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AAON Inc. (NASDAQ:AAON)

Q3 2007 Earnings Call

November 07, 2007 4:15 pm ET

Executives

Norman Asbjornson - President and CEO

Kathy Sheffield - VP, CFO and Treasurer

Analysts

Frank Magdlen - The Robbins Group

David Woodyatt - Keeley Asset Management

Graham Ryan - Bears Capital Market

Tony Polak - Maxim Group

Anthony Rabb - Perminar Capital

Operator

Good day and welcome to today's AAON Incorporated ThirdQuarter 2007 Earnings Conference Call. Just to remind you, this call is beingrecorded.

And at this time, I'd like to turn the call over to Mr.Norman Asbjornson. Please go ahead, sir.

Norman Asbjornson

Good afternoon. Thank you.

Before I go any further, I'd like to read theforward-looking disclaimer. To the extent any statement presented herein dealswith information that is not historical, including the outlook for theremainder of the year, such a statement is necessarily forward-looking and madepursuant to the Safe Harbor provisions of the Securities Litigation Reform Actof 1995. As such, it is subject to the occurrence of many events outside AAON'scontrol that could cause AAON's results to differ substantially from thoseanticipated. Please see the risk factors contained in our most recent SECfilings, including the annual report on Form 10-K and the quarterly report onForm 10-Q.

Thank you. I would like to introduce Kathy Sheffield, ourVice President and CFO, and turn it over to her. Thank you. Kathy?

Kathy Sheffield

Good afternoon and welcome to our conference call. We appreciateyour attendance today. I'd like to begin by discussing the results of the threemonths that ended September 30th, 2007 compared to September 30th, 2006.

Our revenues were up 11% to $70.9 million from $64.2million. Our gross profit remained constant at $13.6 million for both periodsand was 19.2% of sales for 2007 compared to 21.2% for 2006. Selling, generaland administrative expenses decreased for the third quarter by 7.9% to $5.5million or 7.7% of sales from $6 million or 9.3% of sales for the same timelast year.

Operating income increased 6.8% to $8.2 million or 11.5% ofsales from $7.6 million or 11.9% of sales. Net income went down to $5.4 millionor 7.6% of sales compared to 8.4% of sales last year. Diluted EPS for bothquarters of 2007 and 2006 were $0.28 per share.

Now, for the nine months that ended September 30th, revenueswere up 13.3% to $200.4 million from $176.9 million. Gross profit increased31.9% to $45 million or 22.5% of sales from $34.1 million or 9.3% of sales.

Our SG&A expenses increased for the first nine months by7.3% to $16.5 million or 8.2% of sales from $15.4 million or 8% of sales for2006.

Operating income increased 52% to $28.5 million or 14.2% ofsales from $18.7 million or 10.6% of sales. Net income increased 47.5% to $18.6million or 9.3% of sales from $12.6 million or 7.1% of sales. Diluted EPS forthe nine months was $0.98 per share versus $0.66 per share a year ago.

Our earnings per share for the three months and nine months periodof both years were based on approximately 19 million shares and are reflectiveof the company's three-for-two stock split that occurred on August 21st.

Moving to the balance sheet now, the current asset ratioincreased to 2:5 from 1:7 for the same period last year due primarily to higheraccrued liabilities based on our higher sales that are related to both warrantyand commissions payable.

Our capital expenditures for the nine months ending September30th were $8.7 million. Expenditures were related to new equipment purchased toincrease production efficiency and also to some renovations to our Tulsa facility.

Shareholders equity per share as of September 30th was $5.69compared to $4.85 for the same period a year ago. Also, the company paid cashdividends of $5 million in 2007 and also bought back stocks from certainretirement incentive plans in the amount of $7.1 million.

I'd now like to turn the call back over to Norm who willdiscuss our results in further detail along with new product information andthe outlook for the remainder of the year. Norm?

Norman Asbjornson

Thank you. There are a number of things which need to bediscussed here relative to what's happening in the economy and also in ourCanadian facility; to the economy first.

In the month of July, we found that there was some sort ofhappening occurring. We don't know what is happening in the marketplace. And wehad an unexpectedly low booking month in July, as compared to our June booking.We were talking to our representatives who said they have plenty of jobs theywere sure they were getting, but for whatever reasons the contractors weren'tplacing the orders as fast as it was anticipated.

It caused us some concern and we started not replacingworkers in our facilities, thinking that we were on the edge of the downturn.And so we started letting attrition slow the workforce down. Regarding August,all of a sudden the situation reversed itself, and these anticipated ordersstarted coming in and we were moving forward at a brisker pace. Augustcontinued into September and in October there was the same thing.

So what happened? To give you some percentages that reflectwhat happened, over the four-month period, starting from the end of June in the1st of July through the end of October, our total input of orders wasup 12.9% even with that weak month of July.

If we just take the three months and discount the Julynumbers altogether, in the last three months, our orders compared to 2006 wereup 44.5%. So you can see there's been a remarkable switch. Whatever was occurringin July didn't continue. In fact, everything got much healthier than what wehad anticipated.

So as that was occurring, we had already started reducing ourworkforce. Of course, we had a little higher drop-off than what we wereanticipating in the way of revenue. We thought and should have gotten upsomewhere around 15% revenue growth, instead we got about 11% revenue growth.

Some of that we couldn't turn around, because since theorders didn't come in during July, we couldn't ship them out. We wouldn't haveshipped hardly in August, but we would have shipped a fair number of them inSeptember if we had the manpower or setup to do so. So that did have a revenueeffect upon our P&L statement, and it also, of course, had a bottomlineeffect on the same period of time.

So this is a portion of the problem. Another, if I take alook at October so we can give you a sense of how much it’s changing. I'vealready told you that if I took the four months revenue, and it was up 12.9%compared to 2006, and I told you that if I only took the last three months,it's up 44.5%, If I just take October by itself, it's up 57.2% compared to ayear ago. So it's throwing a lot of difficulties in forecasting, I guess, iswhat I could say.

It does indicate one thing though, which we said in ourrelease this morning, we're anticipating and we have gone back into the hiringmode and into building up our workforce again. And we expect to have a goodfourth quarter for this reason as far as orders coming in. the door.

However, on the other side of the situation, a problem whichwe mentioned in the release this morning has to do with the exchange ratebetween the Canadian dollar and the US dollar, plus the operation of theCanadian facility. The operation of the Canadian facility continued to be lessthan anticipated and not making money during the three months. This wasmagnified by the operating part of it. The majority of the problem turned outto be the exchange rate and how the exchange rate affects us.

It's like this. Most of the sales that we do out of theCanadian facility are done in the United States. So if we take anorder in the United Statesfor $1 and when we took it, we thought we were going to exchange it for $1.20or something in Canadian dollars. In reality, by the time we ship it andcollect the money, we get something like $0.97 or $0.98 instead of getting$1.20. So of course, the exchange rate change is a very significant thing.

Now then, we were booking business in the Canadian facilityvery well in the first part of the year anticipating that we were going tospeed the facility up. We've had a great deal of difficult trying to speed thefacility up. So it became obvious that we weren't going to meet the revenuenumbers we were trying for, and so we started slowing the order input down atthe end of March, and we did that by increasing prices.

The net result, however, is that the orders that we tookbefore that time period had to be shipped and are still being shipped out ofthat facility today. So the exchange rate that we're looking at is not justbetween what we collect for today, but what we anticipated in the first part ofthe year. So there is a problem which will continue into the fourth quarterwith us.

It will have about the same effect on us as it did in thethird quarter, we think. The exchange rate for those of us who aren't watchingit would be anticipated based upon trend lines and based upon various people'scomments in the newspaper and whatever the Canadian dollar is worth, as much as$1.10 or $1.05 by the end of the year. So that's a negative [bonus].

Summing up, what I'm seeing right now, our Longview facility is doing very well. Theorders for the air handler that we started building down there haven't grown asfast as we thought, as early as we thought. They are now growing the way wethought they would, but we had a delayed reaction in how fast that startedhappening. And it's picking up speed.

In the Tulsa operation, as Imentioned with the numbers I have given you here, we have an input of orderswhich tells us we're picking up speed again in the Tulsa facility. So those two which equate toover 90% of our business are looking very good, and we've got something lessthan 10% out of the Canadian facility, which is looking bad. It's kind of likehaving a speck or something in your eye. It bothers you very much, but it's nota big deal to clean it out. It just sometimes takes a little bit of time, andthat's what we anticipate here. We are looking at several alternative actions,but we're not going to continue to have these losses for very long.

That kind of gives a very quick summary of what's going on.Now, from an operational standpoint, a couple of questions sometimes are asked.What about your bad debts or bad debt reserve? And our bad debt experience hasbeen trending down for a number of years and is continuing to trend down. Ourwarranty expense is trending down and has been trending down for a number ofyears. We expect to hold that.

Now, let's talk a little bit about the expectations for nextyear; what we see and what we're reading. There are various things that are outthere that are making predictions about trendlines. I would say that from myexperience, right now, the trend of the industry, not talking about AAON, butjust talking about the industry, would tell me that commercial construction isprobably going to slowdown somewhere maybe to little or no growth, and evenpossibly becoming a little bit negative.

A lot of people would say, well, what about the residentialsituation? The general tenure of everything I read is it's had a substantialreduction this year, but the reduction is moderating and isn't expected tocontinue too much into next year. And there is talk of it being somewherearound no reductions for the year 2008. So there has been a little slowdown.

Now how does all of that affect my perception of what AAONhas the capabilities of doing? We aren't going to be introducing a lot of newproducts, but we have already introduced a number of new products that are anywherefrom five years into their life history to just a couple of months into theirlife history. So we anticipate those to pick up momentum and grow. And they arethings, which in many cases, like I said some are very recent, work in our --they have worked before.

If I go down to all of our product lines one–by-one and lookat the growth from year-to-year, it's obvious that one of our big growthfactors are units which we did introduce four or five years ago, mainly ourlarger tonnage equipment, which includes large tonnage rooftop units, waterchillers and large tonnage condensing units.

These have grown at a much faster rate and show every signof continuing that growth. We are a very small part of that portion of thecommercial market. And so even a flat market I don't think is going to havemuch effect upon our growth. I think we're going to continue our growth becausewe have some very marketable things that are not copies of other peoples. Itsniche marketing and we're filling a niche that is, in our opinion, needs to befilled. And so, we anticipate that to grow as fast as we want, we need to tellour story and get people to listen and realize the value we got available.

In the smaller tonnage grouped ups, likewise, we'reexperiencing substantial growth on a year-to-year basis, and much of that is,as far as we can see, going to continue. Those of you who have been listeningto us for quite sometime, know that being a very limited customer-based companyover the years to becoming a much broader-based, and through that cycle we wentthrough a lot of national accounts in big time.

And as we've grown and we’ve had to choose sometimes betweenour customers because of our limitations on production capability, we've tendedto go toward the general market, a little bit away from the national accountsfor a number of reasons. This meant less reliance on fewer customers et cetera,et cetera, and a little more profitable part of the business world.

And we are now pretty well stabilized with a good nationalaccount business as well as a good general business other than nationalaccounts which include schools, houses, hospitals, and a lot of otherfacilities, which sometimes run counter to the general market condition. Thisoccurs because many of these are governmental-supported facilities, and theywill sometimes spend money to get the marketplace growing a little faster.

So it's, in our opinion it is still a good viable market forus to continue our growth pattern. But the nature of it is changing apparently.But as I said, if we were just to look at recent trends for the last threemonths, and even if we go back and pick up the very weak month of July, we'restill up 12.9%. And if we just look at the last three months, we're up 44.5%,and if I looked at last month, up 57.2%. So the trend line is obviously notdown.

That being said, I think I'll turn it over to you people toask questions. Hello?

Question-and-AnswerSession

Operator

Yes, sir. Are you ready for questions?

Norman Asbjornson

Yes, I am.

Operator

Thank you. (Operator Instructions)

And we'll take our first question from Frank Magdlen withThe Robbins Group. Please go ahead, sir.

Frank Magdlen - TheRobbins Group

Good afternoon, Norm.

Norman Asbjornson

Hi, Frank. How are you?

Frank Magdlen - TheRobbins Group

Good.

Norman Asbjornson

Good.

Frank Magdlen - TheRobbins Group

And I guess I'm more encouraged from your talking about theorder rate. But could you help quantify a little bit where the backlog standsnow or, say, at the end of the quarter?

Norman Asbjornson

I sure can. One moment. Backlog at the end of the quarterwas $55.4 million.

Frank Magdlen - TheRobbins Group

All right. And what you do think you could reasonably shipin the fourth quarter? And I say that because you brought your workforce down alittle bit and now you've ramped it back up a bit. And if I've heard you right,you would have shipped about $73 million or $74 million in the quarter. But youmissed by about $3 million or $4 million missed sales or missed shipments,because you just didn't have the labor to put it through the factories. Is thatcorrect?

Norman Asbjornson

That is pretty much correct and we were a little hesitant.We didn't want to throw a lot of overtime on it because that July scared us.And so, we were starting to ramp it back up, but more on standard, regular timeand throwing a lot of overtime out. So we could put overtime into the equationif we get that to thinking that this continuation of the order input goes upthat will happen.

Frank Magdlen - TheRobbins Group

Okay. And then what is your CapEx for '08?

Norman Asbjornson

It's going to be approximately where it is this year, andwe've told you all along about $10 million and right now we are at $8.7 millionroughly. Depending upon the arrival of the couple of pieces of equipment forour coil facility, we will be in the $10 million range plus or minus a littlebit perhaps this year. And next year, I don't see us exceeding that.

Frank Magdlen - TheRobbins Group

Okay. I'll jump in queue, and then I'll come back with somemore.

Norman Asbjornson

The net result, to answer you a little bit further, Frank,that's roughly what our depreciation is. So on a cash flow basis, thedepreciation and the CapEx are going to be about the same area. And so,profitability will go toward paying dividends plus buying back stock. And thedividends are somewhere in the $6 million area and the profitability is goingto be over $20 million. So we're going to have some excess money around.

Frank Magdlen - TheRobbins Group

Right. And I'll jump back in queue and come back to you witha couple of more questions.

Norman Asbjornson

Thank you.

Operator

Thank you. We will now take our next question from David Woodyattwith Keeley Asset Management.

David Woodyatt -Keeley Asset Management

What was the backlog a year ago?

Norman Asbjornson

A year ago for the same period it was $59.3 million. It'sroughly $4 million down.

David Woodyatt -Keeley Asset Management

Okay. I also wanted to ask you about, in the press releasewhere you're talking about buying back stock, your quote is just saying that ifyou make purchases at current levels that's going to enhance book value andearnings per share. It may enhance earnings per share, but it won't enhancebook value, either absolutely or per share. I wouldn't want to challenge you onyour knowledge of your business, but I think that's erroneous.

Norman Asbjornson

Where did you see that I was quoted on something like whatyou mentioned? I don't remember making those statements.

David Woodyatt -Keeley Asset Management

There is a paragraph where you mentioned that you're goingto repurchase up to 10% of the outstanding shares. It was approved by theBoard.

Norman Asbjornson

Correct.

David Woodyatt -Keeley Asset Management

The following paragraph.

Norman Asbjornson

Okay. We've talked about that it's currently substantiallyundervalued, the effect -- okay, the book value and earnings per shareremaining on the outstanding shares. If we lower the outstanding shares, thatwill have an effect upon the things relative to the outstanding shares.

David Woodyatt -Keeley Asset Management

Well, I think what you're missing is if you, for instance,bought $10 million worth of your own stock, you have to subtract $10 millionfrom shareholders' equity.

Norman Asbjornson

Yeah, that's out of earnings.

David Woodyatt -Keeley Asset Management

Shareholders' equity for the remaining shares actually goesdown, you have to pay less than book value per share to increase the book valueper share on the remaining shares. And you're still well above book value pershare of the stock. Just wanted…

Norman Asbjornson

All right.

David Woodyatt -Keeley Asset Management

In any event, it sounds like business is going very well.And I greatly appreciated your visiting the subs in Chicago.

Norman Asbjornson

Thank you.

Operator

And we'll now take our next question from Graham Ryan with BearsCapital Market.

Graham Ryan - BearsCapital Market

Hi, Norm.

Norman Asbjornson

Hi.

Graham Ryan - BearsCapital Market

Could you provide a little bit more detail about what newproducts you might be rolling out in the near future?

Norman Asbjornson

Well, as I said, I wouldn't depend upon them for bottomline,but I will tell you what we're doing. We're working on continuing what we begana few years ago, updating all of our present product line. And we've done thaton the two larger sizes of our rooftop units, and we are now going to do themix size down. Probably during the next year, we will probably get two sizesdown. We may still get the third one, which would mean our entire rooftopproduct line will be then redesigned and updated.

And the updating is very significant. We're going from oneinch of fiberglass insulation with one piece of sheet metal to two pieces ofsheet metal and two inches of foam insulation. We're upping the R-value, theenergy saving part of the cabinetry by about two to three times better, 200% to300% better cabinet. And we're improving the air-moving efficiency, the waywe're going to move the air will take less horsepower, as well as well thecooling of the air takes less horsepower. So it's a significant upgrade of theproduct line.

As we've been telling you, we've been bringing you new airhandling unit online, and we have got it online and are just beginning toexperience the sales. And so that's going to have a definite impact on ourvolume and bottomline because, I think, we've got an excellent product that'scompetitively priced for what it offers. And we will get growth out of that.

We're also into, but just playing within, we're not reallygoing seriously after the residential part, which we've been talking about forsometime. Since that is a depressed market, everybody who's in it is fightingpretty heavily for market share. And it's not a place for us to spend lot ofour effort while that is going on.

That's basically the two big things. And then, the otherone, I'll give you a feel for one of the other issues. Some of the other largethings that we've introduced and the kind of growth we've gotten out of them,it would appear that on a order booking case, the water chillers which weintroduced a few years back are going to our bookings. There are going to beabout 100% growth on bookings this year over last year.

On the large tonnage rooftop, which we've introduced severalyears ago now, it looks like its somewhere in the 15% or 20% growth from lastyear to this year. So those things which are growing rapidly right now haveonly been out there for a little while. And we would expect continued heavygrowth in those bigger tonnage products.

Does that answer your question?

Graham Ryan - BearsCapital Market

Yes, sir. It's very helpful. Can you provide a little bitmore detail? You're talking about how -- initially when you guys were optingaround I think Wal-Mart was a big national account you had, and they kind ofput you on the map. And then you, it sounds like, kind of moved away from thatto go into the more general market and establish your customer base there. Areyou now putting more of a renewed focus on going back and getting some of thesebig national accounts, is that what you're trying to say?

Norman Asbjornson

Yes, to a degree. What happened is we had a slowdown in thegeneral commercial market in the early 2000's. And during that slowdown, ofcourse, what business was out there was being fought over pretty strongly.Because of the pricing levels that were occurring in some of that nationalaccount, we chose not to take the orders at the price level that they weretaken at. And we instead were pursuing, broadening our product or our customerbase, and we got into more of the general market.

And therefore, we had a slowdown in the national accountbusiness more than offset by the other part. The market now is stronger and wehave the capability now of building more product. We made a lot of capitalinvestments which have given us the ability to build more than what we'regetting in orders right now. And so, we're more seriously going after it.

And I spoke just a few minutes ago about the fact that we'reintroducing a whole new line of small tonnage products. And that's where lot ofthe national account business is in those kinds of products, which goes up toabout 30 tons in a unit size. And that's where, for instance, you mentionedWal-Mart, Wal-Mart is within that scope of product line. And we think as weintroduce these new products, we're going to have a much better chance toenhance our national account business.

Graham Ryan - BearsCapital Market

Okay. And then the last question: Any thoughts of hedgingthat exchange rate or taking up some sort of derivative to kind of mitigatethat risk?

Norman Asbjornson

I haven't gotten into that yet. It probably should, but Ihaven't at this point in time. I'm getting a lot of conflicting advice as towhat's likely to happen. And the one which we're obviously real concerned aboutis the Canadian dollar. At this point, no, I have not done anything on it.

Graham Ryan - BearsCapital Market

Okay. Thanks a lot.

Operator

And we'll now go back to Frank Magdlen with The RobbinsGroup.

Frank Magdlen - TheRobbins Group

Norm?

Norman Asbjornson

Yes, Frank.

Frank Magdlen - TheRobbins Group

Yeah. What were the revenues in Canada? And if I understood youright, we should look for about another $0.5 million loss from Canadain the fourth quarter, is that correct?

Norman Asbjornson

Probably somewhere in that vicinity, Frank. Like I said,you've got to be dependent to a large degree on what happens to the exchangeratio. As I explained, a lot of that business comes back in the US. Sowhen we change the US dollar back to Canadian dollar, and we get less than weanticipate; it will have an effect on the bottomline.

What has happened on the Canadian orders? Just let me tellyou in a moment here. I've got them right now. We were growing the orders.Between '05 and '06, we grew them about 15%. And because of the problems we'rehaving this year to last year it's diminishing. We've raised the price sinceMarch. We've raised the price close to 30% to try and offset the exchange rate.

The problem with it is that because we have that largebacklog, which we're still working out, the new dollar or the new orders atimproved pricing, as we've raised the price since March, have not flown throughto the bottomline. They will start flowing through, and it gives us anindication by what we've gotten from a month that we just closed or closing onOctober, which we don't have the final numbers on yet, but where we are at thispoint looks like it might be having some of that impact.

So it has also done one other thing. It slowed down theorder input, which was -- normally we would go and do that. It was slowing andit was (inaudible) to not take orders that shouldn't be profitable. And sowe're either going to get it profitable or we're going to take some otheraction. The profitability is going to be diminished without any question. It'sgoing to go down. It will go down this year. If I had to guess, I would saywe're going to be down somewhere around 40% on orders from what we were lastyear.

So it's going to reduce the size of our operation because wehave to depend upon one or two things, either Canadian orders, which aren'taffected by the exchange rate, or those orders which we can get at the higherprice in the US. And that is unknown to us because it's changing so fast or haschanged so fast that we don't have real good fix on it. We know what hasimpacted our ability to get orders.

Frank Magdlen - TheRobbins Group

But can you just quantify a little bit as to what Canadais going to do, maybe $10 million or $12 million revenue?

Norman Asbjornson

In revenue? Just one moment. Yeah, I was talking orders amoment ago, and just a moment, we're going to be probably at $15 million inshipments.

Frank Magdlen - TheRobbins Group

For '07?

Norman Asbjornson

For '07.

Frank Magdlen - TheRobbins Group

All right.

Norman Asbjornson

But we're not going to be taking orders at that rate becauseof the problems we're having with the exchange rate.

Frank Magdlen - TheRobbins Group

Okay.

Norman Asbjornson

We were well on our way to getting what distance we weregetting. We were well on our way to getting that, started to be corrected andmaking a profitable company, and then we've gotten hit by this other problem.

Frank Magdlen - TheRobbins Group

Okay. Could you help us out a little bit in looking at yourmarkets, what percentage of your revenue is now replacement versus newconstruction?

Norman Asbjornson

Let's talk about what replacement is and then we'll get intonew construction. There are two types of replacement business. There is theunexpected replacement business, which, in the middle of the summer some unitfails, and they say it's not worth fixing, buy a new one, which is theunexpected type of replacement that demands that you have a product availableright away because the people need the cooling right away. And then, there isthe replacement market where somebody knows something is getting old and theydecide when it's not so hot out that they're going to change those units outand put new units on the roof.

The unexpected replacement market is best served by thosepeople who have distributors as a source of marketing of their product.Positive effect there is that they have a very good shot at that unexpectedreplacement market. The bad thing is a distributor cost more than a directsales force. So they have chosen to go that way and a couple of majormanufacturers are that way. Other major manufacturers, including ourselves,have gone direct route, which is either a factory-owned sales force orindependent agency direct sales force.

So on the unexpected replacement, we're not strong. We'restrong on the expected replacement. The market in general is a little morereplacement market than it is new construction. So one portion of thereplacement market we're strong in, one portion we're not. We are, however,more strong in the new construction than the people who have decided to go withdistribution or with distributors since there are sales force out there.

So there are three companies, three major companies that aredirect sales force, I would say, and two who are primarilydistributor-oriented. And so what does that do to us? Instead of being a littlemore than 50% in replacement like the market is, we're a little less than 50%.How much less? I'm going to guess right now we're somewhere around 45%replacement and 55% new construction.

Frank Magdlen - TheRobbins Group

All right. And then just a couple of other questions:Looking at your revenue, is it about two-thirds of the revenue growth fromprice and one-third from volume as you've worked through price increases overthe last several years?

Norman Asbjornson

Well, it's very immensely. This year we're probably gettingabout one-third of it through price increase and two-thirds of it throughactual growth. In past years, it's been the reverse or something in thatvicinity. But this year, we're probably going to get the actual dollar increaseas we're probably going to get somewhere around 5%, and we're probably going tobe, what, right now so far this year total of nine months growth revenue.

I got to check my numbers to make sure I'm telling you thetruth. We're 13.3% so far, and I think we're going to hold or increase that alittle bit, so that will kind of give a ratio.

Frank Magdlen - TheRobbins Group

Run that by me again. You said how much again?

Norman Asbjornson

Total change is 13.3% for the nine months.

Frank Magdlen - TheRobbins Group

All right.

Norman Asbjornson

And that we're probably going to hold in that percent,somewhere around that percent and possibly increase it. And of that, probably5% of that is price related.

Frank Magdlen - TheRobbins Group

Okay.

Norman Asbjornson

Although we had more price increase, some of that aren'tfollowing through the backlog just fast enough to change that.

Frank Magdlen - TheRobbins Group

Okay. Just a couple, simpler, questions: Kathy, how manyshares have you repurchased this year and about the average price? And thenanother thought is any major changes in tax rates?

Kathy Sheffield

On the shares that we've repurchased…?

Norman Asbjornson

Give him the dollar value, first of all.

Kathy Sheffield

Yeah. Keep watching just this year. That's from thebeginning.

Norman Asbjornson

All right, so all inclusive.

Kathy Sheffield

Yeah. That's the original plan. Bear with me just a secondon tiers here.

Frank Magdlen - TheRobbins Group

Or another way of looking at it going forward, Norm, is theplan you announced today is that a new plan and there's nothing left of the oldplan or is that…

Norman Asbjornson

Left in the old plan, when we went to dividend on basis ofthe new quantity of stocks, there's 100,704 shares yet authorized but not done.And the previous authorization based upon the new share quantity was 1,987,500,and we still have 100,704 shares left to buy on that. And we've announcedanother stock buyback, which we intend to start implementing after the blackoutperiod, which means we can start on Friday of this week.

Frank Magdlen - TheRobbins Group

Okay.

Kathy Sheffield

Frank, the numbers I have are available at my fingertipshere, have to do more with not just in 2007, but overall and reflect the stockssplit.

Frank Magdlen - TheRobbins Group

We'll take those.

Kathy Sheffield

On our original stock buyback, it is reflective of the stocksplit. The average price was $11.86. We've spent $22 million. And as Norm said,on that original buyback there is 100,704 shares left to repurchase on theoriginal plan.

We also, in 2005 started a buyback on 401(k) investmentsfrom the employees that they would like to diversify. We have repurchasedthrough that program 467,637 shares for an aggregate price of about $7.1million and an average price of $15.14 a share.

And then, we also have repurchased some stock back fromDirectors that began in November of '06. We have repurchased 260,625 shares foran aggregate price of $5.2 million and averaged at $20.08 per share. So wereally have three type programs that we have to purchase stock back. For thequarter, we purchased back 199,943 for an average price of $20.98.

Frank Magdlen - TheRobbins Group

Okay.

Kathy Sheffield

Of all three programs.

Frank Magdlen - TheRobbins Group

All right. Well, thank you very much. And we look forward toyour continued success.

Norman Asbjornson

Thank you, Tony.

Operator

And we'll now go to [Tony Polak] with Maxim Group.

Tony Polak - MaximGroup

Good afternoon.

Norman Asbjornson

Hi, Tony.

Tony Polak - MaximGroup

On Canada,can you give us an idea of what the gross margins are without Canada in your business, and atwhat point, do you fold it up?

Norman Asbjornson

If we pull Canadaout of there, just the way it is right now, our gross margins would have beenin the low 20s, somewhere in the 21 area on our other portion of the business.Folding it up is one of the alternatives, and we have raised the price enough.One or the other, we are either going to have it profitable or else we aregoing to do something else with it, and folding it up is one of thepossibilities.

Tony Polak - MaximGroup

Okay. When you do plan on retiring?

Norman Asbjornson

You are asking me when I am planning on dying. I don't planon retiring. I worked my whole life to get this job and I love this business, Ilove what I am doing. As long as my mind functions, my body prevails, I amgoing to stay at it.

Tony Polak - MaximGroup

Okay.

Norman Asbjornson

I am in a very good health by the way, probably never beenin real good mental shape, but that hasn't changed.

Tony Polak - MaximGroup

Sounds good. Thank you.

Operator

And we'll now go to Anthony Rabb with [Perminar Capital].

Anthony Rabb -Perminar Capital

Hi, Norm. How are you doing?

Norman Asbjornson

Just fine. Yourself sir?

Anthony Rabb -Perminar Capital

Good. Thanks. A quick question what percent of your mixwould you consider counter-cyclical in nature?

Norman Asbjornson

Well a good question. Probably replacement business iscounter-cyclical I think, and it probably goes up because what ticked off thecontractors and the consulting engineers and everybody who is in the businessthen redirects their effort toward trying to get more of the replacementbusiness to happen. And so they probably runs counter to the building constructioncycle because I think more with during those times. And so that would be in our45% or so counter-cyclical for sure, and then certain other portions of it forother peculiar reasons probably kick in and probably get you up to 50% orslightly better.

Anthony Rabb -Perminar Capital

Okay thanks, its very helpful.

Norman Asbjornson

Does that have answer your question?

Anthony Rabb -Perminar Capital

Yes it does, thank you. The next question is on thebuybacks, and I guess just to ask Franks question in another way, is looking atyour history of buybacks, it looks to be running around 1% to 2% of theoutstanding over the last couple of years, and I guess what I'm trying tofigure out is, should we expect a similar clip going forward or is this more ofan accelerated program?

Norman Asbjornson

No if you remember back or you kind of check back at ourannouncements before, when we announced a dividend we also announced acessation of stock buyback on the open market.

What Kathy was talking about is stock buyback that we didn'tcease doing, which was buying back if the employees wanted to sell their moneyout of their [floor] one, and reinvest it in other's, and it was also thatbecause some directors myself included had pretty big stock option plans whichwere coming due, it was decided rather than have those hit the market that wewould sell them at market price to the company if we chose to. And so thosewere the kinds of things that she was referencing, there was no buyback of thatauthorized 100,000 shares. Since - do you have the date handy, Kathy?

Kathy Sheffield

Yes, February 14th of 2006.

Norman Asbjornson

February 14th of 2006, we ceased buying back on that other100,000 shares. So this new plan is definitely going to be a much faster plan.If you look and see what that might be, you would have to go back. We've hadtwo stock buybacks. One, where we were discussing here, out of the essentially2 million shares, we bought back all but a 100,000 shares, look at that upuntil February of '06 and see the rate we were buying it back.

And prior to that, we had another buyback where we boughtback 10% of our shares. I can't give you the quantities of that. I think it was12%. Just as we finished that, we implemented the one that we're talking about,and you could go back essentially through the past almost 22% buyback that wehad prior to that time, and that would tell you how fast it happened.

I can tell you that 22% was bought back, just a minute Kathyis pointing it out to me here something.

Kathy Sheffield

This total is for both of these programs, same program atjust two different times. That's the total number of shares.

Norman Asbjornson

Okay. She correct me here a little bit that the 2 millionshares was for the two programs that we had before, and they started on October17th of 1999 and went till February 14th of 2006. So we bought back 2 millionshares during that time at a prevailing price then and we had stock splitsduring that time period. We've had 3 for 2 stock splits during that timeperiod.

Anthony Rabb -Perminar Capital

Okay. Thank you. Have a good night.

Operator

(Operator Instructions). And it appears there are no furtherquestions. So Mr. Asbjornson, I would like to turn it back to you.

Norman Asbjornson

Okay. I thank all of you for participating in our call. Iappreciate your support. I want to thank you, and in summary, leave you withthe idea that, yes, we've got an issue to be addressed to get the Canadianoperation corrected in some fashion. We are very much aware of it. We areworking towards getting that correction accomplished. The rest of the companyhas continued to work beautifully, and as far as we can see, it looks that wayfor the future. Thank you.

Operator

And thank you very much. That does conclude our conferencefor today.

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