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ESCO Technologies, Inc. (NYSE:ESE)

F4Q07 Earnings Call

November 12, 2007 5:00 pm ET

Executives

Pat Moore - Director of Investor Relations

Vic Richey - Chairman and Chief Executive Officer

Gary Muenster - Senior Vice President and Chief FinancialOfficer

Analysts

Paul Coster - JPMorgan

Patrick Forkin - Tejas Securities

Richard Eastman - Robert W. Baird

John Quealy - Canaccord Adams

Steve Sanders - Stephens, Inc.

Operator

Good day and welcome to the ESCO Fourth Quarter Year-End2007 Conference Call. Today's call is being recorded. With us today are VicRichey, Chairman and CEO; and Gary Muenster, Senior Vice President and CFO.

And now, to present the forward-looking statement and forintroductions, I’d like to turn the call over to Miss Pat Moore, Director ofInvestor Relations. Please go ahead.

Pat Moore

Good afternoon, everyone. Statements made during this callregarding fiscal 2008 and subsequent year's expected results, futuredevelopments and the timing of revenues in connection with the companiesPG&A contracts, the company's TNG software, Hexagram's RF 6 networkelectric product; the certainty, timing, and impact of the Doble acquisition,and other statements which are not strictly historical are forward-lookingstatements within the meaning of the Safe Harbor provisions of the federalsecurities laws.

These statements are based on current expectations andassumptions and actual results may differ materially from those projected inthe forward-looking statements due to risks and uncertainties that exist in thecompany's operations and business environment, including but not limited to therisk factors referenced in the company's press release issued today and therisk factors referenced in the company's press release issued on November 7,2007.

We undertake no duty to update or revise any forward-lookingstatements whether as a result of new information, future events, or otherwise.In addition, during this call, the company may discuss some non-GAAP financialmeasures in describing the company's operating results.

A reconciliation of these measures to their most comparableGAAP measures can be found in the press release issued today and found on thecompany's Website at escotechnologies.com under the links investor relationsand press releases.

I’ll now turn the call over to Vic.

Vic Richey

Thanks, Pat. Good afternoon and thank you for joining ustoday. Before I give you my perspective, I’ll turn it over to Gary to cover afew of the financial highlights.

Gary Muenster

Thanks, Vic. As noted in the release, we reported GAAPearnings of $0.64 a share during the fourth quarter, which does not include the$20 million in actual shipments and cash collections from the DCSI's electricportion of the portion of the PG&E contract, which was worth about $0.20 ashare.

On an actual delivery basis, our operational EPS would'vebeen $0.84 in the quarter. For the year, we reported $1.28 a share on a GAAPbasis or $1.48 on a delivery basis including these electric products shipments.I also want to remind everyone that are reported results include an additionalquarterly charge of approximately $0.06 a share or $0.25 a share for the fullyear related to the amortization of intangible assets.

As I mentioned on the August call, we were projecting astrong fourth quarter and excluding the accounting related revenue deferral atPG&E; we delivered on our expectations.

The 2007 fourth quarter EPS increased 60% over prior year ona 33% increase in sales. All three operating segments generated significantlyhigher sales and profit contributions compared to the prior year fourthquarter.

The Filtration segment once again had a very strong quarteras both PTI and VACCO delivered EBIT margins greater than 20%. Sequentially,when comparing the fourth quarter to the third quarter, again, all threeoperating segments showed very strong growth in sales and profits.

The Test segment generated the most significant improvementduring the fourth quarter as sales increased nearly 30% and EBIT increasedsignificantly from the third quarter. The communications segment had anoutstanding quarter led by Hexagram's nearly 150% increase in sales over theprior year fourth quarter along with an EBIT margin over 22%.

At DCSI, we continue to be the market leader in productdeliveries to the co-op and muni market as we delivered an industry-leading $94million worth of TWACS products to over 200 customers in North America during2007. Our balance sheet remains exceptionally strong as we ended the year withnearly $19 million in cash while net cash provided by operating activities wasover $45 million for the year.

During the year, we used $18 million of cash, which wasconsistent with our plan and was driven by ongoing investments in capitalequipment, AMI software upgrades and share repurchases. In the fourth quarter,we repurchased approximately $10 million of our stock and we still have an openauthorization to repurchase an additional 935,000 shares.

Entered orders were a bright spot for the year as we booked$562 million in new business, bringing our total backlog to $288 million atSeptember 30. This backlog amount reflects an increase of $35 million or 14%from the start of the year.

Our particular interest was the receipt of nearly $50million of AMI orders received from PG&E at DCSI and Hexagram in the fiscalyear. Subsequent to year-end, Hexagram received a purchase order from PG&Efor an additional 100,000 gas units worth approximately $6 million.

Moving on to our guidance for '08, which currently does notinclude the results of the Doble acquisition currently expected to close at theend of this month. We will update or 2008 guidance shortly after closing thetransaction. We expect 2008 operational EPS adjusted for certain intangibleassets to be within the range of $2.03 to $2.18 a share, with GAAP earningsincluding amortization to be between $1.75 and $1.90 a share.

While it is not our practice to provide quarterly guidance,since we always have several moving parts and certain contracts and the relateddeliveries can move a month or two around at quarter and, I will tell you thatconsistent with our 2007 results, the 2008 EPS outlook by quarter is moreheavily weighted towards the second half of the year.

With that said, we do expect favorable EPS comparisonsduring the first half of 2008, when compared to the first half of 2007. On anoperating unit basis, the communications segment is leading the expected EPSgrowth outlook in 2008 by projecting over 35% top line growth and EBIT marginsof approximately 15% as all product offerings within this segment areanticipating year-over-year growth.

Hexagram sales, driven by additional product deliveries to PG&Eshould increase nearly $20 million or 40% in 2008. And Comtrak is expected todeliver over $12 million of product in 2008. Filtration is projecting anothersolid year in 2008, as sales are expected to increase over 11% and EBIT marginsshould be around 13%.

Test sales are expected to increase approximately 5% withEBIT margins up significantly over 2007 and are expected to be approximately12.5%. I'll be happy to address any specific financial questions during theQ&A.

And now I will turn it back over to Vic.

Vic Richey

Thanks, Gary. As Gary mentioned, our results for the fourthquarter and fiscal year were generally in line with our guidance, excluding thedeferral of the electric portion of PG&E contract. We encountered a numberof issues in '07, which I believe we successfully managed our way through.

Certainly, the slowdown of our deployment at PG&E andtheir decision to evaluate other alternatives to our PLC solution was a majordisappointment. In addition, we had an adverse arbitration ruling in our Testbusiness, related to a legacy contract, which cost us around $0.06 a share.

Despite all the challenges, we were still able to grow salesand profit year-over-year. And, we made significant progress across the companyon many fronts, which has positioned us well for significant improvement infiscal 2008.

Our estimated GAAP EPS range for 2008 is $1.75 to $1.90 ashare, which represents an improvement of roughly 40% over 2007. Additionally,we expect sales to increase by approximately 20%. This growth comes from acrossall operating units but certainly the most significant contribution is comingfrom the communications segment as the PG&E contract ramps up, and weexpect further success with new customers.

Let me now update you on a couple of areas of interest. Wecontinue to make progress at PG&E despite the deployment delays as TWACS NGversion 2.0 was delivered in October and we remain on track to completedevelopment and testing of version 3.0 this quarter.

Product installation continues at a fairly low rate but isexpected to accelerate significantly after the first of the year. From aforecasting perspective, we have assumed no additional PG&E electricdeliveries in '08 either PLC or RF related products. That being said, Hexagram'sRF pilot at PG&E continues to perform very well.

The gas portion of the project remains on track, evidencedby the fact that we received additional orders in the first quarter for over100,000 gas units. My view of the general utility market remains positive and abit of proposal activity that we are participating in continues to remain high.

On the electric side, it appears there will be severalawards and expansions in 2008 so we are seeing a good bit of interest in bothare PLC and RF solutions as well as our recently announced Hybrid solution.

We had a great year 2007 with our COOP customers and weanticipate another solid year in 2008. Additionally, we are seeing asignificant amount of interest being generated for our AMR, AMI products on theinternational front. We have added to our sales and marketing staff in thisarea to address this interest and we are seeing some early successes.

Currently, on the international front, we have three or fourpilots underway and we anticipate several additional pilots as well asexpansions to the existing ones over the next couple of months. These arecustomers who appear generally committed to going forward with full deploymentin the relative near term. In water utility market, it also appears to beheading toward the growth cycle. Municipal water market remains an area ofstrength for us and we anticipate several larger city awards to be made thisyear as well.

On the software front, our Meter Data Management softwarehas gained some market traction with several recent awards. Additionally, inthe fourth quarter, we made a small acquisition in this space by acquiring theassets of WR Systems, which is utility asset management software company, whichwill be integrated into the Nexus product offering and organization.

In our Filtration segment, we see continued strength inaerospace markets and anticipate improved operating performance again in fiscalyear 2008. In Test, we see the wireless and Asian markets continuing theirpositive trends. Since we recently discussed our planned acquisition of DobleEngineering last week, I won't spend too much time on that today except to saywe are still targeting an end of November closing and we remain very excitedabout the opportunities they bring to the Company.

In conclusion, we see fiscal 2008 as the year forsignificant improvement and growth. I am excited about the opportunities wehave ahead of us and I think we are well positioned to take advantage of theseopportunities. With that, I would be glad to answer any questions you have.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from PaulCoster with JPMorgan.

Paul Coster - JPMorgan

A couple of quick questions, if I may. First of all, can youtalk about currency effects? Are you seeing any beneficial or otherwise impactfrom currency fluctuations currently? And are there any assumptions going intoyour guidance for ‘08?

Gary Muenster

Hey Paul, this is Gary. Relative to ‘07, I would say thatthe currency impact on the sales growth is pretty insignificant. The majorityof our foreign contracts are settled within local currency. We tend tomanufacture in Europe, ship in Europe, and that sort of thing. So we're notexposed to a significant amount of currency fluctuation.

And so what we've done for ‘08 is obviously, as we modeledthis out we generally held the currency rates the same at the points they areroughly today. So, we didn't, we did not build in currency expectations up ordown.

Paul Coster - JPMorgan

Okay, and tax rates for ‘08, what should we be thinkingabout?

Gary Muenster

The tax rate approximately 38%.

Paul Coster - JPMorgan

Okay. Got it. Now, one of your competitors has talked abouthow evaluation of AMI is causing some of the AMR programs to slowdown. Are youseeing the same? The other thing they've said is that the AMI projects, whenthey start to kick in the next year is going to be a year of prototyping andpilots and the really large domestic projects probably skewed towards ‘09,2010.

Do you concur with that as well?

Gary Muenster

Well, it's always hard to put firm numbers on the timing.But we see the opportunity for a couple of these awards to be made in ‘08 andreally deliveries to start in ‘08. One difference with ours maybe that some ofthe other products that are being sold out there is, utilities really becauseof the fact that we already have some pretty significant deployments on the PLCside, there's not a requirement for a pilot to take place and leastdomestically.

We're seeing a little bit more of that internationally. But,we really don't see a need for that or really that utilities are going to belooking for that at least for that technology. And if you hop over to the RFside, although Hexagram or our RF solution isn't widely deployed on theelectric side, the facts are they are using the same core technology that weutilize on the gas and the water. So again, there shouldn't be this need forpiloting to take place.

We have not seen as much of that in the last couple of yearsas we did four or five years ago as people have gotten more and morecomfortable with the core technology. Now, if we were deploying a brand-newtechnology then it might be a different case.

Paul Coster - JPMorgan

Got it. And then on the Test and Filtration side, you soundconfident and you're not seeing then any signs of a cyclical slowdown at themoment that obviously, the market is worried about? Is that correct?

Vic Richey

Yes, if you look at the end market that we serve, other thanthe automotive, I would say that's the one exception, now we really don't see alarge amount of cyclicality only because if you're looking at medical, you'relooking at aerospace which remains strong. You're looking at some consumerappliances. And on the Filtration side and on the Test side, again, that'sreally being driven by the development of new electronic products, particularlywhat's going on in Asia and with the wireless products.

And so, we don't see a lot of slowdown in any of those endmarkets. Again, I would say the one place we have exposure is automotive. We'vealready kind of built some hedge into that, if you will.

Paul Coster - JPMorgan

Okay and then lastly, I just want to make sure I understoodthis that you're going to be issuing additional guidance, post the close ofDoble to advise us on what impact that has on this guidance, is that correct?

Gary Muenster

That's correct. And if you recall from the last week'sconference call relative to our announcement of the planned transaction, we didsay that it would be accretive. And relative to the slideshow, we said it wouldbe in the neighborhood of $0.15 to $0.20 per share. Obviously pending thepurchase accounting amortization that will be evaluated once the acquisition iscomplete.

But relative to their historical margins, I think what wehad announced is roughly $80 million of sales and roughly $28 million to $30million of EBITDA as you bring that through the ESCO model and my accretionassumption obviously is net of debt service. So it's accretive after debt. Andso really, the only pending item is the amortization. So, on a cash basis, itwill be accretive in the $0.15 to $0.20 range.

Paul Coster - JPMorgan

Very good, thanks very much.

Operator

Next is Patrick Forkin with Tejas Securities.

Patrick Forkin - Tejas Securities

Good afternoon. Congratulations on the quarter and on Doble.

Gary Muenster

Thanks Patrick.

Patrick Forkin - Tejas Securities

Gary, there was a statement in the release that RF AMI saleswere up 164% for the year. How much of that was related to the Hexagram gasproduct at PG&E?

Gary Muenster

I would say, when you look at their delta period overperiod, I would say about 75% of that delta is PG&E related. And thebalance keep in mind we have the Kansas City project that we announced nine or10 months ago. That’s in full-scale deployment and then Hexagram continues topick up what I would call small municipal water projects that have beenadditive year-over-year subsequent to our ownership structure of them.

Patrick Forkin - Tejas Securities

And then Vic, in the guidance for 2008 you said you areassuming no more electric AMI shipments to PG&E during fiscal 2008. Theyare out publicly saying that they are basically going to continue the existingAMI deployment as they reevaluate this technology and even if they selected anew technology, it wouldn't roll out until sometime late 2008. I'm not sure howto reconcile their statements and your statements. Is it just that you haven'treceived orders for 2008 yet on the electric side?

Vic Richey

That’s correct. And certainly, our hope is that we willeither get some continued deployment of PLC product and/or some deployment ofthe RF electric product as well. It's just; we haven't modeled that into ourforecast because we don't have a firm view of that.

We think there's still a lot of churn going on there. So wefelt it was prudent not to include that at this point in time. But certainly,we're out fight for that business right now and I think we have a goodopportunity. But that would be seen as offside to this forecast.

Patrick Forkin - Tejas Securities

Okay and then Gary, on Doble, the 35% EBITDA margins thatyou guys talked about last week, that looks like that might equate to about 30%EBIT margins before amortization. Is that a good way to look at that?

Gary Muenster

Yes, upper 20s to 30% is fair.

Patrick Forkin - Tejas Securities

Okay. And then, the Doble acquisition really looks greatfrom the perspective of a nice addition to AMI and out into the grid. Vic, howare you guys looking at looking to, I mean you are clearly showing a commitmenthere to the Communication segment. How do you continue that process and how doyou continue the process of evaluating your existing portfolio of assets?

Vic Richey

Yes, certainly I would say that we're not done. I mean thisis an area of growth for us, we saw this as a way to really further penetratethis utility market with some additional products. Not only are they additiveto our AMI business, but I think they are just something separate and apartfrom that as well.

So, we continue to look for other opportunities to grow, bothinside the AMI segment and outside the AMI segment within the utility industryand certainly this international perspective that the folks from Doble have Ithink is going to be beneficial as well as we both try to take our AMI productsinternational and I think there's some good opportunities either to add to theDoble Company with some international acquisitions as well.

That's basically the approach that they've taken is, they'vegrown internationally its going to find a strong partner and then have themjoin the company and we plan to continue that process as well as there are someother test areas where they think that they can build on the base that theyalready have and we'll be looking there. So, I think there's a tremendousamount of opportunity for us to further grow our Communication segment, bothorganically and through continuing acquisitions.

Patrick Forkin - Tejas Securities

And last question. Gary, on the delivery of the TWACS NGversion 3.0 software, you guys pushed this out so, is it safe to assume thisisn't like a December 31st type of event?

Gary Muenster

No, that's not the plan. I’d say based on where we are todayand in the release we put out announcing the movement of this time frame, Iwill say that the testing protocols are clearly in our hands. This is not thedelay from the original expected date was not something that was predicated onsome problems with the software, nor was it related to PG&E's distress overthe system. It was not that at all.

So, I think our rigorous protocols have continued say at thelast data point I've seen we're well past the 85% point and so we're shootingfor sometime in the last week of November, which gives us sufficient amount oftime, once we get it in the field to make sure we put the final dotting the i'sand crossing the t's on it. So, we are not charging up to 12-31 as we sittoday.

Patrick Forkin - Tejas Securities

Okay. Appreciated, thanks.

Operator

The next question comes from Richard Eastman with Robert W.Baird.

Richard Eastman - Robert W. Baird

Hi Gary, can you just remind me what's the tax rateinfluence in the fourth quarter this year?

Gary Muenster

I would say it's the final true up relative to the researchcredits and a couple of the other modest credits that we had there.

Richard Eastman - Robert W. Baird

Okay, should we be expecting that same type of the fourthquarter event next year?

Gary Muenster

No. I mean, the one thing we have to keep in mind is as Imentioned earlier throughout the year, we have been living in a net operatingloss carry forward world so it wasn't real beneficial in prior years to gochasing these credits around. So, what we did is, we significantly upgraded ourtax group with a lot more intense strategic focus coming out of the NOL world.And I would say the team that we have assembled there has a much more strategicthinking orientation.

And so, the big projects that they undertook at the start oflast year relative to these research credits really related to roughly fiscal2000 up through 2007 to get all the cumulative credits basically rolled throughbetween last year and this year and so, we have captured the majority of them.

I would say if we do have any residual or trickling effectin 2008, it will be nominal, but the magnitude and the significant amount ofthe credits that have come through in the last 18 months, I wish they could berepeated but unfortunately, we're at pretty well at the end of the line onthose.

Richard Eastman - Robert W. Baird

Okay. And then, I have a question on the EBIT contributionin the fourth quarter from the Comm business. 15.7% was kind of the EBITmargin, if I look at that versus the third quarter or year-over-year, theincremental margin is not very good and I'm curious, why weren't we able todeliver a bit more margin in the fourth quarter on the Comm revenue number?

Gary Muenster

Let's say the amortization was a little part of that andthen I think as the sales mix and as Vic had mentioned, we're staffing up someof this international marketing group. So, we have an increase in headcountduring the fourth quarter both sequentially and year-over-year. So, that's abig part of it.

Richard Eastman - Robert W. Baird

Its in when we look out to 2008, the EBIT guidance of 14.8%to 15.2% and again looking at the sales guidance I'm still a bit surprised thatthe incremental margin wouldn't be better than say 25% on that type of salesgrowth year-over-year.

Gary Muenster

Well, and again, the amortization really steps up once wedeliver 3.0. So, I think as I noted in the release, that normalizing if youwill for TWACS NG amortization, that the EBIT margin is 19% or so. So you dosee some of the delta there if you normalize for some of the TNG.

Richard Eastman - Robert W. Baird

And that amortization number is still expected to be around$9 million?

Gary Muenster

I think it's going to be a little higher than that. It'sgoing to be in the neighborhood of $10 million to $10.5 million.

Richard Eastman - Robert W. Baird

Okay, because then the base business with that kind ofvolume, you're not getting 25% to 30%. You need more volume than the 268 to 270number to get those kind of margins back, is that fair?

Gary Muenster

Right.

Richard Eastman - Robert W. Baird

And then on the Filtration business, is the growth rate inthe guidance seems a bit high. Is there something in there from VACCO or thedefense side that gives you good visibility on a double-digit growth rate intoin the Filtration business?

Vic Richey

I would say it's across-the-board. I would say at PTI thiswill be the third or fourth year in a row of significant upticks in thecommercial aerospace. One thing I would add in that arena is, in that portionof the business a reasonably high percentage of that business is priced underlong-term agreements with the OEM suppliers.

And those long-term agreements range from a short one wouldbe two years, a mid-level one would be five and a long-term would be 10. AndI’d say relative to 2008, we're sitting in a nice spot where several of thoseLTAs expired and the new pricing arrangement going forward is indicative of thechanges in the cost where you basically get to add the additional margin ontop.

So, the pricing structure is changing at PTI in a prettymeaningful way. And I would say that's probably 50% of the net delta you areseeing in the profits at PTI. So, there volumes, their unit volumes are goingup but the pricing the positive pricing trends off of the expiration of theLegacy LTA certainly is helping them.

At VACCO, I think some of the mix changes are helping withsome of that. And then, at Filtertek, I think we've talked in the past aboutsome of their commercial projects. This deal they are doing with Moore Energywhere we purchased the equipment this year and are ramping up the productdeliveries as we go into 2008, I think that is helpful as well as a few of theother medical applications that Filtertek is planning.

Lastly, the Tek Packaging Group of Filtertek is having ameaningful increase in 2008 versus 2007 as well, as they have been able todevelop several new customers within their core functional delivery groups thatI think are going to provide a very meaningful up tick in the profitcontribution as well. So, it really is I’d say it is hitting on all threecylinders if you will.

Gary Muenster

Well, the other thing too that we called on our pressrelease and we really hadn't talked about before today was this acquisition ofWintec for VACCO and that's essentially all additive. We add them in there fora couple of months in '07 but that will all roll into 2008 and I think we hadabout $6 million of sales. So, that is additive is well.

Richard Eastman - Robert W. Baird

Good point. Okay and then just the last question I have.Again, just doing the straight math, the co-op and muni business had a verygood year in '07 and we've about $94 million. And we talked a little bit in thepast about that business maybe being a steadier business but maybe not asgrowthy and I'm curious, are you expecting that business to grow from the '07base into '08?

Gary Muenster

Well, our current assessment has it kind of staying steadywith '07 which, given the penetration level I think would be a good outcome. Aswe mentioned in the couple of releases ago, we did reorganize the sales andmarketing group within the Communications group and what we've done is gottenmore people focused on the co-op business as well as more people focused on thegas and water municipal. So, that's one reason why we have some confidencewe'll be able to maintain those levels in ‘08.

Richard Eastman - Robert W. Baird

Okay. Very good, thank you.

Gary Muenster

Thanks.

Operator

(Operator Instructions) Next question come from John Quealy,with Canaccord Adams.

John Quealy - Canaccord Adams

Hey good afternoon guys. Gary, coming back to you on cashflow; I asked last week on Doble, can you give us an outlook here on what we'relooking by the moving pieces in ‘08 in terms of operating and free cash fornext year?

Gary Muenster

Consolidated or just the Doble piece?

John Quealy - Canaccord Adams

Consolidated, yes.

Gary Muenster

Yes, I think just so everyone understands clearly becausesome people have different definitions of free cash flow, what I'm looking atis cash available for debt service will be north of $75 million.

So, as I said, we become a taxpayer in 2008. So, justfocusing on pure cash deltas, we should be able to generate $75 million incash. And so, if you look at the investment levels we've made here in CapEx andTNG and acquisitions, we don't anticipate outside of the Doble acquisition ofcourse, we don't expect next year to be spending $19 million in CapEx.

And we certainly as we come to the end of 3.0 delivery, theTNG expenditures going forward will be much more rationalized, kind of in the$3 million to $5 million range for maintenance and true ups and things like that.So, we are projecting for debt service levels north of $75 million and that'sbefore you put Doble on top.

And so, if you assume that their EBITDA at roughly $30million it's probably 75% of that manifests itself into cash to help pay downdebt service. So, we feel like we are in pretty good shape relative to ouroperating cash flows to be able to take this $300 million of debt down prettysignificantly within 12 months.

John Quealy - Canaccord Adams

Okay. The risk of putting the cart before the horse, interms of inventory step-ups when you close Doble, anything major day that weshould expect as we get into the end of this quarter?

Gary Muenster

No, the nice part of Doble is because about 30 or 40% oftheir businesses service oriented, they really don't maintain a significantamount of inventory at any given point in time. So, you should not see youshould not see a meaningful step-up in inventory at all.

John Quealy - Canaccord Adams

Okay, then in more strategically, Vic, can you comment onthe AMI pipeline, how you folks feel you are positioned? Obviously there's beena lot of wireless talk lately. But can you give your thoughts on DCSI and howyou are positioned to some new opportunities here moving into 2008 and into 2009?

Vic Richey

Well, I think there's going to be a mix. And I think that'syet to play out and fortunately we have now two approaches to take to themarket, both at the power line as well as the RF, as well as the Hybridsolution. So, I think that's going to play out over the next 12 months.

Certainly if the DCI or the power line DCSI's power linesystem has a tremendous amount of capability, is well proven and if you look atwhat's going on at PPL for instance and all the data they are able to bringback and how rapidly they've been able to pay for their system, there's somepeople I'm convinced that are very interested in having that solution. Also, wesee that as the major play internationally.

But certainly we understand that there are some people thatwant to have an RF solution and that's one reason we've committed the resourcesthat we have to get Hexagram solutions out there and working. I think again,the trial that we have ongoing at PG&E has proven that it is going to workwell.

And again, just to reiterate a point I made earlier, it'simportant to understand, that the core technology that's being used for that isthe same one that we have in large deployments on the gas and water side in anumber of places.

John Quealy - Canaccord Adams

And my last question, a housekeeping question, with regardto Hexagram, what sort of visibility do we have into the ‘08 guidance forHexagram right now? You mentioned another 6 million in orders in the near-termbut can you give us some visibility on that?

Vic Richey

I think pretty solid. I mean you always go into at leastwith that business we have a pretty good understanding of what we thinkPG&E is going to do. And that's certainly the biggest piece of theirbusiness and certainly the biggest piece of the growth. We also have made someassumptions on the rate of adoption in the municipal market and our success insome of these other cities.

But I think it's fairly consistent with what we've seen inthe past. So, I don't think we have any wild assumptions in there on what'sgoing to happen with their product.

John Quealy - Canaccord Adams

Great. Thank you.

Vic Richey

Thanks.

Operator

Next question come from Richard Eastman with Robert Baird.

Richard Eastman - Robert W. Baird

Just as a follow-up one, Vic. When we look at the firstquarter, I presume just generally speaking that $2.03 to $2.18 guidancepresumably includes the PG&E electric recognition in the first quarter?

Gary Muenster

Correct.

Richard Eastman - Robert W. Baird

And, if I look at the first quarter without that PG&Econtribution, are we profitable?

Gary Muenster

Yes.

Richard Eastman - Robert W. Baird

Okay. All right. Thank you.

Operator

Your next question comes from Steve Sanders with Stephens,Inc.

Steve Sanders - Stephens, Inc.

Good afternoon.

Vic Richey

Hey Steve.

Gary Muenster

Hey, Steve.

Steve Sanders - Stephens, Inc.

Just a follow-up on PG&E. Where did we come out in ‘07on total revenues for PG&E? And then, based on the orders you have, howdoes that look for ‘08 today?

Vic Richey

Obviously, on the electric side, we basically had zerobecause we have to defer all of it and on the Hexagram side, it's in the low20s.

Steve Sanders - Stephens, Inc.

Low 20s for ‘07?

Vic Richey

Yes.

Steve Sanders - Stephens, Inc.

And then ‘08 is $20 million for the electric and thenroughly what for the gas?

Vic Richey

I don't think it is appropriate for us to break that out atthis point. We're still in the process of getting a firm delivery schedule fromthose guys. We've made some assumptions, but I don't think it's appropriatethat we go into what those are.

Steve Sanders - Stephens, Inc.

Okay. And then on the Hybrid solution, from a capitalinvestment perspective, technology integration, what do you need to do at thispoint to really have that as an option for the customers?

Vic Richey

Well, we're out talking to customers about it right now. Andthe reality is, you can make the case that we have our Hybrid solution in placeat WPS. We have a Hybrid solution in place at PG&E.

The thing that we have to do to really make it verycommercially viable I would say is, we need to bring the interfaces to thecustomer on onto one system so that as they go to their console to query thesystem whether it be for the gas or electric or whether it before RF Electricour PLC Electric, they go to one operating system to that.

So, we currently have that underway. We're taking advantageof the expertise we have at Nexus to help us do that. And so, that's just amatter of developing that level of better phase at the customer level. So,that's not a huge investment if you will.

Steve Sanders - Stephens, Inc.

Okay. And then TXU just where do we stand on that one goinginto 2008? I think you guys were getting pretty close to filling your backlogwith them, but can you give us an update on that project?

Vic Richey

Yes, that's one is a little bit up in the air right now Iwould say in that their PUC has come out with some specific requirements thathave to be met. We're in the process of incorporating those into our product.

We will have those delivered and verified to the customer byJanuary. And so, it would be at least then before we see what their next stepwith us is going to be.

Steve Sanders - Stephens, Inc.

Okay. And could you just provide a little more color on someof the international pilots you have going? Anything there would be helpful,potential size, timeline, we might find out whatever you could add.

Vic Richey

Well, I'm not going to give a lot more information justbecause every time I talk about a pilot I seem to get burned on it. But, we dohave several pilots in Central and South America is where they’re at.

What we've found is the size of the utilities are prettysignificant so, I'm really happy that we've made the investment that we have atTNG because that will be required going forward.

As far as the timing, I would say, somewhere between thenext six to 12 months we could see some significant progress on a couple ofthese. But, it is just very difficult to assess the timing of these. But thepilots thus far are going well and there seems to be a real interest in movingforward.

Steve Sanders - Stephens, Inc.

Okay. Thank you very much.

Operator

That concludes today's question. And now I’d like to turnthe call back over to Mr. Vic Richey.

Vic Richey

Okay. Well, thank you again for your interest in ESCO. Andas Gary mentioned earlier, once we get the Doble acquisition closed we'll beback to give you an update on the impact to ‘08. So, thank you very much.

Operator

That concludes today's conference. Thank you for attending.

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Source: ESCO Technologies F4Q07 (Qtr End 9/30/07) Earnings Call Transcript

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