CLARCOR Management Discusses Q3 2013 Results - Earnings Call Transcript

| About: CLARCOR Inc. (CLC)

CLARCOR (NYSE:CLC)

Q3 2013 Earnings Call

September 19, 2013 11:00 am ET

Executives

Tom Lawrence

Christopher L. Conway - Chairman, Chief Executive Officer and President

David J. Fallon - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance

Analysts

Brian Drab - William Blair & Company L.L.C., Research Division

Nicholas Prendergast

Brian Sponheimer - Gabelli & Company, Inc.

Robert W. Mason - Robert W. Baird & Co. Incorporated, Research Division

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the CLARCOR Incorporated Third Quarter 2013 Earnings Conference. Today's conference is being recorded. [Operator Instructions] It is now my pleasure to turn the conference over to Mr. Tom Lawrence of Dye, Van Mol & Lawrence. Please go ahead.

Tom Lawrence

Thank you. We appreciate your interest in joining us on CLARCOR's conference call to discuss results for the third quarter of 2013. 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 [ph] 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'll 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 wanted to let people know that all the information statements made during the call are made as of the date of the call, September 19, 2013. Those listening to any replay should understand that the passage of time by itself will diminish the quality of the statements. 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.

Christopher L. 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 and our guidance. I will finish by sharing some highlights from the last quarter, which point to progress being made on our long-term growth objectives, before we open it up for questions.

We reported diluted earnings per share of $0.57 for our third quarter after the close of trading yesterday, a decline of 5% from $0.60 per share in the third quarter of 2012.

Two noncash items impacted our earnings this quarter, reducing diluted earnings per share by approximately $0.10 per share. One, we have talked about previously, the $3.1 million charge to account for a pension obligation settlement. The other is a loss on disposal equipment for low-end HVAC disposable filters, the $0.99 spun fiberglass product you might find on the bottom shelf of a retail store. David will comment on these further in his remarks.

Excluding the impact of these 2 noncash items, we had an excellent operational quarter. Operating margin increased to 17.2%. Gross margin at each of our reporting segments increased from the third quarter of 2012 and our selling and administrative expenses as a percentage of net sales declined 0.8 percentage points from last year's third quarter.

We also continue to see progress in our march to 15% operating profit in our Industrial/Environmental segment, with an operating margin this quarter of 12.5% in that segment after removing the noncash charges.

Now I'll turn it over to David.

David J. Fallon

Thanks, Chris. As mentioned in our press release and as Chris alluded to, our third quarter financial performance was clearly impacted by 2 significant noncash items. In our second quarter conference call, we briefly discussed the $3.1 million pension expense related to the final retirement plan payment for our former Chairman and CEO, Norm Johnson. This third quarter noncash charge was anticipated and included in our earnings guidance throughout the year. And, of course, due to the nature of this expense, it will not recur going forward. The entire $3.1 million expense was recorded in selling and administrative expenses in the third quarter and has been allocated to our 3 reporting segments.

The second significant third quarter noncash item was the $4.6 million loss on disposal of equipment at our HVAC Filtration business. As mentioned in our press release, this equipment was developed pursuant to our Project 14 strategy to manufacture low-end, low-margin disposable air filters. While we continue to sell these low-end products, our primary focus certainly has shifted towards higher-end, higher-margin product lines.

This strategic shift, in conjunction with the redesign of our disposable filter products and the development of a manufacturing process which allows us to build these filters at a lower cost, led us to the decision to dispose of this equipment in the third quarter. The entire $4.6 million loss on disposal has been recorded in cost of sales in our Industrial/Environmental segment.

To allow investors and analysts to better understand our results of operations excluding these 2 noncash charges, we have included an additional table on the face of our press release to illustrate our adjusted 2013 third quarter and year-to-date financial results. We have also included reconciliations at the end of the document showing how we determine these adjusted amounts. These adjusted 2013 non-GAAP figures are not intended to replace GAAP results, but we feel that their inclusion facilitates meaningful analysis and comparison with 2012. In my comments today, all statements related to third quarter and year-to-date 2013 financial results refer to these adjusted non-GAAP figures.

On a consolidated basis, our third quarter diluted earnings per share, as adjusted, increased 12% to a record third quarter high. This earnings growth was primarily driven by a 1.1 percentage-point improvement in operating margin as our net sales increased just 1% from last year's third quarter. Our higher operating margin was the result of both an improvement in gross margin and lower selling and administrative expenses as a percentage of sales.

In dollar terms, our selling and administrative expenses, as adjusted, declined almost 4% from last year's third quarter and on a year-to-date basis. This expense reduction is the result of a benefit from the reversal of an accrual related to contingent consideration in the TransWeb acquisition and continued focus on the elimination of waste consistent with our cost-conscious culture. It is important to note that our drive to reduce selling and administrative cost has not been at the expense of continuing investment in research and development and in quality sales and engineering resources, which we consider vitally critical to achieve our long-term growth initiatives.

From a segment perspective, our third quarter sales at Engine/Mobile increased 2%, including 5% growth in the U.S., partially offset by a 4% reduction in foreign sales.

Our domestic sales were driven by our ongoing heavy-duty engine aftermarket product and distributor initiatives, which catalyzed 6% growth in that market. Most of our other domestic Engine/Mobile markets also posted nice growth, including sales of our locomotive filtration products, which increased 7% from last year's third quarter.

Outside the U.S., we had another solid quarter of growth in China, which grew 9% from last year's third quarter, primarily due to the continued expansion of the heavy-duty aftermarket. OE sales actually declined in the third quarter.

Despite strong sales growth in China, sales in many of our other foreign markets were down significantly, including Europe, Australia and South Africa. Lower sales in these geographic markets in the third quarter more than offset the sales growth in China.

From an operational perspective, Engine/Mobile operating margin, as adjusted, increased 0.8 percentage points from the third quarter of 2012, almost entirely due to lower selling and administrative cost as a percentage of sales, due to our continuing focus on cost reduction and control.

Third quarter sales in our Industrial/Environmental segment increased 1% based upon continued strong global growth in our Oil and Gas Filtration business, offset by sales headwinds in several other filtration markets in this reporting segment. Sales of Oil and Gas filtration products increased 6% in the quarter and have grown 8% on a year-to-date basis.

A significant catalyst of our Oil and Gas growth this year has been the expansion of our Latin American market, which grew about 300% in the quarter and 180% on a year-to-date basis. As we mentioned in our second quarter conference call, our growth in Latin America demonstrates our commitment and ability to grow in expanding international markets. After entering Latin America with a small sales office in Brazil only a few years ago, we have been able to build that market into a $15 million to $20 million business, with legitimate expectations going forward for continued growth at a double-digit rate.

Third quarter sales in other filtration markets in our Industrial/Environmental segment offset some of our growth in Oil and Gas. For example, U.S. HVAC and air filtration product sales declined 10% from last year's third quarter, primarily from a significant reduction in swine filtration sales for a variety of reasons including a hangover from last year's drought. Although we continue our excitement with the long-term growth potential of this higher-margin swine filtration market, lower year-over-year sales in the third quarter and expected lower sales in the fourth quarter are reminders of the volatility and uncertainty inherent in the launch and penetration of any new product line.

From an operational perspective, Industrial/Environmental operating margin, as adjusted, increased 1.1 percentage point to a record third quarter high of 12.5%. This higher operating margin was driven by both a slight expansion of gross margin and a more significant reduction in selling and administrative expenses as a percentage of sales.

I'd like to close my comments with a few words concerning our 2013 earnings guidance. As discussed in our press release, we lowered full year diluted earnings per share guidance by $0.10 from a previous range of $2.45 to $2.55 to a current range of $2.35 to $2.45. This revision was significantly influenced by the $0.06 per share negative impact of the $4.6 million loss on disposal of equipment. The remaining $0.04 per share reduction in guidance was driven by lower-than-internally-projected operating results. The $3.1 million noncash pension charge did not influence our change in guidance since it has been projected throughout the year.

The $0.04 per share reduction related to lower projected operating results is primarily driven by challenges with top line growth in several filtration markets, ironically excluding our global Oil and Gas business and the domestic heavy-duty engine aftermarket. We experienced lower year-over-year sales in several significant foreign heavy-duty engine filtration markets in the third quarter, and we expect headwinds in these geographic markets to continue in the fourth quarter.

In our Industrial/Environmental segment, we expect sales pressures in offshore oil drilling filtration and our domestic HVAC and swine filtration markets to continue in the fourth quarter.

With that said, I turn it back over to Chris for additional sales and operational comments.

Christopher L. Conway

Thank you, David. I'd like to take a few moments to review some operational highlights from the third quarter. We have many examples of success in our growth initiatives. In Engine Filtration in North America, as David mentioned, we saw 6% growth in our heavy-duty aftermarket. This is the result of continued growth in our product offering with hundreds of new products added this year, as well as the addition of new customers. Our largest customer in that business continues to grow and we are growing with them, resulting from our continued high level of service, high product availability and the broad product offering I just mentioned.

We also added a large multi-location heavy-duty truck lube customer this past quarter, and expect significant sales as a result of their promotional launch featuring our Baldwin products.

And our locomotive filtration, as David indicated, saw a 7% growth in the U.S. as railroad tonnage shipped has improved over last year and as new products we developed for OEMs to meet tighter emission regulations have started to ship.

Our sales of engine filters in China continue to grow, which is the result of new products and expanded aftermarket business, both through our OE customers and our own network of independent distributors.

Shifting to our Industrial segment. I'm pleased with the continued growth we see in our Oil and Gas business. This past quarter, we grew 9% in natural gas and bulk jet fuel filtration. We've previously highlighted the continued expansion of natural gas work in the U.S.

This quarter, I'd like to point out that our bulk jet fuel filtration business, which is part of this segment, has consistently been a key contributor and last quarter was no exception. We gained new business at airport locations we had not penetrated before and saw some significant sales at existing long-standing customers in both the commercial and military segments.

Aftermarket sales in the U.S. for commercial and military aviation were up close to 20% for the quarter and year-to-date. This business operates with a high level of customer service, which is a distinguishing hallmark of CLARCOR's emphasis across all our companies.

In our Aerospace business, we were up over 10% in sales as we continue to sell certified aftermarket parts to commercial airlines, as well as sell and ship first fit systems to OEM customers like Boeing. We've also had success growing in this business in Europe. This past quarter, we secured a parts supply contract with a major European-based airline which will generate sales going forward.

We continue to make progress in developing our presence in Brazil, as David indicated. Our sales were up significantly over last year's third quarter as we shipped a large vessel order for a new refinery and continue to sell filters for offshore platforms to Petrobras. On the dust collection side in Brazil, we are partnered with a well-recognized Brazilian company and are working with them to promote our UAS-style product in the Brazilian market.

In our Industrial business in China, we're making progress in selling into the fibers and plastics market with sales 10% over the prior year. These products support global multinational chemical and fiber companies who are producing in that market for domestic and export sales.

Our growth in dust collection sales in China continue as we have introduced products for portable and fixed weld fume collection which are popular with many of the fabrication shops in China, which are seeking to improve working conditions in their facilities.

These are just a few examples of the growth we are seeing amidst broader headwinds across many of our markets. Our continued emphasis, good time or bad, is to serve our customers well, introduce new products and expand our geographic footprint. The examples I've shared are indicators of the foundation that we continue to build for long-term growth of the business. These successes require hard work and persistence, but we are confident the investments and initiatives we are making today will pay dividends over the long run.

We'll now open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Brian Drab with William Blair.

Brian Drab - William Blair & Company L.L.C., Research Division

Can we dig a little deeper on China just for a second? A few questions, maybe tell us roughly what total sales are in China, or what they were in the third quarter? And then how are the OEM sales into China -- or I guess you said they're down, but how much were they down? And what's the breakdown now between OEM and aftermarket in China at this point?

Christopher L. Conway

Okay. I'll have David answer that question for you.

David J. Fallon

Yes, there's a series of questions there. I think, first, to size the market, it's about a $40 million market for us in Engine/Mobile and the run rate is generally pretty even as you go through the quarters. If you look at the overall breakdown in our business, right now, it's probably 80% OE and 20% aftermarket. And that aftermarket includes both sales to independent distributors and also to OE dealers. The OE sales, which we had expected to increase in the third and fourth quarters, were actually down in low to mid single-digits while our aftermarket sales were up, from an OE side, close to 50% and from an independent aftermarket perspective, close to 30%. So we are hitting our initiatives in growing that aftermarket and as expected, we had very successful results in the third quarter. However, as we talked about in the second quarter, we were hoping for double-digit growth in China in the second half of the year after experiencing close to 20% growth in the second quarter. That did not happen, primarily because of some headwinds on the OE side. We expected that to increase significantly based on some communication we had from some of our significant OE customers. Those sales did not materialize and we are not optimistic that those sales will materialize in the fourth quarter. As a result, we anticipate growth in China in the fourth quarter to be up in the mid single-digits. Still pretty good, but not the double-digit growth rate that we had anticipated at this point in time at the end of the second quarter.

Brian Drab - William Blair & Company L.L.C., Research Division

Okay. And one follow-up question on China. The aftermarket gain, was that driven more by increased distribution presence in China, or primarily by just getting your first fit systems on the road and having the aftermarket presence?

Christopher L. Conway

So it's a combination, Brian. This is Chris. We have previously mentioned a launch of a major aftermarket initiative through one of our OE customers. That program has launched well and continues to do well. But we also continue to see additions of our own independent distributors and broadening of our own product lines. So I think both those factors have helped.

Brian Drab - William Blair & Company L.L.C., Research Division

Okay. Great. And then I'm not sure you gave this level of granularity on the call, but shifting to Europe, how did the Engine/Mobile segment do specifically, and how did the Industrial/Environmental segment do specifically?

David J. Fallon

Europe was down about 7% in the third quarter. On a local currency basis, however, it was down about 10%. In Industrial/Environmental, which is driven primarily by Oil and Gas, Europe overall was up 6% but Oil and Gas was up 12%.

Brian Drab - William Blair & Company L.L.C., Research Division

Okay. And then did you say the Engine/Mobile growth in Europe, or...

David J. Fallon

The Engine/Mobile was down 7% in U.S. dollars but down 10% in local currency.

Brian Drab - William Blair & Company L.L.C., Research Division

Okay. And is that more on the OE side or aftermarket side there?

David J. Fallon

The aftermarket side.

Brian Drab - William Blair & Company L.L.C., Research Division

I mean, I know, most of your exposure is on the aftermarket. So that's driven...

David J. Fallon

Correct.

Brian Drab - William Blair & Company L.L.C., Research Division

Okay. And then maybe just one more question. The swine filtration products were, for the last year or maybe more than a year, is a pretty good source of growth for you. Something changed in the outlook there? Why is that a challenged business, it seems, in the quarter and going forward?

Christopher L. Conway

Brian, this is Chris. The swine business really is in early adoption phase of the market, I would call it, and one of the factors that's affecting it -- that affected it last year was the draw [ph]. The fact that producers make decisions on investing in new barns and outfitting them with filtration, based on the cost structures they see and what's happened with the drought last year and the pressure on corn prices, farmers and producers basically made the decision to delay investing in new capital. And there's still a carryover effect of that. So it's one of these things that, for that industry, there tends to be these cycles of investing and then holding back based on corn prices being 70% of the input costs for the raising of the hogs.

Brian Drab - William Blair & Company L.L.C., Research Division

Okay. And then maybe just ballpark. How much in revenue is that -- maybe how much in revenue will that business be for you in the full fiscal year?

David J. Fallon

Right around $5 million to $6 million.

Brian Drab - William Blair & Company L.L.C., Research Division

Yes, so it's for the full year?

Christopher L. Conway

Right.

David J. Fallon

Correct.

Brian Drab - William Blair & Company L.L.C., Research Division

So it's not major.

Christopher L. Conway

So it's relatively small at this point.

Operator

We'll hear next from Nick Prendergast from BB&T Capital Markets.

Nicholas Prendergast

On your industrial EBIT margins, it looks like they're about 11% in 2011, 12% in '12, and it looks like they're probably going to be about the same for this year. I know you touched on the fact that you've got this 15% in 2015. Can you comment on how you plan on getting there and your confidence level that you can actually get there in 2 years?

Christopher L. Conway

Yes. We've talked about this in previous calls that we see it coming in 3 different ways. One, we're continuing to grow our Oil and Gas business and the process side of the Industrial/Environmental segment, and that carries higher margins than the 15%. So with that growth, we get the benefit of increased margin. The other 2 factors are, one, improvements in the operating efficiencies of our HVAC business. And then the third is the comments we've made about moving upscale towards higher-end offerings in the HVAC and environmental air market. So those 3 factors are what really are helping us to drive to those numbers.

Nicholas Prendergast

And -- so you're still confident that you can actually make that by 2015, though?

David J. Fallon

Yes. I'm not sure that we've specifically thrown out a 2015 date. But we believe that in the next 2 to 3 years as we exit that time period at a run rate, we can be at a 15% operating margin pace.

Nicholas Prendergast

Okay. And on your balance sheet, it looks pretty strong. You guys have about $4 a share in net cash. It's been a while since you've actually executed a deal and buybacks are relatively muted right now. Can you maybe comment on your capital plans or priorities?

David J. Fallon

Yes. Our capital plans continue to be what they've been in the recent past. And number one, we certainly love to continue to fund our quarterly dividend. We plan to continue to fund internal growth projects, and we've done some of those projects and very recently with a research and development center in Mineral Wells, Texas to support Oil and Gas initiatives. We've added capacity to our heavy-duty engine filtration manufacturing here in the U.S. We plan on expanding our distribution center here as well. But beyond the dividend and internal growth initiatives, we absolutely would love to entertain a larger accretive acquisition. And then outside of that, our next priority would be to continue buying back shares.

Operator

We'll take our next question from Brian Sponheimer with Gabelli & Company.

Brian Sponheimer - Gabelli & Company, Inc.

Just to stay on the balance sheet and cash flow, roughly speaking, you're looking at $200 million in net cash in the balance sheet, $215 million in EBITDA this year. It's probably arguable that the balance sheet could take a turn and a half of leverage. So you're talking about $500 million or so of potential -- of potential dry powder for an acquisition or a larger buyback. I guess what's preventing you from deploying leverage as a tool right now given where rates are? And should we expect anything different over the course of the next 2 to 3 years?

Christopher L. Conway

I think there's nothing preventing us from deploying more leverage other than the fact that, at this point, we're looking at a number of different possibilities in acquisition pipeline. We're inclining to just hold our dry powder for the right opportunity. At this point, I don't know that we would redeploy in any different way. So as we said before, it's a high-class problem to have. We recognize that it's there but we're not just going to do something irrational based on the numbers that are sitting there.

Brian Sponheimer - Gabelli & Company, Inc.

Right. And would it make sense at all, looking out, to be able to term out some debt for 7 or 8 years out at 5%, just to continue to have the ability to fund an acquisition at the rates that you can get right now?

David J. Fallon

Yes, that's something that we talk about internally. I don't think we're prepared to share any specific strategy on this call. But we very clearly look at our cash capacity, not only the cash sitting in our balance sheet, but our ability to borrow additional. And we see that as a strong asset for us. We absolutely are ready and willing to deploy that asset going forward. But as Chris mentioned, we're not going to do something just to do something. We want to make absolutely sure it's a right -- it's the right deal, it's the right opportunity. And we very consistently said in the past, we'd rather do 1 larger deal than 10 smaller deals. So we certainly recognize the cash accumulating on our balance sheet. One thing to consider is that about half of that is trapped offshore and we definitely would like to use that for international acquisitions. But your point and concern is well taken, Brian. And I just want to give you confidence that we recognize that and we are looking for value-added uses of that cash going forward.

Brian Sponheimer - Gabelli & Company, Inc.

Sure. Great. I appreciate the color there. Just a -- within the operations, what's your sense of inventory, particularly for -- within the aftermarket, both in the Engine and Industrial side? Are you pretty confident right now that whatever destocking that may have been taking place is over, and you can potentially get a double benefit if we start to get some economic growth here?

Christopher L. Conway

I would say that we think that pretty much, the destocking, any that had occurred, is behind us. Most of the distributors are out there fairly lean right now. So, yes, I think your premise is fairly accurate for where we see things.

David J. Fallon

Yes. And we don't believe we are getting the whipsaw benefit of a restocking. So we believe a lot of the destocking occurred last year. We do anticipate a benefit at some point in time from restocking, but we don't think we have experienced that thus far this year.

Operator

[Operator Instructions] We'll hear next from Rob Mason, Robert W. Baird.

Robert W. Mason - Robert W. Baird & Co. Incorporated, Research Division

I wanted to ask about the Oil and Gas business, see if you could provide any color, Chris, on how bookings have trended across your various geographies? It sounds like South America's still somewhat strong. But just how those have trended during the quarter. And then secondarily, last quarter, you had mentioned you had some shipments on vessels coming up near year end or would straddle your year end. Timing could be a concern there, just wanted updated thoughts on how that may be playing out.

Christopher L. Conway

Sure. I would characterize our backlog right now as essentially flat from the end of last calendar year. As we have indicated, yes, we've got some significant orders that are shipping out of that backlog and we have some more orders in the pipeline that are coming in behind those. Certainly, maybe not as large as the 2 or 3 that we've highlighted. In terms of geographies, yes, the backlog in Latin America is strong. We've had, both in Brazil and Mexico, some significant orders. There's a couple of other orders that are out there that we're in the midst of bidding on right now, that we have yet to hear on. When we look across the European -- we include the Mid East in our European segment for that business. And the Mid East still has projects going on. The rest of Europe, we don't see too many -- a lot of smaller projects. And then in Asia and Australia, we've seen a little bit lower level of activity in the recent months. Then I didn't comment about the U.S. Canada has been off from a capital standpoint. The U.S., though, continues to have a steady stream of business and both in engineered or order business. And we've also had some success in -- a fair amount of success in shipping product that we've built -- vessels that we built and put into stock that we're shipping out of stock for fairly quick turnaround. So I think the U.S. is still robust. Latin America, very strong. The Mid East, fairly steady. Asia maybe a little bit off and Canada, a little bit off.

Robert W. Mason - Robert W. Baird & Co. Incorporated, Research Division

Any thoughts, just on the timing of these vessels that you had commented on last quarter? Just -- is that factored into this year, or do you have any slippage in the next year?

David J. Fallon

Rob, at this point in time, we're anticipating most of those vessels to ship here in the fourth quarter. As you know, there is some volatility with timing. If you look at the numbers, our sales in our -- the Industrial side of our Industrial/Environmental segment should be up about 12% in the fourth quarter versus the third quarter. So there's a nice spike there and that will eat into our backlog a little bit, but that's the additional large orders we're anticipating in the fourth quarter. However, if you look year-over-year, our Oil and Gas sales in the fourth quarter will be up only about 3% because last year in the fourth quarter, we had a very strong shipping quarter. And that's a product of timing as well. So at this point in time, we have not adjusted our guidance, our top line guidance in the fourth quarter for Oil and Gas projects from what we had anticipated 3 months ago.

Robert W. Mason - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then Dave, you mentioned, I thought, you had an accrual that you reversed related to TransWeb. But that was in the third quarter?

David J. Fallon

Yes. So as part of the acquisition, there was a small piece of contingent consideration dependent upon financial results. Based on the performance of TransWeb, where we sit today, we have concluded that we will not have to pay that contingent consideration and that payment would have been due after 2015. So as a result, we reversed that accrual and it was a little bit over $1 million.

Robert W. Mason - Robert W. Baird & Co. Incorporated, Research Division

Okay. Any thoughts as to when that's -- your air business, TransWeb included I suppose, maybe hits bottom? Or at least, we hit some easier comps and see a reversal in the trend?

Christopher L. Conway

I think, obviously, from our point of view at this point, we think we're there. We think business is going to improve from here. The commercial and industrial side of that business is still steady. It's -- this year is off a little bit because of the way the spring weather affected us. But I think, in general, we see operating profit in that business is gradually improving like we thought. We have trimmed out some top line sales that weren't as profitable as we wanted. So I think we're past most of that, call it rationalization effort, at this point.

Robert W. Mason - Robert W. Baird & Co. Incorporated, Research Division

Okay. And the TransWeb, the kind of the large, plus customer headwind, does that get behind us in the fourth quarter as well?

David J. Fallon

Mathematically, at some point in time, we're going to benefit from a year-over-year comp. But I would say at this point in time, we're not optimistic that sales will return to previous levels any time in the next several quarters. So we continue to struggle with the impact of that 1 larger customer, but I believe the year-over-year comps start to get a little bit better here in the fourth quarter.

Operator

We currently have no further questions. At this time, I'd like to turn the conference back over to Chris Conway for additional or closing remarks.

Christopher L. Conway

Thank you. CLARCOR's mission is to make the world a cleaner and safer place for people and equipment. The markets we serve depend on us for timely service, excellent support and high-quality products. None of those happen without the dedication and hard work of all our employees, who I wanted to recognize and thank today, and thank all of you on the call for your interest and your questions. Goodbye.

Operator

And this does conclude today's conference. At this time, you may disconnect.

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