Donaldson Company Inc (DCI) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the fourth quarter 2011 Donaldson Company, Inc.

earnings conference call.

My name is Jasmine, and I'll be your coordinator for today.

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

We will be facilitating a question and answer session towards the end of today's conference.

(Operator Instructions) As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, to Mr.

Rich Sheffer, Director of Investor Relations for the Donaldson Co Inc Company.

You may proceed.

Good morning and welcome to Donaldson Co Inc's fiscal 2011 fourth quarter conference call and Webcast.

Following this brief introduction, Bill Cook, our Chairman, President, and CEO, and Jim Shaw, our Corporate Controller will review our record fourth quarter earnings and initial outlook for fiscal '12.

They will be presenting their comments live from the New York Stock Exchange.

Next, I will 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.

It is a great pleasure to be here at the New York Stock Exchange doing our earnings Webcast.

With me here in New York today are Jim Shaw, our Corporate Controller, and Amy Becker, our Assistant General Counsel.

I also want to remind everyone that 3 of our fellow employees will be doing the closing ceremony here at the Exchange today.

Jennifer Zhang, from Wuxi, China, Bart Vandenplas from Belgium, and Kathleen Flanagan from our Frankfort, Indiana plant will be representing our 11,000 fellow employees around the world in celebration of both our record year and updated strategy.

Now, back to our earnings call.

As Rich mentioned, we issued our fourth quarter earnings release earlier this morning and we're very pleased to report that we had a very good fourth quarter as we set records for both quarterly sales and earnings per share.

This also puts the finishing touch on a record fiscal '11 in which we had record sales of $2.3 billion, reported record gross and operating margins of 35.5% and 13.7%, respectively.

Which resulted in record net earnings of $225 million.

And finally, we delivered record EPS of $2.87 per share.

While clearly fiscal '11 was a year with strong sales growth in most of our end markets, and solid execution in our manufacturing plants and distribution centers, it may be less obvious to you that we also made key long-term strategic investments during the year.

These investments will benefit us in the years to come and help us on our journey to build Donaldson into a $3 billion filter company.

But first, let's briefly review our fourth quarter results.

Fourth quarter sales were a record $625 million, up 21% over the past year.

While foreign currency translation was a help in the quarter, accounting for nearly 8% of this year-over-year increase, our organic sales growth was 13%.

The combination of our 21% sales growth and a 14.4% operating margin delivered a net income increase of 29%.

And an EPS record of $0.84 in the quarter.

In our Engine Products segment, local currency sales increased 18% over the prior year.

Our engine after-market or replacement filter sales were up 12%, as utilization rates of existing truck and off-road equipment fleets continued to improve.

We have also, in our after-market, continued to add new distribution, more part numbers to our product line and new customers.

Consequently, we believe that a portion of our sales growth is a result of increased market share.

This is clearly evident in Asia, where our engine after-market sales are up 27% in the quarter.

Our 2 engine OEM businesses were also both up strongly in local currency terms.

Off-road product sales were up 30% as the agricultural, construction and mining end markets we serve have continued to strengthen and increased demand for our customers new equipment upon which our filtration systems are installed.

On-road product sales were up 51% as North American and European new heavy truck build rates have continued rebounding.

Now, switching to our Industrial Products segments, local currency sales increased 7%.

Revenues from our industrial filtration solution products increased 14%, as sales of new dust collection equipment continued to grow in the quarter.

In addition, our sales of replacement filters for those dust collection systems already in the field have remained very strong.

Although our gas turbine sales decreased 9% in the quarter it does now appear to us that this late cycle business has bottomed out and should start improving soon.

And finally, sales of our special application products increased 3% in the quarter, as rapidly growing sales from our newer product lines which serve the semiconductor, imaging and venting end markets offset slower disk drive filter sales.

Looking at our sales by region, we had good growth in the Americas and Europe where our local currency sales increased 17% and 15%, respectively.

In Asia, our overall local currency sales growth was 7% in the quarter as our engine product sales increased 24% and our industrial filtration solution sales increased 13%.

Partially offsetting these 2 strong performances were lower sales in gas turbine and special applications.

I'm now going to turn the call over to Jim Shaw for his comments on our operations before I discuss our fiscal '12 sales outlook.

Jim?

Thanks, Bill, and good morning.

Our gross margin was 36.3% in the quarter, which is even with last year.

As we've mentioned in the last 2 quarters we've been experiencing higher purchase material costs which net of selected price increases decreased gross margin by 80 basis points compared to last year.

The magnitude of the cost increases were in line with our previous guidance.

Much of the increased experience in the quarter was related to the April expiration of our steel contracts in the US, and increases in petroleum-based raw materials such as plastics, urethanes and adhesives.

We expect additional increases for some of these materials, as well.

Higher oil prices not only affected our petrochemical based raw materials but it also increased our freight cost 10 basis points in the quarter.

Fortunately, we've been able to offset most of the impact of these increases through our continuous improvement initiatives.

But the magnitude of these increases has also required us to implement some selective price increases.

On the positive side, better fixed cost absorption and our continuous improvement initiatives were 90 basis points positive in the quarter.

So in total, our gross margin was the same as last year's fourth quarter margin of 36.3%.

Our operating expenses remained well under control, coming in at 21.9% of sales, which was relatively consistent with last year.

This includes our planned strategic operating investments for growth in Asia, Europe, Latin America, for liquid filtration technology and product development, as well as our global supply chain projects.

These investments totaled $5 million this quarter and $14 million for the year.

Our operating margin came in at 14.4% this quarter and we finished the year at a record 13.7%.

Looking at our operating margin forecast for fiscal '12, we expect the impact from recent price increases in our purchased raw material costs to moderate over the next couple of quarters.

And that will continue to experience a small benefit from continued higher volumes as we leverage our fixed costs and continue to benefit from our continuous improvement initiatives.

In total, we expect our operating margin for fiscal '12 to be between 13.7% and 14.5%, which means that anything above the bottom of this range would represent another operating margin record.

Our effective tax rate was 27.3% in the fourth quarter versus 29.5% last year.

During this year's fourth quarter, we had $2.6 million of tax benefits primarily from the expiration of some statute of limitations and the favorable impact of dividends from some foreign subsidiaries.

Based on our projected global mix of earnings in fiscal '12, we expect our tax rate to be between 28% and 30% for the full year.

Our fourth quarter CapEx came in at $17 million which brought us to $60 million for the year.

During the quarter we completed work on new labs in China, India, and our Bloomington, Minnesota headquarters.

We plan to continue our strategic investments to support our customers this year.

As previously mentioned, we are building a new air filter plant in Aguas Calientes, Mexico, which will add more filter manufacturing capacity for the fast-growing Latin America region.

And also allow us to use our existing plant in Aguas Calientes strictly for an expansion of our liquid filter production.

We expect this new plant to open during the third quarter this year.

In total, we expect CapEx spending to total approximately $100 million this year as we are continuing to invest globally to meet our strategic growth plans.

We have many new projects included within our $100 million CapEx plan and we expect these will positively impact our corporate ROI when completed.

And we expect depreciation and amortization to be between $60 million and $64 million this year.

Free cash flow was $60 million in the quarter which was a conversion ratio of 91%.

For the year, free cash flow was $186 million which is a conversion ratio of 83%.

While working capital was a use of cash this year, driven by higher sales, the metrics we used to measure working capital effectiveness, day sales outstanding, days payables outstanding and inventory turns, all either remain consistent or improved for the year.

We expect free cash flow to be $175 million to $205 million in fiscal '12.

We repatriated approximately $100 million from our foreign subsidiaries in the fourth quarter which dropped our debt-to-cap ratio to 22.2% and debt to EBITDA to 0.7%.

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

We're expecting interest expense in fiscal 2012 to be between $11 million and $13 million.

And our balance sheet remains strong with $273 million of cash compared to $267 million of total debt.

So with that, I'll pas s it back to Bill who will provide additional details on our outlook for fiscal '12.

Bill?

Thanks, Jim.

As all of you know, there have been many discouraging economic reports in the media over the past 4 weeks.

Obviously, how all of these indicators impact our future business conditions remains to be seen.

So it is clear that we're beginning our fiscal '12 with a lot of economic uncertainty on the horizon.

But we're also beginning our new fiscal year with a lot of momentum, both with our open order backlog and our operating metrics.

And based on our fiscal '12 plan, we are expecting our full-year sales to be between $2.45 billion and $2.6 billion, up 7% to 15% over the prior year.

This is supported by our recent order trends and our current backlogs.

Our forecast does assume positive global economic growth but it also anticipates that it will be lower than what we enjoyed in fiscal '11.

Bottom line, we still expect to grow faster than the global economy through the introduction of new filtration technologies and products.

And also by increasing our sales, especially in emerging geographies.

Now I'll review our outlook by segment.

Our Engine sales are forecast to increase between 8% and 15%.

Within off-road product sales we expect continued strong demand for our OEM customers' agricultural, construction, and mining equipment, as the average age of equipment in the field remains historically old.

This should support an ongoing equipment replacement cycle.

We're also forecasting a continued strong recovery in our on-road product sales as the North American forecast for heavy truck builds is expected to increase from about 154,000 in calendar '10 to about 255,000 in calendar '11, a 66% increase.

Current truck fleets are also historically very old, indicating the need for a continuation of the current replacement cycle.

In Europe, truck builds are also expected to grow although at a slower pace than what I just mentioned in North America.

Finally, within our Engine segment we expect our after-market or replacement filter sales to 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.

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

Now I'm going to switch and talk about our other reporting segment, Industrial, where our sales for fiscal '12 are forecast to be up between 7% and 15%.

We expect our industrial filtration solution business to be up between 7% to 15% as customer demand for new industrial dust collection equipment continues to improve as new plant and manufacturing equipment capital spending increases.

We also expect our replacement filter sales for dust collection equipment in the field to continue to grow, again with the increased utilization by our customers for that equipment already installed in their plants or in the field.

In gas turbine, we expect the demand for large gas turbines used for power generation to begin rebounding in fiscal '12.

In addition the demand for smaller turbines for the oil and gas market we forecast should remain strong.

Overall, we expect our gas turbine sales to increase between 14% and 22% in fiscal '12.

The final part of our Industrial segment is special applications.

We're forecasting our sales to increase between 2% and 9%, primarily as a result of the continued growth for our membrane products and our ongoing market penetration for some of our new venting products.

Incorporating this sales guidance into the operating guidance that Jim just covered, we expect our full-year earnings per share for fiscal '12 to be between $3.15 and $3.45 per share which would be a new record.

Finally, I'd like to provide a quick update on some of our new technologies before we wrap up our prepared comments.

As we've discussed over the past few years, we've highlighted our PowerCore technology as an example of how we continually introduce new filtration technologies for our customers, in order to help both grow their and our businesses.

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 breakthrough filtration in a 30% smaller footprint than our first generation.

Our engine PowerCore sales in the fourth quarter were a record $23 million, up 47% over the prior year.

The ramp up in our OEM customers production rates resulted in our first PowerCore sales growing 71% in the quarter.

In addition, our after-market or replacement filter sales of PowerCore were up 35%.

On the Industrial side of our business we introduced our third Torit PowerCore product in May.

This new part of our product line is targeted towards the high-abrasive, heavy-loading mining and metal working market segments.

For our customer this product offers many advantages including that it is up to 70% smaller than the comparable competitive collectors.

In our fourth quarter, we sold another 250 Torit PowerCore systems which accounted for about $2.5 million in sales.

We've talked over the past couple years about our goals to build a bigger presence in liquid filtration.

We've unveiled a new line of Select fuel filters with our proprietary Synteq XP Media at the ConExpo show in March.

Since then we've already won 5 OEM platforms with Select and interest in this new generation of diesel fuel filters is very high.

As we mentioned last quarter, we're also winning new customers with our mew Bulk Fuel and Lube filtration product line.

These filters clean the fluids prior to entering a storage tank, protect the fluids while they're in the tank, and then final filter them as they're pumped out of the storage tank for use in equipment.

This is a growing opportunity for us as the new diesel engines introduced by our customers require cleaner and cleaner fuel.

Finally, we're continuing development work in our next generation of Duramax hydraulic filters.

When launched, we expect these filters will offer our customers improved filtration performance and longer filter life.

These are just a couple of examples of the many liquid filtration opportunities we're working on.

In total, our liquid filtration sales are up 24% in fiscal '11 with sales exceeding the $400 million mark.

So to summarize, we delivered record results in fiscal '11 with sales exceeding our long-term 10% growth target by a wide margin.

This puts us very well on pace to achieve our fiscal '16 $3 billion sales target which we established in our strategic growth plan a year ago.

We acknowledge that the past month has increased the level of uncertainty regarding global economic growth but we currently have good momentum which should get our fiscal '12 off to a great start.

As we successfully did during the recent recession, we will continue to focus on those things within our control.

We will focus on developing new technologies and products to help our customers' changing filtration needs.

We will continue to make the key long-term investments to achieve our fiscal '16 and fiscal '21 growth targets.

That concludes our prepared remarks, Jasmine.

Now we would like to open it up to questions.

(Operator Instructions) Laurence Alexander with Jefferies.

Two quick questions.

One is, what type of market share assumptions are embedded in your 2012 forecast?

And also could you revisit what productivity measures you might have available as a Plan B?

And what you are watching, like what kinds of deterioration in your end markets would you need to see to trigger tightening the belt leading towards steps to offset?

Okay, on your first question, in terms of market share, when we take a look at our long-term growth target of the 9% to 10% that we've mentioned we're looking at probably between 2% and 4% per year for market share growth.

This is in addition to the normal growth in the filtration market.

And then we supplement that with a little bit of acquisition.

But about 2% to 4% per year for market share growth.

And I'll add, that's not just aspirational.

That's actually what we've averaged over the past 20 years.

That's new products, new geographies, new customers, product line extensions, a combination of all those factors.

On your second question, we look at lots of indicators to try and figure out what's in front of us.

We have the back half of our business is very short cycle.

That's our replacement parts business.

The other half of the business, the first-fit business, we have longer order backlogs from our customers so we have more visibility with that business.

We look at that on essentially a monthly and weekly basis to determine what's out in front of us.

And we're looking at what other companies are seeing and especially our customers in terms of their outlook.

So, customers like Caterpillar, we follow their announcements very closely.

What we have, we have a very strong continuous improvement philosophy and many programs that are embedded in our operations, in our plants, in our engineering departments and our sales organizations that are always working on cost reductions.

That's part of the normal Donaldson practice.

But what we did in the last recession is when we saw that things were deteriorating we shifted some of our resources from some of our growth investments to the continuous improvement to help us get through the recession.

Not all of them but we shifted more of our resources to work on cost reduction and margin protection.

And we'll do the same thing if we do see things deteriorating.

Kevin Maczka with BB&T Capital Markets.

Bill, first a couple questions on margins.

As it relates to Industrial, it looks like you had a little higher revenue but lower margin this time.

I'm just wondering if there was a mix issue in there at all?

Or if you can provide more color on that just generally.

Kevin, I'll turn it over to Jim for that one.

Yes, hi.

This is Jim.

Within Industrial, we will from time to time see some fluctuation there because it really does depend on the mix of products versus after-market.

Especially GTS and IS can really influence that.

So I think the decrease this quarter is not a surprise and pretty consistent with the range at which that will move around.

And then as we look out to '12, you're expecting total Company operating margins to increase.

Is that all coming from the Engine side?

Is that fair to assume?

Or should there be some contribution there from the Industrial side as well?

Kevin, Bill here.

I'll start off and maybe Jim wants to add something.

But it's from both reporting segments, Engine and Industrial.

And the operating margin improvement is consistent with what we talked about in our strategic plan, is that over time, we want to continue to expand our operating margins as we target both fiscal '16 and fiscal '21.

Jim, do you want to add anything?

No, I think that's consistent.

As I mentioned in the prepared comments, we will continue to see some challenge on the gross margin line.

But with volumes and the continuous improvements we hope to leverage that a little bit through operating expenses and continue to expand that on both sides.

Okay, Bill.

And then if I could just ask one more high-level question as it relates to this increased uncertainty that everyone is seeing.

In your early cycle units, are you seeing anything anywhere from your customers that would suggest a slowdown there?

And how concerned are you about IFS just because that's generally tied to global industrial CapEx?

So Kevin, good questions.

We are in lots of different end markets that follow lots of different cycles.

I think our experience from the recession that started in 2008 was that probably, even though we're in lots of different end markets, that we probably start to see things in mid cycle.

So, compared to some other companies we're not one of the first ones to see something if it's happening, either good or bad.

It takes maybe a couple of months.

So we recognize that so we follow lots of other companies to see what they're saying or seeing.

As I mentioned earlier, one of our biggest customers, Caterpillar.

So we follow their forecasts very closely.

A month ago, they increased their sales guidance for calendar '11 over their previous guidance.

So we're very focused on watching things.

We hope things don't fall off but we're going to watch and then we'll react proactively if things do weaken.

In the IFS business, specifically you asked about, that for us is clearly a mid-cycle business.

The equipment side of it that typically if people have projects underway, new capital projects, new plants where our equipment is incorporated, they will continue with those.

So it ends up being a mid cycle.

But the replacement part of that business, which is about 40% of the sales, is an earlier cycle.

And we've seen that business, as we mentioned in our comments, has been very strong, which indicates that people are using the production equipment that's out there in the field.

Brian Drab with William Blair.

Congratulations of a great year.

It's hard to picture getting back to record revenue level in 2009 but you're back there at the Stock Exchange so that's great to see.

First question, going back to just market share discussion, can you give us an update on roughly where your market share is in the Asia engine market at this point?

Brian, Bill.

So in Japan, where we've been operating for over 40 years, we have very high market share on first-fit air, on the Engine side.

Really not anything on liquid so that's an opportunity for us that we're building out.

So high in Japan.

In China and the rest of Asia, it's pretty low.

And a lot of that is a function that historically, a lot of the equipment didn't need our level of technology.

But that's changing, as we've discussed before.

So now the Chinese truck and equipment manufactures need better filtration and that's opening up the opportunity for us.

So in China, our market share on engine products is in the mid single digits and so it's a huge opportunity for us.

And where is the bigger opportunity do you think in China?

In the after-market or in the first fit?

And can you talk just a little bit about how you go to market in China?

So Brian, the opportunity is big on both sides, first fit and replacement filters.

There is a lot of equipment in China that has our air filtration systems already installed.

Some of our western customers are exporting equipment in there so there's an available after-market that we're going after.

And we're doing that through distribution models similar to what we use in the US and in Europe, setting up local distribution, and managing that with their own direct sales force.

On the first-fit side, we're working with both the western OEMs that are setting up production there but we're also going after the local Chinese equipment manufactures that, again, are making this transition to needing a higher level of filtration technology.

So, we've mentioned we've won a couple of Chinese truck platforms already, that are starting up in production.

And there's a lot more opportunities there for us to continue to grow that.

The Chinese heavy truck market, they will build something over 900,000 heavy trucks this year which is like 3X the US market.

So it's a huge opportunity and that opportunity is going to open up to us as more and more of those trucks need a higher level of filtration.

And then just one more question maybe, looking at the income statement and the percentage of sales that SG&A accounted for in the quarter is a little bit above where we expected.

Can you give us any more specific sense on what we should expect in terms of SG&A as a percentage of sales?

22% plus or minus might be the range we're expecting?

I'll start, Brian, and then I'll turn it over to Jim.

We did have $5 million worth of strategic operating expenses in the quarter.

So that was a little bit higher run rate.

And that is by design, because, as we've talked, we are trying to optimize our operating margin, not maximize it.

What we want to do is grow the Company and optimize that margin and we're going to invest back in the business.

But, Jim, you have some additional comments?

Yes, I think if I just take a look through the components in terms of WACC from fiscal '10 of 21.8% to 21.9%, we were running very efficiently last year at this time.

So when we add a little bit of volume net of these investments that Bill talked about, I don't think there's really anything new or unusual there.

We're actually quite happy that we ended up pretty close to last year.

There probably was a little bit more spend in the quarter as well, with our good results, had a little bit of a true-up on things like incentive compensation, but nothing out of the ordinary.

Hamzah Mazari with Credit Suisse.

Just the first question is just on your capacity expansions.

Could you remind us where you are in that process, what's coming online soon?

And then what kind of incremental margins are you guys baking in for next year in your guidance?

I'll start, Hamzah.

This is Bill.

The production, the biggest ones that we have coming online over the next year are the ones that Jim mentioned.

We're building a new plant in Mexico.

It will be our third plant in Mexico.

This one will be dedicated to air filtration products.

We're also investing in another plant at 1 of our existing plants in Mexico to put more liquid filtration production capacity there.

We're also making investments in some of our existing plants in the US.

In Wisconsin we have a liquid filtration plant that we're putting more capacity into, and some of our air filtration plants in the US as well.

So the one Jim mentioned that I started with is a bricks-and-mortar investment with a new plant.

A lot of production capacity expansions in both Europe and the US, as well, that don't require bricks and mortar.

Of the $100 million that we mentioned in terms of CapEx, it's basically about 4 parts.

About 25% of it is for capacity improvements or expansions.

About 25% of it is for new product processes, new product tooling.

About 25% of it is for continuous improvement initiatives to take cost out of our products.

And then the final 25% is for new technology.

So whether it's IT, corporate technology or R&D.

So that's split roughly in quarters.

It's not exact but that's a rough way that we're investing.

And then on your distribution network, the expansion of that, where are you guys in that process?

Are those early?

Is this early innings in terms of distribution expansion in emerging markets?

Or how much more runway do you have to go there?

Hamzah, Bill again.

I think we have a lot of runway left.

We're building out both the distribution and our product line so we are making sure we can give distributors more products to sell.

In some cases that's products where we weren't on the first fit, where we're fitting somebody else but giving them the broadest product lines.

And then just building distribution.

And that's really in all the BRICs, so it would be Brazil, Russia, India, China, South Africa, Southeast Asia, that we're rapidly building out our distribution.

And we think we have a lot more to go.

Lastly, on your balance sheet, how are you thinking about leveraging that?

Are you getting more aggressive on M&A?

It seems like you're just focusing more on organic right now.

Is that fair?

Are you seeing any opportunities out there in the marketplace?

This is Bill, Hamzah.

Going back to our overall growth target of 9% to 10% per year, we assume in that that we would be doing acquisitions of, say, 1% to 3% per year.

So that means that 7% to 9% of our revenue growth is going to be organic.

And that's what we've historically done.

That's what we're comfortable doing.

We see the opportunities to continue to do that.

And that's also consistent with delivering more consistent financial results, we think, focusing on organic growth.

But we do look for acquisitions and we are continually looking at those.

Even though it's not a major part of our growth story, it is an important part.

And so we have a small team that's focused on looking at those.

And we can't comment prospectively but on average we would like to do 1% to 3% of our annual revenue growth through acquisitions.

Which would mean we would need about $50 million roughly in acquired sales each year at this current size.

So we're looking.

I think the last one we did was our Western filter acquisition.

That was liquid filtration in an end market we already knew.

That would be typical of the things that we're looking.

Extensions of things that we know that bring us additional products, additional after-market presence or additional reach into new geographies.

Charles Brady with BMO Capital Markets.

This is actually Tom Brinkman standing in for Charlie Brady.

Just a couple questions.

First of all, you talked about your expectation that purchased raw materials, the cost could continue to rise.

Could you talk about your expectation for gross margin in 2012 and how that's going to trend over time do you think?

Yes, this is Jim.

I did mention in the prepared comments about commodity prices.

And even though since April there has been some softening in certain of the commodities such as steel and petroleum-based products, we're still up, for steel for example,, we're still up 20% year over year.

Because, for much of the year we had been protected by some long-term agreements, specifically in the US.

So even if the costs hold at their current levels we're still going to have some challenges next year in terms of margin, as well as some of our other key commodities, petroleum-based and media.

So we've worked into the forecast to hit the mid point of that range that we have out there for next year's goal would be a 14.1% operating margin.

So we factored in these higher commodity costs but also factored in our continuous improvement initiatives and leveraging the volume that we hope to see next year as part of that.

So that's how we took a look at putting together the plan for next year.

There is some pricing in there too, Tom, selectively in certain market segments where we either have index agreement with customers or where we can recover it based on justification that we do recover some of that on a dollar for dollar basis.

And then just moving on to some of your broader comments about geography.

Can you talk about what you've seen in the European market recently?

Just across your markets but also in on-road or build rates, what you've been hearing from your customers?

Tom, this is Bill again.

I think I mentioned, talking about the build rates for on-road trucks in Europe, certainly being up again in calendar '11 over calendar '10.

We follow a lot of industry forecasts.

And so that's baked into our forecast and our guidance.

This is a difficult time to get a lot of information on what's happening in Europe, given the fact that our customers are still mostly on vacation.

So over the next month as they come back and they update their forecasts we'll get better information.

But going back, from what we can get over the past 4 to 6 weeks, that's all baked into our guidance.

So on-road heavy truck builds in Europe up year over year but not up as much as the US numbers that I mentioned.

And then can you give any more granularity on some geography, some results you had elsewhere in terms of the growth rates from other markets -- South America, Asia, elsewhere?

Tom, I'll turn it over to Rich.

I think he has some of those details.

Rich, can you help us with that one?

Sure.

If we look at growth rates in some of our other markets, Latin America -- so Mexico, Brazil, Chile -- we were up about 27% year over year.

We mentioned Asia Pacific up 17% in total.

But places like China, we were up 40%.

Some of the other, even Japan with them coming back now, we were up 26%.

So we had some clear pockets of strength in the quarter.

And then just about the comment you mentioned, you continue to benefit from increased market share on customers; Tier 4 equipment platforms.

Can you provide some more color on that and what your market share is in Tier 4?

Tom, Bill here again.

I think the opportunities around the new equipment platforms that the new engines require a higher level of both air and liquid filtration technology.

So that's really opened the door for us.

On the air side we already had a high market share in first fit, is to put in new products where we can lock up the after-market or protect the after-market for a longer period of time for our customers.

So it's more maybe a market share opportunity on the replacement parts.

On the liquid side where we were not doing very much in terms of first fit before, it's an opportunity to get in there and win on both the first fit and replacement parts.

In terms of the actual shares, so in North America, our air on the engine OEM side, our first-fit air is very high.

It depends on the segment but it might be between 70% to 80% or 90% on the first fit.

On the replacement parts it's probably between 20% and 40%, depending on which segment.

So there's opportunities on air, still on the first fit but especially on the after-market.

In Europe, the percentages are lower than those on both the first fit and air.

So opportunities on both.

And as I mentioned on the liquids side, it's a huge opportunity on both sides, as well where we really haven't had much first-fit share other than hydraulic filtration, but really not much on either fuel or lube.

So it's really all upside on both.

And then the last question is, you talked about with your special applications product sales forecasts that it's going to be mostly driven by membrane sales, the growth will be Do you expect positive growth in the disk drive space?

What do you expect there?

Tom, Bill again.

Yes, I think we have seen the second half of our fiscal year that the disk drive sales were softer.

That was an early cycle business that recovered very quickly out of the recession and it's been flattish for the past 6 months.

The industry forecast suggests that drive volumes, hard drive volumes by our customers, will be up 6% on the back half of this calendar year over the first half.

So we are looking at, I think it's going to go from about 327 million drives produced in the first half to about 345 million or 350 million drives in the back half.

So there is going to be growth but it's going to be in that mid to high single digits versus what they saw coming out of the recession initially.

Richard Eastman with Robert W.

Baird.

Very nice quarter, and nice finish to the fiscal year.

In terms of sales, the sales forecast, Bill, if I take a look at the 7% to 15% sales forecast for '12 and I take out my currency assumption on the EUR1.42, against that local currency growth rate of maybe 5% to 13%, how are you looking at the distribution relative to the Americas, Europe and Asia?

Do you expect the low end out of Europe?

Rick, Bill here.

I don't have the numbers in front of me, the exact numbers, but I don't think we anticipate seeing very different percentages between the US and Europe.

We do expect to see higher percentages in Asia than either of the other 2.

So that trend will continue.

And then also, when I look at the Asian growth rate, in the quarter, it was plus 7% I think is the number you mentioned, I'm curious, I think you'd said that the engine products were plus 24% and with the industrial, maybe IFS, was plus 13%.

Is that what you were saying there?

I'm looking up the exact numbers, Rick, but essentially both of those are very strong in the quarter.

You're right.

Engine and industrial filtration solution, industrial dust collection equipment.

Those 2 are partially offset by disk drive.

And we just talked about that.

That's basically almost, it's entirely an Asian business.

So that was flat.

And the other one was gas turbine was down a little bit in the quarter.

As you know, Rick, the gas turbine sales bounce around from quarter to quarter.

So fourth quarter over fourth quarter year over year gas turbine was down a little bit.

But what we tend to do, Rick, is take a look at the other 2 businesses as indicative of what the real strength is in that region in Asia.

And that's the engine business and the IFS, the industrial filtration solutions.

The larger gas turbine systems that you would expect to maybe start to bounce off the bottom here, those would be skewed more towards Asia then, correct?

They would be some in Asia and some in the Middle East.

We've seen a lot of quoting activity from the Middle East, as well.

And then Bill, just a last question.

You talk about the build-out of your capacity on the engine mobile to liquid side.

That sounds like a nice growth driver.

How do you source that product into Asia?

Do you have liquid engine mobile filtration capacity and manufacturing in Asia?

We do.

We source it a couple different ways, Rick.

Some of it is actually coming from the US and Mexico from our liquid filtration plants there.

And that's one of the products we have that actually ships pretty well.

The value per cube is pretty good so you can ship it, versus some of our larger air filters.

As you know, it's hard to ship those long distances.

So we're shipping a lot from the US and from Mexico into Asia.

We also have a plant in Indonesia, a longstanding joint venture in Jakarta, that we source a lot of product for Asia.

And actually for other parts of the world, as well.

Primarily liquid but also some air.

So we have liquid capacity already in Asia through our operation in Jakarta.

And is most of the Asian liquid business, is that mostly first fit at this point in time?

It's mostly replacement parts.

(Operator Instructions) Gary Farber with CL King & Associates.

Just 2 questions.

Is it possible to quantify roughly what you're running at as far as capacity utilization as a Company?

And then give us maybe where is your low end of that, what region, where is your high end.

And also, can you discuss overall what your hiring plans are for employees for this year and just how that might be different from last year?

Okay, Gary, this is Jim Shaw.

I'll take the first part of the question and then turn it over to Bill for the second half.

But in terms of our capacity, we're running pretty consistent with what we have the last couple of quarters, and that's at about 80% to 85% of our capacity.

I think we've talked about this in previous quarters but initially when we were coming back from the recession, we did get a benefit from being able to use that capacity and get some incremental margins.

We're really at the point now where any incremental margin benefit has gone and any new sales are really at our existing margin levels.

So that's where we're at from a capacity level but I can have Bill fill in a little more detail on that.

I'll add to that, Gary.

So we measure capacity as 80% of 2 shifts.

So that 80% that Jim mentioned is 80% of essentially a 2-shift operation.

We do run many of our plants at 3 shifts but we tend to use that for surge capacity until we can add more permanent capacity.

So we have the ability to flex up a bunch still.

We are adding capacity.

And you asked about regionally.

We take a look at our capacity investments and needs really in 3 buckets.

We take a look at it for Europe and we take a look at it at the Americas, and then we take a look at it for Asia.

And we make the investments there to try and make sure that we have enough capacity where we need it and close to the customers.

And that is part of what we're doing, we mentioned earlier, with our CapEx is making, we talked about a new plant in Mexico, the production line investments in the US, Mexico.

There's investments in Europe.

We just expanded one of our factories in China.

We just completed that, putting more equipment in there.

So we tend to make those all regionally because that's what works the best for us in terms of customer support and logistics penalties.

In terms of the hiring, I think we're up about 800 people from where we were this time a year ago and we're very happy about that.

We're up to where we were pre-recession.

Our hiring plans are really dependent on what we see happening with the business going forward.

We really can't comment on those prospectively but if you take a look at what we've done, as our business has come back, we've added back a lot of people in the developed economies in Europe and in the US.

And where we're really making a lot of new investments is in the emerging economies and we're aggressively hiring there.

So, in China, in Brazil, and other parts of Latin America.

We just opened up an operation in Chile, as Jim mentioned, distribution center.

So lots of hiring in the emerging markets, as well, to support our growth there.

And that mix of 800 people you've hired, is it weighted towards a different product line than it was in the past or a different geography in the past?

It's all over.

It's not all in any 1 region.

So when we went down, it came down all over and we've added it back all over.

I'd say probably maybe the percent is a little bit higher in the emerging markets, I would guess, because of the investments we're making there.

And we had very few people, and in some cases no people.

So maybe weighted a little bit more towards the emerging markets but we've been hiring back everywhere.

At this time there are no further questions.

I would like to turn the call back to Mr.

Bill Cook for closing remarks.

Okay, now I'll just wrap up our call.

And, first, I'd like to thank everyone for your time and continued interest in Donaldson.

As I mentioned, fiscal '11 was a very good year with strong sales growth and solid execution across our Company.

My 13,000 colleagues made all of this possible I'm very proud to be part of the Donaldson team and what we're creating together today and for the future as we continue on our long-term growth objectives.

A very sincere thank you to all of you.

Goodbye and I hope you can see us on the closing ceremony later today.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a wonderful day.