Q4 2019 Earnings Call

Donaldson's fiscal 2019 Q4 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers remarks, there will be a question and answer session.

If youd like to ask a question during that time simply press Star then the number one on your telephone keypad, if youd like to withdraw your question press. The pound key. Thank you Brad Pogalz director of Investor Relations you May begin your conference.

Thanks.

Good morning, Thank you for joining Donaldsons fourth quarter and full year 2019 earnings conference call with me today are Tod Carpenter, Chairman CEO and president of Dolphin, and Scott Robinson, Chief Financial Officer.

This morning, Tod and Scott will provide a summary of our fourth quarter performance and an overview of what we are planning for the new fiscal year.

During today's call, we'll reference non-GAAP metrics such as adjusted earnings you can find a reconciliation of GAAP to non-GAAP metrics within the schedules attached to this mornings press release.

I want to remind everyone that any forward looking statements made during this call are subject to risks and uncertainties, which are described in our press release and SEC filings with that I'll now turn the call over to Tod Carpenter Tod.

Thanks, Brad good morning, everyone.

We said several new records in fiscal 2019.

Sales reached an all time high of $2.85 billion adjusted earnings per share up $2 or 21 cents were 10.5% above last years record.

And we invested a quarter of a billion dollars and our future with $150 million of Capex expenditures and $100 million for the acquisition of both.

On top of investing for the future, we returned nearly $230 million to shareholders through dividends and share repurchase.

Well. These measures 2019 was a solid year for Donaldson company.

I want to thank our employees for their contributions and continued commitment to our stated purpose probably advancing filtration for a cleaner world.

We have a strong plan for 2020, which Scott and I will talk about later, but first I will share some thoughts on fourth quarter sales.

Total sales of $727 million were in line with our forecast and slightly up from last year.

Pricing added 1%, while gains from Bofa and revenue recognition accounting offset a currency headwind of 2%.

Results in the quarter highlighted the uneven demand environment.

And you didn't sales were down 1% and slightly ahead of projection, while industrial sales were slightly below projections with a 3% increase.

In engine the forecast favorability came from aerospace and defense sales were up 4% last quarter with the first fit orders driving your growth.

As expected on road growth moderated to 2% last quarter, which follows nearly two years of significant growth in the U.S. in China.

Wow heavy duty truck production in the U.S. is likely at peak, our fourth quarter sales grew at a robust rate of 26%.

In China sales were down as we lapped a 600% increase last year.

As we have previously discussed our new programs in China are with local manufacturers that have more order volatility than their western counterparts. So we expect demand fluctuations will be a natural part of our growing of growing our share in China.

Off road sales were down 10% last quarter, a little better than forecast and reflective of an uneven demand environment.

Sales in Europe were the strongest with continued benefits from pre buys related to upcoming regulatory changes.

In other parts of the world, including the U.S. large customers appear to be a docking as backlog and orders hovered at two year lows.

Also within off road fourth quarter sales of razor to sell razor blade products were flat with last year, which is significantly stronger than performance of legacy technology.

Innovative products have been and will remain a core part of how we mitigate the natural natural cyclicality of our engine markets.

Aftermarket is another mitigating factor fourth quarter sales were about flat last year or up 2.5% in constant currency.

We continue to see evidence of Destocking at large OE customers and lower demand in the construction agriculture and oil and gas markets were added crushers.

The macro headwinds facing aftermarket were offset by a low single digit sales increase more innovative products, which make up about a quarter of total aftermarket.

They consistently grow faster than legacy products, making them an important stabilizer for the company.

Turning to the industrial segment fourth quarter sales grew 3.3% for 5.5% in constant currency.

Sales within industrial filtration solutions, or ISS were up 6% last quarter.

This translates to an increase of 3% when you exclude the benefit from Bofa and headwinds from currency.

Sales last quarter of new dust collector were below expectations driving the miss for the segment.

Quoting.

Activity is stable, but customers seem reluctant to invest in new systems given macro uncertainty.

We are however, still generating growth with dust collection replacement parts.

China was the strongest region last year, where sales were up more than 30%.

Although the business there is still small it's growing rapidly and things like China is blue Sky initiative create new demand for our products.

Also with an eye Fs fourth quarter process filtration sales were up about 10% and that's on top of a 30% increase last year.

We're generating new agreements with manufacturers and the food and beverage industry and our expanded sales force is gaining traction with customers around the world.

Based on this momentum we see another year of strong growth in 2020.

As expected fourth quarter sales in gas turbine systems, our GTS were up 7% from last year.

The increase was driven by large turbine projects due in part to an easy comparison in the prior year.

I want to pause here and recognize the GTS team they've done an excellent job of Rightsizing. This business over the past few years, they're proactive approach and focus on driving profitable growth turn GTS into a more stable business with greater margin potential.

We're also pleased with how we are managing our disk drive business.

Secular pressures in that market drove the 9% decline in special applications last quarter, but high standards with distressed customers Spurs advancements in our technical capabilities that can be leveraged elsewhere in the company.

Sharing innovation across our company is complemented by a strategic approach to managing our portfolio.

I want to highlight a few.

Of our successes from last year.

First our combined advance and accelerate portfolio grew twice as fast as the company.

Second replacement parts were also above the company average at more than 60% of total sales replacement parts are critical to mitigating the cyclicality of the markets we serve.

Third innovative products remain a growth driver for both new equipment and replacement parts.

Sales of these products in engine, we're up about 10% in 2019 and dust flow collectors were up more than 30%.

Our diverse portfolio is a core strength and we will leverage that in 2020.

We plan to make further investments in our growth businesses supported by efficiency gains in other parts of the company.

In addition to those gains we are actively looking for other opportunities to reduce costs and optimize our structure, which is standard work for us.

This is what we will control in 2020.

We are also paying close attention to the markets, which have changed in the five months since our investors day.

At that time, we estimated market growth between 1% and 3% supported by stable levels of investment commodity prices and currency exchange rate.

Based on todays estimate global equipment production will likely be down in the low to mid single digit range industrial production has come down to the low end of our prior estimate.

And currency is anything but stable.

It's hard to say how much of the change is driven by cautiousness versus real demand erosion, but we do expect the environment will be more challenging than prior year.

With these factors in mind, we are projecting a modest sales increase in 2020, which also means that our 2021 sales will likely be closer to the low end of the range, we provided at Investor day.

I will now turn the call to Scott for more details on whats included in our 2020 plan.

Scott Thanks, Todd.

Good morning, everyone.

In 2019, we focused on supporting our customers.

Enhancing our global processes.

And strengthening our foundation for future growth.

This year, our focus is navigating an uneven demand environment and driving gross margin improvement.

I'll share some thoughts about 2020 after a quick recap of 2019.

Overall, we're pleased to have delivered fourth quarter sales and EPS that were both in line with forecast and constant currency sales were up 2.3% last quarter and GAAP EPS was 45 cents.

Versus 78 cents last year the year over year change was largely in.

Due to tax reform, we had a 20 cents benefit in 2018.

Compared with the 16 cents charge in 2019.

A portion of the charge relates to final regulations for the tax Act and we also had some strategic restructuring of our legal entities.

With the flexibility enabled by tax reform, we simplified our structure to more easily matched global cash with operating.

Please note that the restructuring charge resulted in not operating expense this year compared with income last year.

Excluding non recurring items fourth quarter adjusted EPS grew 5% to 61 cents, an audit settlement led to a better than expected tax rate, which was offset by lower than expected margin.

Operating margin was down 50 basis points last quarter or 40 basis points above the revenue recognition change lower incentive compensation contributed to a favorable expense rate, which partially offset the gross margin decline.

At a high level, we didn't make as much progress on gross margin as we'd expected pricing offset higher costs in the quarter, which we feel good about what we still have work to do on key initiatives, including line transfers to reset the supply chain cost takeouts within our manufacturing process and strengthening our park level profitability.

Market level mix pressure was also one thing that helped gross margin back in some cases, our best performance came from lower margin products like the emission free buying off road or large turbine projects in GTS.

Uneven demand was another headwind in fact every quarter in 2019 had a period where demand change suddenly and dramatically in some cases demand stabilized afterwards in other cases, we had a modest rebound which is what happened in July .

Well good news in July wasn't enough to offset the margin shortfall in the quarter. We were encouraged by the trend as July was one of our strongest gross margin performance of last year.

Moving off the income statement, our balance sheet showed improvement in working capital last quarter. The leverage ratio is right in our target range and fourth quarter cash conversion was more than 100% on an adjusted basis.

For the full year investments in the business and cash returned to shareholders totaled 475 million.

Excluding the tax charges, we generated a strong ROI see of more than 18%.

We are proud of this performance and we plan to build on the success.

Turning now to our outlook our fiscal 20 sales are forecast between a 2% decline and a 4% increase.

We expect a benefit of 1% from pricing and currency headwinds of one or 2%.

Engine sales are projected between a 4% decline and a 2% increase first fit is under the most pressure with sales in both on road and off road projected down in the mid teens.

The annual decline is primarily driven by the U.S.

Lower heavy duty truck production is widely anticipated.

We're also planning that on what we will be down in China, We're still optimistic about the long term.

But the process is mature and our relationships with these customers.

Combined with their order volatility makes for a dynamic environment.

And off road strong comparisons from pre buys in 2019.

Unexpected softness in key end markets are driving that decline.

We expect aftermarket to provide stability in 2020 with a full your increase in the low to mid single digits.

That's above our estimates for a company of inflation driven by share gains from innovative products.

Shared sales of aerospace and defense our plant up in the mid single digits, reflecting growth in commercial aerospace and ground defense.

Industrial sales are projected up between two and 8% which is strong growth for our mix portfolio.

We expect a low single digit decline in special applications, driven by the secular disk drive trend while growth inventing solution provides a partial offset.

For GTS, we are forecasting a low single digit increase this year strong sales of replacement parts should more than offset further contract contraction of large turbine projects, which represent less than 10% of GTS sales.

Sales of I. FSRU plant up in the mid to high single digits, including a small partial year benefit from Bofa.

Share gains with dust collection replacement parts should easily offset market related headwinds for new equipment and we also expect another strong year with process filtration.

We continue to expand our life tech offering and our larger than ever sales team is building relationships with new food and beverage customers.

For 2020 operating margin, we expect the full year rate between 13.9 and 14.5%.

Which is up 30 to 90 basis points from last year.

The improvement comes from gross margin and the key activities relate to what I mentioned before resetting the supply chain aggressively pursuing cost reductions and enhancing part level profitability.

We expect higher expenses will offset a portion of the gross margin improvement resetting the annual incentive plans is the biggest headwind, which adds about $10 million of expense and will continue to invest in R&D and our growth businesses.

We are planning to minimize the profit impact of these investments with cost reductions in other areas.

Beyond what's in plan, we will continue to identify and harvest additional savings around the company.

For other operating metrics, we plan to interest expense of 18 to 20 million other income of four to 8 million and a tax rate between 25 and 27%.

Just a quick comment on taxes. This years rate is up from last year as we don't expect as much benefit from stock options or audit settlements.

We actually expect capital expenditures to remain elevated at $110 million to $130 million.

Driven primarily by in flight capacity projects, we also expect to repurchase 2% of shares again this year.

Altogether, we're planning cash conversion of 80% to 95% and GAAP EPS between 221 and 237.

Overall, we expect typical seasonality in 2020, which means that the second half should generate higher sales margin and EPS in the first half.

That said there are some nuances so we want to help with modeling, but I have one request. Please keep in mind that our practice is to limit the detailed guidance for the full year. So my comments will stay at a high level.

For sales and Thats why 20.

Tougher comps combined with the pace of ramp up for certain initiatives translates to a first half forecast is down from 2019, the operating margin for the full year growth of 30 to 90 basis points will be driven by performance in the second half.

The first half as a few things going against tougher comps margin improvement initiatives that build over the year and the headwind from incentive compensation kicks in right away in the first quarter.

One more point about modeling about half the 10 million headwind from compensation expense will go into the corporate and unallocated line with the balanced split between the segments.

As I said earlier, our mentioned this year is to navigate an uneven demand environment and drive gross margin improvement.

Our 2020 plans reflect the live route choices related to growth and investments.

For example, the advance and accelerate business are receiving the most investment and being passed with the highest growth.

Conversely areas like our first fit engine businesses are creating investment cap capacity with expense savings and enhanced profitability in a challenged environment.

Looking further ahead the fiscal 21 market conditions are the only reason, we see ourselves towards the low end of the targets we provided at Investor day.

We see great opportunities in front of us and there are several things that make me confident in our future.

We have the right strategy, we have a disciplined approach to managing the portfolio and we have a powerful and committed base of employees that are acting as a one donaldson team I want to thank our employees for the work they did last year and the role play and our long term success.

Ill now turn the turn the call back to Todd Todd.

Thanks Scott.

I think it's clear, but just to reiterate our focus this year is navigating uneven demand and improving gross margin.

Our global team is aligned around this mission and each area has plans in place to achieve this result.

That's our tactical plan.

But we will also drive our strategic plans.

We are a returns focused company that is committed to long term profitable growth. So I'll share a few examples of our progress.

As always Donaldson story begins with innovation.

We plan to spend $65 million on R&D. This year, that's up 7% from 2019 and another year of developing breakthrough technology.

Material science capabilities are the biggest opportunity for us and the new research facility is under construction.

These technologies can be applied in many areas like process filtration.

The customers in the food and beverage industry care deeply about the integrity of their products, which creates an opportunity for us to further leverage our advanced Lifetech filters.

Sales of process filtration, our plant up again this year and we see a long runway ahead.

We also leverage new technology, and venting solutions. These high tech products protect sensitive devices and parts and this business is the one place at Donaldson, where we are targeting the automotive industry.

To that point, we recently launched events that protect battery packs, which is critically important intellectual vehicle, we see a big opportunity in this new space and we are excited about the role of venting and our future.

Connected solutions are the other unique offering for us.

With remote sensing we can provide end users with real time actionable information about their dust collector performance.

Based on our research this level of support is highly valuable further solidifying our brand as an innovative and customer focused partner.

We are also innovating the way, we sell and we are doing that through e-commerce .

Which we launched nearly two years ago.

Since launch Weve invoiced more than $480 million in sales through hundreds of thousands of transactions.

There have been millions of sessions from customers around the world and those figures should grow again this year.

For the engine business ecommerce gives us an opportunity to better serve existing aftermarket customers.

They appreciate the efficiency and we appreciate the speed and cost savings from processing the orders.

The same is true with our industrial customers with one added benefit.

We turned on the ability to receive guest orders earlier this year and that can drive incremental revenue from customers, we couldn't efficiently serve in the past.

Cultivating innovation is a core principle at Donaldson and we see it everywhere in the company.

With our excellent employees.

Clear strategic focus and disciplined approach to investing I'm more confident than ever in our ability to create long term value for all our stakeholders.

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

Ladies and gentlemen to ask a question. Please press Star then the number one on your telephone keypad, well pause for just a moment to compile the county roster.

Your first question comes from Nathan Jones with Stifel. Your line is open.

Good morning, everyone.

Morning, Nathan.

I'd like to just start off in.

I asked access and that part of the guidance you guys are I've got mid to high single digit growth.

In 2020, which on the surface looks pretty strong and this kind of macro environment.

It looks like one to two points from Bofa, probably offset by one to two points of currency headwinds. So you are still looking at organic growth. It's in that range I would've thought industrial Capex, new industrial Capex is probably down in 2020 industrial production is probably flat. So maybe you could just bridge that gap for us how you get to.

What's pretty strong growth there in an environment, that's not that strong.

Sure. This is Todd so Nathan I think you have your numbers build in that model accurate bofa will add $9 million to $10 million of that growth and then when we really considered a comprehensive portfolio of what's in Ifmis. We while there is that capex portion of our dust collection business or our brand we call tourists that likely will face. Some headwinds also in that ISS business in our advance and accelerate portion of the portfolio is our dust collection aftermarket business, which we've been growing.

Frankly at high single digit for a number of years and we have good opportunities in taking share in China based upon the blue Sky initiatives. There we have good momentum in Europe , we have.

Multiple growth opportunities across the Americas, and then also don't forget that ISS carries our process filtration business, which we have been growing at double digits for multiple years and we look for another year of strong growth. So if you roll that altogether and effects have some have some really strong opportunities for us in fiscal 2000.

Okay, that's very helpful.

Second question here, maybe just on the cash conversion you guys are spending pretty heavily last year. This year this coming year.

On the strategic initiatives can you maybe give us an update on how long we should expect this kind of level of capex. When we should return to a more normalized level, what that is and what the long term free cash flow conversion target though.

Yeah, and this is Scott so it's consistent it's still consistent with what we said at Investor day. So this year, we ended right on our target of $150 million of Capex, and we said at Investor day and in the past that we are expecting higher levels of investment last year and this year. So for this year. We have continued elevated levels of $110 million to $130 million and the purpose for that is to finish the projects that we have in flight. So we've been adding significant amounts of capacity and we need to finish these projects in.

I'll grab the returns to help with the margin improvement. So we feel good about where we're at so we're right on line with the projects and we have to complete those longer term.

This spending will come down we expect a more.

Average our normal range will be 3% on revenues, we set our cash conversion is 80% to 95% this year and Thats with Capex of 100 in 10 to 130 million. So we expect over time that will improve as we come back to a more normalized capex spending of 3% of sales. So we're still at elevated spending was slightly lower cash conversion and that will improve you know as we bring down the capex spending.

And you would anticipate 100, plus long time in terms of conversion.

Yes, I mean, you know 90 to 110, depending on the revenue growth and what other things we're doing but that's a that's a reasonable range.

Okay, and then just on gross margins you guys.

Called out gross margins is the big driver of 30 to 90 basis points of margin expansion.

And clearly you'd be growing margins here outside of any kind of volume leverage can you maybe talk about the biggest initiatives that you guys have got that that are going on to drive that gross margin improvement what you're looking at in times of price cost Tailwinds I assume that will be in fiscal 2020, and just any information you can give us on whats driving that margin improvement.

Yes. So you know as I said, we were disappointed our margin improvement for this year, we did not accomplish everything that we want to do and that's why our margins ended up a bit short, but the projects are in flight and that's what that Capex relates still so number one is complete the projects we have in flight and drive the returns that we expected out of those as we complete those projects, we will begin to normalize our supply chain and improve our inbound freight and focus a lot more on regaining efficiencies with cost take out.

And allow our teams to spend more time on raw materials.

We have to work on our product level pricing to improve products with low margin in all parts and.

Are we are going to we had a 1% increase for pricing this year.

That will drive any.

Costs associated with raw material increases tomorrow have a neutral position.

In terms of media, we are expecting slight increases.

In media cost this year and you know thats one of the reasons that we have to continue to increase our prices will offset the raw material impacts.

Thats kind of a overall summary on all the things that are going into margin and why we believe we have great opportunities to improve our gross margins going forward and we are going to drive both those projects to completion and maybe just add a little bit of color here. Nathan is that overall the organization is really focused on it every region has specific targets.

Every business is focused they understand this is the number one problem in the corporation across the entire leadership. This is this is really from an operational standpoint of view our focal area.

That's helpful I'll pass it on thank you very much.

Thank you.

Your next question comes from Brian Drab with William Blair. Your line is open.

Hi, good morning, Thanks for taking my question.

Ron you know at the analyst meeting.

I talked about the 100 million target for cost cutting and.

Clearly discussions cost cutting so far today on this call to I'm just wondering.

Do you have a.

Maybe a little more urgency around the 100 million to maybe pull some of that.

In order to accelerate that schedule somewhat and in the us.

Yes, I guess, it's about five months only since the analyst day, but where are we on that 100 million program at this point.

Sure. Brian This is Todd so we still feel strongly that $100 million is the proper target. We embrace that challenge we have specific plans across our operations teams now the lead time of some of those projects, we had urgency even at Investor day relative to the $100 million and so the opportunity to accelerate that from what we had thought it is really not there. These projects are multiple quarter projects that we have in flight that were really pressing hard on in order to bring forward, but it's still it's still the target that we covered it.

Still being executed on but I do not see opportunity to really accelerate that.

Okay. Okay, and then you know given the.

No no not a huge change but change in trajectory and the top line versus what we discussed at the analyst day over the next few years is there any any change and.

Your plans for capacity expansion or reducing capacity potentially.

Given the given the change in trajectory.

Yes, Brian Todd again. So this is what we talked about Investor day, as well and we have a multiple year five year plan within our operations teams and what we did in order to expand the capacity as we pull forward by year, sometimes as much as three years. Many of those two years ahead in within that five year plan. When we expanded capacity. So we're really just executing what were our plans to begin with and so consequently, we really feel good about where we are and frankly that allows us to now really work hard at normalizing our internal supply chain for our customer base and that's what that's what our focus is today, we're comfortable with where we are on capacity.

And we'll just continue to execute that plan.

Okay. Thanks, and then just one last one kind of along the same lines just wondering.

As these end markets are challenged it at the moment.

Lisa.

Many of them are.

Is there any way that you can.

Accelerate getting some of these new end markets up and running specialty chemical electronics medical pharmaceutical some of these things that you talked about at the analyst day.

To offset some of the pressure.

So we're clearly pressing hard into process filtration, but.

Also with the markets that we talked about and we highlighted this at Investor day as well you know the sales cycle on those in order to be have validation are often multiple year type of activities.

We have a process filtration while in flight people are are pressing hard, but but were as much as two to three years into that cycle already which is the reason why we are seeing some momentum and doing quite a nice job. The others are still going to take some time and if you remember on on that whole medical opportunity, we still need to advance our material science opportunities and we'll continue to do so the other one we didnt talk so detailed about in.

In our Investor day is our venting.

Products and so venting is a good opportunity and we're pressing hard on that which is the reason why in my prepared remarks, I really highlight about our opportunities in automotive.

In supporting electric base vehicle within vending. So that's a good opportunity that we'll be pressing harder.

In order to grow as quickly as possible.

Got it and just quickly can you make any comment on August versus what you.

Hi.

In terms of overall demand.

Everything we've experienced in August is baked into the guidance that we gave for the full year.

I thought that would be what you might say thanks very much.

[laughter], Thanks, Brian Thanks, Brian .

Yes.

Your next question comes from Richard Eastman with Baird. Your line is open.

Yes. Good morning. Thank you. Thank you for the questions Tomorrow.

Thank you.

We could just circle back for a minute on the gross margin.

Can I just ask from a deep you get if you give some decent guide on the op margin improvement 30 to 90 basis points you did mention opex will be up some here mainly incentive comp.

But as a target what would be the target for the gross margin improvement would be that range would it be.

100 basis points to it maybe you could just lay that out and I'm curious how much mix should be beneficial for you this year.

Yes, I mean, this is Scott Hi, Rick.

We factored certainly mix into the guidance in and we are working to grow our advance and accelerate and grow higher margin products, right, which which you can mix the company up by investing in higher margin products and that's something we're always going to be working to deal with our advance and accelerate category. So that helps with mix and thats one of the ways. We're driving our gross margins up. So we said we're going to be up quite a bit in op margin and thats, mainly driven by gross margin for the most part which is a little bit of a headwind from operating expenses. So all the improvement is really coming solely from gross margins and it's all the things that we talked about with with Nathan's questions and on my script and we have to finish those projects to improve our margins, but gross margins are the key for this year in the operating margin improvement is going to be driven you know soul.

Lead by gross margin improvements and part of that comes from mix and part of that comes from all the other things I referred to.

With with regard to improving our margins.

Okay.

So so might we expect 102.

You know 100, a quarter of gross margin improvement basis.

Well, it's 60 point to 60 basis points of operating improvement is the midpoint for margin and Thats all comes from gross margin.

Just a little bit of a headwind from the expenses. So all of the operating margin in comes through gross margin improvements Yeah. Real quick. This is Brad I would I would pull on that that's that's the thing to keep in mind. If you just pick something within the range and.

For the exercise of the 60 basis points to assume that the incremental incentive compensation that the math on $10 million. Just gets you into the neighborhood of 30 basis points. So we've got a we've got offset that right away. So thats kind of where you get to it you started talking away into 100 plus basis points and that's just that's just above where we'd expect to end the year, but we certainly expect strong improvement.

Yes, and then one would expect.

Again, given how this year lays out relative to the comps relative to the deceleration we're seeing in some of the.

Some of the engine markets to be sure one might think that again.

The maybe the first half revenue was down.

We still may see first half gross margin you know the financial metrics still across the piano are probably still down.

In the first half and then the improvement for the full year that you're laying out is really going to be second half driven when the.

When the sales growth kind of materialize as against the easier comps is that is that how the PML should shake out first half second half.

Yeah, I think that's a fair characterization, Rick, especially when you start to look at our gross margin project improvement projects that are in flight. There. They are more back half related based upon we have to finish up those projects in order to drive what we would expect that take place. So yes clearly.

It it that correction, if you will ramp up as we progress through the year and this is Brad I'll add to that Scott touched on this but keep in mind the incentive comp headwind starts August one, yes first day of the fiscal year.

Okay, Okay, and then just as a quick.

The follow up here, maybe on the industrial side of the business.

It's good to see finally, the gas turbine forecasts may be being up low single digits. We should probably presume then the equipment side of that business is kind of based out.

It's probably a little north of zero, but.

But the.

With that but the big risk there around the equipment side seems to be washed out of the numbers now we're kind of talking about replacement parts.

Is that is that accurate there that the risk of of gas turbine kind of bottoming here is finally, maybe finally in the rearview mirror.

Hi, Rick Todd, Yes, that's absolutely right. Your characterization is fair, we look at our large turbine projects as being somewhere between zero and 5%.

So it will be.

Mid single digits at best this year. So yes, it's it's washed out we've been highlighting that in the last couple of quarters, saying that.

It's less of an overall risk to the corporation and that.

Really aligned.

Well with our longer term strategy, whereby the growth of the business will come from aftermarket or share gains within aftermarket. But then also keep in mind that we have a small turban project base there things such as.

Oil and gas pipelines offshore.

Oil rigs things like that and that we is essentially the bulk of our project based business and we call it small turbine as as opposed to.

Making projects for the power grid.

Mhm, Okay, because overall the your sales guide for the full for the for fiscal 20 for the full year. It looks like you've kind of stress test is pretty well.

This early in the fiscal year with the guide and maybe the risk maybe the risk.

To the total LOE in the minus 2% revenue is kind of concentrated down on the industrial sales and maybe maybe macro risk.

Can I can I summarize it that way.

I'd say the risk would be more macro geopolitical what's going to take place.

The risks and uncertainties that we're all.

Experiencing in our daily lives now and.

And.

Yes, I think thats fair to characterize and wrap up as a risk.

Very good okay. Thank you.

Thanks, Rick.

Your next question comes from Laurence Alexander with Jefferies. Your line is open.

Good morning.

I guess two quick ones can you give an update on how your thinking has evolved around M&A opportunities.

Both valuations that you're seeing and.

Areas that might be.

More likely over the next year or so in the current environment continues.

And I'd like to say on the Chinese side could you speak a little bit about.

What you're seeing in the aftermarket there and.

What you now see as the timeline before the aftermarket really kicks in as a growth driver for your China business.

Hi, Laurence this is Todd let me take the M&A portion first so M&A continues to be part of our long term strategy nothing has appreciably change from a market standpoint view, we still work it.

As as part of our normal based processes, we would suggest that we still have a robust pipeline, it's very strategic.

We remain a disciplined buyer so our behaviors all remain intact.

And we have seen no appreciable change in the overall M&A markets at this point.

Longer term for China relative to the aftermarket we have some momentum, particularly on the industrial side within China because of the Blue Sky initiative in our high Fs based businesses and so we are starting to see the aftermarket portion of that already come through.

And that is one of the reasons why we would suggest our ISS has a good growth opportunity and that is baked into our fiscal 2000 guide that you have received today. So we think that China has some have some momentum already that we are seeing in the aftermarket.

And were really quite happy with that.

[noise].

There are no further questions queued up at this time of the call back over to Tod Carpenter for closing remarks.

That concludes todays call I want to thank everyone listening for your time and interest in Donaldson company have a great rest of the week.

Goodbye.

This concludes today's conference call you may now disconnect.