Donaldson 4Q16 Earnings Call Notes

Tod Carpenter

Restocking but urge caution

“In the quarter, we also saw some positive macro trends with restocking being the most notable. As an aside, I feel compelled to add a bit of restraint to the recent enthusiasm regarding market conditions. Beyond restocking the signs of stabilization are becoming more apparent; key measures like commodity prices, rig counts and industrial production all appear to be moving in the right direction. While these trends are encouraging there is still uncertainty relating to the timing of sustainable demand driven growth.

The mixed outlooks provided by our large customers reinforce the point that it is unlikely that we will see a meaningful turn prior to the end of our fiscal year in July. There is also lingering uncertainty related to policy changes and global economic conditions, which is underscored by the dramatic exchange rate fluctuations in recent months.

While our assessment may seem conservative, we believe a cautious stance is appropriate because it gives us flexibility to react to market changes. Turning back to the recap of engine sales strengthened aftermarket off-road and aerospace and defense, offset continued weakness in on-road.”

Encouraged but cautious

“Thanks Scott. To summarize our sentiment we are encouraged by overall end market conditions but not yet confident that sustainable market growth is right on the horizon. We are however confident in our strategic priorities and our ability to maintain our focus on those things that are within our control. More specifically we continue to act with the future in mind. Our sales teams are in this field building and deepening our customer relationships while our engineers are developing new and innovated filtration techniques and products.”

Not sure where we are in the restocking cycle yet

“Sure, this is Tod. Relative to restocking and where we are in the cycle of restocking it’s really tough to say. What we have seen clearly is good execution and share gain. We’ve seen restocking. As far as the third component end market increase, really unclear at this time. On the restocking I want to remind you that our sales on the independent channel are roughly 60% of our aftermarket and our OES channel is 40% and you’ll see less of a restocking phenomenon in the independent channel than you will on the OES and we are seeing it on the OES. So where we are within that particular cycle of restocking, it’s not sure, we’re not sure.”

Some people getting more positive on mining

“Sure, I think what you see are articles about the actual mining operators and producers like the Rio Tintos of the world coming out a little more positive on their balance sheet recovery et cetera, and so that’s getting people more positive about the mining sector. But for us it’s really about vehicle utilization and overall quantities of that product, that’s been shipped. And so we continue to look for vehicle utilization.”

Scott Robinson

Certainly some inflation coming

Yeah, there is certainly some inflation coming. We monitor our commodity prices every day and they are providing a little bit of a headwind going forward. We work to mitigate that, but that’s something that we are aware of.