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CLARCOR, Inc. (NYSE:CLC)

F1Q 2014 Results Earnings Conference Call

March 20, 2014 11:00 AM ET

Executives

Tom Lawrence - Dye, Van Mol & Lawrence

Chris Conway - Chairman, President and CEO

David Fallon - Chief Financial Officer

Analysts

Kevin Maczka - BB&T Capital Markets

Brian Drab - William Blair

Richard Eastman - Robert W. Baird

Operator

Good morning ladies and gentlemen thank you for standing by. Welcome to the CLARCOR Incorporated First Quarter 2014 Earnings Conference Call. As a reminder today’s conference call is being recorded. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session instructions will be provided at that time for you to queue up for questions.

It is now my pleasure to turn the conference over to Mr. Tom Lawrence of Dye, Van Mol & Lawrence. Please go ahead, Mr. Lawrence.

Tom Lawrence

Thank you. We appreciate your interest in joining us on CLARCOR's conference call to discuss results for the first quarter of 2014. By now everyone should have received a copy of the news release that was distributed yesterday. If anyone does need a copy, it is available on CLARCOR's website at www.clarcor.com, or you can call Ava Gold at (615) 244-1818, and she will send you a copy immediately.

Before I turn the call over to Chris Conway, CLARCOR's Chairman, President and CEO, I remind you that all statements made in the news release and during this conference call, other than statements of historical fact, are forward-looking statements. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

The company believes that its expectations are based on reasonable assumptions. However, these forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the company's actual results, performance or achievements, or industry results, to differ materially from the company's expectations of future results, performance or achievements expressed or implied by these forward-looking statements. In addition, the company's past results of operations do not necessarily indicate its future results.

Finally, we want to let people know that the information statements made during the call are made as of the date of the call, March 20, 2014. Those listening to any replay should understand that the passage of time by itself will diminish the quality of the statements. And also, the contents of the call are the property of the company, and the replay or transmission of the call may be done only with the consent of CLARCOR.

It's now my pleasure to turn the call over to Chris Conway for his opening remarks.

Chris Conway

Thank you, Tom. Good morning and thank you for joining us today. With me are David Fallon, our Chief Financial Officer; and David Janicek, our Corporate Controller. After a few opening remarks, I'll turn it over to David Fallon to review our financial results in more detail. After David's remarks, I'll discuss the quarter from an operational perspective and discuss our outlook and guidance before we open it up to questions.

We reported diluted earnings per share of $0.48 for the quarter after the close of trading yesterday. This compares to $0.47 for last year's first quarter. Net sales increased 22%, primarily due to additional sales from the acquisitions of GE’s Air Filtration business which was completed in December 2013. As you can tell from our press release, there were a lot of moving parts with significant positive and negative impacts related to acquisitions at a restructuring this quarter in our HVAC air filtration business.

We completed two acquisitions the GE Air Filtration business now known as CLARCOR Industrial Air and the Bekaert Advanced Filtration business, now part of our Purolator Advanced Filtration business. I will provide you more perspective on these later in the call. While the work to integrate the acquisitions is well underway, we expect more to be done in the next couple of quarters to achieve our integration objectives.

We know these additions create challenges to understand our overall baseline performance. Our press release details combined with comments today that David will provide are intended to provide clarification. Meanwhile many of our existing businesses saw good results this quarter, which I don’t want to miss highlighting. Tails in our engine mobile segment increased 4% driven by favorable growth in both our domestic heavy duty after markets and our locomotive businesses.

Excluding the acquisitions, sales in our industrial environmental business increased 3% from last year with excellent sales in our dust collection business and moderate growth in oil and gas business. As noted in our press release, we took a $1.3 million restructuring charge in our HVAC filtration business related to a plant closing and a reduction in force.

This restructuring is expected to reduce annual operating cost by $1.5 million to $2 million as part of our rightsizing to fit current levels of business.

Now I will turn it over to David to review more financial details. David?

David Fallon

Thanks Chris. Clearly there are a lot of moving cards implicit in our first quarter financial results which make the comparison to last year’s first quarter somewhat challenging. To facilitate this comparison we have included non-GAAP reconciliation schedules on pages 13 and 14 of the earnings release to allow investors and analysts to understand more clearly the various components of our first quarter results. Because it is almost certain that different investors and analysts treat the various add backs and deducts differently for their analyses where they are trying to determine a run rate or a number most comparable to quarterly expectations we wanted to provide full detail of all components of our first quarter earnings while also respecting the restrictions we have with any non-GAAP disclosures. I will provide additional clarification and color in my comments this morning.

Overall net sales increased approximately $56 million or 22% from the first quarter of 2013 primarily as a result of our first quarter acquisitions. Excluding the impact of these two acquisitions net sales grew organically about 3% materially inline with our expectations headed into the quarter and within our anticipated full year organic sales growth of 3% to 5%. Consolidated operating profit declined approximately 8% from the first quarter of 2013 however this reduction was negatively influenced by a $1.3 million restructuring charge at our HVAC filter business and $6.7 million of combined costs related to purchase accounting and integration at our CLARCOR Industrial Air business formally GE Air Filtration when the impact of these items in the two first quarter acquisitions are removed from our first quarter results base business operating profit was relatively flat compared with last year, while operating margin declined approximately 0.4 percentage points.

Now briefly delving into the segments. Engine/Mobile sales increased 4% in the first quarter of 2013, on the strength of a 7% increase in U.S. aftermarket heavy-duty engine filtration sales. This increase was higher than our expectations headed into the quarter and was driven by a 13% year-over-year increase in February. We believe a portion of the strong February growth was a pull ahead from our second quarter in response to a customer price increase announced at the end of January to offset higher material cost. Although we expect our second quarter sales to be negatively impacted by this pull ahead, our full year expectations are still consistent with our original guidance of 3% to 5% U.S. aftermarket sales growth.

Operating margin at our Engine/Mobile segment declined approximately 1.2 percentage points from last year’s first quarter primarily related to the absorption of fixed cost, as we discussed in our year-end conference call and higher material costs. As we move through fiscal 2014, we anticipate this Engine/Mobile operating margin gap with last year to progressively narrow and we expect an operating margin of 21.5% at the midpoint of our full year guidance.

At our Industrial/Environmental segment organic sales excluding the impact of the two acquisitions, increased approximately 3% from last year’s first quarter. This sales growth was consistent with our expectations headed into the quarter, but was lower than the 6.5% growth at the midpoint of our full year expectations due to lower than normal oil & gas filtration sales impacted by the timing of several large natural gas projects that shipped in last year’s fourth quarter and several others that moved into this year’s second quarter.

When looking specifically at our oil and gas filtration market, first quarter sales also grew 3% well below our full year expectations of 10%, but we fully expect to reach this 10% target for the full year based upon our all time high backlog at the end of the first quarter. Operating profit at our industrial environmental segment excluding the impact of acquisitions and the HVAC restructuring charge increased approximately 11% from last year’s first quarter driven by higher sales and a 0.6 percentage point improvement in operating margin due to a favorable sales mix in our oil and gas filtration business.

Moving to first quarter financial results at CLARCOR Industrial Air topline sales of $45 million were 20% higher than last year’s comparable period with strong sales growth across all segments including gas turbine and industrial air filtration.

Higher sales in our gas turbine market were driven by higher heavy-duty inlet system sales and higher clear current pro aftermarket cartridge sales, which incorporate our proprietary technology. The all-in first quarter operating margin in this business was approximately a negative 2%, however this operating loss included approximately $6.7 million of acquisition in integration costs.

When adjusted for these costs, first quarter operating margin at our CLARCOR Industrial Air business was 12%. Although we are proud of these first quarter results, we do not expect this operating margin level to continue for the remainder of the year. We remind our investors that there is volatility in the gas turbine business and operating margin can be somewhat volatile with changes in sales mix between systems and aftermarket filters.

Our first quarter mix of gas turbine systems which typically have lower margins in aftermarket filters was likely at the lowest quarterly percentage of the year. Accordingly the resulting first quarter operating margin for our gas turbine market was likely the highest quarterly operating margin for the year. Consistent with our guidance heading into the year with CLARCOR Industrial Air we continue to expect a full year operating margin of 7% to 9%, excluding integration and acquisition costs and 3% to 5% all in.

Finally, I'd like to add some color on our full year guidance. For the avoidance of any doubt I confirm that our updated diluted earnings per share guidance of $2.60 to $2.75 represents an all in U.S. GAAP number. This guidance includes the projected operating results of both acquisitions, projected $4.3 million of expense related to inventory step-up in the GE acquisitions, projected $5 million of integration costs in the GE acquisition. The $1.3 million HVAC Air restructuring charge and the $2.8 million bargain purchase gain. All of these items with the exception of the bargain purchase gain and the restructuring charge were contemplated in our initial 2014 guidance disclosed in our year end conference call.

Our updated guidance has been adjusted upward by approximately $0.05 primarily related to the inclusion of the bargain purchase gain. We generally do not comment on perspective quarterly expectations, but we want to provide some general direction as we anticipate our U.S. GAAP second quarter earnings per share to be slightly lower than last year's second quarter for various reasons including growth related cost at our headquarters location, additional integration and inventory step up cost at CLARCOR Industrial Air and expected loss pursuant to our Bekaert acquisition as we begin to turnaround that business.

Assuming a slight year-over-year decline in second quarter earnings per share, the implication in our full year guidance is that we expect significant year-over-year earnings growth in the third and fourth quarters and we positively confirm that expectation at this time.

With that I turn it back over to Chris.

Chris Conway

Thank you, David. I would like to take a few moments to review some operational highlights from the first quarter. As David mentioned, our Engine/Mobile business grew 4% in the quarter while operating profit declined 2%. This was the result of higher media and steel cost and lower absorption, the result of added capacity in infrastructure put in place for long term growth needs. We expect to recover material cost increases through pricing but also productivity improvements and cost reductions.

But the facility and equipment investments we made in Yankton South Dakota last year that are operational this year, were done with an eye to the future growth we expect. The Kearney distribution facility that we’ve discussed previously is a similar investment and that we will both consolidate current off-site warehousing and at the same time provide long term capacity for future growth.

So our margins Engine shows some short term pressure, our long term view remains to have operating margins in the 22% to 24% range and provide capacity for growth in Engine/Mobile.

In our domestic on-highway business, we had strong growth this past quarter from our leading independent aftermarket chain and from a new truck loop center customer we added last year.

We also have seen continuing improvement in OEM business as we continue to expand sales and engineering efforts in that channel. Locomotive aftermarket sales were strong with steady gains in carload and intermodal business driving usage. Export sales were strong, especially to Latin America where we have added additional distribution relationships.

Shifting to our industrial environmental business, our sales increased 3% organically and 43% when the acquisitions were factored in. As noted, while small, our domestic dust collection business grew 29%, the result of several new and continuing OEM products including products to collect diesel particular dust, to collect cooking fuel mess, and to collect dust from railway maintenance equipment and well fumes.

Sales in our packaging business declined 4% and operating margin declined 2.7 points, the result of significantly lower sales resulting from customer inventory adjustments in our highest margin segments. We expect these customers to return to normal ordering patterns as we progress through the year and for margins to return to their previous levels.

Now to focus on the acquisitions, CLARCOR Industrial Air is our name for the former GE Air Filtration business, our largest acquisition ever. We are extremely excited to have this business become part of CLARCOR. The first quarter results and activity confirm for us that this is everything we expected, good products; great people; and lots of opportunities.

We do have lots of work to stand this company up separate from GE and make it part of the CLARCOR family. Most of the heavy lifting ahead falls in the IT and systems area. Our plants are running on or ahead of schedule and I want to give a big shout out to all who have worked on or are working to make the transition a success after what was an extremely tight diligence and acquisition process. I also want to commend all the CLARCOR employees sister companies who have welcomed this new family member and are helping us achieve synergies and benefits beyond what we expected.

One specific example of note is the addition of a nanofiber based gas turbine aftermarket cartridge to the line of product previously offered by GE Air Filtration. This extension to the product line positions us to provide the broadest product offering in the market for replacement filters for gas turbines. It comes as a result of the integration into CLARCOR where we had existing technology already available and is complementary to the current pro product developed while part of GE.

Bekaert while not as large as GE acquisition, represents the typical attributes we seek can in evaluating prospective acquisitions, namely geographic expansion; new technology addition; and new products and customer access. This business complements our global polymer fiber business with the European and Indonesian location. Added to our China, Houston and North Carolina locations, we now are in the center of all major fiber and polymer manufacturing markets. And with the great team of people we gained in this business, we are very excited about the prospects ahead to achieve profitable growth.

The team at Purolator Advanced Filtration has a track record for improving businesses they have acquired and I am confident they will do the same in this case. These are just a few examples of the work done in the first quarter to continue growth both organically and through acquisition.

Now, I’d like to address our forward outlook. As we entered 2014, we foresaw continuing steady but not significantly greater growth for the year. Our growth in the quarter was in line with our expectations as we’ve noted. Our oil and gas business continues to grow and we expect it to sustain better growth through the year than this first quarters, as the timing of capital orders pushed out of the first quarter leveled out through the year.

Engine/Mobile business while strong this first quarter will growth steady but in the low single digits. Packaging return to expected levels set at outset of the year. The one item as David mentioned that we did not expect, the bargain purchase gain as $2.8 million adds to our forecast guidance. Accordingly, we are increasing our guidance $0.05 on the lower end and upper end to between $2.60 and $2.75 diluted earnings per share.

We will now open it up for questions.

Question-and-Answer Session

Operator

Thank you, Mr. Conway. (Operator Instructions). Our first question comes from Kevin Maczka with BB&T Capital Markets.

Kevin Maczka - BB&T Capital Markets

Okay, thanks. Good morning.

Chris Conway

Good morning, Kevin.

Kevin Maczka - BB&T Capital Markets

David, I guess I might as well start with the Q2 guide, since you commented on that and just to make sure we’re all clear there. So, down slightly from the $0.66 that was reported last year and will no longer have discreet restructuring or the acquisition gain but we will still have some more inventory step up in integration cost?

David Fallon

That is correct.

Kevin Maczka - BB&T Capital Markets

Okay, got it. Going to Engine/Mobile, can you talk a little bit more about that? It sounds like you had some pull ahead, there is some price increase that you took, can you maybe quantify both of those things if that is possible? And then beyond that, is it the tonnage decline that’s factoring in to your view that the second quarter will be a little bit softer here. And have you seen any specific softening on that front in March other than just a pull forward effect?

David Fallon

Yes. I think if you looked at our sales growth in the first two months of the year, it's about December and January, we were running at about a 4% growth clip which was exactly in the middle of our expectations heading into the year of 3% to 5%. Of course when we got the February that growth increased to 13%, we're pretty confident that increase was related to price increase.

So, there certainly will be some pull ahead from March and potentially April. But the impact that price increase is factoring, we believe we're at a 4% run rate. And that's why we haven't changed our expectations for the full year, we still expect to be in that 3% to 5% growth rate for the U.S. aftermarket.

Kevin Maczka - BB&T Capital Markets

Is that through of Q2 as well David, do you still think that that will be in that 3% to 5% range or will it dip negative because again we've got this huge February?

David Fallon

Yes. We believe it will certainly be below the 3% to 5% range, it's difficult to quantify the exact impact of the pull ahead. The other factor that needs to be considered is that, the weather in December and January and part of February wasn't necessarily conducive to strong trucking statistics.

So, it's quite possible that -- even our first quarter numbers were negatively impacted by that. So we could get the reverse impact of the swing back related to weather. The one thing that we do anticipate is to be below that 3% to 5% range in the second quarter, whether it dips below zero, that’s yet to be seen.

Kevin Maczka - BB&T Capital Markets

And just finally from me, on the acquired GE business up 20%, you said there is strength there across the board, the gas turbine business helped a lot. I know that’s lumpy, but is there any color you can give us in terms of the cadence going forward, what we are to expect there in terms of, do we come down off of that I guess unsustainably high 20% growth in the coming quarter? Are there share gains that are factoring in there? Thanks.

David Fallon

Yes. I would say, year-over-year we would probably anticipate that growth rate to go down a little bit, but we have some pretty -- we made some pretty strong strives in this business over the last 18 months. We would fully expect that year-over-year growth to continue maybe not in the 20%, but we think in the low single-digit, I’m sorry, the low double-digit.

If you look from a mix perspective, certainly the first quarter mix of the system sales were lower than what we anticipate going forward and as we mentioned in the press release and then also in my comments that positively influenced operating margins.

So that’s the other dynamic that we’ll see as we move forward in the year is that the mix of these system sales will increase as we get into the second and third quarters. As a result, the operating margin will come down off of that 12% run rate. And for the full year, we still expect to be around that 8%.

Kevin Maczka - BB&T Capital Markets

Okay, got it. I’ll get back in line. Thank you.

Operator

Our next question comes from Brian Drab with William Blair.

Brian Drab - William Blair

Hey David hey Chris.

Chris Conway

Hey Brian.

Brian Drab - William Blair

Just a few questions, just to be really clear on this one point. When you look at your results in the first quarter and your outlook for the full year was the quarter basically inline with your expectations and the full year forecast really not changed materially and the only thing that we have here that’s changed the guidance is the $0.05. It seems clear from the press release, the only thing that’s factored into the guidance seems the $0.05 from the gain, purchase gain?

Chris Conway

That was essentially the message we’re trying to make sure it was clear there.

Brian Drab - William Blair

Okay. Yes, just wanted to be really clear on that. And then on the second quarter guide you have given us a little insight as to what direction EPS will be going year-over-year. Can you give us any guidance on the revenue line first quarter to second quarter maybe sequentially?

David Fallon

Yes. We are still dealing with getting our arms around the volatility in sales with the GE Air Filtration business. We certainly can say that we anticipate an increase in sales in the second quarter versus the first quarter there. When you look at the remainder of the business, I would say our expectation is for increase in second quarter sales versus first quarter sales very consistent with what we have seen historically.

So the impact of volatility we have seen that historically beginning with the [PICO] acquisition with these large vessel orders. And we will see a similar dynamic with the gas turbine business with their large inlet system orders as well. So unquestionably we are going to see some volatility and we’re still trying to get our arms around exactly how that will impact revenue quarter-to-quarter.

Brian Drab - William Blair

So even after this strong quarter -- there is an echo there, sorry.

Chris Conway

Go ahead.

Operator

And I do apologize; it looks like his line went out of the queue. We’ll take our next question. (Operator Instructions). And we’ll take Richard Eastman from Robert W. Baird.

Richard Eastman - Robert W. Baird

Yes. Good morning.

Chris Conway

Good morning Rich.

Richard Eastman - Robert W. Baird

Could you just maybe talk for a second or two, we talked about this BHA up profit at this 12%, better than 12% in the quarter, and David you addressed this with the mix of business. But given how this business is likely to flow in through the year, can you give us a sense of maybe the OE sales as a percentage of BHA sales in the first quarter? In other words, what’s the delta of the distribution and the mix of business from OEM to aftermarket potentially look like?

David Fallon

Yes. Rich, we don’t necessarily want to start getting in the practice of disclosing each quarter what that mix is. What we can do is if you look at that entire business, the CLARCOR Industrial Air business, we’ve guided full year revenue in the $245, $250 range. In the long-term, we believe half of that business will be gas turbine and half of it will be Membrane and Industrial Air products. Of the 50% that is gas turbine, depending on the quarter you could have a mix of 40% systems up to 60% systems. And as we kind of implied in our comments, the mix of systems in the first quarter was at the lowest point that we would anticipate this year.

Richard Eastman - Robert W. Baird

Okay. And is the mix more influenced then by the systems on the gas turbine side being low or is there anything to suggest that the mix between gas turbine and essentially dust collection or baghouses, is that mix influential in the quarter?

David Fallon

Yes. Certainly, if you look at the Industrial Air business and then also the gas turbine aftermarket filter business, that’s going to be because of its aftermarket base, it’s going to be a little bit more stable. With that said, it’s probably somewhat more volatile than what we would see for example at a Baldwin. But the volatility in both of those aftermarket businesses would be significantly less than what we will see on the system side in gas turbine.

Richard Eastman - Robert W. Baird

Right. And the aftermarket gas turbine business and the aftermarket baghouse business, just generally speaking the same higher profitability than the OEMs there?

David Fallon

In general, and there is some volatility on the system side, so we could have some systems that are very low margin, but there are some system sales depending on the market and the customer that we get a higher margin. The one thing that I also want to remind everybody is the seasonality in our businesses; in general our first quarter is our lowest sales quarter. And that’s historically been the case. And that is also the case as it relates to this CLARCOR Industrial Air business.

So, we would expect our first quarter sales to be our lowest sales quarter. So when you move from the first to the second quarter, we would generally expect an uptick in sales just from that seasonality.

Richard Eastman - Robert W. Baird

Okay, overall okay. And then, can I also ask, I think that maybe the thing that surprised me, just given that commentary, first quarter lowest; was there anything else in terms of volumes? Is there anything else in the first quarter at CLARCOR Industrial Air that bumped that up profit margin percent or can we think about that being in upper-end of what this business will deliver?

Chris Conway

Well, this is Chris. The business, again we’ve had what maybe 12 weeks to watch this business closely. So, you got to put cold March around what we’re proceeding at that point. But the business had a very good mix of baghouse product, high volume; we were running the lines fairly heavily in the first quarter. And so that’s helped on the baghouse absorption side on that part of the business.

We are looking at the details of those baghouse orders and looking at the spread of customers. There is -- largely this is a make to order type business with some repeat activity in it, but there is a lot of customers that will order once this year and maybe it will be 18 months before they order again, there is some that order regularly. So what we see on the baghouse side is that, I think we benefited from high utilization in this first quarter to one-time.

On the element side, one of the things that we’ve talked on the gas turbines aftermarket element side, the business introduced this product called [correct pro] about a year and half ago and the sales of that product have been picking up steadily and it carries a higher margin than the baghouse product and we were helped by the mix of that product coming on strong with a thinner mix of systems in this first quarter.

So I think essentially that maybe characterizes a little bit better for you.

Richard Eastman - Robert W. Baird

Yeah, okay. And that 12% includes the amortization, right?

David Fallon

That is correct.

Richard Eastman - Robert W. Baird

Okay.

David Fallon

Which we anticipate being about $8 million for the full year.

Richard Eastman - Robert W. Baird

And then just a quick question that I have on the Engine/Mobile side of the business, could you give us a sense, I think you had mentioned China was flat in the quarter kind of that rest of world piece, any better feel for how Q2 through Q4 look in China? I mean just kind of hearing mix things about aftermarket, as well as OEM sales?

Chris Conway

We feel at this point, it’s pretty much leveled to slightly up for the year is what our projection would be. And we like everybody else are watching what’s going on with the economic activity there and it’s pretty much anybody’s guess at this point whether they will see significant uptick. I think our hope is we continue to grow the aftermarket there partly through the OE dealer network and also through our own independent efforts. And the expectation will be that not dramatically improved growth prospects at this point from what the economy is doing there.

Richard Eastman - Robert W. Baird

Okay. And then just a last question, just wanted to jump back to I&E for a second, but in the U.S., U.S. was up a percentage point, one of the soft spots there was this aviation fuel business on the military side. Is that your reference to maybe some inventory adjustment or is that business declined for the full year, is that more tied to military budgets or just some inventory adjustments?

Chris Conway

It’s more tied towards the military spending and budget outlook.

Richard Eastman - Robert W. Baird

Okay. So that probably doesn’t change a great deal then?

Chris Conway

No.

Richard Eastman - Robert W. Baird

Okay. All right very good. Thank you.

Chris Conway

Thanks Rich.

Operator

(Operator Instructions). And we will take a follow-up from Brian Drab with William Blair.

Brian Drab - William Blair

All right, let’s see if I can work my phone this time.

Chris Conway

Okay.

Brian Drab - William Blair

We got new phones and then we get echoes all the time and I’m not sure you are happy there. What I was about to ask though is just on the gas turbine side, the GE Air side; it sounds like even after this very strong quarter that you are expecting a step up at least in revenue in that business from first quarter to second quarter?

Chris Conway

Yes.

Brian Drab - William Blair

Okay. And, but I shouldn’t expect the same thing on the -- in terms of operating profit from that business because it’s so mixed dependent and the mix was optimal or very favorable in the first quarter, and shouldn’t expect that for the balance of the year; is that correct?

Chris Conway

That’s correct.

Brian Drab - William Blair

Okay. And then someone asked about China and the outlook there and I think the message on the last call was China and Europe, the visibility just isn’t really there, it could be up -- could be down now. We saw the quarter was flat, you just made the comment on the outlook in China. But, so two questions; is your visibility in giving that forecast for China better for some reason now compared with what it was a couple months ago? And then also a same question for Europe and then what you’re expecting for the balance of the year in Europe?

David Fallon

Yes, Brian. So as we talked about at year-end, the expectation for growth in the international side of Engine/Mobile is relatively flat sales internationally, heavily dependent upon Europe and China. We anticipate sales growth in the U.S. 3% to 5%. When you bring in all together, we have 1% to 3% growth overall for Engine/Mobile. So flat in Europe, flat in China, we still have those expectations implicit in our forward guidance for the full year.

I would say we’re probably more optimistic at this point than we were three months ago, but not optimistic enough that we are prepared to change our guidance for the full year. So, we have additional volatility in China because of the 85% exposure to OE. We’ve had a good month followed by a poor month in the first quarter. So, we are probably exactly where we were at the beginning of the year, but our long-term outlook as far as optimism is probably more favorable now than three months ago.

Brian Drab - William Blair

And again the increased optimism is just based on results that you are seeing or something that you are seeing in the backlog or conversations with customers there?

David Fallon

Correct. So based on our discussions with customers and we have some very large customers over there. We believe that there could be some stronger orders coming in the second half of the year.

Brian Drab - William Blair

Good, okay. All right, thanks very much.

Chris Conway

Thank you.

Operator

And at this time there are no further questions in the queue. I will turn the call back to you, Mr. Conway.

Chris Conway

Thank you. The results we reported on today come from the hard work of all our CLARCOR employees. We invested to grow our business both organically and through acquisitions. Our balance sheet has been put to work and we are confident in our future. Thank you for your interest and your questions.

Operator

And this does conclude today’s conference call. At this time, you may now disconnect.

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