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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-Finance and Chief Financial Officer

Analysts

Scott Graham - Bear Stearns

Jeff Hammond - KeyBanc Capital Markets

Brian Drab - William Blair

Richard Eastman - Robert Baird

David Leibowitz - Burnham

Anil Chachra - Gabelli

Operator

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

It is now my pleasure to turn the conference over to Mr. John Van Mol of Dye, Van Mol & Lawrence. Please go ahead Mr. Van Mol.

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

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

Before I turn the call over to Norm Johnson, CLARCOR's Chairman and CEO, I remind you that all statements made in the news release and during this conference call other than statements of historical fact, are forward-looking statements. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

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

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

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

Norm Johnson - Chairman, President and Chief Executive Officer

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

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

The good news is, we still expect the 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 the rest of CLARCOR. In reality more things went right to wrong, most of our businesses performed very well and we were able to significantly enhance our long-term growth opportunities.

Sales and earnings increased for the 15th consecutive year, both our Engine/Mobile and process liquid businesses had strong performances. Engine/Mobile sales were up 9% for the quarter and operating margins were 24.4%. Process liquid sales were up 12% for the year and operating 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 not officially take place until early in our fiscal 2008, we completed the acquisition of Perry Equipment Corporation, which we have merged with our Facet business to create one of the leading companies serving the oil and natural gas filtration markets, which are showing excellent growth around the world. With this acquisition, our liquid process filtration sales are higher than air filtration, a goal of ours for a long time.

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

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

Bruce Klein - Vice President-Finance and Chief Financial Officer

Thank you, Norm. I want to address briefly some information of our international growth and some financial matters that rose during the quarter. Despite our disappointment in certain areas of our environmental air business this quarter, in our industrial filtration business, which we also call process liquid filtration, sales growth and operating margins are very good.

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

Regarding our CLC Air restructuring, I think, it is very important to repeat that we have not changed our goal, or the timing for an operating profit improvement of $40 million from 2006 levels by the end of 2009. We expect that you will see results from this program 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 than usual impact on our reported sales and operating profit. The faster growth in non-US markets, even in local currency terms continued to drive the percentage of our non-US sales, total CLARCOR sales higher each quarter.

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

In our Industrial/Environmental segment, international markets were also strong in Holland, Germany, UK and Spain. Additionally, the acquisition of Perry Equipment Company will increase the percentage of international sales compared to our total sales.

Norm discussed briefly our acquisition of Perry Equipment Company. As we noted in an earlier press release, 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 larger in 2009.

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

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

Just after year-end, we entered into a new revolving credit bank agreement for $250 million. Part of which was used for the Peco acquisition. This agreement is for five years, and the interest rates spread is less than it was in our old debt agreement which we have terminated.

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

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

Norm Johnson - Chairman, President and Chief Executive Officer

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

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

I want to review why we are in the business, why we believe it can be an important contributor, and our expectations for the future? We have stated our objective is to increase industrial environmental margins for air and liquid filters to a minimum of 10%. While margins in this segment improved slightly to 6.1% in 2007, we still have four points to go. Fourth quarter performance shows it can be done.

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

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

Why do we stay in the environmental air business where margins are lower than our engine and process liquid businesses? First of all, we measure our business on an economic value-added model; we call CVA or CLARCOR Value-Added. The margin targets we have established for our air business generates positive CVA.

Secondly, independent filter market research studies predict above industry average growth for environmental air filters in both residential and commercial applications. Thirdly, the market is not going away. Every building, home and factory needs an air filter.

In summary, we believe this business will grow. We are optimistic about new products and technology we are introducing, including our nanofiber filter media. And finally, the new machinery and plant rationalization will reduce our cost resulting in higher margins.

I mentioned earlier about how excited we are about the acquisition of Peco, which positions us to be a leader in oil and gas filtration. The acquisition also strengthens and expands our customer in geographic breadth. Now, third line of goal, our only filtration 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 as well as positions ourselves to just about any filter acquisition with one of our companies. While we are most excited about the growth opportunities, the diversification also protects us on the down side.

We've all heard the economist saying the probability of recession is now over 50%. There is no doubt we are not immune from the economic cycle, but fortunately 80% of our business is at recurring revenue model.

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

With this said, I don't want to paint too rosy of a picture, because we just don't know what will happen to the economy. 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 economy and 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 environmental air, we will be at the higher end.

To reach our objectives we have to, one, continue our historical performance in Engine/Mobile. The business growing 6% to 10% per year with 24% operating margins is a great base to build upon. [Industrial/Environmental], a minimum 10% operating margin in this segment, which includes liquid filtration were the significant impact on the company; successfully integrate Peco and continue our expansion into the process liquid market; continue increase international business as a percentage of sales and while recognizing acquisitions are opportunistic, hopefully make some.

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

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

Question-and-Answer Session

Operator

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

Scott Graham

Yes, good morning. Just a couple of questions for you. The margin growth in the Industrial/Environmental business 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 the narrowing of the loss or were there other things, because clearly you did have a little bit of a slowdown in the liquid side, and you had lesser decline on the air side, which suggest to me sequentially that's kind of a negative for the margins. So was that 50 basis points all the narrowing of the loss in the air business?

Bruce Klein

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

Scott Graham

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

Norm Johnson

Yeah, Scott. I said in my comments that the margin excluding the settlement was about 9% in that segment for the quarter.

Scott Graham

Sorry, I missed that. Okay. The other question related to the Engine/Mobile business, where you had some pretty good growth in that business domestically, and I'm wondering if you could maybe kind 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-year basis. How did you forge that number?

Norm Johnson

Well, first of all, I guess we were fortunate, and it shows the strength of our distribution system. But don't forget, I mean, certainly over the road is a very important market for us. But, the farm machinery sales, construction equipment, mining would be better than obviously homebuilding. Garbage trucks, there is a lot of markets, just besides over the road, and we continue to think that we are picking up market share in the aftermarket North America.

Scott Graham

Okay. I guess the last question would be about the Peco acquisition. You're now a month's been changed post the acquisition, but certainly you guys have been aware, pretty fairly intimate with 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 touch points to be in the first half of the year? Where do you expect things to be in the second half of the year? And is it going to essentially run like a standalone business for a little while until you kind of figure out the best way to do things?

Norm Johnson

Well, we've already -- did you put 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 the management of our Facet business with the Peco business. And we have operating companies. We have one operating president; he is responsible for both businesses, that we've already done some integration of management in Europe, that we're starting to sell our aftermarket cartridges that are manufactured by what we call Facet into the Peco organization.

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

Scott Graham

And Norm, would you say than if that's the case in the first six months of the year, you are going to start to talk about sales synergies or cost synergies or both? So, what's the critical path here?

Norm Johnson

Well, hopefully both.

Scott Graham

Okay, because the incremental earnings per share contribution in your forecast for fiscal '08 is quite nominal. Is that a number that you guys just kind of want to circle and sort of aim higher, you're just putting that number out there because you think that there 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 into CLARCOR at 11 times EBITDA, and the earnings per share accretion should be a little bit higher than that. What's holding you back there?

Norm Johnson

Well, we will update the earnings per share estimate, as the course go on. We're trying to be prudent and careful as to what we promise. I think you will see that the benefits from the integration will certainly accelerate during 2008, and those will pick up in last 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 a while to do things, plans however aggressive you are in implementing them just takes time to come to fruition. But we will change our earnings per share estimate from the accretion after the first quarter.

Scott Graham

Thank you.

Bruce Klein

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

Scott Graham

Thank you.

Operator

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

Jeff Hammond

Hi, good afternoon gentlemen. I guess good morning still here. Just want to get a better sense, going back to Engine/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 see a softening in North America in the heavy duty transportation market that actually we did better in the fourth quarter than we probably expected we would do in that segment. But there is no doubt that the demand for filters for over the road trucks are declining and we see our growth rate not being as strong right now as it was a year ago.

Jeff Hammond

Okay. And then, I guess going back 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 initial accretion guidance?

Norm Johnson

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

Jeff Hammond

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

Bruce Klein

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

Norm Johnson

Peco isn't generally a seasonal business so much as it is an order business. They get big orders and it drives sales 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, final question. Packaging certainly is smaller piece of the mix, but I just want to better understand the precipitous decline you saw there this year. And then, why you are so confident that you see a bounce back into '08, both in terms of sales and margins?

Bruce Klein

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

Jeff Hammond

And you think the margins snap back, 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 might happen, but you can never be guaranteed 100% that everybody is going to buy what they certainly intent to buy.

Jeff Hammond

Okay.

Bruce Klein

We are not expecting it, but it could happen.

Jeff Hammond

Sure. Okay. Thanks guy.

Operator

And our next question comes from Brian Drab with William Blair.

Brian Drab

Good morning.

Norm Johnson

Good morning, Brian.

Brian Drab

Just wanted to start by asking you regarding the Perry acquisition, and the debt that you raised to fund that acquisition, do you think you're going to stick with higher debt level, and could you talk a little bit about how you are thinking about the capital structure 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. We entered into industry swap to fix our interest cost for a couple of years, and under hedge accounting you need to have enough debt outstanding to cover the swap you've entered into.

So, we will do that plus, as I said, we expect to continue to buyback shares, additional stock to offset the dilution 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, are you 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't see us getting out of 20s at all, and I would think we will be between 20% and 25%.

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 down debt.

Brian Drab

Okay, great. And then, just within the Industrial/Environmental segment, one of the dynamics that was playing out over the last couple of quarters was the elimination of these lower margin customers, and that was having obviously a material effect on sales growth, has that really played out or do you see that as part of the restructuring going into 2008?

Norm Johnson

I think the majority of that has played itself up. There could always be a couple more, but certainly nothing significant in the future as it's has been in the past.

Brian Drab

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

Norm Johnson

You are talking…

Brian Drab

Total revenue growth for Industrial/Environmental?

Norm Johnson

Just a second, did you hear that question?

Brian Drab

Do I?

Norm Johnson

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

Brian Drab

Yeah, in the meantime, I have a bunch of questions here. Obviously, (inaudible). Just regarding the total filtration program, could you give us an update there as far as new customers and margins?

Norm Johnson

Margins improved in that business for the year, they continue to sign up national accounts and again, remain pretty 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 you take major national accounts, 10 to 20, probably closer to 10, really big major new 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 we will be including Perry Equipment in the Industrial/Environmental Segments. So that growth is going to be pretty high, above 30%.

Brian Drab

Right.

Norm Johnson

Excluding them should be in the high single-digits.

Brian Drab

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

Norm Johnson

Yes.

Brian Drab

Okay. Alright, that's all from me. Thanks very much.

Operator

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

Richard Eastman

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

Norm Johnson

Something we haven't disclosed Rick.

Richard Eastman

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

Norm Johnson

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

Richard Eastman

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

Bruce Klein

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

Richard Eastman

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

Bruce Klein

Getting close to that, yes, not quite 15 but close.

Richard Eastman

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

Norm Johnson

We said it's about 15% of our sales.

Richard Eastman

15% of total sales.

Norm Johnson

Yes.

Richard Eastman

And you expect that piece to show some growth in '08 or is that piece kind of stable than the rest of the industrial 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 approach pricing, Norm in fiscal '08 on both sides of the business? Is there any price or excess plan for…?

Norm Johnson

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

Richard Eastman

Okay, all right. And then from your earlier comment if the Engine/Mobile business I just want to clarify; you said 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 which we can't say for the total of domestic we're down or unless the total would less.

Richard Eastman

You would typically shoot for; well I think your long-term secular growth goal for Engine/Mobile is plus 6 to 10?

Norm Johnson

That’s correct.

Richard Eastman

Still thinking that we can maybe get 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 that range, internationally and domestically in total, yes. We have higher growth internationally, than in the US.

Richard Eastman

Okay. And then just the last question for the overall business in the fourth quarter or even just for the year, if that's easier to get. Can you just give us the breakdown of NAFTA versus 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, but when we talk about international it would include Mexico sales.

Richard Eastman

Whatever you have, just going on how you define it?

Norm Johnson

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

Richard Eastman

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

Norm Johnson

For the whole company it was about 26% to 27% international.

Richard Eastman

Okay, okay, very good. Thank you.

Norm Johnson

You're welcome.

Operator

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

David Leibowitz

Good morning. A few unrelated items, first nothing was said about future acquisitions and CLARCOR normally on their 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 that respect?

Norm Johnson

I don’t know if we -- I'd say that we expected to make some. Certainly there are always acquisition opportunities out there, but we've never really commented if we're close to one or 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 am not trying to be evasive here but you know acquisitions are pretty opportunistic that certainly if we could get the right tuck-in acquisitions that would be $10 million to $30 million in sales, we'd like that. If there was a right technology company that we could take and incorporate into our company, we would go for something smaller.

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

David Leibowitz

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

Norm Johnson

Yeah, it depend upon the commodity that there are couple of -- and I don't have the exact numbers here in front of me, but obviously anything related to energy whether it'd be the use of natural gas or oil or products that take natural gas and oil to make them that we have higher numbers for. But I don't have the exact numbers for the 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, what side 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, but certainly our plans through the combination of both to offset any cost increases, which has been our history for a number of years.

David Leibowitz

Have you instituted price increases so far this fiscal year?

Norm Johnson

Well, it was just asked a second ago. And several 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 how much have we put through in the way of our price increase so far?

Norm Johnson

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

David Leibowitz

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

Norm Johnson

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

David Leibowitz

Thank you very much.

Operator

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

Scott Graham

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

Norm Johnson

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

Scott Graham

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

Norm Johnson

I don't know if we are benefiting share wise. Certainly, for products as you well know that if we are exporting from North America, it makes our cost structure more careful, but we don't want to give that price away to the customers. So, I don't think that, I don't think we can measure it, but I don't think it would be very much if we could.

Scott Graham

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

Norm Johnson

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

Scott Graham

Okay. That's fair.

Bruce Klein

But you know, one thing Scott. As he mentioned, we can't be too specific here. But there was a litigation settlement that extend over two different segments, one with Engine/Mobile and one with 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 the settlement.

Scott Graham

That's very helpful. Thank you, Bruce. I guess the other question would be, your international business on the Engine/Mobile side is really growing strongly and what is that business look like in terms of end market, there is, it all sort of on-road or off-road or is there 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, and depends upon what part of the world [you read] that the mining business and rest 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 go next to Jeff Hammond of KeyBanc Capital Markets.

Jeff Hammond

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

Norm Johnson

Yes, that's fair.

Jeff Hammond

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

Norm Johnson

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

Jeff Hammond

Okay. And then just on acquisition 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 I tried to come off to, it doesn't come off right to me, obviously we want to get good deals. That certainly international acquisitions we would like to do, that process liquid that we can grow the Peco Facet combination more quickly would be a priority for us that as we talked about before, that's -- we're close to a 15% operating margin in that business already and expanding that would be the two primary. But again, our Engine/Mobile business is strong and if the right opportunity came in Engine/Mobile we would move that as well. So, I don't want to exclude any of our businesses that we wouldn't look to add an acquisition too.

Jeff Hammond

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

Norm Johnson

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

Jeff Hammond

Okay. Thanks guys.

Operator

Our next question comes from Anil Chachra of Gabelli.

Anil Chachra

Good morning, everyone. How are you?

Norm Johnson

Good. Yourself?

Anil Chachra

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

Norm Johnson

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

Anil Chachra

And…

Norm Johnson

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

Anil Chachra

Of course. Peco, what percent of that 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 we expect to get the pro forma on Peco?

Norm Johnson

Bruce just…

Bruce Klein

Will be filing those in the middle of February.

Anil Chachra

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

Bruce Klein

Well, the SEC gives us 25 days and 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 for appraisals to come in from our appraisal companies and as you know we have to use Peco's former auditors. We have to close their, and we will, of course, their previous financial statement, audit financial statements and their auditors have to complete a post balance sheet review and update it in order to give us a consent user opinion and that's in process as well. The SEC provides us with 25 days and hope we will be faster than that. However, we will be filling our 10-K shortly and within a next two weeks, and that will have some condensed information about Peco.

Anil Chachra

Great. Thank you very much.

Operator

And we will go back to Richard Eastman of Robert Baird.

Richard Eastman

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

Norm Johnson

Just timing.

Richard Eastman

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

Bruce Klein

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

Richard Eastman

Okay. So that kind of $6 million to $8 million profit level that you've talked about in the past is still a good number 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 questions at this time. Mr. Johnson, I'd like to turn things back over to you for any additional or closing remarks.

Norm Johnson

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

Operator

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

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