Donaldson Company Inc (DCI) 2015 Q4 法說會逐字稿

Good day and welcome to the Donaldson Company Incorporated Q4 FY15 conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Brad Pogalz, IR Director. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome. With me today are Tod Carpenter, Donaldson's CEO; and then Jim Shaw, our CFO. Also in the room with us is Bill Cook, our Chairman. This morning Tod and Jim will cover our fourth-quarter and full-year 2015 performance, review the outlook for our next fiscal year, and provide an update on some of our strategic initiatives.

I want to remind everyone that any statements made during the call that are not historical facts should be considered forward-looking statements. Our results could differ materially from the forward-looking statements made today, as they may be affected by many factors, including risks and uncertainties identified in our press release and SEC filings.

Now I'll turn the call over to Tod Carpenter. Tod?

Thanks, Brad, and good morning, everyone.

One year ago, as we were getting our first look at FY15 guidance, we said regardless of what is happening outside of our Company, we will continue to focus on those things that we can control. After navigating through an ever-changing year, including global uncertainty and end-market headwinds that were greater than expected, I can confidently tell you that is exactly what we did.

We answered last year's challenges by proactively restructuring our Company and aligning expenses with market conditions while maintaining, and in some cases, accelerating investments for growth. I am proud of the more than 1% local currency growth that we delivered last year. Additionally, we made progress on our growth initiatives, despite the many headwinds we faced.

Later in the call I'll share some examples of our progress and successes. But first, I'll provide a brief overview of our sales and Jim will give some additional detail on our FY15 results and FY16 guidance.

Turning to sales, despite macro pressures continuing through the end of the fiscal year, fourth-quarter sales were ahead of our guidance. Our fourth-quarter sales were $610 million, a decline of 9% from last year's fourth quarter, but down 1% in local currency.

The remainder of my remarks today will focus on our local currency fourth-quarter results. 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.

In our engine segment, the 6% decline in fourth-quarter sales [causes] mixed conditions in our end markets. The down trend in mining and agricultural markets drove a 24% decline in off-road. Conversely, strong production rates of heavy-duty vehicles contributed to an on-road sales increase of 8%.

After-market sales declined 5% in the quarter, driven largely by accelerated destocking in our OE channel. This channel, which represents about 40% of our after-market business, experienced a sales decline in the high single-digits.

Typically destocking activities can take one to two quarters before reaching a more stable level of inventory, but the week-to-week volatility in orders has continued into this quarter. With no clear signs of when that may slow, we suspect that customers remain cautious and focused on controlling what they can control.

Our independent after-market channel is still facing uncertainty as well. The reasons for caution are varied, with distributors citing mining and ag market pressures, the oil and gas industry slowdown, and geopolitical risk, as concerns.

Turning to our industrial segment, strong growth in our gas turbine and dust collection businesses was partially offset by sales declines in disc drive and membrane. As you know, the gas turbine business is lumpy and this quarter was no different. We ended up delivering a strong quarter, with sales up 20% over last year.

In our dust collection business sales grew almost 5%, due in part to a low double-digit sales growth of replacement parts. On the first-fit side, quoting activity was strong especially in the US, but we have yet to see a sustainable increase in conversion.

Now Jim will provide some additional detail about our FY15 results and our FY16 guidance. Jim?

Thanks, Tod. Good morning, everyone.

FX meaningfully impacted our top-line results again in Q4, reducing sales by roughly 8%, or $52 million. For the year FX reduced sales by $135 million, or about 5%. Net income was reduced by 8% in the fourth quarter and 6% for the full year due to foreign exchange translation.

Our fourth-quarter GAAP EPS was $0.41. Excluding restructuring and asset impairment charges, adjusted EPS was $0.45, above the top end of our previous guidance due to better expected sales and adjusted operating margin.

Q4 adjusted operating margin was 14%, ahead of the mid point of our earlier guidance by 20 basis points, due primarily to our expense management programs, which was offset partially by a mix of pressure on margins. Versus last year, adjusted operating margin declined 90 basis points, reflecting 170 basis point decline in gross margin that was partially offset by lower operating expenses as a percent of sales.

Our lower volume in Q4, combined with pressure from the mix of sales, negatively impacted gross margin by 200 basis points versus the prior year. Our continuous improvement initiatives partially offset these factors, resulting in a net 170 basis point decline.

Lower compensation expenses compared with FY14 reduced our operating expenses as a percentage of sales by about 80 basis points. Earlier in the year we also implemented discretionary expense controls across the Company, as we reacted to the weak environment in many of our end markets. While this improvement in FY15 includes some benefit from our recent restructuring actions, the vast majority of those savings will be realized in FY16.

The fourth-quarter adjusted operating margin I have been discussing, excludes restructuring and asset impairment charges of $7.1 million, which impacted operating margin by about 120 basis points. Breaking these charges down, $5.2 million was in gross margin and $1.9 million was recorded in operating expense. The asset impairment charge and a portion of our recent restructuring was the result of workforce reductions in China.

In addition, as we assessed our production capacity needs over the next several years, we determined that we are no longer going to pursue our second campus in China at this time. As a result, we recorded a $2.9 million charge in gross margin to exit our partially completed facility in Xuzhou.

To be clear, over the long term we still see significant growth opportunities in China. However, we believe right-sizing our current level investment now, allows us to effectively maintain our competitive stance while also mitigating current economic risk and preserving our flexibility for the future.

Our fourth-quarter CapEx was $21 million, bringing our full-year CapEx to $94 million, which includes the capitalized portion of our investment in our global ERP system of $16 million. Cash flow from operations was $51 million this quarter and $213 million for the year. Free cash flow for the year was $119 million. Reflected in these results is a timing-related increase to our receivables, driven by the large number of gas turbine project sales during the fourth quarter.

With regard to our global ERP, we made good progress on this roll-out in FY15, with 37 locations across the Americas and Europe having gone live. As of now, roughly two-thirds of our revenue is being transacted through the new platform.

In 2015, we paid $91 million in dividends, an increase of 10% over 2014. We also repurchased 4.7% of our outstanding shares during the year, above our historic range of 2% to 4%, and slightly above last year's repurchase of 4.6% of outstanding shares. In total, we returned about 167% of net income to shareholders last year through dividends and share repurchase.

I'll now turn to our outlook for FY16. Starting with the top line, we forecast full-year sales of $2.32 billion to $2.42 billion, which translates to a range of plus 2% to minus 2% versus last year. The acquisitions we've completed in the past 12 months, including Northern Technical, IFIL USA and EPC, are expected to contribute between $15 million and $20 million in additional sales over FY15. However, our guidance excludes the Industrias Partmo acquisition in Colombia because the transaction hasn't yet closed.

Based on our planned forecast of the euro at $1.09 and the 124 yen to the dollar, we expect foreign currency translation will reduce our FY16 sales by roughly $85 million when compared to FY15, which is heavily weighted towards the first half of our fiscal year. Of course, rates have been volatile lately, with the dollar recently weakening against the euro and the yen, yet strengthening against other currencies. If rates stay at current levels, the net impact could drop by about $5 million to $10 million from the $85 million I just mentioned.

Excluding FX, we expect organic sales to increase between 2% and 6%, reflecting local currency growth in engine products of 2% to 6%, and industrial products of 1% to 5%. In engine products' first-fit markets, we see continued strength in the global on-road truck market and relative stability in construction equipment markets. On the other hand, the mining and ag equipment end markets are expected to be down further from FY15.

In the first-fit ag equipment market, given our exposure to the high horsepower equipment, we expect a decline of 10% to 20%, while the decline in mining is another 5% to 10% from FY15. Although we are forecasting utilization of the equipment already in the field to be flat, we expect to see modest growth in our engine after-market, as our proprietary first-fit technologies drive higher after-market retention for replacement filters.

We project FY16 end-market conditions in our industrial products to also be mixed. In our industrial filtration solutions, sales are expected to increase in the low single-digit range with stronger growth in replacement filters than first-fit. Gas turbine sales are forecast to decline between 9% and 13%, reflecting the impact from the oil and natural gas investment slowdown, particularly in the Middle East, due to the current low oil prices.

Full-year operating margin is forecast to be between 12.9% and 13.7%. At the midpoint, that's a 40 basis point increase over our 2015 adjusted operating margin.

There are several puts and takes in the forecast. On the positive side, we'll capture $30 million of savings from our FY15 restructuring actions. Additionally, we plan to recover some of the gross margin we lost in FY15 with ongoing production alignment actions. We will also expect to realize leverage on our expenses with the sales increase.

On the other side of the equation, there are several items which will create about 140 basis points of pressure on margin. Specifically, compensation expenses will increase by roughly $20 million as we reset our annual merit and incentive plans for the new fiscal year.

The expense portion of our new ERP system will increase by about $2 million as we bring more locations onto the system. We also expect $8 million to $12 million of net transactional impact from foreign exchange, since a portion of our purchases by our locations outside of the US are conducted in the now stronger US dollar. Our objective is to return to our pre-FY15 operating margins over the next two years.

Moving down the P&L, interest expense should increase by about $4 million, primarily reflecting debt issued in FY15, as we achieved our target leverage ratio of 1.5 time debt to EBITDA. Now that we've achieved this target, we expect our leverage ratio will remain near that level this year.

Our capital deployment priorities will remain consistent in FY16. We'll invest in the business and continue returning cash to shareholders. CapEx is forecast to be between $80 million and $90 million, a decline from last year, due in part to a lower mix of capital versus expense in our ERP as we move towards completing the full roll-out by the end of this fiscal year. The combination of our expected cash flow from operations, working capital improvement opportunities, and lower capital expenditures results in forecasted free cash flow of $200 million to $250 million, more than $100 million above the 2015 point at the midpoint.

Finally, we expect to repurchase about 2% to 4% of our outstanding shares. We forecast FY16 GAAP EPS of between $1.56 and $1.76. At the midpoint of this range, this would be a 5% growth from last year's adjusted EPS, against sales that are expected to be essentially in line with FY15.

Before turning the call back to Tod, I want to make two points on guidance. First, given that we're not expecting any significant adjusting items in FY16 at this point, our guidance is based on GAAP ranges. Second, while our normal approach to providing guidance is focusing on full-year versus quarterly expectations, we think it would be worthwhile to give a little color on how we expect FY16 to unfold, given the volatility last year.

Not surprisingly, the first part of FY16 has a more challenging comparison. During the first part of 2015 our end markets were healthier and FX had a much less significant impact.

With that in mind, we are expecting both sales and earnings per share will be down in the first half of 2016 versus last year and then up in the second half. More specifically, first quarter will be most challenged and then the year-over-year pressure will moderate as we move through FY16.

Finally, following Q1, we expect both sales dollars and EPS will increase sequentially in each of the quarters in 2016.

Now I'll turn the call back to Tod for his closing remarks. Tod?

Thanks, Jim. As I mentioned earlier, (technical difficulty) we made some meaningful progress over the last year on our growth initiatives, which include: expansion of our core business through first-fit program wins and after-market growth, continued geographic expansion, and disciplined execution of our acquisition strategy.

To provide a little more color, here are some examples. In terms of expanding our core, we remain very excited about PowerCore. Last year PowerCore sales grew more than 10% to $185 million, with growth in both engine and industrial.

In engine, which represents nearly 90% of the total PowerCore sales, sales growth of both first-fit and replacement parts significantly out-paced the total Company. Last year total engine first-fit sales declined about 15% while sales of PowerCore first-fit grew nearly 2%.

Similarly, PowerCore after-market sales grew 12%, or about 10 percentage points higher than total after-market. This outperform result indicates to us that we increased our market share and we further believe that the program wins over the past 12 months plant the seeds to suggest this growth trend will continue.

In 2015, we won a new engine air program on average every day, including a win rate of about 75% on our Must Win program. Importantly, nearly all the Must Win programs we've secured were won with proprietary solutions, and we've successfully retained 100% of the business where we were the incumbent. We had a very good year winning new air programs and planting seeds for future after-market revenue.

All together, we see incremental value to Donaldson over the life of these programs in the hundreds of millions of dollars. And those are truly incremental dollars, more than 80% of this value comes from new business where we were replacing a competitor's solution.

Now, keep in mind that that's our estimate today for the production value of these programs, and that value won't be realized until some point after FY16. However, we are very pleased with these results because winning the program with proprietary technology helps after-market retention for our customers.

The same opportunities to gain market share extends to liquids. And we're very encouraged by the program wins on our proprietary Synteq XP offering. Last year we were awarded well over 100 new programs and our pipeline is still full of opportunity. We're seeing strong response in both fuel and hydraulic, and Synteq XP is already used in more than 40 major OEM platforms. As we expand first-fit, we expect to see characteristics similar to PowerCore, with total sales growth outpacing that of comparable legacy products.

An exciting product introduction in our industrial business is Downflo Evolution, or what we call DFE. We recorded our first sale of this product in early FY15, and by the end of the year we had booked over $11 million of revenue and 360 systems for this new technology. We're now rolling this technology out to OE customers in Europe, so we expect strong growth to continue in 2016.

Turning to geographic expansion, we will build on the success we have had in Latin America. Although still a relatively small part of our total business, representing roughly 7% to 8% of sales, it's growing quickly as a result of our investments in distribution and after-market expansion. For 2016, we are forecasting local currency growth in the mid-teens, which is on top of local currency growth of 13% last year.

We also expect to continue building our dust collection business in Europe by focusing on after-market and investing in our sales force. Last year after-market sales in local currencies grew 10%, and we expect this growth to continue as we refine our sales model to capture more share in Europe.

Also in Europe, we will begin producing our liquid filters at our new plant in Poland, a $21 million investment, later this calendar year. Producing locally will make us even more reliable for our customers, while also mitigating some of the transactional pressures from FX.

Finally, we are very excited about the acquisitions we've announced over the past several months. Each of these acquisitions support one or several of our growth initiatives, including growing our replacement part business, expanding our product line and increasing our global presence.

Our focus in 2016 is centered on successful integration and quickly leveraging these acquisitions. We also remain interested in new acquisitions but we will stay disciplined in our approach.

While it's impossible to predict the opportunities that may emerge, it's more likely that any acquisitions in the near term will be bolt-on in nature. However, we also continue to explore adding a new filtration platform to our Company. As we head into FY16, we will build upon the success we saw last year by controlling what we can, which will be critical as we look to deliver organic sales growth between 2% to 6% in an environment that will be, at best, stable.

Before opening the line for questions, I want to touch on our goal of achieving sales of $5 billion by FY21. Let me start by saying that we absolutely see a path to grow our Company to $5 billion. The growth plans I outlined are critical to achieving $5 billion and executing against those plans is within our control. Outside of our control is the global economy and end-market performance, both of which remain challenged.

We routinely review projected market conditions and our assessment, which seems consistent with the outlook from large customers and competitors, is that meaningful turnaround in the next 6 to 12 months is very unlikely. Beyond that time frame forecasts become even less certain, so I want to acknowledge the corresponding uncertainty in our long-range plan. Until we begin to see sustained improvement in end markets, predicting the long range will be very difficult.

To be clear, that does not mean that we are changing our sales targets. The question is when we will hit $5 billion, not if we will hit $5 billion.

In the absence of meaningful macro tailwinds, we continue to focus on what we can control, which is remaining customer-focused and executing on our growth strategies. We are committed to growing sales and earnings and we will do so with the discipline we've demonstrated over the past 100 years.

Now I'll turn the call back to Taylor to open the lines for questions. Taylor?

(Operator Instructions)

We'll take our first question from Eli Lustgarten with Longbow Securities.

Good morning, everyone.

Hi.

Thank you for the color on the quarter, on the first and second half, given sort of flattish. I'm wondering if you can talk a little bit, you have very sharp declines in ag in your numbers and continuing decline, 10%, 20%; and 5%, 10% in mining or so. Is all that decline going to take place in the first half of your fiscal year, which is the rest of this year? Or are you seeing things for the full year that it just gets less and less? Are the profile of what's weak staying just at current levels and therefore it's a comparative issue? Or there's actually another step-down in production as you look out?

Eli, it's Jim. We do see a little bit of an additional step-down from what we've seen, but the biggest impact is year over year. The first half we were generally pretty healthy in terms of the ag markets on a relative basis. And then we also have the impact of FX hitting us significantly in the first and second quarters, more so than the third and fourth. So it's more a function of year over year, the impact of seeing that strength for the first half of the year that deteriorated as the year went down. We don't see that recovering.

To make sure I understand that, we know we have a serious comparative in the first half of the year. But as you get into calendar 2016 though, there is some modest step-down further from where we are at this point. It's what you're planning at this point. Is that a fair way of --?

That's true, especially when you come to the first-fit vehicle comparisons across the off-road markets. We don't see those same step-downs, we haven't projected those in the replacement parts business of course. We feel we have opportunity to continue to press into the markets and execute our strategies for share gain. But it is true what you're talking about on the first-fit.

And if we look at the gas turbine market, probably no surprises, the potential double-digit decline. Is that all in the second half of the year? Or is that -- will we see that's balanced? Such a lumpy business, when you can be down 10%-plus. Is that every quarter or do we hold up in the first two quarters and the drop off in 2016. Can you give us some feel for how the gas turbine business looks?

Eli, this is Jim. We actually see that decline starting at the start of the year. It's really throughout the year we see those comparative declines. Although last year first quarter was a little bit of a softer quarter, so I'd say we're probably in line with that. But it's a drop-off from the levels that we're seeing here in the fourth quarter.

But it's pretty much a step-down all year in that business, is what you're saying.

Yes.

From current levels.

Again, it's hard to predict quarters because of the timing shifts of some of those projects. But for the most part it's all year, keeping in mind first quarter last year we did have a slower revenue quarter and we see this year being similar.

And as far as the businesses that you have some optimism for next year, is construction and truck, I guess you go stable. Are you expecting modest improvement in construction activity for the rest of the year into next year? Or is that, again, just more of the same? Most of the forecasts for the heavy truck market are showing declines for 2016 over 2015. Is that's how you factored in the year, hold up the first half and declines in the second of half? Can you give us some feel versus what we're hearing from the truck companies at this point?

Eli, this is Tod. In construction, that's exactly right, we have a modest increase, so low single-digit increases throughout the year. And then when you talk about on-road, we actually have it a bit more mixed, so modest in the US, but more positive in Europe. Therefore, you roll those two together and you're low single-digits. It's not the double-digit increases that we experienced last year. It's more the zero to 5%, low single-digit range.

All right, thank you very much.

We'll take our next question from Laurence Alexander with Jefferies.

Good morning, this is Dan Rizzo in for Laurence. Given the FX -- I should say the weakening environment and everything that's going on, is that improving the M&A targets? Are you seeing more people willing to sell now, given how tough things are in certain end markets?

This is Jim. I really don't see that we've seen any impact from -- especially FX with regards to the M&A -- any seller's approach to M&A. It obviously impacts some of the economics in terms of how certain countries translate back to dollars or if there's competitive advantages. But no significant shift there. I'll let Tod comment on this as well, but I don't see any impact of some of the tougher end markets making any companies more available for sale.

I would agree with that. I don't see FX playing a role as a variable in any of these transactions or desire to sell. I also don't see more stressed corporations coming forward as a result of FX. We don't see that at all. It's a more normalized type of an acquisition environment, those two variables are not present.

I'm sorry, I meant just EBIT toughness, not FX. But in regards to FX, I know you guys have done a good job with your contract wins, but is a tough FX environment making more -- or I should say foreign competitors more attractive? Or is increasing -- translation aside, is it increasing competitive pressures on you guys in the different markets, in the different regions?

No, it hasn't. Our strategy as a corporation that we've developed long ago, is to manufacture within regions to support our regionalized customers. So where we're very mature across our air base, we can do that all throughout the world. So Europe for Europe, United States for United States, et cetera. We're a little less mature in liquid because it's an unfolding strategy over the last 10 years. We feel the pressure where we do not have that infrastructure built within region, as we grow our liquid business in a specific region. But that's the reason behind, for example, our Poland investment. We now have volume and it's time to serve our European-based customers on liquid from Europe. So you'll see us naturally have that as a strategy, and therefore probably won't point directly to what you're talking about.

All right, thank you guys.

And we'll take our next question from Brian Drab with William Blair.

Good morning, Tod, Jim and Bill.

Good morning.

Thanks for taking my questions. On the market share gains that you're talking about, Tod, it's interesting, the huge opportunity we know that you have with introducing all the new proprietary technologies. I was wondering if you could, in some way, possibly quantify in terms of geography, US versus Europe and end market, on-road versus off-road, maybe. What share gains you think you're getting there? And also you could talk about first-fit share and how that's changed and then what you're seeing in the after-market. I know it takes a lot longer to play out in the after-market, but any way that you could quantify for us what you're seeing in terms of share gains would be really interesting.

The bulk of the customers that we have on those first-fit opportunities are really US- and Europe-based. We do have the multinational decision makers that are in Europe and the Americas that then translate a win over into Asia, for example. But the decision makers being European- and Americas-based, that's where our wins come from. Then as our OEs globalize, we follow them in order to maximize that win, if you will. So that's where we are really focused. It happens to be a home game, if you will, so our European colleagues are winning in Europe, the US colleagues winning in the US. And that's the way we divide up our OE customer base. So Volvo, for example, would be held out of Europe and Caterpillar here out of the United States. And each account team would have a global team, but really the primary lead person in that region.

We're doing very well, therefore, in Europe and the United States. We can still do better for China-based customers. We have some wins there starting to get some momentum. Going to take a little bit longer based upon the pressures of that general economy. As far as market shares, in Asia I would say our market shares are low single-digits. So we have a very good opportunity. For Europe, our market shares are, say, high single-digits, so something like 8% to 12%. And then in the US it's going to be better than that. But they swing very differently based upon markets. So if your on-road market in the US is very different than the on-road market in Europe, and so it becomes very difficult to give you a meaningful one number on that. But I can assure you that we have plenty of opportunity ahead of us, if that's what you're curious about.

All of that's helpful. Go ahead.

Brian, it's Jim. One thing I was just going to add, in addition to the OE opportunities Tod's mentioning, a good example of where we're growing faster than the end market is Latin America, where in local currencies this year, specifically on our engine after-market businesses, we've been growing in excess of 10% for the year in local currency, where those end markets have generally struggled.

Okay, thanks. Just had a follow-up on Tod's comment on Europe, the 8% to 12%. What number is that referring to? What market are you referring to specifically there?

If I take a look at all of Europe and I try to macro-consider the off-road and the on-road, put it together, it's generally in that range, I would say.

Including first-fit and after-market, just in general?

Right.

Okay, thanks. And then I want to make sure I got this right. You mentioned that you're still seeing a choppy inventory destocking environment in the OE distribution channel. Are you seeing the same thing in the independent channel?

More of just caution. We're not being whip-sawed so much by the independent. It's just more caution with order quantities. Steady orders coming in, just less pieces at a time.

Okay. And then on the restructuring, I would like to put a finer point on the timing here and get a little more help in how to think about this one, building the model. The $35 million in annual savings, when did you achieve that run rate? Or when will you achieve that run rate? And then is there more restructuring to be done in FY16 and the timing of those charges? And what potential cost cuts will we see as a result of those?

Brian, it's Jim. In terms of the annualization of those savings, we got to about 90% run rate. There's a couple things that yet occur in the first quarter. There's a plant we're still in the process of closing in the US that won't hit full run rate until the end of the first quarter. But about 90% of the run rate will be achieved in the first quarter. And we got, of the $35 million, we got $3 million to $5 million of that in the fourth quarter of this year. So next year's number's about $30 million, given that we've achieved roughly $5 million of it already.

In terms of additional restructuring, we're continually fine-tuning our headcount, matching up our production employees with volumes. That's standard work that we're doing all the time. So while we don't call that out as restructuring, that's something that we're consistently doing, is trying to align our expense base with the end-market demands. So we don't have any restructuring planned at this point, but we have to stay tuned to what the end markets do.

Okay, thanks for all the details. Thanks.

We'll take our next question from Kevin Maczka with BB&T.

Thanks, good morning. Jim, said another way on that restructuring savings, so $30 million is the incremental number in FY16 versus FY15?

That's right.

Okay, got it, thanks. Going back to the engine guidance, up 2% to 6% local currency, I guess we were negative 1% in 2015. Listening to your comment, I didn't hear a lot that sounded like it was plus 6% or better here. It sounds like truck and construction may be low single. Of course mining and ag are still down sharply. And even the after-market maybe only modest growth. So can we revisit some of those details? And what is the scenario whereby we'd be up in the 5% to 6% range?

Kevin, I'll start on that. A couple things in terms of the local currency growth. As you recall, third quarter of this year we really started to see a significant decline in our engine after-market business, partially due to end-market weakening, but also due to inventory adjustments that we saw on the OE channels, all the way through the end of the year. In our forecast or plan, we expect that to normalize and not recur. So that's a little bit of a lift on our after-market year over year.

Additionally, some of our end markets that have come down significantly, even though we're not projecting significant increases, we, to the extent these end markets are stable, we'll be able to continue to deploy equipment out in the field to grow our replacement parts that are proprietary in nature, which we project to grow double-digits still with respect to that. So after-market is a positive. Additionally, we do have some new programs that are launching, that will launch into lower volumes than we originally anticipated. But those will begin to launch, in terms of some of the liquid programs we've talked about and some other wins.

Just adding, if you summarize that, Kevin, it's as you said, construction and it's on-road. Both of those are positive on the first-fit side. And then really it's all of our after-market investments, our after-market initiatives such as those new distribution centers in Colombia, as well as pressing forward with more sales people in Europe and our activities in the US.

Got it. And then shifting over to special apps, specifically the disc drive portion of that, what are you seeing there as you look out? I know that business has been under pressure with the tablet PC shift, but it seems like a lot of PCs now are shipping without disc drives all together. So there's maybe some additional pressure there. What do you see for that business in 2016 and longer term?

This is Tod. What we look at in that business in 2016 is essentially a flat business. We have very good relationships and very good share with our customer base. We have opportunities for additional share gain to offset any weakness that we would see in that market. So we see in 2016, at this point, a pretty flat business. Longer term, it's an interesting conversation because ever since I've been at Donaldson, people have been calling death to the disc drive and it really hasn't happened. So we see long term that this is really still a strong business for us. We have to continue to keep up with the drive makers, as they migrate technology into larger platforms and so on. And we believe we have the technology to do so, but we believe that has a long-standing future for our Company.

Okay, thank you.

We'll take our next question from Brian Sponheimer with Gabelli & Company.

Hi, good morning, Tod.

Good morning, Brian.

Tod, strategically how are you thinking about the business relative to your own expectations three to four months ago, when you became -- when you took over for Bill. Has there been any change given the overall market environment? I know you spoke to the $5 billion in sales being a matter of when and not if. But talk about how that's progressed as you've seen the last four, five months take place.

Well, certainly the overall macro view that I had coming into this position took a pretty strong turn in March and April. And so it put us a bit more defensive than offense, playing offense, than we wanted. That's absolutely sure. That's a significantly different look than coming in. However, behind all of that, those are things and cycles that Donaldson Company has experience dealing with. We know how to do that work. It's not fun work, but we do that very well. We stay disciplined in our financial and fiscal management. We'll continue to do so.

But what hasn't changed is the base and foundation of our strategy, in that we're a technology-led filtration Company. And we need to continue to press forward with that to execute well for growth on $5 billion. I talked a lot about those program wins. Those program wins that I talked about will not bring revenue in FY16; and that's unfortunate because we'd all love to have more revenue in FY16. But those are very critical for $5 billion and 2017 and 2018 and so on, because you can't lose those programs. If you lose those programs you put the long-term health of the Company in jeopardy, and I'm very proud to say that we are winning. And so that hasn't changed, that outlook. Surely FX and all those things we can't control, are going to force to change the year of $5 billion. But how we slice that pie and what it looks like at $5 billion, that still looks very same.

Given that the balance sheet is in terrific shape and you have made a few acquisitions of the smaller variety, talk a little about the potential portfolio of assets that are out there. I know you mentioned that end-market volatility isn't really changing much. But is your scope on M&A potentially getting a little bigger? Or -- I'll leave it there.

So about 14 months ago we took a good, honest, hard look at our self and said we need to make our process more robust. We had, as part of our strategic growth plan, 1% to 3% over time of growth through acquisition. And we had only done one in the last five years. So it's we were just honest with each other and said look, we're not performing to our promise. So we refurbished the whole process, and I think you see the results now. The way we started that, is we started with every business, with what is the strategy that they have in the business and where is there an opportunity to accelerate a piece of that strategy through expanding the product family, adding a channel, some variables that we were going to take a little be bit too long to add to that portfolio, create a target list and go start knocking on doors. And we're having some success.

I want to say it that way because I want to emphasize we're staying very disciplined and we are not playing on the fringe. We are playing on strategic bull's eyes and I'm very comfortable with that process. And that is the process we'll continue to use as we go forward. The one we announced yesterday, after Industrias Partmo closes, that's four acquisitions for our Company in 12 months. I'm not saying that every year we'll do four acquisitions. That's not a promise we're going to make. I'm just saying that we have a process we're very proud of now and we'll stay disciplined in our process. We'll continue to use that as part of our overall strategy.

Great, thank you so much.

(Operator Instructions)

And we'll go next to Rob Mason with Robert W. Baird.

Yes, good morning. Real quick, housekeeping. Jim, do you happen to have the first-fit versus after-market split, total Company for the quarter?

Yes, just give me one second.

And maybe if you're looking for that, the liquid filtration revenue in the quarter as well.

Yes, the liquid filtration -- I got the year, one second. So the split between replacement and first-fit total Company is -- for the quarter or for the year?

For the quarter, if you have that. If not, the total.

We were about 69% replacement, 31% first-fit for the quarter. I'm sorry, bear with me. And 57%, 43% for the year.

Okay.

And then I'm finding the liquid here.

Sure.

While Brad looks that up, maybe we could move to the next question.

Sure.

I've got the liquid.

Okay.

So liquid for the quarter was $120 million.

Okay. Could we drill down into the IFS business, just a second. The expectation will grow low single-digits in 2016. How does that shake out between the after-market and the first-fit side? And specifically on the first-fit side, I'm curious how -- you mentioned some quoting activity in the US, but I'm curious how your exposure to capital spending globally is in the first-fit side of IFS.

This is Tod, I'll start. Our exposure to capital spending globally for our IFS business, or dust collection business, is significant. That is the first-fit portion, or the equipment portion, of that business. It's clearly a good indicator, as capital spending has come down, that business has also softened. And we see a pretty good correlation there. It's true in Europe and it's true in the United States.

However, when you see capital spending come down, that does not correlate at all to the replacement portion -- the replacement parts portion, of that business. For example, we've had somewhat modest CapEx spending in the US all last year for dust collection. And so you'll see that in our first-fit, more modest first-fit growth. But our dust collection after-market in the US grew double-digits last year. So there's a different indicator. It's more machine use for the after-market.

More pointedly, would we expect the first-fit side of IFS to grow in 2016?

Yes.

Okay. And last question, Tod. I know this past year, 2015, was a tough year to call with the OEMs and some of your channel inventory activity moving around pretty volatile. Similar situation, I guess, in 2013, difficult to call those as you move through the year from a guidance standpoint. Has there been any -- since you've come on, have you and Jim incorporated any difference, maybe changes to your forecasting methodology? So that as you enter 2016 you're able to get a little bit more confidence around the guidance you're delivering today?

Yes, Rob, this is Jim. We have certainly taken into account the challenges we've had, as we've, in many cases, chased some of the end markets down. We typically, going back a year ago, would have taken the best estimates we can get from our customers, the other intelligence we can get, and make our call in terms of our guidance based on that. The challenge is, our visibility in many of our end markets isn't more than 30 to 60 days in some cases. What happened over this past year was we came out with our best estimate, and a matter of weeks later some of those numbers changed.

So we have tried to take into account the fact that these end markets are very uncertain, and contemplated that as best we can. It's just very difficult when the end markets were changing as volatilely as they were, to adjust our guidance. But we have taken some steps to try to address that.

We have. And last year was clearly difficult. We baked in Caterpillar's guidance that they were going to go down $5 billion. Now they're down another $1 billion. People are all trying to understand what are the variables within that. We have stepped back and tried to make sure that we really canvas the entire organization to make sure we have the best information to roll up into our forecast.

Okay. Understand the challenge. Thank you.

Hey, Rob, before you leave, I apologize, but as I was grabbing those numbers, I grabbed the wrong first-fit replacement. So let me give you the corrections.

Sure.

For the quarter it's 57% replacement, 43% first-fit and for the year it's 56%, 44%. I think one of the numbers I might have grabbed was engine only. So I apologize.

Okay, thanks. Appreciate that.

We'll take our next question from Larry Pfeffer with Avondale Partners.

Good morning, gentlemen.

Good morning.

Just a couple questions on the guidance range again. Do you have an underlying industrial production both in the US and internationally assumption for your FY16?

Larry, each of the end markets operate differently. On the industrial dust collection business we'll look at machine tool indexes and those types of things, which even vary by region. So there's not one index we can look at. Gas turbine we look at some of our major OE customers' projections and take into account what kinds of win rates they're getting, because then those will be our opportunities. Special applications, we talked a little bit earlier about disc drives. We'll look at PC builds and some of those statistics. For the overall industrial groups, given our businesses are in so many different end markets, there's not just one index that we can point to, unfortunately. It makes it challenging.

I was more asking are you expecting a similar pace in the overall industrial environment to what we're seeing right now as you move through the end of this year, into next year?

Yes, I'm sorry. So yes, we're not forecasting any significant improvements, but at the same time it, again, varies by geography. We're less optimistic in places like China or Asia-Pacific than we are in the US and Europe. That's fairly consistent with what we're seeing today.

Okay. And then do you have an overall market share gain assumption built into your engine guidance?

Larry, this is Tod. The way we look at each year is we believe that -- and we hold our self accountable, to gain between 2% and 4% market share gain across our businesses. And that's what we ask of our leadership. That's within our overall growth model.

Okay, fair enough. Thank you, gentlemen.

We'll take our final question from Charley Brady with SunTrust Robinson Humphrey.

Hi, morning, guys.

Good morning, Charley.

Just a quick one on the -- with regard to the mix and the margin expectation in FY16, are you expecting any material shift in that first-fit replacement mix to drive any of that margin? Or is it the 57%, 43% we saw in the quarter? Or, I guess for the year, 56%, 44%, give or take a percentage point. You're not looking for a major shift there, or are you?

No, Charley, this is Jim. We aren't seeing any significant shifts there. A lot of our improvement opportunities are -- Tod mentioned localizing production. We have taken a look at how -- third quarter, the volumes really dropped on us unexpectedly, and we had worse absorption of some of our fixed costs than we would have liked, so we tried to adjust those types of things. But there's not a dramatic mix shift that we're forecasting for next year.

Okay, great, thanks. That's all I had.

And we have no further questions. I would now like to turn the conference back over to our speakers for any additional and closing remarks.

That concludes today's call. I want to thank everyone for their time and their continued support of Donaldson. Most importantly, I would like to thank all of the Donaldson employees for what they do every day to help make our Company the filtration leader. Have a good day, good-bye.

And this concludes today's conference. Thank you for your participation. You may now disconnect.