing regionally so far this -- since you call it January and February?

Okay.

This is Tom.

I'll take the margin issue.

We really have two significant drivers of our margin in the second half of the year, if we compare it to the first half.

So, this is sequential first half to second half.

One is the commodity price increase that I mentioned of about a half a point.

The other is this ongoing mix impact as our OE businesses come out of the recession on a very robust basis and our After market Business in the recession did not decline as much.

So, that, along with a few other mix items, will probably have about a half a point impact, negative impact on our margin as well.

And then offsetting that, we believe will be about 0.3 point due to a combination of our continuous improvement efforts and selective price increases.

And then you had a question on markets and maybe Bill will comment on that.

Yes, I'll take that one.

And I think you asked since the beginning of the calendar year, so over the last, say, six weeks.

And this is all baked into our guidance, it is one of the reasons why our sales guidance for the second half has come up.

Is that what we've seen in many of our end markets that we serve and regions, continued strengthening or continued recovery from the effects of the recession.

There are some later cycle markets that, that does not apply to.

But I would say the heavy truck market here, in the US, in Europe, in Asia, the construction equipment market, the farm equipment market.

What we've seen is from our customers since really the holidays, since the beginning of January further evidence that there -- things are recovering.

I think John Deere is one of our customers increased their sales guidance with their earnings announcement this morning, Caterpillar did a couple of weeks ago.

So, we're seeing a continued indication from our customers that their end markets continue to strengthen.

Did I get your question?

Yes, no, that is perfect.

Thank you.

And we have a question from the line of Charlie Brady with BMO Capital Markets.

Yes, thanks, good morning.

With regard to the capacity utilization, if we're running at 80%, 85% and clearly you are never going to get to 100% capacity realistically and we are seeing improving trends, improving volume pick ups.

The question I would have is at what level are you going to have to add incremental capacity to where you are at today, given that there's still some more upside to where volumes are going to come back?

Charlie, this is Bill.

I'll take that one.

So, we define capacity or 100% capacity as really two shift capacity.

So, we can run many of our plants on three shifts for short periods of time while we bring on other capacities.

So, when you say 80% or 85%, it is 80% or 85% of a two-shift number and we have the ability to add, at least in the interim, additional capacity by adding a third shift or working over the weekend.

So, there is some buffer there.

We do not want to do that though permanently.

And so that gives us time to add additional capacity, which we are already doing.

I think as we pointed out in our guidance, Tom did, our CapEx spend for this year, we're targeting between $70 million and $80 million, which is up almost two X from last year.

And a lot of that is related to increasing capacity ahead of the need.

So, we're -- already have projects launched that are going to bring in more capacity over the next calendar year.

Okay.

And in terms of the OE after market mix, I do not know if maybe I missed it, what was it in 2Q and what is your expectation in the second half of the year in your guidance as to whether or not that is going to be an additional headwind relative to first half?

Yes.

This is Tom, Charlie.

In the first half, OE after market was about 48 to 52, After Market being 52.

As we move into the second half and towards the end of the year, we see that sliding towards the 50/50 mark.

And, again, it's -- our after market business is very robust, but the OE businesses went down the most in the recession and now they are coming back even more quickly than After Market is increasing.

Just to add to Tom's comment, this is good news for us as our OEM business comes back.

So, it is a little bit of a mix effect on the margin.

But that added volume is really good news that it is in recovery now.

Right, right, right.

Thank you.

And we have a question from the line of Kevin Maczka from BB&T Capital Markets.

Good morning.

Hi, Kevin.

Tom, first to clarify on this gross margin comment you made about the half point reduction you are expecting.

Is that relative to what we just saw in the first half or is that on a year-over-year basis?

No, that's sequential from the first half, Kevin.

Okay.

And on the steel purchased contracts expiring, what will you do in April once those expire?

Do you intend to buy at spot at that point?

Or have you negotiated new contracts and that's where the 25% price hike that you referenced is coming from?

Yes, Kevin.

We're working through that now.

So, don't have a firm answer.

We're going to be assessing where market trends are going.

We're going to need to make some projections as to where steel prices are going to be going six to nine months down the road.

I would remind you in some of our businesses we have some material -- or I should say steel index opportunities to increase prices proportionate with the increase in the steal costs that we are paying.

Right.

And I think, Tom, historically you've been pretty good at doing that and not seeing a big impact from rising steel or other commodity costs, but this is maybe a little bit more extreme.

What type of price increases do you think that you will have to go out with to combat this, and might you run into more push back in this case than you have historically?

Kevin, Bill here.

They passed this one to me.

First I'll remind everybody, that all of this that we are talking about with steel is baked into the guidance that we have for the second half of the year.

And we're -- we've been working very aggressively to get ahead of this, because the advantage of having these contracts is that we are protected right now, but we can see what is happening in the market outside of us.

So, we're working to offset these through a combination of these.

We talk about our continuous improvement initiatives, our cost reduction, material substitutions, there is a host of things that we're doing inside the Company, as we've done in the past, we've seen similar material price increases as you've pointed out to offset this.

Offset as much of this as we can.

As Tom mentioned, we have some index agreements that we put into place probably a half-dozen years ago.

The last time that we had a big spike in steel, that was one of the consequences of that, or solutions to that was put in these index agreements.

So, we'll automatically get some price relief.

And then in some cases where we're not protected or we're not -- we don't have index agreements with our customers and we can't offset it through our continuous improvement efforts, we'll look for normal price increases.

So, it will be a combination of all three of those.

And as Tom pointed out, we're expecting about a half a point of pressure on our margins as a result.

But the rest of it we'll take care of.

Got it.

Thank you.

And we have a question from the line of Brian Drab with William Blair and Company.

Good morning.

Good morning, Brian.

I think the first question might be for Tom.

Can you tell us of the roughly $100 million in costs that you stripped out during the downturn, about how much of that has come back into the business at this point?

Yes.

I -- Brian, it's a rough number.

We believe of that $100 million approximately $20 million is permanent.

And we still need to bring back a little bit more.

We're still down in terms of people from where we were going into the recession.

So, that is evidence of some permanent benefit.

But we have some additional catching up to do.

But even after we do this additional catching up, primarily in our plants, we do believe that there was about a $20 million permanent cost takeout.

Okay, great.

And then just looking at the acquisition pipeline, that activity in the industrial universe overall seems to be picking up.

How does your acquisition pipeline look today and does your revenue guidance for fiscal 2011 take into account some expectation for acquisition, contribution in the year?

Brian, this is Bill.

We don't comment prospectively about what specifically we have in the pipeline or what we're doing, but I will comment generally that I agree with your point that I think that over the last 12 months the acquisition -- the activity and acquisition area has picked up.

I think as companies have recovered or the economy has recovered and Company's -- their performance is better.

So, sellers are more willing to try to sell and there are buyers who are maybe more willing to buy now and we're looking, we have a small team that is always looking.

I think that I will just remind everyone that we're mostly an organic growth story.

That we target the majority of our revenue increases over the long term from organic growth, new products, new customers, new markets, new distribution, and acquisitions are sort of the icing on the cake.

So, we -- mostly we're focused on organic growth.

Our guidance for this year does not include any prospective acquisitions, because we can never count on the timing of those.

Right.

Great.

Thank you.

And we have a question from the line of Adam Brooks with Sidoti and Company.

Please go ahead.

Yes, two quick things.

One, just looking at the gross margin, just trying to shake things out for the quarter you said about 80 basis point benefit from increased absorption, 80 basis points due to process improvements, and then 70 hit due to mix and 60 hit due to material prices, which shakes out to a 50 basis point improvement.

I guess I'm looking for what the disconnect is with my numbers versus what the actual improvement was.

Yes, Adam, this is Tom.

There's a couple of smaller items in there.

One was that we had a restructuring charge last year.

That is not -- that is not in this year's.

And that would give you a 0.6 of one percentage point

Right.

And that will give you 0.6 of one percentage point, but I think that will help you out.

Then every quarter with the complexity of our global operation, we're going to have some puts and takes and we had some again this past quarter, but there was nothing significant in that remaining net number.

Sure.

And looking -- you talked about share gains, could you maybe speak to areas in particular where you are looking to expand distribution maybe?

I know that you have talked about the brick nations, maybe anything within the US or Europe where you are looking to expand distribution?

Adam, this is Bill.

Generally everywhere.

We have, as we talked about in our strategic plan, a tremendous opportunity growing our replacement parts business.

Our shares are generally lower in the replacement parts than they are in first fit.

So, we're really looking at adding quality distribution everywhere.

We did talk about the brick.

But I also talked about some of the other the non-brick fast-growing economies like South Korea, Malaysia, et cetera, Indonesia that we're looking there, and we are looking in the developed economies as well, western Europe and the US.

I would say that the bottom line is probably almost everywhere we're looking at adding distribution.

All right.

Thank you.

(Operator Instructions)And our next question comes from the line of Richard Eastman with Robert W Baird and Company.

Please go ahead.

Yes, good morning.

Hi, Rick.

Bill, could you kind of - give some color on the After market business within engine?

We -- the 28% growth rate in local currency, clearly against a pretty tough comp actually, could you maybe just talk about that geographically, US, Europe, and Asia?

And also, would that be the prime beneficiary of some of these distribution market gains?

Yes, Rick, I'll start and Rich is looking up the numbers.

So, I'll give you the high-level stuff.

It is a combination of the increased utilization, as we've talked about.

Yes.

I think that we have been very pleasantly surprised at how strong this has been.

I'm sure you recall, Rick, that this is one of our earliest cycle recoveries, it started about 18 months ago as equipment in the field started to be used more and it has continued very, very strong.

We believe a lot of it is in this emerging market growth and distribution that we're -- as we're adding it there.

A lot of it is around additions to our product line, filling out our product line, so we have more products for distribution itself.

A lot of it is in the OED channel, it is our OE's through their channels as well.

So, it is both independent and OE and then we're getting that kick from the proprietary first fit product like PowerCore.

So, it is continuing very strongly.

We actually have all of the after market people from around the world are in here this week in Bloomington for a meeting and we spent some time with them earlier this week.

The business is running very, very well.

A lot of momentum.

And we're very encouraged about our ability to continue to grow it into the future.

So, Rich has got some specific numbers by region.

Rick.

Yes.

Geographically looking -- and this is in local currency terms, the Americas were up 38%, Asia was up 30% and Europe was up 10% in the quarter.

Okay.

And is there any shift in your market share between Air and Liquid products within that business?

Rick, Bill here.

We don't have the number exactly, but intuitively I would believe that our Liquid sales are growing faster than our Air.

They are both growing a lot.

But our share is a lot lower in liquid as we've talked about.

That's probably where we're adding more of the product line that we've referenced, and so we're picking up share there, I believe.

Okay.

And then just on the industrial side, the special app, your growth forecast there slipped a little bit.

Is that primarily the disk drive piece?

Rick, Bill again.

It is.

The disk drive business, just to remind everyone, was like the after market, it was one of the earliest cycle recoveries, starting about a year-and-a-half ago.

What we've seen is that, that business has slowed down at our customers, we've looked at some of their public announcements.

Some of them suggest that there's probably some inventory built up in the pipeline there that they have to work through, this is at our customers.

Yes.

We're still very bullish on that for calendar year 2011, once we get through maybe the next quarter and look at disk drive shipments globally at our customers being up in the high single digits.

Okay.

And then just the last question.

A couple of weeks ago you had this press release out about divesting this Ultra Cool Chiller business, which I know this is fairly small.

What segment of the business did you account for that?

That was in Industrial segment in the IFS business.

IFS?

Yes.

Okay.

And it sounds non-strategic.

Is that -- somebody gave you an offer that was too good to refuse and it is non-strategic?

Is that the premise there?

Yes, just a brief history on that, we -- this came as part of the ultra filter acquisition, handful of years ago, earlier in the last decade.

It is a great little business.

But, it is a Chiller business, not a Filter business.

And as we updated our strategy over the last year and our focus on being a Filter business, a $3 billion and then $5 billion Filter business, being in a business like this that really does not have a filtration component is not good for the business or the customers.

So, to make a long story a little bit shorter then we divested it.

Okay, I understand.

Thank you.

Sure.

And I show no further questions at this time.

Please continue.

Thanks, Aleesa.

Now to conclude our call, I would like to thank everyone for your time and interest in Donaldson Company.

And to every one of the Donaldson team, your hard work and continual focus on our priorities has helped to deliver another great quarter.

This allows us to continue to reinvest in our business as we work towards achieving our long-term growth goals.

I'm very proud to be part of the Donaldson team and what we're creating together.

Sincere thanks to all of you.

Goodbye.

Ladies and gentlemen, this concludes the Donaldson Company Incorporated second quarter fiscal year 2011 conference call.

If would you like to listen to a replay of today's conference please dial 1-800-406-7325 and enter the access code of 4402190.

ACT would like to thank you for your participation and you may now disconnect.