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.

Donaldson FY 4Q16 Earnings Call Notes

Donaldson Company’s (DCI) CEO Tod Carpenter on Q4 2016 Results

The impact form destocking is becoming less significant

“Overall, we still believe the impact from destocking is becoming less significant; however, there is still enough variability in week-to-week ordering to suggest that both off- and on-road customers have yet to find a stable bottom.”

Expect continued declines in fiscal 2017

“As we transition to fiscal 2017, our performance on the overall market conditions is still somewhat guarded. We expect that global production of heavy-duty equipment will decline across all of our end markets.”

Decline in agriculture, mining and construction equipment

“Within off-road, we estimate that production of agriculture and mining equipment will continue their multitier slowdowns with declines of another 5% to 10% each. We also expect the year-over-year decline in production of construction equipment, albeit in a bit more modest, flat to down 5% range.”

Pressures are not new, although pace of decline has moderated

“There are a wide range of factors pressuring these off-road markets but they’re not new. For example, depressed commodity prices, the impact from the oil and gas slowdown, and a decline in overall infrastructure spending has been affecting production for some time now. We have definitely seen a moderating pace of decline but it is clear to us that there is still some uncertainty.”

China has been difficult but it’s important

“China’s been difficult due to their end markets and their clear GDP pressures. We have restructured China to align our company with the realities of that market. However, we still believe in China and it’s a very important market for our long-term strategy. We continue to invest in China to make sure that we press forward with our innovated products both on the Industrial and the Engine side, and we continue to have wins in China. So long term, we still stay the course with China because we believe in it and it’s important for us.”

I’m encouraged

“I use the word encouraged because it’s been a tough slog for the last 18 months and it’s been a walk down that has been tough to get through. And I think as I look forward, the range of possible outcomes has certainly narrowed significantly for our company. And so the encouragement is that while I’m not ready to call bottom, I am encouraged by the fact that we’re a little bit more predictable than we have been at any time in the last 18 months.”

Scott Robinson

Repurchasing 2-3% of our outstanding shares

“In terms of capital deployment, we remain focused on our core priorities; invest in the business, pay dividends, and to the extent our balance sheet allows repurchase shares. We are forecasting capital expenditures between 70 million and 80 million and we expect to repurchase between 2% and 3% of our outstanding shares.”

Expecting EPS between $1.50 and $1.66

“Altogether, we expect fiscal 2017 earnings per share between $1.50 and a $1.66. As of today, we are not forecasting any impact from adjusting items, so GAAP and adjusted EPS are expected to be one and the same.”

Donaldson FY 1Q16 Earnings Call Notes

Donaldson’s (DCI) CEO Tod Carpenter on Q1 2016 Results

Mining and ag have remained weak and are unlikely to rebound in the near term

“Mining and agricultural end markets have remained particularly week. And perspective from some of our largest OEM customers suggests that build rates are unlikely to rebound in the near term.”

Outlook for construction equipment market has worsened

“Since our last update, our outlook for the construction equipment market has worsened. We now expect that sales will be flat to down 5%, compared with a more stable outlook in our prior guidance.”

Slowdown in heavy duty NA truck

“The anticipated slowdown in heavy-duty North American truck production next year is well documented, and we have been including that in our forecast.”

Our order intake slowed as we got towards the latter half of the quarter

“what we did see is that our order intake slowed as we got towards the latter half of the quarter. And that was one of the considerations when we looked at our guidance, is that we entered the year with a fairly healthy backlog, but as the quarter went on that began to get depleted, even though we were shipping fairly strongly throughout the quarter. So as we ended the quarter, we were less optimistic, particularly in the U.S., with regards to the project inventory, or project-related sales and I think that’s the biggest difference since three months ago.”

The softening we see in construction is from a global perspective

“The softening that we see in construction is really we’re talking about from a global perspective. So we saw additional softening in some geographies like China. We clearly see it hard in Brazil right now. So when we roll it up comprehensively, it’s not necessarily driven for us by an end-market in our comments to you on why we’ve reduced that outlook, it’s more a geographic rolling up to a consolidated number at the company level.”

We know there’s a decline in truck builds coming

“we know that in the U.S. first rate truck builds there is a decline in the future, and we’ve just tried to take a more cautious approach in the second half of our fiscal year and bake that in for the U.S. market.”

JS Notes: TTC, PDCO, DCI

Toro (TTC) CEO Mike Hoffman says the company’s products stand to benefit from increased demand for their micro-irrigation products as a result of the drought in California

“As the regulatory environment changes that will create opportunity, if you are farmer there and only going to get so many acre feet of water than the ability to use that more precisely to maximize your productivities going to matter, that will be slow but it’s clearly moving in the right direction and as we said before in micro irrigation side of the business. It’s the right end of the continuing to beyond, we just need to manage water more precisely and these products do it better than any other.”

Toro (TTC) CEO Mike Hoffman says the company continues to increase their U.S. market share primarily from competitors with less scale

our market share in North America is somewhat higher than our worldwide share, there are certain markets, where we don’t have a strong presence, we continue to work on that; we’ve — North America would be one of our stronger markets on Western Europe, we open there remaining of them few years back to give us a stronger presence in Eastern Europe, and we’ve talked about China in the past; but the U.S. actually would be of the group, probably the strongest.

 

 

 

Patterson (PDCO) CEO Scott Anderson says we’ve reached a cyclical upturn in the “dental market economic cycle” where a significant amount of Dentists will begin to remodel their office utilizing Patterson’s services

I would say we’re starting to see signs of life in terms of the new office construction. We’ve always been very consistent talking about, as the dentists gets busier and is more confident about their book of business and their practice, is when they’re more likely to start making more major investments in physical plans in terms of new office builds or remodels. So, as we look out, I think over to the next one, two, three, four years, we would see that business beginning to accelerate, but at the same time, accelerating in a way that doesn’t cannibalize the technology opportunity, which we feel still has a very long runway and greenfield in front of us, as we move the profession to more modern practices.”

He also says the firm is also benefitting from Dentist’s desire to make their dental office equipment more digitally compatible

“The pace of technology sales growth during the quarter further supports our belief that dentists are eager to invest in technology that improves patient experience and clinical outcomes. It also affirms the overall trend for dental office modernization.”

 

 

 

Donaldson (DCI) CEO Tod Carpenter says that mining equipment orders continue to slow even after declining for the last several years

“When we take a look at mining and we take the inputs from our customer, it’s clear across our customer base that mining is taking another step down after multiple years of decline. We had  previously had and guided our first-fit portion of that business to be down 10%. We’ve now taken that down to 15% to 20% within our model. So mining, globally, is really creating more headwind than we had originally predicted. That’s a big one on us.