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Executives

Norman Johnson - Chief Executive Officer and President

Bruce Klein - Chief Financial Officer

Tom Lawrence - Dye Van Mol & Lawrence

Analysts

Jeff Hammond - KeyBanc Capital Market

Rick Eastman - Robert W. Baird

Adam Brook - Sidoti & Co.

Brian [Bonheimer – Gabelli & Co.]

Gary Farber – CL King

Kevin Maczka - BB&T Capital Markets

David Lebowitz - Horizon Asset Management

Walter Schenker – Titan Capital

Brian Drab - William Blair

CLARCOR Inc. (CLC) F4Q09 Earnings Call January 14, 2010 11:00 AM ET

Operator

Welcome to the CLARCOR Inc. fourth quarter earnings conference call. (Operator Instructions) It is now my pleasure to turn the conference over to Tom Lawrence of Dye Van Mol & Lawrence, please go ahead Mr. Lawrence.

Tom Lawrence

Thank you and good morning. We appreciate your interest in joining us on CLARCOR’s conference call to discuss results for the fourth quarter and 2009 year-end. 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 Shay Jones at 615-244-1818 and she will send you a copy immediately.

Before I turn the call over to Norm Johnson, CLARCOR’s Chairman and CEO, I remind you that all statements made in the news release dated January 13, 2010 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 the information statements made during the call are made as of the date of the call, January 14, 2010. Those listening to any replay should understand that the passage of time by itself will diminish the quality of these statements. Also, the contents of the call are the property of the company and the replay or transmission of the call maybe done only with the consent of CLARCOR.

It is now my pleasure to turn the call over to Norm Johnson for his opening remarks.

Norman Johnson

Thanks Tom. Good morning and thank you for joining us today. With me are Bruce Klein, Chief Financial Officer; [Dave Fallon] Vice President of Finance and Kim Orr, Vice President and Treasurer.

We are pleased we ended the year with our best quarter of 2009 compared to both the prior year and the previous three quarters of this year. Earnings were at the high end of our guidance but still below 2008. As we discussed during prior calls we could not react fast enough to offset the decline in the economy in the first quarter but each quarter since has improved sequentially as we have reduced costs and increased sales.

Operating margins at 14.8% were the highest of any quarter this year and were more than the 14.3% we made for all of 2008. I am especially pleased our industrial environmental operating margin was over 9% for the quarter. We expect to reach 8-10% in 2010 and be over 10% in 2011.

Our people have done a great job in reducing costs and at the same time positioning us for the future. Obviously forecasting was a challenge in 2009. I am glad we were finally able to beat earnings estimates for a quarter. Hopefully this is the beginning of a trend which will continue for a long time. While we fully expect 2010 to be another challenging year we are more optimistic than we were a year ago. I will go over our outlook for 2010 and the growth we expect from our business units when Bruce is finished with his review of 2009.

Bruce Klein

Thank you Norm. As Norm said our fourth quarter results this year came in at the upper end of the forecast we issued in September. In most of our businesses in the last half of 2009 and particularly during the fourth quarter the sales decline we saw earlier in 2009 compared to 2008 fell greatly.

Though we did not see an across the board improvement it was true that many of our businesses began to see some growth in sales compared to earlier in the year. This was the case for heavy duty engine filters, HVAC filters excluding the loss of the 3M business, for our photo distribution business except for maintenance [under] to automobile companies and for our aviation fuel filter business.

In fact, our aviation fuel filter business in Europe actually grew in the 2009 fourth quarter compared to the fourth quarter of 2008 as did our heavy duty engine filter operations in Australia, South Africa and China. As you know, our packaging business had strong fourth quarter sales compared to 2008.

Operating margin continued to improve during the year but overall margins were certainly down from 2008. Having said that, we did see higher operating margin in 2009’s fourth quarter compared to 2008’s fourth quarter for domestic heavy duty engine filters, for HVAC filters excluding a $1 million charge we took in the fourth quarter to write down the value of a manufacturing plant we had for sale, for our European aviation fuel filtration business and for our natural gas filtration business.

Our packaging business not only grew strongly in the quarter compared to last year but operating margins improved significantly as well. After 16 consecutive years of growth in sales and profit, 2009 was a disappointing year for CLARCOR but it was still our third best year ever in sales and our fifth best year in operating profit. The combination of replacement business where even in bad times there is a recurring demand for maintenance filters, together with a diverse portfolio of companies in many different markets and geographies was and is a great advantage to have in a recession.

For example, even though our operating margins fell in 2009 from 14.3% to 11.6% operating margins actually grew in Europe and Asia. The margin decline was mostly in the US. Though our sales decline overall was about 14% in 2009 from 2008, sales in local currency actually grew slightly in Europe. In other words, even in a global recession we still had sales growth and margin improvement in certain operations and in certain regions during 2009.

We reduced our selling and administrative costs throughout the world by over 7% from 2008. As Norm said, we did not respond as quickly as we would have liked in reducing our manufacturing costs when sales demand dropped so suddenly and this caused overhead absorption problems for us but still by year-end our gross margin had improved and we expect the reductions we realized by the end of 2009 in our manufacturing costs to greatly benefit 2010 gross margin.

2009 was not an active year for acquisitions in terms of size but we did make smaller acquisitions during the year; Three in China, one in the US and one in the U.K. We continue to review other opportunities currently throughout the world.

Our balance sheet remains very strong and in some sense we have an embarrassment of riches or in this case, cash. We did repurchase nearly $20 million in stock during 2009 and paid over $18 million in dividends. Even in a poor year, we raised our dividend by over 8% as we expect profits and cash flow to continue to be strong in the future.

Norm?

Norman Johnson

Thanks Bruce. We believe we are well positioned for 2010. We expect most of the markets we serve to be stronger and believe there will be additional opportunities to increase sales and earnings beyond market growth. At the same time we want to be realistic. We expect growth but there are definitely a lot of uncertainties regarding the recovery of the economy and we do not expect it to be rapid or get back to 2008 levels this year. Until we see a more certain upturn we will continue to be conservative regarding our projections and spending.

We will continue to aggressively fund sales growth and cost reduction programs but at the same time remain cautious on other spending items. Management and selling expenses will not increase was much in 2010 and we expect both higher gross and operating margins.

Historically our engine/mobile business has been the growth and profit driver of CLARCOR. In my 20 years with the company we have only had one sales decline until 2009. Even with the sales decline we still maintained operating margins of over 20% as we have for the last 10 years.

In 2010 we expect to grow engine/mobile sales by 5-7%. This growth will be fueled by an improving worldwide economy and greater growth in Asia. We are not sure what will happen in the first fit OEM market but we are confident many of the aftermarket segments we serve will improve and come back more quickly.

As I said earlier our intermediate margin goal for the industrial environmental business is to reach an operating profit of at least 10%. There is no doubt some problems caused by our sales and the slowdown in the economy delayed this from happening as quickly as we expected. We fully expect in 2010 to be close one way or another to that number. 10 in 2010 has a ring to it.

Our CLC Air business will be profitable. Profits will increase as a result of our restructuring program which is virtually completed, sales from new products that serve each of our customers and new sales in the retail market. This business will make a significant contribution to our profits in the future. Some industry experts believe environmental air filtration will grow more than any other filtration market, benefiting from clean air regulation and customer demand. While we will be impacted by fewer sales to 3M we expect good growth in the quarter in these and other end-use markets.

In the long-term our companies serving the oil and gas markets could grow more than any of our other businesses. We are the worldwide leader in filtration for the natural gas industry and the high end segment of offshore oil drilling. You may have seen recent articles discussing oil companies drilling farther offshore because of restrictions on land and closer to shore drilling. These fields farther out in the ocean are subject to harsher environments and are the ones that use the most of our products.

We know the world and especially the United States is awash in natural gas. There have been numerous new discoveries in the last several years, new clean air regulations and its abundance will increase the demand for natural gas and our filters. I just saw in the Wall Street Journal this morning that Boone Pickens is abandoning his wind farm in Texas based on the price of natural gas and the demand for natural gas that he sees in the future, emphasizing the point.

We are well positioned for this growth around the world as we are the leader in both first vessel application and after market replacement products. We have introduced new products as well as implemented the distribution and selling technique for this market that have been used so successfully by [inaudible] for years. While we expect growth in most parts of the world, the leaders will be Asia and especially China. Our engine business is selling both first fit products to Chinese OEMs and growing aggressively the aftermarket. We also expect growth in the dust collector, chemical, fiber, oil and gas businesses in China where we currently manufacture products.

We will grow in Europe but we do not expect the overall growth in European economies to be as strong as Asia or North America. While still small, there are still significant opportunities in Brazil for both our engine and oil and gas businesses. JL Clark Packaging, as Bruce said had a great 2009 and 2010 will be even better. While some of the markets they serve have decreased they have identified new, recurring revenue growth markets to serve and have obtained the business.

We expect sales and profits to increase in all of our businesses in 2010 but increasing sales is the name of the game. The amount depends somewhat on the economy as well as our capability to execute our growth programs. All of our businesses have reduced costs from a year ago and while we will have additional cost reductions our long-term earnings growth is dependent upon revenue growth.

That is why we did not cut back in sales, product development and customer service in 2009. They will pay dividends this year. As I have said many times our recurring revenue sales market has and will continue to serve us well.

As Bruce said, our balance sheet remains strong. I am not sure about his comment about “embarrassingly strong” because I tend to like a strong balance sheet but it was strengthened by record cash flows in 2009. I suppose there might be a negative in that we are in a net cash position with cash and short-term investments of nearly $40 million over outstanding debt but our opinion is we are very fortunate to be in a position to fund internal growth programs, make acquisitions, buy back stock or in a worst case scenario withstand a further downturn.

Recognizing the significant opportunities we have, we are still taking a conservative approach to 2010. At this time we are projecting earnings in a range of $1.55 to $1.70 per share which represents a range of 11-22% over 2009 results. Normally we do not comment on individual months but recognizing you are all interested in how the economy is doing I will say our December was better than we expected with earnings significantly above 2009 for the month of December although still below 2008. This increases our confidence for the year but we still makes us realize the recovery is not over.

We now would be happy to answer any questions you may have. Operator, if you would please set it up. Thank you.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Jeff Hammond - KeyBanc Capital Market.

Jeff Hammond - KeyBanc Capital Market

A question on the industrial environmental I was hoping you could give a little more color on the outlook by the different businesses or end markets. It looks if you take into account the lost 3M business you are calling for that business to grow 9-11% and I just want to understand, a little more color on what you see out of oil and gas, liquid process, what kind of progress you are making on the retail channel to fill the 3M void.

Norman Johnson

Starting with the oil and gas business, we were pleasantly surprised last year how well our oil and gas business held up. The business continues to be strong as I speak, although there is always the possibility it could decline so we are expecting that business to remain good for us. Of course the good opportunity we have where we expect more rapid growth is serving the aftermarkets for the oil and gas business. I think like any business whether it be buildings, whether it be oil and gas, heavy duty trucks, railroads or whatever, some customers increased the maintenance cycle, didn’t do a change out in 2009. That can’t go on forever.

We talked about in previous calls distributors cutting back inventory and reducing demand for taking product out of the channel. Again, we see that stopping. So taking a long time to say it we expect the oil and gas business to grow next year. On what we call the CLC Air side of the business, the HVAC, you are right. We will have, as we said, the loss of the 3M business for 2009 for the first part of the year will have a negative impact. On the other hand we are introducing new products and Bruce did you say the exact number we expect excluding 3M in the HVAC side of the business?

Certainly it will be better growth in 2010 than we had in 2009. Aviation fuel filtration business is, as Bruce said, grew in Europe the last part of the year. That business probably won’t grow as much as the oil and gas business as it depends upon aviation but it is a good, steady business. Packaging, we are very fortunate I guess the packaging guys have heard us say so many times we like recurring revenue business and they have switched a lot of the focus. Instead of the promotional items we used to do to recurring revenue ongoing business and have secured some very significant new contracts we are building products for as we speak. I don’t know if that covers it.

Jeff Hammond - KeyBanc Capital Market

On free cash flow, are you expecting a big working capital build? That number came in pretty light to what I was modeling. Also on CapEx it seems like a pretty big bump 2009 to 2010 given what is maybe a modest recovery here.

Norman Johnson

Before Bruce gives you the specifics, I hope we have one heck of a need for working capital especially receivables because that would mean we would be selling more. Bruce do you have any specifics you want to talk about?

Bruce Klein

In 2010 we do expect working capital to increase. It won’t be a source of funds like it was in 2009. We expect it to be a use of funds. We do expect what we call plant additions, capital spending, to get back to normal levels in 2010 to the $30-35 million range so most of those will increase. Having said that, those both have a strong free cash flow year. It has been many, many years since we have not had one and [audio break]…

Jeff Hammond - KeyBanc Capital Market

I lost you there for a minute.

Operator

The next question comes from the line of Rick Eastman - Robert W. Baird.

Rick Eastman - Robert W. Baird

I think that is your side cutting out because I am having the same problem periodically. Can you give us a sense of what does the backlog in Peco look like at the end of the year? We have talked for a couple of quarters now about the quote activity being very strong but orders may be weak. Is Peco set up to be kind of a second half story?

Norman Johnson

If anybody hears us cutting out would you please let us know and interrupt right away. I don’t know what is causing the problem. We will get you the backlog number in just a moment.

Rick Eastman - Robert W. Baird

Can you just size that business? Did Peco end the year at $110 million or was it a little below that? Just a sense of the base there.

Bruce Klein

Probably just a little over $110 million.

Rick Eastman - Robert W. Baird

On CLC Air, could you give a sense…it was profitable in the fourth quarter. Did we exit with a slight profit or maybe a margin of 5%? What is the starting spot here entering fiscal 2010?

Norman Johnson

We entered with a slight profit. Going out probably just a little bit less than 5% because we still had some write off costs and things like that. At least in the black.

Rick Eastman - Robert W. Baird

You mentioned you absorbed maybe $1 million of cost takeout or restructuring costs in CLC Air. Is there any residual impact we should think about for the first half of 2010?

Bruce Klein

What we did in the fourth quarter was we took a charge on a piece of real estate we owned that had dropped in value in the fourth quarter of about $1 million. So that should be a one-time event and should not recur.

Rick Eastman - Robert W. Baird

Is that other expense?

Bruce Klein

No that is not in other expense. That is above the line.

Rick Eastman - Robert W. Baird

So our cost takeout there and the cost that will run through the P&L is largely behind us as well?

Bruce Klein

From the restructuring? Yes.

Rick Eastman - Robert W. Baird

Out of curiosity, the pension liability jumped significantly from Q3 to Q4. Can you explain that? Does that have any bearing on pension expense in fiscal 2010?

Bruce Klein

No. How much time do you have?

Rick Eastman - Robert W. Baird

I have about five seconds.

Bruce Klein

The biggest difference had to do with the difference in interest rate at the end of 2008 versus the difference in interest rate at the end of 2009. That was the single biggest reason for the change in pension liability jumping. All of it changed interest rates is going to affect pension expense. It is nowhere near as much as the jump in liability. Much, much smaller.

Rick Eastman - Robert W. Baird

So the P&L impact would be miniscule. One last thought, given how the this year unfolds against the comparisons we had in fiscal 2009 do you expect to see revenue growth on a consolidated basis in the first quarter year-over-year?

Bruce Klein

Yes.

Operator

The next question comes from the line of Adam Brook - Sidoti & Co.

Adam Brook - Sidoti & Co.

A quick question on the breakdown in regions. I know you said Asia is going to be strong. Maybe what is the breakdown between domestically and Europe and maybe some color on any margin business there is?

Norman Johnson

Could you state the first part of your question again please?

Adam Brook - Sidoti & Co.

I guess the question is kind of what your expectations are regarding performance domestically versus Europe and maybe if there is any margin difference between the two regions.

Norman Johnson

As I said we expect a higher growth rate in North America than we do in Europe. If you look at our businesses, certainly on the engine/mobile side of the business the percentage is higher in North America than it is in Europe. This is where we get, I don’t want to make this too complicated for you, but still a considerable amount of our product that we sell in Europe is manufactured in North America and we have in our company a transfer price. So when you look at our European margin it doesn’t include the profit we make on the North American sales in that. But our margins in engine are lower in Europe.

On the other hand, on the Peco Facet side of the business, that business at least on the facet side is about 50/50 but the profits there are equally strong in Europe as they are in North America. So from an overall change, the margin mix probably isn’t going to be that much different next year but slightly more growth in North America.

Bruce Klein

Let me add a little more color to that. In 2010 we expect the strongest growth will be in Asia followed by North America and in Europe. In terms of margins, we expect margin improvement in North America and in Europe although margins in Asia might be slightly down but it will be more than offset by the higher growth we expect in Asia.

Adam Brook - Sidoti & Co.

Maybe some update on some new product launches? It is something we kind of like to hear every quarter maybe with an engine/mobile particularly and even industrial environmental save the stuff within CLC Air?

Norman Johnson

On industrial environmental if you look at the CLC Air, we are continuing to introduce new nano fiber products. Some products in higher efficiency ranges. On the Peco side of the business, the oil and gas we have some new aftermarket products that we placed fiberglass that we can make called a peach product where we actually make the filter media ourselves and the new product we make will be using that same technology. On the Baldwin side we continue to introduce new channel flow air filter elements as well as we are doing a lot of work in fuel filtration for both serving the railroad market through our Clark filter operation and the Baldwin operation.

One of the things we are trying to position the company to be, certainly with being a leader in fuel filtration for aerospace and our Purolator company, natural gas in Peco, we have a group of people from all of our companies along with our corporate filter research media to bring in the best ideas. So how can we combine, which we have done, some of the technology that goes into aerospace to put into an engine filter? We have a couple of new products we are introducing for those applications as we speak.

Bruce Klein

Let me just interrupt and go back to the question Rick asked about order backlog. We have pretty much merged operationally our Peco and facet businesses. The backlog for Peco Facet at the end of the year was approximately $35 million.

Operator

The next question comes from the line of Brian [Bonheimer – Gabelli & Co.]

Brian [Bonheimer – Gabelli & Co.]

I just want to go back to the use of cash. Obviously with the major cash build during the quarter you have addressed in the past that your priorities are first internal investment followed by acquisitions. What are you seeing out on the marketplace as far as opportunities directionally at this point? Then where you may see avenues for growth.

Norman Johnson

Without targeting any specific acquisitions the nice thing about the filters business is there is always something to be looking at. While we don’t have anything to announce right now we certainly have some high hopes this year we will be able to get back in the acquisition game.

Brian [Bonheimer – Gabelli & Co.]

As far as…you don’t need to get into specifics but I think you talked about liquid filtration in the past. Is this a 2-5 year idea about the marketplace that there will be opportunities in that space?

Norman Johnson

I don’t think we can say six months or two years. It still is a high goal of ours to make acquisitions in that area. As I have said previously, serving the broadest array of markets of any filtration company, if a good engine/mobile company was available we would be very pleased with something in our CLC Air business or any of our businesses that would make sense for us we would pursue it.

Brian [Bonheimer – Gabelli & Co.]

Going back to the pension question before we have talked about the liability and we have talked about the expense. Should we look at cash contributions in a similar manner than we should the expense?

Bruce Klein

No. Cash contributions don’t necessarily relate to pension expense in any one year or any couple of years at all. We will detail this out more when we issue our 10-K in the next 10 days or so. We will have to make cash pension contributions of probably a couple of million dollars in 2010 that will be required for our Europe and US plans. There is no specific requirement to make larger contributions beyond that in 2010 although we might. We haven’t made a decision yet whether to fund at a higher level our US defined plan although we are certainly talking about it but there is no requirement to do that for 2010.

Operator

The next question comes from the line of Gary Farber – CL King.

Gary Farber – CL King

Can you give an update on trends in raw material input costs? Also give a sense of the portion of the industry that is private, are companies going out of business? Your competitors? Is there opportunity to take market share? Things like that.

Norman Johnson

As you well know in 2009 we enjoyed decreases in raw material purchases that although we are not seeing anything significant as we speak I think realistically we have to be prepared there might be some pressure from the commodities that we buy. Although nothing significant. We are only a month into the year.

As far as private companies going bankrupt, we are talking about private filtration companies? I am not really aware of any private filtration companies that have gone bankrupt. I don’t know if you are or not but I don’t know of any.

Gary Farber – CL King

Have there been opportunities though to take market share from some of the private people who may not have as strong of a balance sheet as you do?

Norman Johnson

We might have taken market share from them. We might have taken market share from other people. We certainly have to think with our balance sheet and the ability as we have talked about before to maintain our sales force, maintain our customer fill rates and everything like that we are certainly better positioned than virtually any company in the industry whether they be private or public.

Operator

The next question comes from the line of Kevin Maczka - BB&T Capital Markets.

Kevin Maczka - BB&T Capital Markets

I heard the same problem with the phone line and I think you are right there is no need to be embarrassed about a big cash balance. My question related to the prior question on raw materials. What kind of pricing is baked into your revenue guidance? You have a comment in your press release about responding quickly if those costs increase. How quickly can you respond with pricing?

Norman Johnson

First of all there is little, if any, price increase built into what the numbers we used to generate our earnings for our budgets for next year. As I have said repeatedly, one of the nice things about our business being in the aftermarket is we control the prices. If we want to raise prices we can do it tomorrow versus if you are dependent on OEM sales where you have to go through an elaborate process or even a lot of big OEMs they expect a price reduction every year. So we say that quickly as we have done in the past the last time…always when we have had inflation, we can move in 30 days to adjust our prices if we have to.

Kevin Maczka - BB&T Capital Markets

Along the lines of your gross margin comment expecting improvement in fiscal 2010 are there some specific cost reduction initiatives that are carrying over into 2010 you can maybe quantify? Maybe some programs you started but didn’t fully realize the benefit yet?

Bruce Klein

The single digit one of course would be the continuing improvement we expect from CLC Air which is not any one specific thing but rather an improvement in all their manufacturing facilities from the new equipment we have put in over the last several years and they are getting higher up on the learning curve and being able to use that effectively. That certainly is by far the single biggest thing that will impact our margin improvement.

We are not a company with major improvement projects that will move the needle a lot. What we have are hundreds of initiatives all of which are designed to improve our productivity at all of our companies. It is difficult to point to any one that is going to be significant but certainly the biggest single one would be the continuing improvements we expect at CLC Air.

Norman Johnson

Probably just one other one, and not as big as CLC Air, I mentioned in my remarks the business we do in the off-shore oil drilling. That is one of them. It is not the biggest sales decline we had. We see that coming back already. We are getting orders. That is not a tremendously big piece of the company but will still have a dramatic impact on that segment of the business as the volume increases. A lot of what will go to the bottom line.

Kevin Maczka - BB&T Capital Markets

Can you give a little bit more color within engine/mobile? It sounds like you are talking about similar growth rates for trucking, ag, construction, all of these types of end markets. I wouldn’t expect the same growth rate from all of them of course. Could you just give a little more color there on what you are seeing?

Norman Johnson

I will do my best. Certainly when you look at some of these filters that the filter part number goes on an ag tractor or construction machine as a heavy duty truck. Where we expect the biggest change to come would be in the heavy duty truck industry. Farming is a smaller piece of the business. You probably just saw in the paper the other day that there was a record corn and soy bean crop certainly farmers are going to plant just as much this year I would guess as they have in the past. We would have expected more to come from the so called stimulus programs with the construction projects although I don’t think we can track back our filters to those programs but we certainly think that is going to get a continued emphasis.

I think as far as rating increases we would expect farming was pretty strong last year. It probably won’t change that much and we will get more growth from heavy duty trucking as well as the construction business. Another strong business around the world for us has been generators. All of the engines that are used, and this is more outside of the United States than in the United States just for auxiliary power. That has been a strong driver for us.

Bruce Klein

To go back to your first question on gross margins, we would be disappointed if the gross margin percentage didn’t increase at least by two percentage points in 2010 from 2008 levels.

Operator

The next question comes from the line of David Lebowitz - Horizon Asset Management.

David Lebowitz - Horizon Asset Management

First, on the nano technology filters, what percentage of your business do they now represent and how fast are they growing as a percentage of revenue?

Norman Johnson

It is very small. It is primarily used right now in the dust collectors business. We are incorporating that technology into other products. Not even a percent. It is probably growth…I don’t have an exact number, but the last we do I remember we were seeing products like that growing by hundreds of percent but it is coming from such a small base.

David Lebowitz - Horizon Asset Management

Second, in terms of the underfunded pension liability have you looked into possibly converting into a defined benefit program?

Bruce Klein

We have a defined benefit program. The pension plan is a defined benefit program.

David Lebowitz - Horizon Asset Management

The packaging business, in terms of not emphasizing or reducing your need in the specialty product area, does that mean we are going back to historical margins at JL Clark or is that still something we can only aspire to?

Norman Johnson

I don’t know how far your history goes back. Hopefully if you look at what they were making five years ago we won’t go back to historic margins. If you are talking making 20% operating profit, and I know you have followed the company longer than anybody on the call, right now I wouldn’t see us back to making 20-25% operating profit but we certainly see double digit operating profit as a possibility. The job they have done as far as identifying new opportunities for more recurring revenue products which is enabling them to use their strong capabilities. They have done a great job.

David Lebowitz - Horizon Asset Management

The 10 in 2010 program you spoke about early on in the call on operating profit to the operation, the question is how much of that 10% operating, what does it translate to on a pre-tax basis?

Norman Johnson

I think it would be the same number.

David Lebowitz - Horizon Asset Management

There are on other expenses in that particular line of business beyond pre-tax? Beyond gross operating?

Norman Johnson

I’m sorry.

David Lebowitz - Horizon Asset Management

You are cracking up on us. I apologize. I will try to rephrase that if I may. If the goal is 10% in 2010 gross operating margin?

Norman Johnson

No, it is just operating margin. The operating margin, we have our gross operating margin which would be material labor and those types of things and then we have what we call operating expenses which is G&A which gets us to an operating which is really the same as EBIT. So the numbers we are giving you really there wouldn’t be anything else as far as a [PBT] number in those businesses. Of course we pay taxes on it.

David Lebowitz - Horizon Asset Management

So you are saying EBIT and pre-tax are the same in this instance?

Norman Johnson

Basically yes.

David Lebowitz - Horizon Asset Management

The wide range…

Norman Johnson

Just to make sure you understand I said the 10 has a ring to it but I think I used the number 8-10% for our goal for next year to cover ourselves a little bit.

David Lebowitz - Horizon Asset Management

The EPS range of $1.55 to $1.70, to reach something closer to the $1.70 than the $1.55 how much of that has to come from the revenue side and how much comes from the operating margins improving because of tighter cost controls?

Norman Johnson

Certainly with tighter cost controls and better productivity we can get closer to it. If we got enough sales revenue it would take care of itself. I can’t break out the exact number to say it is 50 and 50. We can do an analysis and come up with it but I just don’t have that number right now. Suffice it to say we would probably need a little better revenue growth than we are currently projecting to get at least over the $1.70.

Operator

The next question comes from the line of Walter Schenker – Titan Capital.

Walter Schenker – Titan Capital

On packaging given how strong the third quarter and especially the fourth quarter was, is there anything unusual about it? If not, I would have thought your forecast for 2010 on margins a roughly comparable to what they were in 2009. It seems we would be able to do better than 2009. I know you are being conservative but better in 2009 given how strong the year ended.

Norman Johnson

First of all there was nothing unusual. I will pass your comments on to the people that run their business and let them know that they better increase their forecast a little bit. I guess we are probably trying to be conservative, be realistic and not do our bragging until after we have accomplished a longer time period.

Walter Schenker – Titan Capital

To move on to what you would expect me to ask about, on CLC Air you made an effort last year to add a very large account which didn’t work. You have indicated you have added some smaller stuff. You do talk about quality in the product and also pricing. Does pricing have to play a significant role in your ability in this tough economy to gain accounts? You have talked about your willingness now that your core structure is in place. Do you need pricing to gain accounts?

Norman Johnson

I think on CLC Air business certainly we are going for the high end and hopefully the product we have with the filtered medium we have and customer service and everything that price if anything would be a minor impact and not the driver.

Walter Schenker – Titan Capital

Obviously no one wants to see this industry…

Norman Johnson

Can I give it a shot? Would it be appropriate to say that we have no intent to de-list?

Walter Schenker – Titan Capital

I think that is a good decision. How is that?

Operator

The next question comes from the line of Brian Drab - William Blair.

Brian Drab - William Blair

A clarifying question, I may have just caught the end of this answer and I don’t know if it pertains to the whole business but I heard you say you expect gross margin to be up 200 basis points in 2010 from 2008. Did I hear that correctly? Does that apply to the consolidated performance or a particular segment?

Bruce Klein

That is consolidated.

Brian Drab - William Blair

I am surprised to hear that type of projection given the guidance you have out there because the consensus view right now in terms of the analysts by Thompson has a forecast of gross margin in 2010 comparable to that in 2008 but the EPS view is pretty much in line with your guidance. Do you have any comment on that? You seem to be implying there is upside to the guidance you just gave.

Bruce Klein

The other side of that coin of course is SG&A change as well. All I am saying is I would be disappointed if gross margin doesn’t improve by a couple of percentage points and we have given you our projections for operating margin by segment and EPS so you can back in I guess to an SG&A number. I guess I don’t have any other comment besides that.

Brian Drab - William Blair

Looking at industrial environmental segment I just want to make sure I am thinking about this correctly, if you split the segment into industrial and environmental first of all and take into account the loss of business to 3M is it a reasonable assumption to think that the environmental side is roughly flat in terms of revenue in 2010 and the industrial side is up low double digits to mid teens?

Norman Johnson

I think it is reasonable to assume the environmental group taking into account the loss of the 3M business the growth will be a lot lower than it will be in the industrial side of the business. I didn’t catch your percentages.

Brian Drab - William Blair

I am just thinking in rough numbers on the environmental side if you lose that $13-14 million in revenue that is a high single digit headwind in terms of percentage points for that side of that business.

Bruce Klein

That is actually true. The environmental side of the business although we expect growth it will not be significant growth [inaudible] but on the [side] growth should be in excess of 10% which is how we get to the 6-8% in our press release for the entire segment.

Brian Drab - William Blair

In the fourth quarter of 2008 I think your margins benefited as they typically do from the reversal of some pretty conservative accruals throughout the year. Did that dynamic have an effect on margins this quarter or not as much?

Bruce Klein

A little bit. Not a lot.

Brian Drab - William Blair

Would you say not as much as the previous year?

Brian Drab - William Blair

That is correct.

Operator

The next question comes from the line of Jeff Hammond - KeyBanc Capital Market.

Jeff Hammond - KeyBanc Capital Market

Back to the 200 basis point gross margin improvement that is versus 2009 or 2008?

Bruce Klein

Versus 2009.

Jeff Hammond - KeyBanc Capital Market

You mentioned the strong December. Would you say that is reflected in guidance? You saw December come together. You have updated that in your forecast or if that continues that would be upside?

Norman Johnson

We are getting probably into more detail here than we are capable of really knowing because there are just so many uncertainties and I don’t want anybody to walk away with being too optimistic but recognizing we do have significant opportunity. With that said, if December results if we did that much better other months as we did in December we would be at the higher earnings guidance than we are. But it is just one month. We are coming from a really lousy December in 2009 which may have reflected even some of our budgeting characteristics so I don’t want to declare victory on that yet but it certainly gives us more confidence that at least the year is going to be positive in total. Going out and saying we are going to make $1.80 per share is kind of like you get up to bat in the first inning and you hit a home run. I am not sure we are going to hit a home run the next four times we are at bat.

Next quarter we will be able to give you a little bit better guidance. I just thought that was important to bring that up so you know that our company and some other companies are seeing the same thing and it was nice to have some positive news for a change.

Jeff Hammond - KeyBanc Capital Market

Can you quantify your restructuring savings or the absence of restructuring costs you expect to get in CLC Air in 2010 versus 2009?

Norman Johnson

We don’t really expect to have significant, if any, restructuring costs in 2010. That is done.

Jeff Hammond - KeyBanc Capital Market

What would your spend have been in 2009 or these one-time charges?

Bruce Klein

I don’t have the number in front of me. It certainly was several million but I don’t have the number in front of me. I will have to get it and try and get it to you.

Jeff Hammond - KeyBanc Capital Market

How about benefits from restructuring actions taken earlier?

Bruce Klein

What we can tell you is CLC Air will improve its profitability in 2010 compared to 2009 by millions of dollars.

Jeff Hammond - KeyBanc Capital Market

I am just trying to bridge because if I take the midpoint of your industrial environmental guidance on margins and top line, you are talking about $20 million or so, almost doubling of op profit and I just want to understand how much is isolated to this kind of change in CLC Air versus just incremental margin you get from revenue growth.

Bruce Klein

I expect an improvement in industrial environmental in total from 2009 and 2008 the single biggest element is going to be CLC Air improvement.

Jeff Hammond - KeyBanc Capital Market

Back to oil and gas you said the backlog at the end of the year was $35 million. Can you give us a sense of how that looks on a year-over-year basis and maybe versus 3-6 months ago?

Bruce Klein

We are trying. We have the numbers. The end of last year it was about $37 million.

Jeff Hammond - KeyBanc Capital Market

Presumably it is up sequentially? Over the last 3-6 months.

Bruce Klein

The order rate or the quoting rate is very strong. It has been for quite some time now.

Norman Johnson

The quotes changed to orders is certainly an issue but there are a lot of quotes going on right now in that business.

Operator

There are no further questions at this time. I will turn the conference back over to you for any additional or closing comments.

Norman Johnson

Thank you. We appreciate all the questions you have asked. Hopefully we have been able to answer them to your satisfaction. As we said, 2009 while not a good year for us, we think we came through it okay. I think you have heard about all of the exciting things we have going for 2010.

I said in my comments we are going to be cautious until we prove we can do it. We have the opportunity to make things happen and we look forward to the next call. Thank you.

Operator

Ladies and gentlemen that does conclude today’s conference. You may now disconnect.

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Source: CLARCOR Inc. F4Q09 (Qtr End 11/28/09) Earnings Call Transcript
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