Rich Sheffer – Investor Relations Bill Cook – Chairman, President and CEO Jim Shaw – Vice President and CFO

Hamzah Mazari – Credit Suisse Kevin Maczka – BB&T Capital Markets Charlie Brady – BMO Capital Markets Eli Lustgarten – Longbow Securities Jeff Farmer – Jefferies & Company Rob Mason – Analyst

Thank you, Anisa. And welcome everyone to Donaldson’s fiscal 2012 first quarter earnings conference call and webcast.

Following this brief introduction, Bill Cook, our Chairman, President and CEO; and Jim Shaw, our Vice President and CFO, will review our record first quarter earnings and our updated outlook for fiscal ‘12. Next, I need to review our Safe Harbor statement with you.

Any statements in this call regarding our business that are not historical facts are forward-looking statements and our future results could differ materially from the forward-looking statements made today. Our actual results may be affected by many important factors including risks and uncertainties identified in our press release and in our SEC filings.

Now, I’d like to turn the call over to Bill Cook. Bill?

Thanks, Rich, and good morning, everyone. As you’ve probably already seen in the earnings release we’ve issued earlier this morning, we are very pleased to report that we had a very good first quarter.

We set first quarter record for sales and all-time records for both operating margin and earnings per share. This continues a streak of records that began in last year’s second quarter.

I will now take a few minutes to briefly review our first quarter results. Our sales were $608 million, up 13% year-over-year.

While we did have some help from foreign currency translation in the quarter accounting for about 2.5% of the increase. It’s important to note that organic sales growth excluding the currency impact was 11%.

The combination of our 11% organic sales growth and a 14.8% operating margin delivered a net income increase of 29% and an EPS record of $0.90 per share. As you know, we have two reporting segments and I’ll now cover a few highlights for each.

In our Engine Products segment, local currency sales increased 16% over last year. Our Engine Aftermarket or replacement filter business sales were up 10% as utilization rates of existing truck and Off-Road equipment fleets continued to improve.

We’ve also continued to add new distributors and almost -- and part number -- and also added almost 500 part numbers to our product offering. In fact, we added 58 new distributors during the period August and September alone, and most of these in emerging markets.

Consequently, we believe that a portion of our sales growth in the Aftermarket is a result of our increased market share. Our two OEM -- engine OEM businesses were also both up strongly in local currency terms.

Our Off-Road Product sales were up 26% as the agricultural, construction and mining end markets we serve have continued to strengthen and increased demand for our customer’s new equipment upon which our filtration systems are installed. On-Road product sales were up 43% as North American new heavy truck build rates at our customers have continued rebounding.

Switching to our Industrial Product segment, local currency sales increased 3%. Revenues from our industrial filtration solutions products increased 9% as sales of our Torit dust collection equipment continued to grow in the quarter.

In addition, our sales replacement filters for the -- those systems already installed in the field have remained strong. Sales of our Special Applications Products decreased 9% as the rapidly growing sales from our newer product lines serving the membrane and venting end markets were offset by the flooding in Thailand and its impact on the disk drive market.

Now let me take a minute to further explain this situation in a little more detail. As many of you know, we have two clean room production facilities where we manufactured our disk drive filters.

One is in Thailand and the other in China. Our clean room in Thailand is located southeast of Bangkok and outside the flood plain so it has remained fortunately high and dry during the floods that began ravaging a large portion of Thailand in October.

However, many of our disk drive customers and many of their other suppliers in Thailand were or still are currently underwater. While these companies are looking to shift production to other facilities as rapidly as they can, there are severe supply shortages of some critical drive components that will cause disk drive industry volumes to contract by an estimated 40% over the next couple of months.

It is estimated that it will take months for our customers to fully bring their production capacity and supply chains back online. In response to these conditions that our customers we’ve adjusted our production schedules in both Thai and Chinese facilities.

It’s important to note that while the disk drive filter business is a very important business to us, as a result of our aggressive diversification efforts over the past 10 years, it now represents about 5% of our total sales, so it’s not a major part of our total company. Finally, we hope for a quick and full recovery from this disaster for the country and people of Thailand, including and especially our 1,100 fellow employees.

Now, getting back to our release and talking about sales by region. We had good growth in the Americas and Europe where our local currency sales increased 16% and 10%, respectively.

In Asia, our overall local currency sales growth was 4% in the quarter, obviously impacted by the issues in Thailand I just discussed. However, excluding our disk drive filter sales, the rest of our Asian businesses grew at 10% rate in the quarter.

Now going to turn the call over to Jim Shaw for his comments on our operations, before I discuss our fiscal ‘12 outlook. Jim?

Thanks, Bill, and good morning, everyone. Our gross margin was 35.3% in the quarter, up 30 basis points from last year.

There were some plusses and minuses in our gross margin number which I’ll walk you through. First, even though we did see some easing in the market prices of purchased commodity costs during the quarter, we did still experience higher costs when compared to year ago levels.

This was worth approximately 60 basis points. Much of the commodity cost increase we experienced was related to the April expiration of steel contracts in the U.S.

and increases in petrochemical-based raw materials, such as plastics, urethanes and adhesives. While the costs of some commodities did begin moderating during the quarter, it is likely that we will continue to experience some negative year-over-year comparisons for the next two quarters.

In addition, mix was also slightly unfavorable by 20 basis points as our first fit sales grew faster than Aftermarket sales in the quarter. On the positive side, our continuous improvement initiatives and selective price increases combined to increase margins by 110 basis points.

So in total, our gross margin was up 30 basis points from last year’s margin of 35%. Our operating expenses remain well under control, coming in at 20.5% of sales, which was down 70 basis points from last year.

The improvement in the operating expense percentage over last year comes from increased leverage of our fixed costs due to the higher sales levels, partially offset by selective investments we have made over the past year to support our strategic growth initiatives. In addition, while we assess the direction of the global economy, we did selectively slow our planned headcount additions during the quarter.

With much uncertainty remaining and many regional GDP forecasts being reduced, we’ll continue to be measured in the pace with which we add to our fixed expense levels. Our operating margin came in at 14.8% this quarter which is a record.

Looking at our operating margin forecast for fiscal ‘12, we expect the impact from recent increases in our purchased raw material costs to moderate over the next couple of quarters and that we’ll continue to benefit from higher volumes as we leverage our fixed costs and benefit from our continuous improvement initiatives. In total, we continue to expect our operating margin for fiscal ‘12 to be between 13.7% and 14.5%, which means that anything above the bottom of this range would represent another full year operating margin record.

While we don’t provide specific quarterly guidance, it’s important to note that there are several factors that normally make our second fiscal quarter margin the lowest of the year. First, there’s fewer shipping days due to Christmas and New Year’s holidays with some customers fully shutdown during that timeframe for annual maintenance.

Also, Chinese New Year occurs in our second quarter this year. Last year it occurred in our third quarter.

These holidays will impact the absorption of fixed costs in the quarter. In addition, the floods in Thailand and their impact on the disk drive industry will result in a drop in customer orders for that business unit.

Finally, our annual stock option grants occur in the second quarter, so about half of our expected $7 to $9 million of annual stock option expense is expected to be incurred in the second quarter. Our effective tax rate was 25.5% in the first quarter versus 26.2% last year.

In both this year and last year’s first quarters we had tax benefits related to the favorable settlements of tax audits. This year’s benefit was $4.3 million, compared to $2.7 million last year.

Based on our projected global mix of earnings in fiscal ‘12, we expect our tax rate to be between 27% and 30% for the full year. Our first quarter CapEx came in at $18.5 million, during the quarter we continued to work on new air filter plant in Aguascalientes, Mexico, which will add more filter manufacturing for the fast growing Latin American region and also allow us to use our existing plant in Aguascalientes for a significant expansion of our liquid filter production.

We expect this new plant to open in February. In total, we expect CapEx spending of approximately $100 million this year as we are continuing to invest globally to meet our strategic growth plan.

We have many new projects included within our $100 million of CapEx this year and we expect these will positively impact our corporate ROI once completed. Approximately 25% of this year’s CapEx is for capacity expansion, another 25% is for tooling for new products, 25% will be related to cost reduction activities through our continuous improvement initiatives and the final 25% will be for to technology initiatives.

We expect depreciation and amortization to be between $60 and $64 million this year. Free cash flow was $39 million this quarter.

As mentioned, CapEx was $18.5 million, compared to $10 million in last year’s first quarter. And working capital was a use of cash this quarter as we continue to grow our business.

We expect free cash flow will be $260 to $290 million in fiscal ‘12. We repurchased about 1.4 million shares in the quarter or 1.8% of our diluted outstanding for $74 million.

This was the primary driver for the $79 million increase in short-term debt this quarter. Even with this increase, our debt-to-cap and debt-to-EBITDA ratios remain low at 27.9% and 0.9%, respectively.

We expect interest expense in fiscal 2012 will be between $11 and $13 million. Our balance sheet remains strong with $302 million of cash.

So with that, I’ll pass it back to Bill who will provide additional details on our outlook for fiscal ‘12. Bill?

Thanks, Jim. As all of you well know, there have been many discouraging economic reports in the media since August.

Earlier this month many regional GDP forecasts were revised downward again. So we continue to operate in a very uncertain climate.

The much better news is that we got off to a very good start in fiscal ‘12 the evidence is in the first quarter results. Also, our backlogs and coming orders remain healthy and while we see some moderation to our incoming order trends in a few regions, we see sufficient strength globally to retain our overall sales outlook for the year.

So we continue to expect our full year sales to be between $2.45 and $2.6 billion or an increase of between 7% and 15% over last year. Bottom line, we continue to see growth opportunities and we expect that we will grow faster than the averages through the introduction of new filtration technologies and products, and also by increasing our sales in emerging geographies.

Now I’ll review our outlook by segment. Our full year Engine sales are forecast to be up 8% to 15% over the prior year.

Within our Off-Road Product sales we expect continued strong demand for our OEM customers, ag, construction and mining equipment, as the average age of the equipment in the field remains historically old, which should support an ongoing equipment replacement cycle. We are also forecasting a continued strong recovery in our On-Road or heavy truck product sales as the North American forecast for heavy truck build at our customers is expected to increase from the 154,000 they did last year to about 255,000 this year calendar ‘11 and increase again in calendar ‘12 to approximately 280,000.

The current truck fleets also are historically very old, indicating the need for continuation of the current replacement cycle. In Europe, truck build rates are also expected to grow, although at a slower pace than in North America.

Finally within our Engine segment we expect our Aftermarket or replacement filter sales to remain strong. The demand for replacement filters is a function of the increased utilization rates within the existing fleets of heavy trucks and Off-Road equipment currently in the field.

In addition, as I mentioned earlier, we’re aggressively working to further expand our distribution networks especially in our targeted emerging markets. Now switching to the outlook for our Industrial segment.

Our sales are forecast to be up between 7% and 15% over last year. We expect Industrial Filtration Solutions sales to be up also 7% to 15% as customer demand for new industrial filtration or dust collection equipment continues to improve as new plant and manufacturing equipment capital spending increases.

We also expect our replacement filter sales to continue to grow, again with the increased utilization by our customers of those dust collection systems already installed in their plants or in the field. We expect the demand for our large gas turbines used for power generation to begin rebounding in fiscal ‘12 and demand for the smaller turbines used in the oil and gas end markets remain strong.

Overall, we expect our gas turbine product sales to increase between 18% and 25% in fiscal ‘12. And finally within our Industrial segment, we are now forecasting our special application sales to decrease between 1% and 7% year-over-year, primarily due to the impact I mentioned earlier of the floods in Thailand on our disk drive filter sales.

Incorporating this sales guidance into the operating guidance that Jim covered a few minutes ago, we have increased our full year EPS forecast for fiscal ‘12 to be between $3.25 and $3.50 per share, which would be a new record. Now, I’d like to switch gear and give you a quick update on some of our new technologies before we wrap up our prepared comments.

Over the past few years, we’ve highlighted our PowerCore technology, as a great example of how we continually introduce new filtration technologies for our customers in order to help them both grow their and our businesses. Our first generation PowerCore was a tremendous success and our success -- our second generation of PowerCore or G2 as we call it, looks like it will be every bit as successful as it delivers yet another breakthrough in air filtration.

During the last quarter, we won four new programs with our G2 technology and there are another 15 programs in the proposal stage and we’re working hard to win as many of those as we can. In the quarter, our engine PowerCore sales totaled $24 million, up 24% over last year.

On the Industrial side of our business, we’ve introduced our third Torit PowerCore product in May. This new product line is targeted towards the high abrasive, heavy loading mining and metal working market segments.

For our customers, this product offers many advantages including that it is up to 70%, that’s 70% smaller than competitive collectors. In our first quarter we sold another 280 Torit PowerCore systems, which accounted for over $3 million in sales.

We’ve talked a lot about our plans to grow our liquid filtration business and we’ll continue to make progress in that market. We unveiled our new SELECT fuel filters with our proprietary Synteq XP media at the CONEXPO Show in March and we’ve already won six OEM platforms with this technology and interest remains high for this new generation of diesel fuel filters.

Finally, we’re continuing development in liquid filtration on our next generation of Duramax hydraulic filters. When launched, we expect these filters will offer customers improved filtration performance and longer filter life.

So to summarize, we’re off to a good start to fiscal ‘12 with record sales, record margins and record EPS, and looking forward we’re projecting record full year sales and earnings. We will continue to focus on developing new technologies and products to help meet our customers’ changing filtration needs.

We will continue to make the key long-term investments in our business to achieve the $3 billion and $5 billion sales targets we established in our strategic growth plan. Anisa, that concludes our prepared remarks.

Now, we’d like to open it up to questions.

Good morning. Thank you.

The first question is just, if you could just touch on your European exposure, what you’re seeing there, you spoke of some moderation in order trends, maybe if you can touch on which businesses you’re seeing that in? And maybe frame for us how quickly you can react if you see a significant pull back in the macro and whether the work that you did in the last downturn, whether there’s some structural benefits there that will materialize going forward as well?

Hamzah, this is Bill and I’ll start. Good morning.

I think as we mentioned in our comments, the -- generally uncertainty in the global economic environment and I think Europe is one area that we focus a lot of time and attention to. And I’ll start by saying that, we did make adjustments to our forecast in Europe and some of that’s related to our engine OEM business and what we see with our customers going there.

And that’s incorporated in our guidance, so we’ve already incorporated our latest view in terms of what we things going to happen. We’re going to continue to obviously very closely monitor what’s happening over the next month or two especially as we get through the holidays.

And I think to your last point, we really focus in our business in terms of both gathering the intelligence in terms of what’s going out there. And then as we did three years ago, if we have to make adjustments, we strive to react very quickly to try and stay ahead of it.

But we didn’t see a dramatic change in our end markets. We saw some moderation and that moderation is baked into the outlook that I talked about earlier.

If it changes, we’ll react quickly.

Okay. And then on the selected price increases in your portfolio, for Donaldson pricing hasn’t been a material driver just given the nature of your business.

Could you frame for us what -- some more detail as to where you’re pricing? Is this a cost push or is this flowing to the bottom line?

Hamzah, Bill, again. You’re right.

You know the company well. Typically pricing isn’t part of our sales growth numbers given the OEM markets that we operate in.

And also our focus on introducing better technology in both our products and processes that allow us to take costs out and grow market share. So part of that is by our strategy of increasing our penetration.

Generally what we talked about the selective price increases it’s purely around cost recovery. We did -- we do have some pricing indexed with OEMs around the steel that was a result of what happened may be five or six years ago but it’s really focused at cost recovery not margin expansion.

Okay. Great.

Thank you very much.

Hi. Good morning.

Good morning, Kevin.

Bill, I guess everybody is so focused on the macro, maybe I’ll start there too. You addressed Europe but I was wondering if you could say little bit more about Asia?

I thought I heard you say that, that was up about 10% excluding the disk drive situation there. Can you just talk about that, are you seeing any signs of slowing there, excluding the temporary disruption in disk drive?

Kevin, Bill. Yeah.

I think, so, I covered the disk drives and that’s sort of an anomaly unrelated to the global economic conditions because our customers could build and ship a lot more hard drives if they have the parts and we stand ready to supply them when they’re ready to take them. I think the area that we’ve seen and we’ve read about in the paper is just in China that there’s government trying to slow things down slightly.

We’ve seen some moderation in China as well and we believe that’s a temporary condition as they try and bring that down over the next couple of months.

Okay.

Some moderation in China.

Yeah. On PowerCore, Bill, we talk about that every quarter and that’s been a great success and you’re on to Generation 2 and beyond now but I was wondering if you could say little bit more about the competitive landscape there, of course you got competitors trying to catch you?

You’re always trying to stay one step ahead with the next generation. And any of these Generation 2, are you starting to see competitors that can do what you can do there yet or is your product still very unique in that application?

Kevin, Bill, again. I think, we assume in our technology and new product launches that if we’re successful with new technology that our competitors will be compelled to try and copy it or designer around it.

So and we plan to be successful. So given that, what we – what our strategy has been to just continue to reinvest in new technologies.

So we introduced G1, we started on G2. We’ve introduced G2, we’re working on a G3 and G4, the idea being that we, as competitors start to work on design around, we’re working on the next generation, so that we release the next generation before they catch up with the previous generation.

So that’s our model going forward. We have seen competitors in G1.

We were successful so that, I guess, if we weren’t, they wouldn’t feel compelled to copy us so they do. We aggressively defend our intellectual property but we think probably our best defense is sort of the constant reinvestment in technology and introduction of new technologies and products.

We have not seen anybody on G2 yet and we’re working already on G3 and G4 as I mentioned.

Got it. And then just finally from me, can you touch on this other income line in the corporate expense line, how we should think about that going forward?

We had other income much higher than it normally is, corporate expense much lower. Just -- how we should think about that for the next few quarters?

Hi. This is Jim.

In terms of other income, there’s a couple different drivers in there. We do have a little bit more interest income.

That’s part of that. We also have some royalties and our joint venture income is included in there and as the economy has improved, both of those have improved.

And then the third driver is FX. So we did have some positive FX amounts that are in there and that also is part of the amount when you look at the segment footnote.

Part of that difference is FX and interest expense, and income and expense on that line.

Okay. Thank you.

Hey. Thanks.

Just, first, a quick clarification on the last comment. So interest income is in other income line, not netted out in interest expense line?

Correct.

Correct. And that’s about 300,000 of that number.

Okay. Thanks for the clarification.

Can you talk about, I guess in terms of the gas turbines sales, inherently a lumpy business? As you look out towards what your customers are kind of giving you sense of, is it a much more back half weighted or does it start to really climb in Q2?

And then could you talk a little bit about what you’re seeing in the aerospace, commercial aerospace segment, obviously, defense spending down but I’m curious. It sounds like the commercial aerospace seems to be getting a little bit better and it sounds may be you’re being -- you’re not quite as optimistic on that space?

Charles, this is Bill. I’ll start and maybe Jim and Rich, if they have any further comments, they can jump in.

On the gas turbine, it is sequentially increase each quarter. That’s what we see.

We don’t comment specifically on the numbers, but I think specifically is going to -- to your point it’s going to be more back half loaded. We’re seeing a lot of large turbines order activity and actually a lot of those orders are actually going to ship next year just given the lead times.

So which is a -- we’re already starting to fill new order book for fiscal ‘13. This is one of the increases in our guidance -- sales guidance within the different segments is the good news story about gas turbines and a lot of these are -- many large projects around large turbines in the Middle East and in the Far East.

On defense and aerospace, I don’t think our outlook on the aerospace has changed. It’s just that we’ve dialed back the defense a little bit and that so it’s sort of a net-net that we’re assuming it’s going to be essentially flat year-over-year.

Great. Thank you.

Good morning.

Morning, Eli.

Just a couple of clarifications. When you talked about Europe, your press release talked about $1.39 euro and the odds are that that’s probably going to be materially lower than that, I guess, $1.34, $1.35 now.

What would that do? Is there any material impact on anything?

Eli, this is Jim. I think the guidance we used previously at our year end release was $1.42 and now we’re $1.39.

That shifted us about 2% so I think you can extrapolate that to where we’re now, it would be another couple percent.

Is that a 2% positive impact?

That’s negative, so…

Okay.

… we -- previously if we look at our guidance compared to prior year, it would have resulted in a 1% increase in our sales. Now look at our new guidance, which is at the $1.39 euro, it’ll actually be a 1% headwind to our sales.

Okay. The margins in Industrial products were almost nothing short of phenomenal, particularly with gas turbines flat and not much going on in the special applications.

And 16% is quite a margin. Do you have got idea of what’s happening there and obviously your forecast at this point dictates that that number is coming down a bit.

Can you give us some idea of how we should treat that?

This is Jim. I’ll start off.

I think a lot of it is related to the improvements we’ve made over the last several years going back to the recession. We’ve looked at where we could make some permanent changes through the recession.

We’ve improved some distribution and that’s improving both the Engine and Industrial. And then I think we have taken a look at some of the areas where maybe we weren’t operating as effectively as we could and through the recession took some steps to improve that.

So there’s nothing that sticks out. I think it’s something that we’ve just been continuously striving to improve.

I mean.

Eli, this is Bill. Just looking forward then, we have a little bit of a headwind with what we talked about with the disk drives, so at least temporarily.

And we’re quantifying that as about $15 million in sales in the disk drive that will be down.

Yeah. That was as quite easy, you’re saying it’s basically execution.

I’m just wondering with that number that high, it has to come down pretty far in order to be within the range of your operating margin guidance?

Well, and I think you’ve got to consider some of the things I talked about in my prepared comments in terms of the second quarter being an expectation we will come in less than that for second quarter so when you average it out.

Okay. And just one other clarification and it could be corporate and allocated when you look at the segment data, there’s only $2 million, a little over $2 million at global we thought.

Is there a new run rate for that number for the rest of the year or what number, because it’s roll down from what was a number that was a couple times that the last several years?

Yeah. And that one, I think we talked about before.

It does fluctuate from time to time because, not only does it have the things I talked about previously like foreign exchange and interest expense, it also has eliminations of inter-company profit and that can vary from time to time in terms of the timing of that. So it can fluctuate slightly.

So it does get a little hard to predict.

Understand. But I just wondered if there was any sort of guide to give us a second quarter run rate because the difference between $6 or $7 million and $2 million [that make it] share in the quarter.

So it runs materially. Should we be looking at the number staying in the $2 to $3 million range?

I don’t need precision. I think when you go back up to $4 or $5 or $6 or $7 something like that.

I’m just trying to get an idea of how to model that?

I think maybe somewhere between those two is probably a best guest but, like I said, there’s so many variables like foreign exchange, we really can’t predict what’s going to happen there.

Eli, this is Rich. On the foreign exchange piece, what we typically see as it impacts the corporate and unallocated, is when the U.S.

dollar is strengthening against foreign currencies, we tend to have a pickup in other income and that flows through the corporate and unallocated line and shrinks that expense. When U.S.

dollar weakens against foreign currencies, it has the opposite effect. It’ll be a hit there.

Obviously, when we put together our guidance and pick a foreign exchange rate to use, we just take the rate on the date that we start rolling up our latest forecast because it’s pretty impossible to forecast what direction they’re going to go. I mean, by the end of the quarter we could see the euro dollar well over $1.40 again, who knows which way it’s going to go.

One final question. With sales effectively flat in gas turbines in the quarter, you increased your outlook, were some shipments postponed into the second, third or fourth quarter?

Or is it just a build up of business later in the year and you always expected the first quarter to be flat, I mean, I think, I was surprised the first quarter was flat given type of gains for the year?

Eli, this is Bill. I think the technical term for gas turbine schedule by quarter is lumpy, okay.

Right.

I mean, it always has been. There’s always -- these are very large projects and typically at quarter end, just making sure all the paperwork is, all the Is and Ts are dotted, that there’s always probability that something could move from one quarter to the next.

But the bigger, that’s not -- it’s not that a bunch of stuff got delayed or deferred this quarter, it’s mostly that’s just the way the backlog filled in for the second half of the year, especially with these large turbine orders that we mentioned which we started getting over the summer that they scheduled to ship in the second half.

All right. Thank you very much.

Sure. Thanks.

Hi. This is Jeff Farmer for Laurence.

In the OEM business, how are you doing in terms of winning new platforms? And if you can look to the next few years, what might this mean for the visibility on market share gains as we look forward?

Jeff, this is Rich. I think in Bill’s comments he mentioned that we won four new PowerCore G2 programs.

Those will launch probably in 2014 as both the final Tier 4 and the Euro 6 standards go into effect. We’ve won also the SELECT fuel programs that Bill mentioned.

Again, those are going into production over the next couple of years. We’ve already won and talked a lot about prior PowerCore wins and a lot of those are still to go under production with these next rounds of emission implementations.

And we’re starting to win programs in some of the emerging markets as well. They’ve got emission regulations coming into effect kind of the middle to later part of this decade.

Some of those regional OEMs are beginning to adopt Western technology and now that they’re starting to do that, they need Donaldson’s Technology and we’re starting to win programs with those customers as well. But usually, when you win, it’s year, two years, maybe three years out before it actually goes into production.

So there is a lag effect there but we believe we’re set up pretty good over the next several years in our OEM business.

Jeff, this is Bill. Just to add onto that so far we’ve won over 150 platforms with PowerCore including 15 with G2.

So -- and as Rich mentioned, many of those are won and not yet in production, so it’ll continue to ramp up over the next couple of years.

Great. Thanks for the color.

Yeah. Good morning.

I was hoping that you could, Bill, perhaps elaborate a little more on the Engine Products outlook for the year? Obviously the guidance at the top line was unchanged but a couple items appeared to work against you with currency a little bit more negative, aerospace and defense perhaps a little bit lower.

And then also you mentioned that you updated your European outlook in Engine and my sense is that was not towards the positive. But perhaps some things that work the other way?

Ron, this is Bill. Yeah.

I think that you right on all of those that there was some moderation. The aerospace and defense that I mentioned earlier, with the defense as we brought that down so in aggregate, defense and aerospace we’re thinking is going to be flat.

And I think we did moderate our forecast for Europe looking forward. We have to add into that sort of the strong performance we had in the first quarter and we had a very strong Engine performance and better than we expected.

So there’s some other pieces that we got off at the start of the fiscal year with a stronger start and those are also incorporated in the guidance going forward.

Okay. And then also, perhaps how you’re thinking about the pacing in the hard disk drive business, I know you don’t like to give quarterly guidance but it would seem fair to assume that this current quarter is probably the weakest trends that you’ll experience there?

But when might you expect that business to normalize again? Or what’s anticipated in the 1% to 7% decline for Special Apps?

Well, I’ll sort of start with, I think we mentioned this earlier, that we took out about $15 million in disk drive sales from the year that we had forecast. And that’s not because of the economy, that’s because of the supply chain.

So to the extent that they come back sooner, maybe there’s an opportunity but that’s our best guess at this point in time. I think some of these facilities are still underwater and they’re aggressively trying to find alternative sources and move tooling and production equipment to get back into production.

But our guess is that the second quarter, so the quarter that we just started at the beginning of this month, will be the hardest hit but it’ll take some period of time probably beyond our second fiscal quarter for them to get fully back into production.

Okay. Very good.

Thank you.

Thank you.

Thanks. I apologize if missed this earlier but on a cash flow from operations guidance, it looks like that got taken down by about $15 million or so.

What is the driver behind that? Is it hard disk drive business related?

No, not necessarily. I think as we looked at our performance first quarter, we probably have a little bit of an opportunity in terms of some of our working capital.

That used a little bit more than I think we ideally would have liked. However some of that relates to some things that we think will flip here within the next quarter.

We talked about some GTS projects. Those are sitting in inventory so to the extent we can get those out in the next month or two, that’ll help.

The other thing is we are, as we invest in the business, looking out over time here, continuing to add selective inventory in some of our distribution centers as we expand in South American and other places. So those things are more on the opportunity side.

The one that I think probably drove some our change in guidance is our accounts payable did end up being a use of cash for working capital this period and I think what we’re seeing there is, as our last year we were really in a growth, significant growth mode, in terms of trying to keep up. While things haven’t slowed down, we’ve more leveled out to a more normal growth pace and because of that our AP balances have come down a little bit and I think that affected our outlook because we didn’t probably anticipate that as fully in our original guidance.

Charlie, one more comment on the inventory. This is Rich.

As Bill mentioned, we’ve got a slug of GTS orders in and the backlog is starting to fill now for the beginning of fiscal ‘13. That’s going to drive a little higher inventory levels at year end and make some of the comps be a little less favorable at year end than what we had originally modeled.

So we brought it down slightly to cash from operations down that $15 million.

Great. That’s helpful.

Thanks very much.

Okay. I’ll wrap up.

This is Bill. To conclude our call, I’d like to thank everyone for your time and continued interest in Donaldson.

As I mentioned earlier, we’re off to a great start in fiscal ‘12 and continue to expect this to be another record year. My 12,900 colleagues around the world continue to make all this happen.

I’m very proud to be part of the Donaldson team and what we’re creating together for both today and as we continue to make progress on our long-term growth objectives. A sincere thanks to all of you.

Goodbye.