Donaldson Company Inc (DCI) 2015 Q2 法說會逐字稿

Good day, everyone. Welcome to the Donaldson second quarter Webcast and Conference Call. As a reminder, today's call is being recorded. And at this time I'd like to turn the conference over to Jim Shaw, Vice President and CFO. Please go ahead, sir.

Thank you, Aaron, and welcome to Donaldson Company's FY2015 second quarter earnings Conference Call and Webcast. Following this brief introduction, Bill Cook, our CEO, Tod Carpenter, our Chief Operating Officer, and I will review our second quarter earnings and our updated outlook for FY15.

But first let me 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, Jim, and good morning, everyone. In a few minutes Todd and Jim will cover the details of our second quarter results and our updated outlook for FY15, but first I'd like to offer some summary comments.

As noted in our release, conditions in our various end markets around the world remain very mixed. Demand for replacement filters in our engine and industrial aftermarket businesses continue to be very strong. Our gas turbine business also performed well this quarter as we were able to ship both the projects that were delayed from our first quarter and all of the schedule projects for Q2.

And in our engine OEM end markets, on road trucks and our North American base construction businesses continue to perform well; however, our other engine OEM markets, including the North American and European ag equipment markets and mining end markets worldwide continue to face significant challenges.

In addition, the effects of foreign currency translation headwinds from a very strong US dollar impacted us significantly during the quarter. So while we were able to deliver 7% local currency sales growth in Q2, due to the strong US dollar, this translated into US dollar sales growth of only 3%. Now obviously, we can't control the exchange rates and, to be fair, we benefited when it was going the other direction, but this very recent and rapid change in the US dollar has masked our underlying sales growth. Jim will provide more details on the impact of FX in a few minutes.

Last quarter we announced adjustments in our discretionary spending to ensure our cost structure was in line with our projected level of sales growth for the year. These discretionary spending reductions helped us to meet our expected bottom line performance for the quarter.

However as we look ahead, we continue to see weakness in our end markets that are dependent on new CapEx investments such as our first-fit dust collection market and most of our offroad OEM businesses. As a result, we will implement additional productivity improvement and restructuring actions during the balance of this year to further align our cost structure with our latest forecast. We will do this while also allowing us to move forward with key strategic investments in technology and our new growth initiatives that will deliver long term shareholder value.

On January 30, we announced that, effective April 1, I will pass our President and CEO baton to Tod Carpenter who is currently our COO. Tod's promotion to CEO is the result of our ongoing executive development and CEO succession processes which our Board has been actively engaged in for the past several years. I will remain Chairman of the Board.

With over two decades of employment with our Company serving in many leadership roles both in Europe and the US, Tod has demonstrated a passion for our business, a strong customer orientation, and a keen focus on delivering financial results. I have worked closely with Tod throughout his career and am confident he is the right leader for our Company as we celebrate our hundredth anniversary and, more importantly, as we look forward to our next chapter of growth, innovation and value creation.

And as a final news note, we will be ringing the closing bell on the New York Stock Exchange this Thursday in celebration of our Company's first 100 years in business. So let me now turn the call over to Tod to provide an operational overview of the quarter. Tod?

Thanks, Bill. Before I begin with our business review, I would first like to take this opportunity to thank our Board of Directors and Bill for the trust they have shown in me by appointing me as the next CEO of Donaldson effective April 1. I would especially like to thank Bill for the mentoring he has given me during his 11 years as our President and CEO. He is well respected by our employees, customers, shareholders, distributors and suppliers. I look forward to continuing our work together as Bill transitions to his new position as Chairman of our Board of Directors. Thank you, Bill.

Turning to our business review. Our second quarter sales were $597 million, up 3% from last year's second quarter but up 7% in local currency. The remainder of my remarks today will focus on our local currency second quarter results. As a reminder, you can find a detailed analysis of our currency translation by business unit and region on the Investor Relations homepage of our website.

First let me begin with a review of our business segments, then I'll provide more color into specific product lines. For the second quarter, sales in our engine product segment increased 1% over the prior year. Within Engine Products, our Engine Aftermarket sales increased 5%. As a reminder, we sell aftermarket or replacement filters through both our OEM and independent distribution channels.

In our Engine Aftermarket business we saw solid growth in most of our geographies. We attribute this growth to the combination of our sales growth initiatives and improving equipment utilization by end users in the field. Our Engine Aftermarket growth was lead by Latin America growing 24% in the quarter.

Our sales growth in Latin America is an excellent example of our strategy to broaden our distribution channels within emerging markets. This year, we added a distribution center in Peru with great success and will next open two distribution centers in Colombia.

Our replacement filter sales in the US grew 2%. One area of softness we saw this quarter was from inventory destocking in the agricultural equipment service channel. We expect this destocking to continue until the spring planting season.

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 our filters. This higher utilization of equipment in the field will in time result in improving demands for new equipment. We continue to see data supporting this in our onroad heavy truck and construction equipment markets, although at different rates regionally.

Reviewing our first-fit engine OEM business. Our onroad OEM sales increased 12% globally. North and Latin America onroad sales grew 10% and 17% respectively due to a continued increase in build rates of new trucks by our customers.

Europe onroad sales grew 11% in the quarter mainly due to our increased share on the newer Euro 6 trucks now in production. Our Asia Pacific sales were up 15%. Switching to our offroad OEM business, our sales continued to decline with an 18% decrease in Q2 compared to one year ago.

Our decrease is the result of a continued slowdown in demand for new agricultural equipment in both Europe and the Americas, the ongoing decline in the production of new mining equipment globally, and the continued softening of demand for construction equipment in Asia Pacific. Based on our customers' forecasts, we believe that the mining equipment market will continue to decline slightly through the remainder of this calendar year and demand in the agricultural market will continue to soften through the remaining of our FY15.

Our Aerospace and Defense group reported a 16% increase over last year's second quarter. This is attributed to strong sales of defense replacement parts.

Moving to our industrial products segment, sales grew 13%, lead by a doubling of our gas turbine sales compared to second quarter last year. Our gas turbine business is a lumpy, project-based business with large shipments subject to the readiness of our customers' build site to take delivery.

Last quarter, as you may recall, several large projects were rescheduled by our customers to be shipped in Q2. Some of these delays include shipments by our latest acquisition, Northern Technical, located in Abu Dhabi. These projects have now all shipped and revenue at Northern Technical was $5 million in the quarter.

Our industrial filtration solution business reported a 3% increase in global sales, lead by very strong aftermarket filter sales. Our double digit aftermarket filter sales growth was able to offset continued weakness in our first-fit or new equipment sales, reflecting a soft new capital equipment spending market. Our special applications sales were up 4% as disk drive filter sales and venting sales were both good.

In summary, our second quarter saw solid growth from engine OEM onroad, Engine Aftermarket, Aerospace and Defense, and gas turbine which offset weakness in our OEM offroad and first-fit Dust Collector equipment businesses.

Now let me briefly discuss some specific product line results. One of our most successful technology introductions for air filtration has been and continues to be PowerCore. For our second quarter, our PowerCore sales were $44 million, up 15% over last year. In our industrial dust collection business, we sold 344 new systems in Q2. Additionally sales of our branded Toric PowerCore replacement filters for Dust Collectors increased 24% in the quarter.

Also PowerCore replacement filters for our engine business increased 18% in the quarter. The strong growth in PowerCore replacement filters during these difficult end market conditions validates our proprietary first-fit strategy. Our industry-leading technologies are designed to both solve our customers' needs on their new equipment while helping to retain replacement filter business for the long term. So in total, our PowerCore sales were up $5.7 million in the quarter, up 15% over last year.

Our Downflo Evolution, or DFE, is the next generation of cartridge dust collectors that offers improved pulse cleaning technology in a 40% smaller dust collector compared to competitive products. As we reported last quarter, reception of this new product line has been strong and we shipped another 56 systems this quarter. As these new DFE systems are put into service by our customers, just like our PowerCore product line, we will retain the aftermarket or replacement filter sales for a much longer period of time.

Looking at our liquid filtration sales, our second quarter liquid sales increased to $120.7 million. This reflects the continuing end market challenges we face in our offroad markets with reduced production levels at most of our OEM customers. However, despite the current low production levels at our OEMs, we are very excited about our increased market penetration with our new select diesel fuel filters which use our patented Sentec XP media.

We have 13 new OEM customer first-fit programs, the first of which has now begun shipping. All 13 new programs will provide additional first-fit sales growth initially and over time, significant replacement filter growth.

Let me now turn the call over to Jim Shaw to discuss our operational metrics and outlook for the remainder of our FY15. Jim?

Thanks, Tod. Good morning, everyone. As you've listened to or read recent earnings reports from US based multinationals, you've consistently heard the significant impact of the dramatic strengthening of the US dollar and resulting foreign currency translation is having on their results.

We are no different. On a worldwide consolidated basis, this foreign currency translation impact had a $27.5 million or 4.8% negative impact on our quarterly revenues and a 3.3% negative impact on a year-to-date basis compared to FY14. It also reduced our reported earnings by $2.7 million or $0.02.

The most significant strengthening of the US dollar hit us in late December and continued into January so, as I will comment on later, if the US dollar stays at this level, this will also significantly impact us during the remainder of the fiscal year. While the weaker euro has had the most impact to our results, the dollar also strengthened against most currencies, including the Japanese yen and the Australian dollar where we also have significant operations. This quarter, we included additional information in our earnings Press Release that shows how FX has impacted our consolidated and business segment results.

Switching to our gross margin, this quarter it was 34.4% down 30 basis points from last year's second quarter. As we noted in our Press Release, there were a few items impacting our gross margin this quarter. We experienced lower fixed cost absorption due to production volume decreases in a number of our manufacturing plants as compared to last year. This, along with some product transfer costs, resulted in a negative 30 basis point impact.

We also had negative mix impact due to the large increase in first-fit gas turbine project shipments, which had a negative impact on margins of 30 basis points. We also had $700,000 of restructuring costs included in gross margin this quarter. Offsetting these margin headwinds were our continuous improvement initiatives which benefited our gross margin by approximately 40 basis points as compared to last year.

Our operating expenses increased by $8 million, as compared to last year's second quarter. As a percentage of sales, operating expenses increased by 70 basis points. The increase was due to the special lump-sum pension settlement of $3.9 million, additional employee-related costs and other costs in support of our sales growth related investments. This was offset by discretionary cost saving measures which we began implementing at the end of our first quarter.

Our reported operating margin for the quarter was 11.4%. Excluding the restructuring and pension charge, it is 12.2% or down 10 basis points from last year. Looking forward, we expect our full year FY15 operating margin to be between 13.6% and 14.4%, excluding the restructuring charges and pension settlement charge.

Included in that number is $5 million in higher costs per our global ERP investment in FY15 as compared to FY14. Our first go-lives in Europe are scheduled for our third quarter. In addition to our ERP project we're planning to make a number of other sales-related growth investments.

The change in our full-year operating margin guidance from last quarter is primarily a result of sales volume expected to be lower than originally anticipated for the remainder of the fiscal year, which I'll cover in our guidance update. Our effective tax rate for the quarter was 27%, compared to the prior year rate of 22.1%.

You may recall that last year's second quarter included a $6.4 million in tax benefits related to the favorable settlement of the tax audit. The year-to-date effective rate was 27%, compared to the prior year rate of 27.6%. Based on our projected global mix of earnings for FY15 we're forecasting a full year tax rate of 27% to 29%.

Our second quarter CapEx was $24 million. Looking at our forecast for FY15, we expect to spend between $90 million and $100 million on CapEx for the full year. The breakdown of our CapEx spend is projected to be approximately 25% for our technology initiatives, which include our global ERP project and our R & D lab projects; another 30% is for tooling for new products; 30% related to cost reduction activities through our continuous improvement initiatives; and 15% related to our capacity expansion, most notably our new plant in Poland. We expect depreciation and amortization to be between $73 million and $78 million in FY15.

Free cash flow was $12 million in the second quarter, which was impacted by the large number of gas turbine projects shipments mentioned earlier. Those large projects recently shipped have resulted in higher accounts receivable balances and those still in production have had some impact on inventory.

In addition, we have a number of growth initiatives, such as new distribution centers, where we're adding inventory to support our aftermarket businesses which have also impacted working capital in the quarter. For FY15, we expect full-year cash flow from operating activities to be between $245 million and $285 million and with our forecasted CapEx, we expect to generate $150 million to $190 million of free cash flow this year.

During the quarter we repurchased 1,045,000 shares for $39.9 million. Year-to-date we've repurchased 4.4 million shares or 3.1% of our diluted outstanding shares for $174.2 million. We anticipate repurchasing up to 4% of our diluted outstanding shares in FY15. We expect interest expense to be between $14 million and $16 million and our balance sheet remains very strong with $257 million of cash and short-term investments.

Now I'd like to provide some comments on our updated outlook for FY15. Our second quarter results have shown that our first-fit OEM equipment end markets and our first-fit dust collector market conditions continue to be challenging. Additionally, the Asia Pacific region does not currently show signs of recovery in our end markets, impacting even our Engine Aftermarket business there.

Based on the outlook in our Press Release, we're now forecasting sales growth of up 1% to down 5% in FY15. This range is 4% lower than our previous outlook, with much of the decrease attributable to foreign currency translation resulting from the strong US dollar.

At current exchange rates, we expect that sales will be impacted $136 million or 5% versus last year due to the strengthening of the dollar. Or another way of looking at it is that at constant exchange rates we're projecting full year sales to be up 2% to 7%. This difference speaks to how significantly the stronger US dollar has impacted the translation of our international results.

In our engine product segment, we forecast full-year sales to be flat to down 3%. We expect to see continued good momentum in North and Latin American and European truck builds and modest improvement in North and Latin American construction equipment builds. However, further weakening in new agriculture equipment builds and a continued weakness in mining equipment builds and utilization have resulted in a reduction to our forecast.

Finally we expect mid single-digit sales growth in our aerospace and defense business. Our outlook assumes continued weakness in our defense business with better prospects on the aerospace side of the business. In our industrial products segment, we're forecasting sales to increase 0% to 3%.

We expect gas turbine sales to increase 20% to 36% in FY15 as the industry rebounds from the pause it experienced last year and we have our first year of sales from our Northern Technical acquisition. We are expecting industrial filtration solution sales to be flat to 4% down including the impact of FX. Replacement filter sales remain strong and we now expect modest growth in new filtration systems as manufacturing capital investment slowly improves. Additionally our new product launches announced last quarter should help support our top line growth plans.

Finally our forecast for special applications is expected to be down slightly due to decreases in our membrane product sales, partially offset by increases in our integrated venting solutions and disk drive filter sales. As discussed earlier, our forecasted operating margin should be between 13.6% and 14.4%, excluding the pension and restructuring charges. As reported in the Press Release, we recorded charges totalling $4.6 million in our second quarter related to these restructuring and pension lump sum settlements.

We anticipate restructuring charges of an additional $3 million as we close our muffler plant in Grinnell, Iowa. These charges, along with the costs of other productivity and restructuring actions we will be implementing, are not included in our operating margin outlook.

So in total, we expect our EPS to be between $1.65 and $1.85. That's excluding the restructuring and the pension settlement charges. The mid point of this new range would be similar to our record FY14 EPS of $1.76, in spite of the substantial impact of currency on our reported earnings this year.

That concludes my prepared remarks. I'll now turn the call back over to Aaron to open up the line for questions.

Thank you.

(Operator Instructions)

We'll go first to Charley Brady with BMO Capital Markets.

Hi, guys, this is actually Patrick Wu standing in for Charlie. How are you?

Good.

Good morning.

Good morning. On the onroad side of the business, I was just wondering, what are your expectations of -- I guess what estimates are you guys building in for truck build rate in the US and Europe for 2015?

US and Europe?

So Charlie, specifically -- this is Tod. As we look to the US, we're feeling good strength between roughly a 9% to11% increase is our OE build rate look. ACT data would support that, with roughly about 340,000 trucks this year through the calendar year 2015. That's what we have put in our forecast. Within Europe, we see a little bit less, about a 5% to 6% increase; however, still stronger rates than last year.

Okay. Just want to go over to the filtration side. What are your expectations, again, geographically in Europe and the US going forward, given the decline in guidance?

Repeat the last part, we lost you there.

Given the decline in guidance. I just wanted to get a better understanding, get better color on how that has shifted in terms of geographic expectations in the second half of the year.

Yes, so for the overall business, obviously there's differences in each of the end markets slightly. But as an overall blanket statement, I think in the Americas, including Latin America, Mexico, we continue to see pretty good signs in terms of a slow but steady recovery, an improvement in our businesses. The onroad truck is heavier in the Americas, so that obviously helps a little bit.

Europe has been -- I'd say we get mixed signals. So we see some indications that things are improving and then it takes a step back. So Europe has really not changed since our last quarter. I think where we have seen change, which is reflected in our guidance, is Asia Pacific, particularly China.

The things do seem to have weakened a little bit there. That's reflected in some of the news reports you see and it seems the credit situation has impacted some of our larger capital spend and our customers' willingness to launch new programs. So I'd say the biggest difference has been what we've seen in slowdown in Asia Pacific.

Great. If I can squeeze in one more. I think last quarter you mentioned that the ag business was down 25% to 35%-ish. Has that deteriorated even more? Is that what you're seeing or is that still a general guideline that we can probably look at?

Patrick, Bill here. Just I think what we see is that it's probably continued to deteriorate on the first-fit side. We look at announcements like Deere's last week and so we've incorporated that into our guidance, our new guidance.

Got it. Okay, thank you.

We'll go next to Laurence Alexander with Jefferies.

Good morning. Couple of questions. First, with the downturn you're seeing in Asia, can you talk a little bit about the share gains you're making in the region? And are those share gains going to be a fairly steady tailwind to sales growth over the next few years or should we see it as sort of a steadily increasing tailwind as new platforms come on stream?

So, Laurence, this is Tod. In Asia, if we just take the industrial business first, the industrial side of our Company, we're making nice gains in our IFS business across Asia. That would give us some real positive outlook there and as we continue to expand our strategies there for growth.

And then on the engine side, specifically we're focused on winning more share, because we have a very small share on the OE portion, especially in China, and also increasing and implementing our strategies, our successful strategies in aftermarkets. So we believe we'll get some tailwind as we continue to look forward in China over the time ahead.

And then, specifically to China, can you characterize what you're seeing in terms of regulatory tailwinds from tighter regs and environmental standards, and also are we seeing any impact from the governments who are encouraging a buy-local strategy rather than multinationals?

So, Tod again. No, we're not seeing that nationalism, if you will. What we are seeing is the effects of the regulations, especially as they bring on in 2017 Euro IV, so they are focused specifically on cleaning up their 2.5, if you will, is what they call it, PPM in China.

So there is some regulatory positive change that can help us as they look to increase the technology within that market. We are not seeing a nationalistic behavior, however.

Okay, thank you.

We'll go next to Richard Eastman with Robert W. Baird.

Yes, good morning.

Good morning, Rich.

Tod, could you just maybe address the Europe aftermarket business being up just modestly, if not flat, in local currency? Is that just some inventory destocking distortions or is there -- why is that flat?

So overall, we have been looking to Eastern Europe in order to try to help gain momentum. We're feeling the effects of the geopolitical Eastern situation that's really pressing negatively on the gains that we're making in the Western portion of Europe. Last year, we had double-digit gains in our aftermarket and it was really very broad based all across Europe, but specifically the geopolitical activity is making us flat at this time.

Okay. And then just maybe one for Jim. Or two for Jim. Let me drag him into this. The working capital number, I guess you addressed this, but the $70 million use of cash in working capital and that is the receivables on the large gas turbine shipments in the quarter?

There's a combination -- go ahead.

Then you had commented that there's still some gas turbine business in the backlog?

Yes, that's right, so a couple things with working capital. I think, one, we see some opportunity for improvement on that. So a number of the large projects that we shipped were shipped towards the end of the quarter, middle of the quarter, so we haven't yet collected the receivables on that.

So those projects, we had a very significant $60-million-plus quarter in terms of shipments. So that's sitting -- a fair amount of that is still in receivables, so that's impacting us, as well as just the higher growth in our gas turbine business, since the start of the year, has impacted our inventory to some extent.

There's also a couple other things with regards to inventory. So we have increased our inventory as a result of our distribution center expansion, so we're expanding a distribution center in Europe that Tod mentioned, a couple new distribution centers in Latin America, and that's an investment we want to make because that business is growing. Our aftermarket business is growing nicely, so just to keep up with the sales and even keeping turns level, there's an investment there.

I think the couple opportunities we see are the West Coast ports added a couple million dollars of inventory as we built some safety stocks that, now that that's resolved, we can begin to address. We also had some product moves where we were moving production lines from one of our facilities to another and we built up some inventory. So I see some opportunity to reduce inventory here over the next quarter, but those are kind of all of the factors that combined for, I'd say, a less than stellar working capital quarter, but we're going to address that going forward.

And then just when I look at the gas turbine business -- and I was actually under the impression some of that business in the first fiscal quarter would ship in the second half of the year, but it does seem like you turned quite a bit of that. So is the back half of the year then effectively flattish or down modestly in gas turbine shipments?

Yes. So we shipped mid-$90 million the first two quarters of the year, and we're expecting a similar amount to ship in the second half. Just not as lumpy, so you saw we shipped double second quarter than first quarter.

As we move roughly the mid-$90 million that's in the second half of our forecast, about 40% of that we expect will ship in third quarter, about 60% in the fourth quarter, so it will be down a little bit from our second quarter, and then third to fourth will increase a bit.

Sure, I understand. And maybe just last question. Again, when I look at the mid-point of the EPS guide, it's down about $0.12. And again, my math says the incremental currency impact is maybe $0.06 of that. And so the other kind of $0.06 here is, essentially, you're suggesting the dust collection business maybe is a little softer.

And then, the gas turbine outlook seems like it's come in a little, and then maybe some modest incremental weakness in the offroad. Does that kind of define the other half of the earnings reduction?

Yes, maybe on the first point, as we calculate it, we get a little more than half in terms of the FX, so maybe about 60% plus of that change is just due to FX. But then the other factors you mentioned are right on. Just general softness in Asia Pacific, the ag, little bit of slowdown in mining first-fit.

I see. Okay, I'm with you. Thank you.

We'll go next to Eli Lustgarten with Longbow Capital Markets.

Good morning, everyone.

Good morning.

Congratulate Bill on what's been a great tenure and knowing exactly when to put Tod under fire, I guess.

Thanks, Eli.

You got to have a little fun. It's a tough environment and you're executing very well.

So let me ask you, the obligatory, can we talk a little bit about oil field impact that you're seeing? You don't have much measure directly, which maybe some measuring, what have you, or indirect, but filtration does go on all these engines on all the oil rigs and stuff like that, that will be impacted as you go forward. Do you have any feel, or are you seeing any impact from the oil fields at all, or is that sort of negligible, we don't worry about it?

Eli, this is Tod. So we're not seeing any impact at the moment and we are continuing to talk to our customer base. That would be, what we would call, our small turbine business. We're not really prepared to give any outlook or guidance at this time due to the situation (multiple speakers).

It is, and I'll add to what Tod said. We're looking at our customer announcements, as Tod mentioned, and I think there's an anticipation that some of that impact in the oil field is still to be felt. So, we've incorporated that into our guidance for the balance of this year, that there's probably some of the projects that were underway will continue, but probably they won't be replaced with new projects if oil prices stay where they are.

And this would be low single-digit kind of impact in sales, isn't it?

It's pretty small, for the fiscal --

This is Jim, Eli. For this year, it looks pretty small. We see a little bit of impact in some of our aftermarket businesses for the fracking fields and the like. But again, very small as a percentage of our business this year. I think the unknown is, as we look forward, what it does to the bigger projects in subsequent years.

Okay. And in your comments you talked about ag being soft for the end of your fiscal year and mining as being soft. Is that based on the visibility that they've given you? Have you gotten visibility past July from the ag guys or so, or is that's all that you're willing to talk about at this point?

Because, it looks like the ag business will continue down, not just through July but for most of the calendar year. And, BHP just made comments today about cutting more spending, so we suspect it doesn't stop in July.

So, Eli, this is Tod. We baked in, as we talked about last time, 25% to 35% on the down. We've taken that now internally in our models to closer to 40% down, so that's baked into the guidance.

We do have a good visibility over the next 90 days. And we have been talking quite a bit with our customer base. As it gets a little bit later into the calendar year, our visibility gets, obviously, a little bit more clouded, but we've baked in additional decline from last time.

And are your customers sort of saying that the business will stabilize as we get to the summer, or is it uncertain at this point?

On the first-fit large tractors, they believe that there will be a continuing softness. Aftermarket will be fine, but then it will continue to be fine on what's called the feedstock, or the smaller farms, dairy, those type of smaller vehicles, at the current low levels, so that's how we baked it in.

All right, thank you very much.

We'll go next to Brian Drab with William Blair.

Good morning.

Good morning, Brian.

Tod, congratulations on the promotion. And, Bill, we're happy to see you're still sticking around.

Thank you.

Thanks, Brian.

So the first question, just maybe piggybacking on that last question. We heard from Pall Corporation, this morning, that they've heard from customers in the machinery and equipment markets that destocking is occurring and that's supposed to take place, they are hearing from their customers, or I think they said the next six or seven months, and then that will level out. Is that similar to what you're seeing in, I guess, the offroad aftermarket?

This is Tod. In the aftermarket portion, we are only seeing destocking in the ag markets. We are not seeing it in construction or transportation or mining, and that destocking came on at the end of last calendar year. We expect it to continue slightly into the spring planting season, but we should be through the majority of that.

Okay, and then another question related to oil and gas, and I asked this question of Pall Corp. this morning as well. But I think about 50%, 60% of your cost of goods is associated with raw materials, and I would imagine a significant portion of that is petroleum-based resins for manufactured filtration media. Is this a possible tailwind benefit to margins in the back half of the year?

This is Jim. You know, maybe just to clarify that comment, about 65% of our cost of sales are material. The biggest piece of that is steel, so that's about 25% of materials. The next one is media. That's about 20%, and then the third biggest is the petroleum-based products.

We haven't seen the impact of that yet. It generally takes some time to work through the channels. It's possible we'll start to see that here over the coming months, and that potentially could benefit us, but we do have, with many of our OEs, cost-sharing agreements in terms of price downs over time. So yes, it could, but we don't see it very significantly over the next several months at least.

Okay. Thanks for that clarification, Jim, and just one last one for you, Jim. I think in the prepared remarks you said that if the dollar stays at this level, it will have a significant impact on 2015, I don't know if you quantified, in terms of the top line and in terms of EPS, just what exactly is the impact you're expecting from FX for the full year 2015 at this point?

Yes, the full year, year over year, is $136 million to our top line, if rates were the same as last year to this year, year over year. And then, I didn't quantify the bottom line, but generally that follows at a same percentage because our costs are generally matched up overseas.

The one difference and slight impact is, as sales go down, say 5%, generally our profit goes down a little bit more, and that's because many of our headquarters and corporate costs are denominated in dollars. So, we have a higher percentage of our costs in the US versus overseas. So generally, if our revenues go down 5%, our profits go down a little bit more than that.

Okay. And then, just to clarify, the $136 million, that assumes just constant exchange rates from this point on for the rest of the year?

That's correct. In our guidance, we were using the euro at $1.13 and the yen at $1.17.

Okay, thanks a lot.

We'll go next to Larry Pfeffer with Avondale Partners.

Good morning, gentlemen. Congratulations, Tod.

Thank you.

So just a quick question. I know the gas turbine business is lumpy and the outlook is inherently uncertain, but do you have any general thoughts on how the business should trend into the back half of the calendar year?

I missed the first part?

I know the gas turbine business is lumpy and an inherently uncertain outlook, but just wondering if you have any kind of outlook on what the back half of the calendar year looks like there?

Sure, sorry about that. The first half and the second half, in terms of dollars, are relatively similar, so mid-$90 million, maybe upper-$90 million. The way we see that $95 million-plus playing out on the back half of the fiscal year is about 40% of it in the third quarter, about 60% of it in the fourth quarter.

Okay. And then, calendar second half, do you have any outlook there?

Yes, we're just not -- until we get through the next couple quarters, we're not prepared to talk about our next fiscal year at this point.

Okay, I understand. And then, I know we've talked a lot today about the offroad side of the business, but just wondering, where do you see inventory levels at in the onroad aftermarket? I know last year you benefited from some restocking. How do you see that trending right now?

This is Tod. We see us having a very nice strong transportation aftermarket business. No destocking. It's just kind of business as usual and continued with nice growth and executing our growth strategies.

Okay, thank you, gentlemen.

Thanks.

Thank you.

We'll go next to Jim Giannakouros with Oppenheimer.

Hi, good morning. Thanks for taking my questions.

Good morning.

In trying to calculate organic growth components, you touched on new product introductions earlier in your prepared remarks. But can you quantify how much of a positive contribution you're seeing or expecting from new products, both in engine and industrial over the coming quarters, as adding 1 point or 2 from an organic perspective or less than that?

It's really hard to quantify sort of a vitality factor, because as we introduce products, they're sort of slower introductions and small win by small win, but we do continue to win in terms of new products. Tod talked about what we've been able to do with regards to the new applications we've launched in our dust collector business. We feel we're definitely taking share there.

As we expand in some of our geographies, our Latin America business, for example, is growing at significant rates. That's not necessarily new product but new markets for us, where we are able to grow our organic rates. And then, we do have a couple of new programs that are just in the early stages with our power fleet technology.

We just started shipping that here, this quarter, so it wasn't a significant amount of revenue, but that's something that's going to add as we move forward. So, I don't have a specific number for you, but that's part of just our culture in terms of how we are, a point to a couple points, every year, needs to come from new products.

Okay, understood. And one more, if I may. As far as your restructuring or your cost-containment actions that you plan, and I'm sorry if I did miss it, but did you quantify or can you quantify how much in costs you are looking to take out? Or from a margin perspective, how many basis points we should be expecting as a benefit from these actions on a normalized basis?

Jim, this is Bill. We haven't quantified that yet. That's stuff we're working through right now. We have quantified what we're doing related to the Grinnell, and that's in the release, so that part's been quantified. The rest is in process.

Okay, thank you.

Thanks.

(Operator Instructions)

With no questions holding, I'd like to turn it back to our speakers for any comments and closing remarks.

Thanks, Aaron. Just to conclude our call, I'd like to thank everyone, today, for your time and continued interest in our Company. I'd also like to thank my fellow employees for their efforts during our second quarter. So thank you all and have a great day. Goodbye.

This does conclude today's conference. We thank you all for your participation.