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CLARCOR Inc. (NYSE:CLC)

Q4 2007 Earnings Call

January 17, 2008 11:00 am ET

Executives

John Van Mol - Founding Partner,President and CEO of Dye, Van Mol and Lawrence

Norm Johnson - Chairman,President and Chief Executive Officer

Bruce Klein - Vice President-Financeand Chief Financial Officer

Analysts

Scott Graham - Bear Stearns

Jeff Hammond - KeyBanc CapitalMarkets

Brian Drab- William Blair

Richard Eastman - Robert Baird

David Leibowitz - Burnham

Anil Chachra - Gabelli

Operator

Good morning, ladies andgentlemen. Thank you for standing by. Welcome to the CLARCOR Incorporated fourthquarter 2007 earnings conference call. Today's conference call is beingrecorded. At this time, all participants are in a listen-only mode. Followingthe presentation, we will conduct a question-and-answer session. Instructionswill be provided at that time for you to queue up for questions.

It is now my pleasure to turn theconference over to Mr. John Van Mol of Dye, Van Mol & Lawrence. Please goahead Mr. Van Mol.

John Van Mol - Founding Partner, President and CEO, Dye, Van Mol and Lawrence

Thank you. We appreciate yourinterest in joining us on CLARCOR's conference call to discuss results for thefourth quarter and twelve months of 2007. By now, everyone should have receiveda copy of the news release that was distributed yesterday. If anyone does needa copy, it is available on CLARCOR's website at www.CLARCOR.com or you can callBonnie Cash at 615-244-1818 and she will send you a copy immediately.

Before I turn the call over toNorm Johnson, CLARCOR's Chairman and CEO, I remind you that all statements madein the news release and during this conference call other than statements ofhistorical fact, are forward-looking statements. These statements are made pursuantto the Safe Harborprovisions of the Private Securities Litigation Reform Act of 1995.

The company believes that itsexpectations are based on reasonable assumptions. However, theseforward-looking statements involve known and unknown risks, uncertainties, andother important factors that could cause the company's actual results,performance or achievements or industry results to differ materially from the company'sexpectations of future results, performance, or achievements expressed orimplied by these forward-looking statements.

In addition, the company's pastresults of operations do not necessarily indicate its future results. Finally,we wanted to let people know that the information statements made during thecall are made as of the date of the call, January 17, 2008. Those listening to any replay shouldunderstand that the passage of time by itself will diminish the quality of thestatements.

Also, the contents of the callare the property of the company and the replay or transmission of the call maybe done only with the consent of CLARCOR. It's now my pleasure to turn the callover to Norm Johnson for his opening remarks. Norm?

Norm Johnson - Chairman, President and Chief Executive Officer

Thank you. Well, good morning andthank you for joining us today. With me are Bruce Klein, our Chief FinancialOfficer and Kim Orr, our Corporate Controller.

Those of you, who have been onour conference call this year, know 2007 was an unusual year for us. We aredisappointed, the restructuring efforts in our environmental air business aretaking longer than we had originally projected and had a negative impact on ourearnings.

The good news is, we still expectthe original savings we've communicated; it will just take six months longer.Unfortunately, it seems we talk about these issues so much we short change therest of CLARCOR. In reality more things went right to wrong, most of ourbusinesses performed very well and we were able to significantly enhance ourlong-term growth opportunities.

Sales and earnings increased forthe 15th consecutive year, both our Engine/Mobile and process liquid businesseshad strong performances. Engine/Mobile sales were up 9% for the quarter andoperating margins were 24.4%. Process liquid sales were up 12% for the year andoperating profit rose nearly 15%.

International sales grew by 15%and are now nearly 30% of our total. While the big event of the year did notofficially take place until early in our fiscal 2008, we completed theacquisition of Perry Equipment Corporation, which we have merged with our Facetbusiness to create one of the leading companies serving the oil and natural gasfiltration markets, which are showing excellent growth around the world. Withthis acquisition, our liquid process filtration sales are higher than airfiltration, a goal of ours for a long time.

Another milestone will be reachedin 2008; our sales should be well over $1 billion. We're optimistic about thefuture; we serve good markets, and are well-positioned for growth.

Bruce will now discuss thefinancials, and I will return with our outlook for 2008.

Bruce Klein - Vice President-Finance and Chief Financial Officer

Thank you, Norm. I want toaddress briefly some information of our international growth and some financialmatters that rose during the quarter. Despite our disappointment in certainareas of our environmental air business this quarter, in our industrialfiltration business, which we also call process liquid filtration, sales growthand operating margins are very good.

In particular, we saw strength inoil and gas markets, in fibers and resins markets and in aerospace markets.Even in environmental air market, certain sectors were strong, such as airpollution control systems, and even air filter sales to the automotive sectorwere good this quarter. Operating margins also continue to be above 10% in mostof our process liquid markets.

Regarding our CLC Airrestructuring, I think, it is very important to repeat that we have not changedour goal, or the timing for an operating profit improvement of $40 million from2006 levels by the end of 2009. We expect that you will see results from thisprogram in 2008, and that these results will accelerate as the year progresses.

Fluctuations in the US dollar,and particularly its weakness during the quarter resulted in a larger thanusual impact on our reported sales and operating profit. The faster growth innon-US markets, even in local currency terms continued to drive the percentageof our non-US sales, total CLARCOR sales higher each quarter.

As it has been true for some timenow, Engine/Mobile Filter sales are very strong outside the US.For the quarter, in dollar terms our Engine/Mobile international sales grew bymore than 15% in China,over 30% in South Africa,over 20% in Australiaand over 15% in Europe.

In our Industrial/Environmentalsegment, international markets were also strong in Holland, Germany, UKand Spain.Additionally, the acquisition of Perry Equipment Company will increase thepercentage of international sales compared to our total sales.

Norm discussed briefly ouracquisition of Perry Equipment Company. As we noted in an earlier pressrelease, we expect that Peco will be accretive to our earnings in 2008 by about$0.01 to $0.02 per share and that we expect this will be significantly largerin 2009.

Approximately $75 million of thepurchase price for Peco was in CLARCOR stock. To offset dilution arising fromusing our shares as part of the purchase price, we repurchased approximately$25 million of our stock in the fourth quarter. We expect to continue torepurchase shares in 2008 under the terms of our $250 million repurchaseauthorization. Under which we still had $225 million available at the end ofthe fourth quarter.

We briefly mentioned in the releasethe settlement of several lawsuits during the fourth quarter. We are restrictedby confidentiality agreement as to what we can say about these. In one suit, wereceived a settlement and in another suit we paid a settlement. However, intotal these settlements added $0.01 per share to fourth quarter earnings pershare.

Just after year-end, we enteredinto a new revolving credit bank agreement for $250 million. Part of which wasused for the Peco acquisition. This agreement is for five years, and the interestrates spread is less than it was in our old debt agreement which we haveterminated.

Given our solid cash flows, whichreached a record high for 2007, and the availability under our credit facility,we have significant capital available to meet our operating goals, capitalinvestments requirements, share repurchase plans and also to fund acquisitionopportunities as it become available.

And finally, our earnings pershare guidance for 2008 is in a range of $1.85 to $2.05 per share. As usual, wewill narrow this range as the year progresses. Norm?

Norm Johnson - Chairman, President and Chief Executive Officer

Thanks, Bruce. I again want todescribe how well most of our business has performed last year and in spite ofthe environmental air shortfalls, total company margin still improved, althoughslightly from 14% to 14.1%. It is equally important to point out industrialmargins were about 9% for the quarter after backing out the gains from thelegal settlement in spite of our problems and environmental air.

For those of you who payattention, we beat the year's earnings expectations by $0.04, again, a penny ofit coming from the legal settlement. Even though the environmental air businesswhere restructuring is less than 15% of our total sales, it is the business weget asked the most questions about and based on our performance, I understandwhy?

I want to review why we are inthe business, why we believe it can be an important contributor, and ourexpectations for the future? We have stated our objective is to increaseindustrial environmental margins for air and liquid filters to a minimum of10%. While margins in this segment improved slightly to 6.1% in 2007, we stillhave four points to go. Fourth quarter performance shows it can be done.

One does not need to be in rocketscience to figure out our liquid margins are higher than 10%. I want to makesure we all understand something and are looking at the numbers in the sameway. Our first objective is to hit the 10% goal for combined air and liquid. Weexpect to come close to that in 2008, reach it in 2009, and surpass it in 2010.

We will not be satisfied toplateau there and expect and have plans for better margins, especially as wegrow in liquid filtration with the Peco acquisition.Certainly these businesses are capable of double-digit margins. I just want tomake sure we hit the 10%, and then we'll worry about the 12% and 15%.

Why do we stayin the environmental air business where margins are lower than our engine andprocess liquid businesses? First of all, we measure our business on an economicvalue-added model; we call CVA or CLARCOR Value-Added. The margin targets wehave established for our air business generates positive CVA.

Secondly,independent filter market research studies predict above industry averagegrowth for environmental air filters in both residential and commercialapplications. Thirdly, the market is not going away. Every building, home andfactory needs an air filter.

In summary, webelieve this business will grow. We are optimistic about new products andtechnology we are introducing, including our nanofiber filter media. Andfinally, the new machinery and plant rationalization will reduce our costresulting in higher margins.

I mentionedearlier about how excited we are about the acquisition of Peco, which positionsus to be a leader in oil and gas filtration. The acquisition also strengthensand expands our customer in geographic breadth. Now, third line of goal, our onlyfiltration business was Engine/Mobile and virtually all sales were in North America.

With Peco 40%of our sales are Engine/Mobile, 30% process liquid, 25% environmental air, 5%packaging and over 30% international. This diversification along with our 80%recurring revenue mix gives us multiple growth opportunities in many markets aswell as positions ourselves to just about any filter acquisition with one ofour companies. While we are most excited about the growth opportunities,the diversification also protects us on the down side.

We've all heard the economistsaying the probability of recession is now over 50%. There is no doubt we arenot immune from the economic cycle, but fortunately 80% of our business is atrecurring revenue model.

Filters are changed in good andbad times. We expect continue double-digit growth in our internationalbusinesses. The oil and gas business is booming. We are seeing strengths in ourenvironmental air business and Engine/Mobile are still growing in North America and at even higher rate internationally.

With this said, I don't want topaint too rosy of a picture, because we just don't know what will happen to theeconomy. As a result, we have given a fairly wide earnings range of $1.85 to$2.05 per share for next year. Things can go wrong including the worsening economyand we still should hit low end. If we continue our success in Engine/Mobile,process liquids and international and reach our year two goal in environmentalair, we will be at the higher end.

To reach our objectives we haveto, one, continue our historical performance in Engine/Mobile. The businessgrowing 6% to 10% per year with 24% operating margins is a great base to buildupon. [Industrial/Environmental], a minimum 10% operating margin in thissegment, which includes liquid filtration were the significant impact on thecompany; successfully integrate Peco and continue our expansion into theprocess liquid market; continue increase international business as a percentageof sales and while recognizing acquisitions are opportunistic, hopefully make some.

There is no doubt we serve a goodmarket, the world does need cleaner air and liquids, if we manage our businesseffectively and pursue the right growth opportunities our future looks good.

We will now to be pleased toanswer any questions you may have. John, if you would like to set that up we'dappreciate it. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). We'lltake our first question from Scott Graham, Bear Stearns.

Scott Graham

Yes, good morning. Just a coupleof questions for you. The margin growth in the Industrial/Environmentalbusiness year-over-year was impressive and I know that you narrowed the loss,but was that, I think it was a 50 basis point increase, was that all from thenarrowing of the loss or were there other things, because clearly you did havea little bit of a slowdown in the liquid side, and you had lesser decline onthe air side, which suggest to me sequentially that's kind of a negative forthe margins. So was that 50 basis points all the narrowing of the loss in theair business?

Bruce Klein

Sequentially, operationally, thatcertainly did better than it did in the third quarter and second quarter thereis no doubt about that. The 10.3% margin you see was benefited by part of theloss, the loss suite settlement that we received. So would not have been 10%excluding that settlement, but you are right it is sequentially up inoperations it was much better.

Scott Graham

Okay. So that loss suites sort ofgain was in there, does that bring the number down to in a 9 to 10 range, belowthat or?

Norm Johnson

Yeah, Scott. I said in mycomments that the margin excluding the settlement was about 9% in that segmentfor the quarter.

Scott Graham

Sorry, I missed that. Okay. Theother question related to the Engine/Mobile business, where you had some prettygood growth in that business domestically, and I'm wondering if you could maybekind of tell us where that came from, because you cited on-road there as well,here we have, truck tonnage numbers continuing to decline on a year-over-yearbasis. How did you forge that number?

Norm Johnson

Well, first of all, I guess wewere fortunate, and it shows the strength of our distribution system. But don'tforget, I mean, certainly over the road is a very important market for us. But,the farm machinery sales, construction equipment, mining would be better thanobviously homebuilding. Garbage trucks, there is a lot of markets, just besidesover the road, and we continue to think that we are picking up market share inthe aftermarket North America.

Scott Graham

Okay. I guess the last questionwould be about the Peco acquisition. You're now a month's been changed post theacquisition, but certainly you guys have been aware, pretty fairly intimatewith these buyers for profits that are part of the year-by-year, if not longer.

I guess my question would be;what does it look on a timing basis? Where do you expect the integration touchpoints to be in the first half of the year? Where do you expect things to be inthe second half of the year? And is it going to essentially run like astandalone business for a little while until you kind of figure out the bestway to do things?

Norm Johnson

Well, we've already -- did youput your full question in; I didn't mean to interrupt you?

Scott Graham

I'm done, no that's…

Norm Johnson

We've already integrated themanagement of our Facet business with the Peco business. And we have operatingcompanies. We have one operating president; he is responsible for bothbusinesses, that we've already done some integration of management in Europe,that we're starting to sell our aftermarket cartridges that are manufactured bywhat we call Facet into the Peco organization.

So, there is a lot of programsgoing on as we speak, and we think it would just be something that increases onan incremental basis. But the process basically started day one, just becauseas you said, they were very kind at. They know that's put our operatingpresident in a month before we closed the deal.

Scott Graham

And Norm, would you say than ifthat's the case in the first six months of the year, you are going to start totalk about sales synergies or cost synergies or both? So, what's the criticalpath here?

Norm Johnson

Well, hopefully both.

Scott Graham

Okay, because the incrementalearnings per share contribution in your forecast for fiscal '08 is quitenominal. Is that a number that you guys just kind of want to circle and sort ofaim higher, you're just putting that number out there because you think thatthere is always some sort of level of upset in the first year integration. Just-- it seems to me that when you plug a sort of 15% plus growth business intoCLARCOR at 11 times EBITDA, and the earnings per share accretion should be alittle bit higher than that. What's holding you back there?

Norm Johnson

Well, we will update the earningsper share estimate, as the course go on. We're trying to be prudent and carefulas to what we promise. I think you will see that the benefits from theintegration will certainly accelerate during 2008, and those will pick up inlast six months compared to first six months in terms of operating performance.But again we've owned the company for just a bit over a month and it takes awhile to do things, plans however aggressive you are in implementing them justtakes time to come to fruition. But we will change our earnings per shareestimate from the accretion after the first quarter.

Scott Graham

Thank you.

Bruce Klein

I think Scott, in fairness, thatwe want to make sure we understand the business before we over communicateanything and be confident that we are going to do what we say we're going todo.

Scott Graham

Thank you.

Operator

And we'll take our next questionfrom Jeff Hammond, KeyBanc Capital Markets.

Jeff Hammond

Hi, good afternoon gentlemen. Iguess good morning still here. Just want to get a better sense, going back toEngine/Mobile, just the pace of business you saw through the quarter,particularly domestically and into January, was there any notable change,acceleration or deceleration that would get you excited or worried?

Norm Johnson

Hi. To be realistic, that we seea softening in North America in the heavy duty transportation market thatactually we did better in the fourth quarter than we probably expected we woulddo in that segment. But there is no doubt that the demand for filters for overthe road trucks are declining and we see our growth rate not being as strongright now as it was a year ago.

Jeff Hammond

Okay. And then, I guess goingback to the Peco acquisition, can you just talk about any one-time cost,whether it be an inventory step-up that would be incorporated into that initialaccretion guidance?

Norm Johnson

Well, they certainly are -- wedon't to have one-time cost but there are inventory and fixed assets andintangible values that will be amortized going forward, and they are includedin that $0.01 to $0.02 per share accretion estimate. We're not anticipating anyfactory closings or any one-time write-downs for in-process R&D or anyrestructurings at all.

Jeff Hammond

Okay. And then, how should welook at seasonality in the business in near-term growth rate, i.e, what's Pecogoing to grow at in fiscal '08 versus maybe its historical run rate?

Bruce Klein

Well, what we're certainly areprojecting double-digit sales growth and like all of our businesses or not allof our businesses, but it always seems to be that it's going to be stronger inthe second half than the first half 0:36 .

Norm Johnson

Peco isn't generally a seasonalbusiness so much as it is an order business. They get big orders and it drivessales in a period. So it's largely driven by the size of the orders they receive.And that's not due to seasonality.

Jeff Hammond

So it can be lumpy from quarter-to-quarter?

Bruce Klein

That's correct. Yeah.

Jeff Hammond

Okay. And then I guess, finalquestion. Packaging certainly is smaller piece of the mix, but I just want tobetter understand the precipitous decline you saw there this year. And then, whyyou are so confident that you see a bounce back into '08, both in terms ofsales and margins?

Bruce Klein

Well, as we said, there were acouple of customers that cancelled some programs and since we know what thosecustomers are going to take in the first part of the year, it give us a certainamount of confidence, since its happening.

Jeff Hammond

And you think the margins snapback, that substantially on kind of mid single-digit growth?

Bruce Klein

Yes.

Jeff Hammond

Okay. And is there any risk that,as you move through the year, there is further cancellation risks?

Bruce Klein

Sure. There is always the risks.We try to project in our forecast that a certain amount of cancellations mighthappen, but you can never be guaranteed 100% that everybody is going to buywhat they certainly intent to buy.

Jeff Hammond

Okay.

Bruce Klein

We are not expecting it, but itcould happen.

Jeff Hammond

Sure. Okay. Thanks guy.

Operator

And our next question comes fromBrian Drab with William Blair.

Brian Drab

Good morning.

Norm Johnson

Good morning, Brian.

Brian Drab

Just wanted to start by askingyou regarding the Perry acquisition, and the debt that you raised to fund thatacquisition, do you think you're going to stick with higher debt level, andcould you talk a little bit about how you are thinking about the capitalstructure going forward?

Bruce Klein

Yes. We will probably, I'm sorry,it's not probably. We will stay with a higher debt level for a while. Weentered into industry swap to fix our interest cost for a couple of years, andunder hedge accounting you need to have enough debt outstanding to cover theswap you've entered into.

So, we will do that plus, as Isaid, we expect to continue to buyback shares, additional stock to offset thedilution from the acquisition, and we did some of that in the fourth quarter,but there is more to do.

Brian Drab

Okay. And could you give a range,as to what you are looking at as far as EBITDA to total cap going forward, areyou talking about may be a 15% debt to cap, somewhere in that range?

Bruce Klein

Well, we are under 20% now.

Brian Drab

Great.

Bruce Klein

I could see us getting -- I can'tsee us getting out of 20s at all, and I would think we will be between 20% and25%.

Brian Drab

20 to 25? Okay.

Bruce Klein

For the next couple of years.When the swap expires then we probably will be more aggressive in paying downdebt.

Brian Drab

Okay, great. And then, justwithin the Industrial/Environmental segment, one of the dynamics that wasplaying out over the last couple of quarters was the elimination of these lowermargin customers, and that was having obviously a material effect on salesgrowth, has that really played out or do you see that as part of therestructuring going into 2008?

Norm Johnson

I think the majority of that hasplayed itself up. There could always be a couple more, but certainly nothingsignificant in the future as it's has been in the past.

Brian Drab

Okay. And could you give anyguidance as far as growth for that segment in 2008?

Norm Johnson

You are talking…

Brian Drab

Total revenue growth forIndustrial/Environmental?

Norm Johnson

Just a second, did you hear thatquestion?

Brian Drab

Do I?

Norm Johnson

They are looking up, Kim Orr, islooking at the right numbers.

Brian Drab

Yeah, in the meantime, I have abunch of questions here. Obviously, (inaudible). Just regarding the totalfiltration program, could you give us an update there as far as new customersand margins?

Norm Johnson

Margins improved in that businessfor the year, they continue to sign up national accounts and again, remainpretty optimistic about what's going on in that business.

Brian Drab

And could you quantify that all,Norm, regarding new customers within -- in the last twelve months or?

Norm Johnson

Certainly, there has been if youtake major national accounts, 10 to 20, probably closer to 10, really big majornew ones, in-roads that lot of other ones.

Brian Drab

Okay.

Bruce Klein

We don't have all the business (inaudible).

Norm Johnson

Yeah, if you include, remember wewill be including Perry Equipment in the Industrial/Environmental Segments. Sothat growth is going to be pretty high, above 30%.

Brian Drab

Right.

Norm Johnson

Excluding them should be in thehigh single-digits.

Brian Drab

Okay. So that's a core growthnumber in high single-digit?

Norm Johnson

Yes.

Brian Drab

Okay. Alright, that's all fromme. Thanks very much.

Operator

We'll take our next question fromRichard Eastman of Robert Baird.

Richard Eastman

Yeah, a couple of questions. Ijust want to stick for a second on the CLC Air business. Can you give us asense of what's that business loss in the fourth quarter and for the full year,in dollars?

Norm Johnson

Something we haven't disclosedRick.

Richard Eastman

Well, that's why I was asking. Weare in a public forum. I mean, is it going to be in the quarter alone more thansay a couple million dollars?

Norm Johnson

Well, go ahead and ask the nextquestion. That lifted up for you.

Richard Eastman

Assuming that we lost say $1million to $2 million and we pull the settlement out ofIndustrial/Environmental market?

Bruce Klein

Rick, it was less -- we said it'swas mainly the fourth quarter, it was less than $2 million.

Richard Eastman

Okay. So then the math will kindof hold, so would appears though the balance of that business excluding CLC Airthat the margins were maybe around 15% for everything else in thatIndustrial/Environmental segment? Does that seem about right?

Bruce Klein

Getting close to that, yes, notquite 15 but close.

Richard Eastman

Okay. And then as we've lostwe've kind of culled out some revenue in CLC Air. Is that business just the CLCAir business? Can you give us a dollar number for where that finished up forthe year?

Norm Johnson

We said it's about 15% of oursales.

Richard Eastman

15% of total sales.

Norm Johnson

Yes.

Richard Eastman

And you expect that piece to showsome growth in '08 or is that piece kind of stable than the rest of theindustrial growth?

Norm Johnson

It might show a little growth,we're not budging anything substantial right now.

Richard Eastman

Okay. And then how do we approachpricing, Norm in fiscal '08 on both sides of the business? Is there any priceor excess plan for…?

Norm Johnson

Yes, there is. That we will behaving price increases in the next couple of months in several of ourbusinesses. We haven't announced yet so I am not going to say, but yes, yes wewill.

Richard Eastman

Okay, all right. And then fromyour earlier comment if the Engine/Mobile business I just want to clarify; yousaid you don't expect the same level of growth in '08 versus '07 for Engine/Mobile,which would seem reasonable?

Norm Johnson

We said domestically, but whichwe can't say for the total of domestic we're down or unless the total wouldless.

Richard Eastman

You would typically shoot for;well I think your long-term secular growth goal for Engine/Mobile is plus 6 to10?

Norm Johnson

That’s correct.

Richard Eastman

Still thinking that we can maybeget to the low end of that range, all in international and domestic rate?

Norm Johnson

Bruce has got the number.

Bruce Klein

Yeah, we expect to be in thatrange, internationally and domestically in total, yes. We have higher growthinternationally, than in the US.

Richard Eastman

Okay. And then just the lastquestion for the overall business in the fourth quarter or even just for theyear, if that's easier to get. Can you just give us the breakdown of NAFTAversus international or domestic versus international, how you look at it?

Norm Johnson

We said NAFTA now.

Richard Eastman

Well, I think in terms of NAFTA,but if you think domestic is just US.

Norm Johnson

Well no, we run the business, butwhen we talk about international it would include Mexicosales.

Richard Eastman

Whatever you have, just going onhow you define it?

Norm Johnson

Are you saying just for the totalcompany, or just for Engine/Mobile?

Richard Eastman

You finished the year, fiscal '07for the whole company.

Norm Johnson

For the whole company it wasabout 26% to 27% international.

Richard Eastman

Okay, okay, very good. Thank you.

Norm Johnson

You're welcome.

Operator

We'll go to our next questionfrom David Leibowitz of Burnham.

David Leibowitz

Good morning. A few unrelateditems, first nothing was said about future acquisitions and CLARCOR normally ontheir conference call say, we are pursuing or we are talking with or whatever.Would it take that to mean that there is really nothing going on in thatrespect?

Norm Johnson

I don’t know if we -- I'd saythat we expected to make some. Certainly there are always acquisitionopportunities out there, but we've never really commented if we're close to oneor if we're not as close to one.

David Leibowitz

But what about the size there, Norm?

Norm Johnson

Well, again, that's -- and I amnot trying to be evasive here but you know acquisitions are prettyopportunistic that certainly if we could get the right tuck-in acquisitions thatwould be $10 million to $30 million in sales, we'd like that. If there was aright technology company that we could take and incorporate into our company,we would go for something smaller.

Obviously, we'll always look atthat the larger ones, $100 million to $200 million, but we see moreopportunities on the $20 million to $30 million sales companies than we do the $20million companies.

David Leibowitz

Okay. Second, what are youfactoring in for raw material cost increases this year?

Norm Johnson

Yeah, it depend upon thecommodity that there are couple of -- and I don't have the exact numbers herein front of me, but obviously anything related to energy whether it'd be theuse of natural gas or oil or products that take natural gas and oil to makethem that we have higher numbers for. But I don't have the exact numbers forthe commodity with me right now.

David Leibowitz

I mean on blended rate on average.

Norm Johnson

2% to 4%, in total.

David Leibowitz

Okay. And offsetting that, whatside of price increases you are hopeful of attaining this year?

Norm Johnson

We hope that we would offset 3%to 4% by a couple of points of price increase and the rest cost reduction, butcertainly our plans through the combination of both to offset any costincreases, which has been our history for a number of years.

David Leibowitz

Have you instituted priceincreases so far this fiscal year?

Norm Johnson

Well, it was just asked a second ago. Andseveral of our companies they are in the--

David Leibowitz

No. I mean on the blended rate,not by component. In other words, in response to your question, roughly howmuch have we put through in the way of our price increase so far?

Norm Johnson

We have not put anything throughas we speak today. If you ask me that question in a couple of months, theanswer will be different. Well, that's just where we were in the process ofnotifying customers and implementing the price increases.

David Leibowitz

Okay. And last question. You havean earnings estimate guidance or earnings guidance of $1.85 to $2.05, how muchof that gain over the year just ended is currency?

Norm Johnson

Well, none of its currency. Whenwe project, we're not projecting that the dollar will change with respect toother currencies during 2008.

David Leibowitz

Thank you very much.

Operator

We'll go to our next questionfrom Scott Graham, Bear Stearns.

Scott Graham

Hi, I want to hit on thatcurrency thing again. That was my question when I got in the queue. Could youtell us what currency was in the quarter by segments?

Norm Johnson

I can, but it's -- hang on just asecond. I just want to make sure I give you right numbers. It was about $3 million in Engine/Mobile andabout $3 million in Industrial/Environmental, and nothing in packaging. This ison sales.

Scott Graham

Okay. And do you think that as alower price point, kind of quick turn product. It's like you are benefitingshare wise in international markets from the weaker dollar, on volume?

Norm Johnson

I don't know if we are benefitingshare wise. Certainly, for products as you well know that if we are exportingfrom North America, it makes our cost structure morecareful, but we don't want to give that price away to the customers. So, Idon't think that, I don't think we can measure it, but I don't think it wouldbe very much if we could.

Scott Graham

Okay. And further on theEngine/Mobile that margin in that business has now declined for a couple ofconsecutive quarters? Acknowledging that you had tougher comparisons in thesecond half this year. Is that a margin that might, you know, kind of [peakor], until we need may be 5% volume growth sort of rev it again or this is kindof what it is?

Norm Johnson

Well, it call 24% margindeclining that I suppose it is. Yeah, as we said historically that we don'texpect the operating margin percent to be higher in this business. It mightdrop a half a point, it might go up a half a point. But certainly, that Iwouldn't built into anything that the margin is going to go from 25 to 26 to 27to 28, no.

Scott Graham

Okay. That's fair.

Bruce Klein

But you know, one thing Scott. Ashe mentioned, we can't be too specific here. But there was a litigationsettlement that extend over two different segments, one with Engine/Mobile and onewith Industrial/Environmental. We will be of inside Engine/Mobile margin,actually we have been about the same as last year if it hadn't been for thesettlement.

Scott Graham

That's very helpful. Thank you,Bruce. I guess the other question would be, your international business on theEngine/Mobile side is really growing strongly and what is that business looklike in terms of end market, there is, it all sort of on-road or off-road or isthere some locomotive if there, I mean, what is that looks like right now?

Norm Johnson

Most of that is on-road,off-road, it's a similar -- would be less locomotive than our domestic mix, anddepends upon what part of the world [you read] that the mining business andrest for example is good but not a substantially difference mix.

Scott Graham

Thanks. Well, thank you.

Norm Johnson

You're welcome.

Operator

(Operator instructions) We'll gonext to Jeff Hammond of KeyBanc Capital Markets.

Jeff Hammond

Hi, guys, just a follow-up, justin terms, I am trying to get a better sense of guidance, it seems like at thelow end you [backing] or recession is that fair?

Norm Johnson

Yes, that's fair.

Jeff Hammond

Okay. So, it just seem that yougo through some of the details Engine/Mobile organic sales seem to be accelerating,Industrial/Environmental same thing, packaging you get the snap back, somebenefit from Peco, it just feels like unless you get that kind of worst casescenario that you are nowhere near that bottom to that range.

Norm Johnson

As we said in our remarks thatpeople talks what the economy is going to do we can come up with a lot betternumber. But when you hear is much talk about recession that we think we wouldbe foolish not to be paying for it and being prepared to operate the company ina recessionary environment if we have to everything goes right, be nice toreport 205 next year.

Jeff Hammond

Okay. And then just onacquisition can you maybe prioritize within your different business segments,where you're most apt or least apt to make acquisitions?

Norm Johnson

This is going to be – kind of Itried to come off to, it doesn't come off right to me, obviously we want to getgood deals. That certainly international acquisitions we would like to do, thatprocess liquid that we can grow the Peco Facet combination more quickly wouldbe a priority for us that as we talked about before, that's -- we're close to a15% operating margin in that business already and expanding that would be thetwo primary. But again, our Engine/Mobile business is strong and if the rightopportunity came in Engine/Mobile we would move that as well. So, I don't wantto exclude any of our businesses that we wouldn't look to add an acquisitiontoo.

Jeff Hammond

So, I guess just given theinternal focus on the air side, you probably wouldn't be too focused externallythere?

Norm Johnson

We wouldn't be too focused, but it'sthe right since -- I think we're learning how to fix the business, it wasn'tthat good and if the right opportunity came around that we felt we could enhanceshareholder value, we'd definitely take a look at it.

Jeff Hammond

Okay. Thanks guys.

Operator

Our next question comes from AnilChachra of Gabelli.

Anil Chachra

Good morning, everyone. How areyou?

Norm Johnson

Good. Yourself?

Anil Chachra

Great, thanks. Just a couple ofhousekeeping questions. What would you expect the international portion of yourbusiness to grow at in '08, and what margins? Have you given that information?

Norm Johnson

No. We've said we expect ourinternational business to grow double-digit rates, and we've not discussed themargin by each of our different segments.

Anil Chachra

And…

Norm Johnson

I guess, if the sales are goingto grow double-digit, profits are going to grow double-digits.

Anil Chachra

Of course. Peco, what percent ofthat is and actually it sounds like what you said earlier is that the …

Norm Johnson

40%

Anil Chachra

Sorry.

Norm Johnson

40%.

Anil Chachra

And finally, when should weexpect to get the pro forma on Peco?

Norm Johnson

Bruce just…

Bruce Klein

Will be filing those in themiddle of February.

Anil Chachra

Middle of February. Okay. Isthere any particular reason for February and not in January or is it…?

Bruce Klein

Well, the SEC gives us 25 daysand we are working diligently to get it all done. If we can get it fast,certainly we will, but it is not entirely in our hand. We are waiting forappraisals to come in from our appraisal companies and as you know we have touse Peco's former auditors. We have to close their, and we will, of course,their previous financial statement, audit financial statements and theirauditors have to complete a post balance sheet review and update it in order togive us a consent user opinion and that's in process as well. The SEC providesus with 25 days and hope we will be faster than that. However, we will befilling our 10-K shortly and within a next two weeks, and that will have somecondensed information about Peco.

Anil Chachra

Great. Thank you very much.

Operator

And we will go back to RichardEastman of Robert Baird.

Richard Eastman

Hi. Hey, Norm, I want to just asktwo additional questions on the Air business. I think coming out of the thirdquarter you were pretty confident that you would not loose money in the fourthquarter in Air. And just to circle back to that were there any new problems orwas this just continued delayed in getting the equipment. Is there anything newto look for or watch for there or is it just the timing?

Norm Johnson

Just timing.

Richard Eastman

Okay. and then also when you talkabout the $10 million profit improvement in that business in fiscal '08, are weto think of that as $10 million of profit improvements coming off of a losspositions, in other words in absolute dollars. I'm not -- do you expect thatbusiness to make $10 million in profit, or do you expect that business to makekind of $6 million to $8 million after you absorb the loss, the swing?

Bruce Klein

It includes, it's a change fromthe loss position in '07 to the profit position in '08.

Richard Eastman

Okay. So that kind of $6 millionto $8 million profit level that you've talked about in the past is still a goodnumber to think about for the full year?

Bruce Klein

Yes. That's correct.

Richard Eastman

Yeah. Okay. Thank you.

Operator

And we have no further questionsat this time. Mr. Johnson, I'd like to turn things back over to you for anyadditional or closing remarks.

Norm Johnson

Well, thank you again for joiningus. We enjoyed the questions. Hopefully, you've come away from the meeting thatwe do have excellent growth opportunities, that compared to most companies weare probably better positioned to do well in a recession, that we've got astrong balance sheet, and we are excited about 2008 being another record year.So thank you again for joining us.

Operator

And ladies and gentlemen, thisdoes conclude today's presentation. Thank you for your participation. You maydisconnect at this time.

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