Donaldson Company Inc (DCI) 2014 Q4 法說會逐字稿

Good day, everyone, and welcome to today's Donaldson fourth-quarter call and webcast. Just a reminder, today's call is being recorded. At this time it is my pleasure to turn the conference over to Rich Sheffer. Please go ahead, sir.

Thank you, Lori. Welcome to Donaldson's fiscal 2014 fourth-quarter earnings conference call and webcast. Following this brief introduction Bill Cook, our CEO; Tod Carpenter, our COO; and Jim Shaw, our CFO; will review our fourth-quarter earnings and our initial outlook for fiscal 2015.

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. Good morning, everyone. In a few minutes Tod and Jim will cover the details of our fourth-quarter results and our initial outlook for fiscal 2015, but first I'd like to offer some summary comments.

I am very pleased with our strong fourth-quarter finish. While there is still some challenging conditions in many of our end markets, we delivered 6% organic revenue growth and record earnings. Our fourth-quarter performance was a great conclusion to our fiscal 2014 in which we delivered a new EPS record of $1.76.

Having said all of that, I want to add that it wasn't easy, as we faced declining conditions in some of our end markets and higher purchase commodity costs. We also continue to make significant long-term investments in our business, especially in the areas of technology advances and new growth initiatives that will pay big dividends down the road, but not today.

Fiscal 2014 is a testament to our Company's long-term focus on creating shareholder value and our culture of excellence in all aspects of execution and continuous improvement. I am deeply grateful for the efforts and contributions of my fellow 12,600 colleagues, each of whom played a role in our successful year.

Now, those of you who have followed our Company over the past 25 years know that we have very deliberately and consistently used our technology and international beachheads to build out a portfolio of technology-based filtration businesses around the world. This conscious diversification plan has created a filtration company where the individual businesses are linked via our technology and operational investments but provide different end-market and regional-cycle exposures.

In aggregate our diversification model has worked. Each year some of our end markets or regions are cycling up and others are not, but putting them all together has allowed us to grow in 22 of the past 25 years while significantly improving our operating margins and the value returned to our shareholders. This is what happened in fiscal 2014 and this is the basis for our outlook for fiscal 2015.

Always, regardless of what is going on outside of our Company, we will continue to focus on those things that we can control, which includes using our technologies to win new customers and programs, executing our continuous improvement initiatives to more effectively support our customers, and invest in our business while further expanding our margins, and effectively deploying our capital in order to return superior value to our shareholders.

We are very proud of how our Company is operating. In the quarter we achieved a 14.8% operating margin and returned $137 million in value to our shareholders between our dividend and share buybacks. For the full year, we've returned over $360 million to our shareholders.

As we prepare to celebrate our Company's first century in 2015, our sites are focused on our long-term objectives of further building our Company to first $3 billion in revenues and then $5 billion.

I'll now turn the call over to Tod for a review of our fourth quarter sales. Tod?

Thanks, Bill, and good morning. Our fourth-quarter sales were a record $668 million, an increase of 6% from last year's fourth quarter. Foreign currency translation had a 1% positive impact at the consolidated level, however the impact of FX varied by region. For example, our European businesses had 4% benefit from translation while our Asian businesses had a 1% headwind.

As a reminder, you can find a detailed analysis of currency translation by business unit and region on the Investor Relations home page of our website.

The rest of this review will discuss local currency fourth-quarter results. Sales in our engine products segment increased 6% over the prior year. Our on-road OEM sales increased 8%, as build rates of new trucks increased globally. Our growth was led by Latin America, which grew 21%, and Asia-Pacific, which grew 6%.

Our off-road OEM sales decreased 11% due to a slowdown in end-market demand for new agricultural equipment in both Europe and the Americas and continued soft mining and construction equipment demand in Asia-Pacific. Based on our customers' forecasts, we believe the mining equipment market will remain at the current low level until sometime next calendar year and that demand in the agricultural equipment market will continue to soften through our fiscal 2015.

The much better news is that we continue to see strong conditions in our engine aftermarket where we supply replacement filters through both our OEM and independent distribution channels. Our engine aftermarket sales increased 16% in the quarter with strong sales in all of our major regions. We attribute this growth to the combination of improving equipment utilization in the field and our market growth initiatives.

We are continuing to see strong replacement filter sales growth in developed markets from our OEM customers dealer organizations and are also benefiting from our increased aftermarket penetration with independent dealers and distributors in emerging economies. Our engine aftermarket is one of our earliest cycle end markets and the improvements we have seen over the last few quarters provides evidence that diesel equipment in the field is being used at an increasing rate generating the need for more maintenance, including filters. This higher utilization of equipment in the field should eventually result in improving demand for new equipment. We see data supporting this in the on-road heavy truck and in the construction equipment markets although at different rates globally.

Finishing my review of our engine products businesses, our aerospace and defense sales decreased 20% as the slowdown in defense spending for ground-based military equipment continued this quarter. Also impacting the year-over-year comparison were sales from a Black Hawk helicopter program that began ramping up in last year's fourth quarter and peaked in this year's first quarter.

Switching to our industrial products segment, sales increased 3%. In our industrial filtration solutions business our sales increased 4% as solid levels of manufacturing activity drove record demand for replacement filters for our Torit dust collectors. This aftermarket growth was enough to offset continued weak manufacturing capital spending in levels in North America, which has dampened demand for our new industrial dust collectors.

In our special applications business, our sales increased 11% on an increase in our disk drive filter and membrane product sales. Partially offsetting the increases in industrial filtration solutions and special applications was the 9% decline in our gas turbine sales.

As we've highlighted in our last few calls, we expected a short slowdown in our gas turbine business during fiscal 2014 as the marketplace digested the surge of large driven projects from last year. This has occurred and we are now expecting a rebound in gas turbine in F15, which Jim will discuss in his outlook section.

To summarize our fourth-quarter top-line results, we are pleased that our business model, again, worked as designed. Our diversified portfolio provides exposure to many different end markets and regions that are typically cycling up or down at different times.

During fiscal 2013, sudden OEM and industrial contractions, the downturn was softened by our late cycle gas turbine business and some of our emerging regions. Now, we're seeing continuing improvement in our early-cycle replacement filter businesses across both our engine and industrial end markets. At the same time, we're seeing a variety of conditions in our first-fit markets. All of these combined to deliver a 5% local currency sales increase in the quarter.

I'll now turn the call over to Jim Shaw for his comments on our operational metrics and our outlook for fiscal 2015. Jim?

Thanks, Tod. Good morning, everyone. Our gross margin was 35.7% comparable to our third quarter but down 40 basis points from last year's fourth quarter. As we noted in our press release, there were a few items impacting our gross margin this quarter. One of the favorable items was a lower number of large gas turbine shipments in the quarter, as these shipments typically have a lower gross margin than our Company average.

We also benefited from a higher percentage of replacement filter sales, which were 56% in the quarter compared to 53% last year. In many of our end markets, the utilization of existing equipment in the field is good and that helps our replacement filter sales, which carry a higher margin.

Overall, product mix had a positive 30 basis point impact on gross margin. In addition, our ongoing continuous improvement initiatives benefited our gross margin by approximately 50 basis points compared to last year. Partially offsetting these benefits was a 70 basis point impact on margin from higher compensation and indirect costs, as we made additional investments in engineering and incentive compensation costs were up compared to last year. We also experienced higher material costs in the quarter, primarily steel, which negatively impacted gross margin by 50 basis points.

Our operating expenses increased by $11 million compared to last year's fourth quarter. As a percentage of sales, operating expenses increased by 50 basis points. Higher incentive compensation expense, incremental expenses related to our global ERP project and higher travel expenses associated with our global growth initiatives and increased customer visits increased operating expenses by 100 basis points. These increases were partially offset by lower warranty expenses and operating leverage from our sales increase, which lowered our operating expenses as a percentage of sales by 50 basis points.

Our lower gross margin and higher operating expenses resulted in 100 basis point decrease to our operating margin in the quarter, which is 14.8%. For the full year, our operating margin was 30 basis points higher than last year. Looking forward, we expect our full-year fiscal 2015 operating margin to be between 14.1% and 14.9%.

The investment in our global ERP project is expected to increase in fiscal 2015 as we finish our implementation in the Americas and begin to implement the new system in Europe. We're also planning to make a number of sales growth related investments this year. We're forecasting that we will spend an incremental $10 million in fiscal 2015 on these items.

Our effective tax rate was 27.7% in the quarter versus 28.2% last year. The decrease compared to the prior year was primarily due to changes in the mix of earnings between tax jurisdictions. Based on our projected global mix of earnings for fiscal 2015, we're forecasting our full-year tax rate to be between 27% and 30%.

Our fourth-quarter CapEx was $31 million bringing our full-year CapEx to $97 million. Looking at our forecast for fiscal 2015, we expect to spend between $90 million and $100 million on CapEx over the full year. The breakdown of our CapEx spend is projected to be approximately 25% for our technology initiative, which includes our global ERP project and our R&D lab projects, another 30% is for tooling for new products, 30% will be related to cost reduction activities through our continuous improvement initiatives, and 15% related to capacity expansion.

We expect depreciation and amortization will be between $68 million and $72 million in fiscal 2015. Free cash flow was $57 million this quarter and $221 million for the year. For fiscal 2015 we expect full-year cash flow from operating activities to be $260 million to $300 million. With our forecasted CapEx, we expect to generate $160 million to $210 million of free cash flow this year, as we anticipate investing in working capital to support our forecasted revenue.

We repurchased 2.8 million shares in the fourth quarter for $114 million. For the year we repurchased 6.8 million shares or 4.6% of our diluted outstanding shares for $279 million. Combined with the dividend payments of $83.1 million, we returned 164% of our free cash flow to shareholders in fiscal 2014. We are targeting to repurchase approximately 2% to 4% of our diluted outstanding shares in fiscal 2015.

We expect interest expense for fiscal 2015 to be between $13 million and $15 million, and our balance sheet remains very strong with $424 million of cash and short-term investments.

I'd like to give you an update on our global ERP project before I discuss our outlook. We went live at 17 locations in fiscal 2014 and 4 more earlier this month. These go-lives have gone well. Our ability to receive, process and ship orders at these locations has not been impacted as they transition to the new system. We're now more than 70% complete on converting our Americas' location to the new system. We'll continue the rollout to the remainder of our Americas' locations through the fall of 2014. We'll then be shifting the implementation efforts to our Europe locations.

Now, I'd like to present some comments on our initial outlook for fiscal 2015. Our fourth-quarter results have shown that conditions in our OEM first-fit equipment end markets remains mixed with some improving, some stable and some weakening. Conditions are much better for aftermarket sales as we are seeing continued strength in demand for replacement filters in both our engine and industrial end markets.

Based on the outlook in our press release, we're forecasting sales growth of 4% to 8% in fiscal 2015. Please note that our outlook does not include any impact from our pending acquisition of Northern Technical, which we anticipate will close in late September.

In our engine products segment, we forecast full-year sales growth of 3% to 7%. In our OEM end markets we expect to see continued improvement in truck and construction equipment builds but lower demand for new agriculture equipment. In addition, new mining equipment builds are expected to remain weak.

Demand for our aftermarket products is forecasted to remain strong as utilization rates of equipment that is in service remains good and we continue to execute on our strategic growth strategy as well.

Finally, we expect mid-single digit growth in our aerospace and defense group. The defense portion is expected to remain weak, but we see better prospects for growth on the commercial aerospace side of the business.

In our industrial products segment, we're forecasting sales to increase 5% to 9%. Again, this does not include any impact from our pending acquisition of Northern Technical. We expect gas turbine sales to increase 20% to 26% in fiscal 2015, as the industry rebounds from the pause it experienced in fiscal 2014. We typically have six to eight months visibility in our gas turbine business, so we have a reasonable degree of confidence in our forecast based on orders we've received plus projects we're quoting on for our customers.

We expect industrial filtration solution sales to increase 1% to 7%. Sales of replacement filters have been at record levels and we expect them to remain strong. We anticipate seeing some modest growth in our new filtration system sales as the manufacturing capital investments slowly improve. In addition, we are expecting to launch some new product lines in fiscal 2015 that should support our top-line growth plans.

Finally, we forecast for special applications to be up 1% to 5% in fiscal 2015, as we anticipate sales of our membrane products, integrated venting solutions and -- as we expect increases in membrane, integrated venting solutions and semiconductor filters. As previously mentioned, we are forecasting our operating margin to be between 14.1% and 14.9%, with the midpoint of our guidance range representing the 10 basis point improvement in our operating margin over fiscal 2014.

In total, we expect our EPS to be between $1.81 and $2.01 per share, the midpoint of which would represent a 9% increase over fiscal 2014. Based on this guidance, we're expecting low single-digit sales growth in our first quarter and mid single-digit sales growth in the remaining quarters. Our operating margin is expected to be between 13% and 14% in our first quarter, then is expected to be roughly even with our prior-year in our second quarter before increasing in our third and fourth quarters.

With that, I'll pass it over to Bill who will discuss some of our growth initiatives. Bill?

Thanks, Jim. As Tod and Jim have already noted we have continued to make the investments needed to support the long-term objectives outlined in our strategic plan. Our plan is a compilation of the very detailed plans by business unit and region that when aggregated add up to our sales targets of $3 billion and $5 billion. We have a number of very focused initiatives underway that will help us grow over time, regardless of the economic environment.

I'd like to take a few minutes to highlight several of these initiatives. The first is with emerging economies, such as Latin America, Southeast Asia, India, China and Eastern Europe. Each of these regions offers us significant organic opportunities for growth. In these targeted emerging markets we are continuing to add sales resources, parts to our product line, distribution capabilities, distributors and OEM customers.

For example, in our engine aftermarket business we added 58 new distributors and over 460 new part numbers in the quarter. Another example is our continued investment in our distribution capabilities. We just had the grand opening of our newest distribution center in Peru last week. Work continues on another new distribution center, this one in Slovakia, which will open up this fall. Both of these will support further growth of our replacement filter businesses.

By having more of our product offering available locally and supported by local distributors and our salespeople, we have shown, time and time again, that we can grow our business.

Another of our key growth initiatives is the utilization of our technologies to help better solve our customers' filtration issues on their new equipment while also protecting their replacement filter business. As we've we discussed in the past, one of our most successful air filtration technology introductions is PowerCore. It is a great example of how we invest centrally into R&D and then leverage our technologies into as many different customer applications in as many of our businesses as possible.

We are now very successfully using the newest generations of PowerCore in both our engine and industrial segments. Our engine PowerCore sales in our fourth quarter were $41 million, up 18% over last year. We had great growth in both the first-fit systems and replacement filter sales, which increased 11% and 21% respectively. We have a number of new PowerCore programs going to production with our OEM customers now and over the let next 12 to 18 months.

On the industrial side of our business we sold another 360 Torit PowerCore dust collection systems. In addition, the sales of our Torit PowerCore replacement filters for those systems already in the field increased 50%. In total, our Company PowerCore sales totaled $47 million in the quarter, up 13% over last year. As we enter fiscal 2015, it's at roughly a $200 million annual run rate.

In addition and in conjunction with PowerCore, we're now launching another new air filtration technology called PowerPleat. PowerPleat will complement our PowerCore technology by providing an alternative design with improved system performance and a 20% space savings while also protecting our customers' replacement filter business. We've already won three new programs in PowerPleat and we'll start reporting our PowerPleat sales in fiscal 2015.

Last, but certainly not least, I'd like to give you a brief update on our liquid filtration growth initiatives. Our liquid filtration sales increased 13% in the quarter with very strong growth in all categories. That brought our liquid filter sales for the full year to a new record of over $500 million. Our new select diesel fuel filters, which use our proprietary Synteq XP media, are now in production. As our OEM customers begin launching their new engine and equipment platforms, we'll see the benefits.

Our other recently launched product lines that use our Synteq filter medias include our new hydraulic and bulk fuel product lines. While sales of both of these are still relatively small, both showed very promising growth with increases in the quarter of 31% and 36% respectively. So, we're off to a very good start. Market reception to all of these new products I just discussed has been great.

Just to close, our goal is to remain the filtration technology leader in our targeted markets to better meet our customers' filtration needs, to continue to grow our Company, provide opportunities for employees, and finally, to continue to deliver superior value to our shareholders.

Lori, that concludes our prepared comments. We'd now like to open the call up to questions.

Thank you.

(Operator Instructions)

Hamzah Mazari, Credit Suisse.

The first question is on M&A. I realize you're buying back more stock and primarily as a result of not finding any deals out there. I assume that's because of a higher degree of discipline because it seems like a lot of your competitors are doing a significant M&A.

Maybe if you could give us an update on, are there any product gaps within the portfolio currently that exist where you really do need M&A to fill those? Or can we expect you to do that organically? Just trying to get a sense of, given that there's been a lack of M&A, does the portfolio get hurt longer term? Thanks.

Hamzah, it's Bill. I'll start. As we've talked about in the past, we're mostly focused on our organic growth and we see plenty of opportunities to do that, but we do use M&A and have used M&A over the years to supplement that. As you probably have seen, we did announce a pending acquisition of Northern Technical, which will complement and add product line breadth in our gas turbine business. I'll ask Tod to update us on that in a minute.

It's an organic growth story with M&A adding say roughly 2% of our revenue growth per year as our target. Organically, we would like to grow 6% to 7% and then M&A would be the additional 2%.

We do have a team focused on M&A, but we're very disciplined in terms of how we approach those and look for the right value for our shareholders. As you noted, over the past year, when we have not closed any deals, we have ramped up our share buyback and dividends also as another way to return value to our shareholders. Tod, do you want to give us an update on Northern Technical?

Sure. Hamzah, as we talk about growing our Company, first becoming $3 billion and then $5 billion, we talk about four strategic imperatives, though we want to have more international, more replacement parts, more industrial, and more liquid. The acquisition of Northern Technical addresses three of those four strategic imperatives. It gives us, obviously, more international, more replacement parts and more industrial. That's from a Company perspective.

As we get direct into our gas turbine business specifically, the gas turbine market, really the number one worldwide market is the Middle East and Northern Technical is located in Abu Dhabi. So, this really strengthens our presence in the number one gas turbine market in the world.

Additionally, what Northern gives us is more replacement parts. It helps us fill out our replacement part portfolio to address static turbine applications. You put those two together, that's why we feel it's a strong addition to our Company, and we look forward to closing it in late September.

Great. Just a follow-up question, you spoke about the timeline associated with the ERP rollout. Could you give us a sense of how we should think about the benefits post the ERP system having been rolled out, whether you can do that qualitatively or quantitatively? Any color there would be appreciated? Thank you.

Hey, Hamzah, it's Jim. In terms of where we're at with the project, as I mentioned in my prepared comments, we're wrapping up the Americas here this calendar year then moving to Europe, next calendar year, with then the efforts, once we complete the project in Europe, shifting to Asia-Pacific. This project will take us through the end of fiscal 2016, maybe a little bit into 2017, but I think our goal is to wrap it up by the end of 2016.

In terms of the benefits, there's two things. One is, obviously, the lack of these incremental costs that we're experiencing today. For this fiscal year, we've spent a little over $8 million of expense, which once the project is completed that will end.

In terms of the benefits, obviously, these are always hard to measure specifically, but we've identified a number of benefits in the double digits of millions, once we're live. Timing-wise, we're not going to start seeing some of those benefits until we get a full region. Once we get the Americas live this fiscal year, we'll start to see some of those.

I think where the bigger benefits come in is towards the end of next fiscal year into fiscal 2016 where we have all of the Americas and all of Europe on a single system. Some of the intangibles with that are the ability to transfer our people, have processes the same way, in multiple locations.

Then, there's also a lot of transaction related costs savings in terms of how we transact our inter-company transactions, a lot of automation that we don't have today. Once this is fully rolling, in terms of full regions on board, we expect to see double-digit million-dollar type savings.

Very helpful. Thank you.

Eli Lustgarten, Longbow.

Can we get some commentary insight into the operating margins that we saw for the two sectors? I understand a bit of the weakness in engine, but I thought the industrial number was superb.

Was that all aftermarket mix or is there anything else you can help us? Because that was probably the big surprise [to me].

Sure, Eli. This is Jim. As you mentioned, engine was somewhat similar to last quarter. It's really the same types of things in terms of the year-over-year decrease we're seeing in operating margin, which is some of the investments I mentioned in my introductory comments in terms of engineering. A lot of those are focused on both market development and new product launches on the engine side.

Then, engine also does get a higher share of some of the investments that I mentioned as well as incentive compensation. The year-over-year incentive compensation is skewed more to the engine side, as they had a higher year respective to their goals than the industrial side.

Turning to the industrial side in terms of the improvement, you'll recall from last quarter, this wasn't so good. Part of that was just a function of the sales leverage.

We had some very strong finish on the industrial side with both gas turbine improving and some of our IAF aftermarket. That's really helped from a leverage standpoint because we didn't add to the business in terms of operating costs.

Then the other factor is mix. We did have a number of larger gas turbine projects that maybe were a little bit below our typical margin last year just given their size, and now the mix has improved with more aftermarket and the lack of those larger gas turbine projects.

If you look back maybe two years, the 17% is right in line with where we ended fourth quarter of 2013. Those are some of the main factors there.

Then you might guess where I'm going because as we look out to 2015 with gas turbine up 25% or so, can you give us some insight of what we should expect? It sounds like the 17% might not recur so readily next year, so just trying to get a fix of how to model this thing out?

I think it's probably somewhere in between. It's not -- we're making investments because we are targeting a lot of growth opportunities within industrial, so that will be a little bit of it.

At the same time, we don't expect those, maybe, we don't have any of those large GTS projects of that size, the $20 million or so, that would bring it down to the level it was last year. I think probably a reasonable assumption is somewhere in between there is where we would see it going forward.

Okay. Is there any skittishness to the shipping schedule for the 26% or is it uniform? Will Northern Technical, which is I guess about $22 million in revenue, should we -- we have to add the revenue, but does it have any impact on the profitability? (technical difficulties) Hello?

One moment, everyone. One moment, Mr. Lustgarten. Hold the line and just double check on it.

Okay, thank you.

One moment, we'll reconnect them. Hold on just a moment, everyone. Ladies and gentlemen, please stand by as we connect our speakers. It looks like Mr. Sheffer is back. Mr. Lustgarten, please go ahead.

That's what you get for having better margins than anybody else this quarter, I guess. Hello?

(laughter) Yes. We're here.

I was just asking about shipping schedules for gas turbine and putting the Northern Technical acquisition in starting September, this $22 million is not a big deal to sales. Does it have any impact on the profitability or earnings that we should know about?

Eli, it obviously depends on when we're able to close that, but we think it will be mildly accretive. Again, it depends on the closing date.

Is the 25% gain gas turbine pretty uniform for the year, or skewed to the second or third quarter? Is there anything we should know about that?

It's fairly ratable. Just the only variable would be the date of the close.

I was talking about the gas, the 25% gain in gas turbine for the year?

I'm sorry. Yes. It is a little bit more towards the back end. I think we're projecting roughly 10% up in our first quarter and then that increases probably, second quarter into third quarter, so it's sort of a ratable increase all throughout the year with each quarter sequentially being larger.

One final question. The $10 million expenses incrementally that you cited in the press release, is that going to be reported in the segments or in corporate overhead, on how to divide it, or is it reported in the corporate number?

That gets put into the segments, essentially, in proportion to their sales.

Okay. Alright. Thank you very much.

Kevin Maczka, BB&T Capital Markets.

Jim, can I first just clarify something I think I heard you said? On the margins, you're looking for operating margins for the consolidated basis, 13% to 14% in Q1 and then improving from there, is that correct?

Yes. 13% to 14% in Q1, second quarter about the same as last second quarter, and then improving third and fourth quarter.

And so in terms of Q1, is some of the investment timing impacting that or is it gas turbine mix that's --? What are some of the puts and takes that are pressuring that so much in Q1?

I think it's a couple of factors. One is in terms of the revenue growth, it's going to be lower year over year in Q1. Then as we ramp that up, the sales growth that we're forecasting is higher towards the back half of the year, which is what gives us that additional leverage.

Some of the expense is a little bit higher in the front end as we move the first two quarters of our fiscal year with regards to the ERP project. The biggest piece of that is going to be the first half, where we're finishing deployment in the Americas, while at the same time we're implementing in Europe. There is a little bit of that front-end loaded as well.

Okay. Then, if I could just shift over, in terms of the cash flow outlook being lower in 2015, you mentioned some working capital investments there. Can you maybe give us a little more granularity there and talk about --?

Your always pursuing different continuous improvements type initiatives. Are there some offsets there that may help us do better on that working capital line?

Yes. We're obviously always looking for opportunities for improvement and this year is no different. Our goal is to find ways to exceed that, but what we've modeled in with the larger growth in our gas turbine business and some of the other OE businesses picking up, generally, that growth is a use of working capital, especially the two I mentioned, OE and gas turbine.

Okay. Finally, for me on the gas turbine, it's been so lumpy and I think we understand why, last year and this year. Can you just say a little bit more about your view longer term there? Are we still early in a multi-year cycle and we just had a one-year anomaly here, or is it more of an excess capacity situation where we may have years like this, like 2014, more often than not?

Kevin, it's Bill. It is lumpy. I think that's the technical term we've always used for it. I think what we saw is a pause this past year after a very strong period, as a lot of that new capacity that was brought on was absorbed into the system.

Longer term, we're very bullish on the gas turbine business just because it's the cleanest fossil fuel for power generation and there's a lot of it in many parts of the world, including our country. We see, longer term, that the gas turbine businesses is going to continue to grow, but I don't think it's going to be a linear growth line for the next half a dozen years.

It will be probably some a little bit ups and maybe some downs. You draw a line through that, we think it's going to continue to grow very nicely. That's one of the reasons, back to Tod's point about buying Northern Technical, a lot of that growth is going to be in the Middle East and this really gives us a very strong position in one of the largest gas turbine markets.

Okay. Makes sense. Thank you.

Jeff Schnell, Jefferies.

You're seeing very strong Latin American trends. What are the trends you're seeing in 2015. If you could help me understand what's driving that mix?

This is Tod. We had a lot of success within Latin America with our growth initiatives, all the way from Mexico with our aftermarket opportunities, by adding new distribution as well as parts, and our engine business all throughout Latin America, we have had a lot of success growing our share. We expect that to continue as equipment utilizations really continue at nice levels.

Also though, what's helping drive our growth is just our strategic plan that we have put together and really attacking low market share opportunities to be able to grow across that market. We see good opportunity, and we have a growth plan across Latin America that is again in the double digits. We would expect, given our strategic outlook and the plans that we have in place, to be able to deliver that.

Great. Thank you.

(Operator Instructions)

Charley Brady, BMO Capital Markets.

This is actually Patrick Wu standing in for Charley. On the industrial side, how much of special applications is described related today? Also, what are the growth plays that you guys are baking in for agriculture in your fiscal year 2015 guidance?

Maybe I'll start -- this is Tod, and talk a little bit about how we do ag. The way we were taking a look at ag and what we have put into our guidance for fiscal 2015 is we have experienced a bit of softness within the agricultural markets currently as we ended up our fiscal 2014.

We have the ag markets, as supported by our customers' commentary, customers like Deere and CNH and AGCO for example, all have it continuing to soften, somewhere between zero and 5% throughout our fiscal 2015. That will be a slow softening led by softening across the Americas as well as in Western Europe. That's what we put into our forecast.

Maybe I'll turn it over to Jim on the second part of your question.

In terms of the special applications, what that's been running here over the recent quarters has been about half. The disk drive represents about half of the special applications sub segment.

Then, on the engine side, what end markets do you see the greatest strength in this past quarter? What are your expectations for Class 8 truck builds in your -- in 2015 or fiscal 2015?

This is Tod again. When you take a look at Class 8 trucks, for example, ACT's latest forecast has 2014 at about 294,000 Class 8 trucks and calendar year 2015 at 312,000. There's a gradual increase from the current levels that we've experienced growth in.

Overall, what we've put into our forecast is additional growth this year in fiscal 2015 between that 2% to 5% across our on-road markets. That's really led by North America and then also into Latin America. The other parts of the world, we're a bit more guarded about.

Great. The end markets for engine in general?

The last one we talked about, agriculture and then now on-road. A little commentary on construction, we see construction really driving a bit of growth for us. From a market standpoint of view, we see it up between 2% and 5% is what we put within our forecast.

That's really across the Americas and Europe. It's obviously softer in Asia-Pacific and we have baked that bit more softness and modest, flat to down 2% or 3% across the construction markets in Asia-Pacific.

That's what we've baked in within our forecast. You roll that all together in construction, it's about 2% to 5% increase.

Lastly would be mining within engine, and if you really looked at our mining opportunities as supported by really our customer base, like Cat and Komatsu and Levere, there has been more positive commentary about the potential to have a stronger market or some pickup in calendar year 2015. However, we've not seen that. We have seen a little bit more positive within the replacement parts opportunities there.

We would say that that wouldn't be, the replacements part section of mining would be more flat to maybe down just a little bit, so slightly up from its current low levels. Overall, the mining sector is not one that we have baked growth into in our forecast for fiscal 2015. We have it more soft, down between about zero and 2%.

Thank you.

Brian Drab, William Blair.

First question for Jim. I think some of these numbers have come out, but just so I can get all these into the model here. Can you give us, specifically, how much you spent on the ERP system in the fourth quarter?

I know that you gave us the $10 million figure, but that wasn't all ERP for the fourth quarter. Then full-year 2014, and what you expect in 2015 and you have a total project cost again?

Yes. The costs for Q4, this is the total cost not the incremental cost, was above $2.5 million. For the year, we spent about $8.5 million. That's compared to a little over $4 million last year, so about a $4 million incremental from fiscal 2013 to fiscal 2014.

Now, for fiscal 2015, we're looking at another incremental $5 million, so about $12 million to $13 million of spend for next fiscal year. As I mentioned earlier, that's the year where we're really doing two regions at once. That should start to tail off, then, as we move into fiscal 2016.

Okay. Great. That $12 million to $13 million in 2015, again, will be divided across the segments relatively proportionally with sales?

Correct.

Okay. Great. Just looking at the guidance, and some of this has already come out, but make a few more comments? Looking at the guidance for 2015 on the margins, and I think you have some things that are working in your favor in terms of margins.

The aftermarket business is strong and maybe some more, a higher proportion of sales from liquid filtration, but the margin guidance is basically flat, up 10 basis points. Is it gas turbine or what is there that, what are the main offsets to those positive factors?

One, we're running very well right now, so from a Company standpoint, we're running well. I think the mix is the primary factor there as we look to next year, gas turbine is going to be accelerating. It's good business, but it carries a little bit lower margin than our replacement parts sales, and those are first-fit projects.

Then, we are forecasting our OE business to increase. Tod talked about heavy truck and maybe some opportunity in construction. Again, that's good business, but it's a little bit lower margin.

Those factors, as well as some of the investments, in terms of the operating margin would include the ERP costs as well as there's about $5 million of additional investments that we're making as we really focus on growth, couple million dollars of that is associated with the distribution centers that Bill mentioned to really facilitate more aftermarket growth. Then, we have additional investments in technology and growth initiatives as we really look forward to the opportunities in front of us and controlling what's within our control because we can't control the overall economic environment. Those are some of the offsets in terms of, we will get some leverage, which will help, but we're continuing to invest.

Great.

Brian, I would add to what Jim said that we're not trying to maximize our operating margin. We're trying to optimize it with the revenue growth. To get that revenue growth, especially with the organic revenue growth taking share, we're going to need to make the investments that Jim mentioned.

We also we're opening up another plant in Poland next spring. In addition to the DCs, we've got other investments we didn't mention, but they're all about the long-term investments we need to support our growth.

Okay. Great. It's good to understand all those and that incremental $5 million in the ERP project helps make sense of that, too.

Maybe just one more question on the longer-term targets, where we're getting closer to fiscal 2016, and we can see the midpoint of your revenue guidance for 2015. Is $3 billion a round figure that we're targeting, or is that a --?

It just looks a little more aggressive today and I'm wondering if we'd have to do some acquisitions to get to that $3 billion figure? Because I think it represents about 15% growth from the midpoint of your 2015 guidance.

Good question, Brian. I'll take it. A couple years ago we were ahead of the pace, and last couple years with the economic conditions, we've been off of that, fallen off of the pace to get to $3 billion, but we're not giving up. We've had -- it might be -- we hope for stronger organic growth. That's where we're making investments that Jim and I just talked about.

We're also looking at acquisitions, as Tod mentioned with Northern Technical. That's not a big one, but we're looking at those type of bolt-ons to help. If we got to $2.95 billion, I think I'd still be pretty happy. That's an intermediate point to still getting to $5 billion.

We see the opportunities to do that with what's going on in the filtration market and the changes in the market that really in many aspects of the market that play to our strengths. Whether we get to $3 billion exactly in 2016 or not, we still see the opportunity to get to $5 billion and beyond.

We're in the process of completing our first 100 years, and now looking forward to the next 100 years. We're trying to make sure we're making the right investments to get to both the $3 billion and the $5 billion over that period of time.

Okay. Thanks for those comments. It's obviously impressive that you're getting close to that $3 billion target even given the environment that you've been operating in. Thanks very much for taking my questions.

Stanley Elliott, Stifel.

Quick question on the engine/mobile margins. I think we've talked about it a little bit. The decline on both the sequential basis and the year-over-year basis, is that due more to the additional investments you're making? I guess just for point of clarification, with the higher aftermarket mix within that business, currently I would have expected it to be a little bit different, but just any color or thoughts around that would be helpful?

This is Jim. With regards to the engine business, there's a couple of factors there. I think Eli asked a similar question in terms of the operating margin. It's really related to the investments we're making and engine's share of those.

The incentive comp is skewed more towards the engine side, the year-over-year, last year we had very favorable adjustments from an incentive compensation adjustment, because we didn't have the year we targeted. Now this year, the engine group is performing well, so the year-over-year incentive comp is hitting them disproportionately higher than the industrial side.

These investments I talked about are, this quarter, more on the engine side, specifically a lot of engineering expenses as we're in the process of rolling out new programs and developing additional test capabilities to support our growth. It's a combination of incentive comp and investments that are being made, at least currently, more so on the engine side, but like I talked about, we have growth plans that we're investing on on the industrial side as well.

That's great. From the leverage, just to tweak up a little bit interest expense up a little bit next year, is there a debt target that we should start thinking about? Is this going to be something we'll gradually move towards that, these targets, or is this something more opportunistic as far as what's happening right now?

I think as we looked at our leverage over the last year and half, we did, a couple years ago, dial down our share buyback as we looked to pursue additional acquisitions and the right ones just didn't present themselves. This year, we consciously increased the share buyback with the ultimate goal, I think, it's not set in stone, but I think we informally have targeted a 1.5 times EBITDA leverage ratio. I think that's where we think we'd ideal -- we don't want to create extreme leverage because that's just not who we are, but I think 1.5 is our informal target.

As far as for the share repurchase for next year, should we think that 2% to 4% more is opportunistic or are we looking at a similar dollar type level from this year? Lastly, what was the final share count at year end, if you could help us out with that?

I'll start on that. We take a look at our share buyback, and we have for over the past 20-plus years, really in two tranches. The first is that we're always going to buy back enough shares so that new option grants would not be dilutive. That would be say the roughly 1%.

Then above that, we are more opportunistic in terms of other uses of the cash, whether it's CapEx or M&A. We take a look at it in two pieces. The range of 2% to 4% that we talked about, that Jim mentioned, is our guidance for the year. It's not really that much different than where we've been historically, although we've operated within a range of probably 2% to over 4% over the past 20 years, always getting at least 1%.

Right. Then as far as -- I was just going to say the share count at the end of the year?

The share count at the end of the year, we ended just over 143 million.

Great. Congratulations, and best of luck, guys.

Thank you.

(Operator Instructions)

Rob Mason, Robert W. Baird.

I wanted to ask about what is embedded in your, to the extent we do 10 basis points of operating margin improvement, what's embedded within that around the gross margin? I know, Jim, you called out some of the headwinds, mix and the like, gas turbine that might impact that.

But, you didn't speak to the raw material costs that were up 50 basis points in the quarter. If you could comment, around that as well?

Yes. As we look to the sales growth, we do have an opportunity for some leverage in terms of maybe the first 10% of our sales growth, especially on the industrial side where our first fit, we're running at lower than historical capacity in terms of where we'd ideally run those plants. We have some opportunities within our industrial plants, if we were to get some volumes, to pick up some incremental margin pretty quick on maybe the first 10% or so of sales.

We've built some of that leverage in, but to your point, we are seeing commodity cost pressures right now, specifically steel but we're also seeing it with some of the petrochemicals and paper-based products as well. We have factored that in. It's may be roughly 5% to 10% increases.

We're looking at right now, if those prices hold. There's a lot of speculation as to what they're going to here going forward. We've factored in some of those increases that is also affecting, in addition to the investments I mentioned, why we're maybe not forecasting up the historical 30 basis points that we've targeted.

Now that you're aftermarket mix has drifted higher, is your ability to capture price or capture price more quickly, is that noticeable, externally?

This is Bill. We really take a look at offsetting commodity price increases, like Jim mentioned, really two ways. One is through our continuous improvement efforts, really taking costs out of our processes and products. We need to do that because contractually, with many of our large OEs, we're committed to either stable prices or price downs.

Then selectively, we do do price increases. You're right that in the aftermarket we typically have more flexibility, especially on the independent aftermarket. In some of our industrial businesses like dust collection, we do as well.

It will be a combination of both our internal cost reduction efforts and selective price increases. Just to Jim's point, there's usually a lag in terms of when it hits us and when we can recover through either of those two initiatives. That's part of what we have baked into our operating margin forecast.

Okay. Just last question. You commented on the engine aftermarket outlook expectations for strong growth globally. Given that business was up, I think, 12% for the full year, is that suggestive that we could still settle down to maybe mid single digit or is double digit still a prospect, double-digit growth?

This is Tod. As we look at our engine aftermarket opportunity, we believe we have the strategic plan in place, specifically, to continue to press and take share as well as really globally take share that is -- and they really start with, as Bill mentioned earlier on in his commentary, really two main things, which is expanding our distribution and strengthening our distribution network globally, particularly in Asia-Pacific where we are underrepresented as well as in Europe and Latin America. Then also expanding our product portfolio, so in the quarter we added 58 new distributors, but also almost 460 new part numbers available across our networks worldwide.

Those strategies have a lot of runway ahead of them as we continue to look out and press to gain share within the engine market. We believe that as we look forward, we have really high single-digits to double-digit opportunities within our engine aftermarket for growth. We're really quite bullish on the success that we're having worldwide.

Okay. Thank you.

Gentlemen, I have no further questions at this time. Mr. Cook, I'd like to turn the program back over to you for any additional or concluding remarks, sir.

Thanks, Lori. Now, to conclude our call, I apologize again for the short interlude there where we lost our telephone. I'd like to first thank, again, and recognize and thank my fellow employees for their contributions to our record fourth quarter and FY14. We look forward to another great year in FY15 and celebrating our 100th anniversary.

I'd like to thank everyone on the call today for your time and your continued interest in our Company. Thank you and have a great day.

Ladies and gentlemen, once again, that does conclude today's conference and again I'd like to thank you for joining us.