CLARCOR Inc. F3Q08 (Qtr End 08/30/08) Earnings Call Transcript

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 |  About: CLARCOR Inc. (CLC)
by: SA Transcripts

CLARCOR Inc. (NYSE:CLC)

F3Q08 Earnings Call

September 18, 2008 11:00 am ET

Executives

Tom Lawrence - Dye, Van Mol & Lawrence

Norman Johnson - Chief Executive Officer and President

Bruce Klein - Chief Financial Officer

Analysts

Kevin Maczka - BB&T Capital Market

Richard Eastman - Robert Baird

David Lebowitz - Verizon

John Mantel - Royal Capital

Jeff Hammond - KeyBanc

Adam Brook - Sidoti & Co

Operator

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

Tom Lawrence

We appreciate your interest in joining us on CLARCOR’s conference call to discuss results for the third quarter and first nine months of 2008. By now everyone should have received a copy of the press 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 press 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, September 18, 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 is now my pleasure to turn the call over to Norm Johnson for his opening remarks.

Norman Johnson

With me are Bruce Klein, our Chief Financial Officer and Kim Moore, our Corporate Controller.

From an operating perspective we are very please with this quarters result. Sales were up 16%, operating profit increased 18% and earnings before taxes 13%. We expected similar results in the fourth quarter which Bruce will review in more detail in just a bit. Operating margin of 14.9% was an all hike for the third quarter, and margins for the industrial environmental segment improved to 7.5% compared to 5.8% last year. This was achieved despite CLCA not yet leading its profit target which we had expected.

Unfortunately the EPS comparison this year was a lot tougher, since in 2007 we had a one-time tax credit of $0.08 per share, which makes quarterly comparisons a challenge, even with some of the best operating results we achieved in any other quarter.

In any event, our business has performed well, is evidenced by the numbers I just mentioned and I believe it illustrates our ability to grow in any economic environment. As we have said many times, we served more end used markets than any other filter company and 80% of sales are recurring revenue.

In today’s economic environment, some segments are doing better than others, which are primarily related to the end markets being served. Fortunately, not every market or country is in a recession and some of our businesses are doing very well now and will continue to do so driving our future increased result.

We still have the opportunity to increase our operating margins from the record level we generated this quarter with the improvements, which will come from CLC Air or to maintain these margins and invest even more in growth programs, which will result in more top line growth, the bottom line increasing with either alternative.

Our recurring revenue business generates consistent earnings growth and cash flow in good and bad economy. We have significant growth opportunities around the world, in fact more than we’ve ever had as we serve more end used market. Probably, even more important, we have the ability to fund them and the organization to manage them. We believe CLARCOR is stronger than ever. Bruce will now review the financials then I will discuss these opportunities in our outlook for the future.

Bruce Klein

I want to talk about various financial matters this morning, and first address raw material costs. Raw material price increases certainly has impacted in our cost this quarter, as they have had in the first six months of this year as well.

Even though we have softening, recently in oil and certain commodity prices, this has not affected our material purchasing cost as you had. So, we expect this to change at least price decreases hold. For the year-to-date compared to our cost at beginning of the year, purchase prices for raw materials have increased by over $10 million. That is to say our cost of sales would have been more than $10 million less, than it was if raw material cost will stay the same throughout the year.

In fact that our gross margins have actually increased from last year is really due to three factors; first we acquired Peco at beginning of the fiscal year and its gross margins were higher than CLARCOR’s were last year. Second, we have converted sales flow and attached it to most, but not all of our raw material cost increases.

Although you’ve asked in each conference call, what’s the percentage of increase you’re raising your prices by and when did you do it? Reality is a lot more complicated. We are decentralized organization with 10 major domestic operating companies and more outside of the U.S. Each of these companies has a different approach of prices increases and each does show different times and in different amount.

We are fortunate that by that by selling to the aftermarket, we generally sell without restrictive or frozen contracts and therefore we can usually raise prices as necessary without having to negotiate first with customers, but to try to answer this question, about half of the sales increase so far this year excluding Peco, is due to increased prices the rest is due to increased unit volume growth. So perhaps most importantly for our margin improvement, our operating companies have focus intensively on improving manufacturing efficiency, which were up in most of our companies and controlling their overall cost structure throughout this year.

I noted that Peco historically has had higher gross margin in CLARCOR’s prior to this acquisition. I think it’s also important to note that it had slightly lower operating margins that CLARCOR had. Even so, our consolidated operating margins this quarter and for the year are still better than in 2007, again this is really a tribute to all of our company’s. For Peco specifically its operating margin this quarter, excluding purchase accounting adjustments is actually higher than it was as a privately-owned company.

We tried to point out in the press release the impact of tax benefit we recorded in the third quarter of 2007 had on last year earnings per share. The $0.08 per share benefit last year certainly distorts the comparison with this years result. If you adjust both year to the same effective tax rate, our earnings per share this quarter increased by over 11% even with an extra 900,000 shares outstanding due to the Peco acquisition. Year-to-date earnings per share with the same tax adjustment would also be up 11%.

As usual currency fluctuation had only a small impact on sales and operating profit. This is always been something of a disappointment to me, as the dollar has weaken over last few years and I would have like a larger positive impact on sales and profit. On the other hand the strengthening of dollar in a last few weeks other than the last two days, which should like wise have relatively little impact on our operating results going forward, the reason for this has to do with where our profitability raise outside the U.S. and the currencies we pay and bill in and not encouraging currencies in financial markets, which we have not done in many year.

To summarize several financial issues, for the year-to-date international sales now comprise 32% of CLARCOR’s tool sales compared to 27% last year, we expect that trend will continue. The interest rate swap unexpectedly was a charge this quarter and increased interest expense to $84,000. This was because of the drop in interest rates in the third quarter. The current fair value of this swap is a negative $1.4 million and this amount will reduce interest expense over the next five quarters. So, how much it occurs in any specific quarter is impossible to predict as it’s largely driven by future interest rate changes.

As we noted, we closed the CLC Air plant in North Carolina in the third quarter and we recorded a chare nearly $1 million mostly to an accounting rule, requiring a re-look at pension obligations whenever a partial curtailment of a pension plan occurs caused by reduction in a workforce. Substantial we have booked a charge this quarter of nearly $1 million that we would have booked in the future anyway.

Cash flow was very good and should be strong throughout the rest of this year and into 2009. Although we did now buyback any stock this quarter we continue to look at the possibility of doing so given our strong balance sheet. It seems that our stock price has become more volatile this year than usually is and certainly as the price continually to drop as it did this morning, the likeness of purchasing becomes much great.

We still have over a $180 million available under our current repurchase authorization. We expect our tax rate to be approximately 34% to 35% to the last quarter, well this made decline slightly if Congress passes an extension of the Research and Experimentation Tax Credit.

Capital expenditure should be approximately $10 million than the last quarter. Finally, as I’m sure everyone knows by now we changed our earnings per share guidance to a $1.88 to $1.93 for 2008. Before discussing some of the reasons, let me provide you with the more insight into our expectations for the fourth quarter.

We expect sales to increase compared to the fourth quarter last year by 17% to 20%. Excluding Peco, we expect sales growth to be in the 5% to 7% range. We expect operating profit to increase by 17% or 23%. Again excluding Peco, we expect operating profit growth of approximately 8% to 12%.

Peco probably has a slightly lower operating margin in the fourth quarter that it had in the third quarter this year. The improvement in operating profit therefore will be driven by the [Inaudible] businesses and particularly the continuing improvement of CLC Air. Our earnings per share guidance for the rest of this year did not include any benefit from the interest rate swap credit I spoke to above.

Now why do we change our earnings per share guidance? The U.S. economy continues to be slow and Europe appears to be slowing. Asia, on the other hand continues to exhibit strong growth for us and we are assuming its up by the broad diversity of our other businesses, so that when one market is slow, it is often the case than another side of the market is doing well. Such as is the case this year with a relatively slow over the road truck market with booming oil and gas market.

If things go very well in the last quarter, we could be at the high end of the range and could even exceed it. We wanted to be realistic in our comments and one final point, it was not clear to me that analyst had noted the $0.08 per share tax benefit in 2007 when estimating our 2008 third quarter results. Therefore I’d like to point out that in last year’s fourth quarter we recorded a $0.02 per share gain from the settlement of the various lawsuits. Thank you.

Norman Johnson

Well there is no doubt the overall economy is challenging and some of our businesses have been negatively impacted, but they were still growing just at a lower rate. You all know the oil and gas business is booming. It is a challenge to be able to make enough with some of our products, thus orders remain strong and we are aggressively selling more aftermarket products. With that said what do we see for the future?

From the long-term perspective we expect demand for filtration products to grow more than the next five years that it has the prior five. In the short-term the growth rate in some of our business will be slower than we have experienced in recent years, in others it will be higher. Well third quarter Engine/Mobile sales were slower than our historical growth averages, it was an improvement over the prior two quarters of the year and we are degradedly optimistic this trend will continue. Obviously, we are pleased with the improved operating margins.

We expect strong double-digit growth to continue in China, Mexico, South Africa, South America and Middle East. We are growing at double-digit rates virtually everywhere, but the United States and now Western Europe. We continue to add new products as well as expand geographically. Heavy-duty trucks are the largest customer base of the Engine/Mobile market and while growth in North America has slowdown, we still had an increase and continued our double-digit growth in international marketplace

We continue to pursue growth opportunities in the currently faster growing mining, air and power generation market. We see new opportunities by being able to combine the products of Peco Facet and Baldwin to end use customers and distribution with many customers use products manufactured by both companies. A lot of engine filters are used in the oil and gas industry and now we have another channel of distribution to serve those customers.

We’ve probably talk about our HVAC business, CLC Air and its restructuring efforts more than any other business we have and just probably so. Good thing is the market for CLC Air products is nearly 100% recurring revenue, there will always be a demand for its products and with our restructuring it will now be profitable. This quarter, our industrial environmental segment generated operating profit of 7.5% and would have been over 8% excluding the plant closing charges. Most of this increase was due to the liquid side of the business, but I am pleased to say CLC Air will be in black since remainder of the year and soldierly profitable next year, as we achieve what we call project 14 savings.

Even if CLC Air made only 5% operating profit and our target is higher the total for this segment will be well above 10%, which is our stated objective. The CLC Air factories have been rationalized or soon will be. Some of the new equipment is installed and exceeding expectation and the rest is coming. We now have to execute and it will happen in the fourth quarter and 2009.

The result of our total preparation business is a mixed story. When we ended the total preparation business, our largest customer base was maintenance filters for automotive plant. We all know what has happened to that industry, but we didn’t know then was how to fast and how deep the fall would be? We do not anticipate growth in order to expect the current state of affairs.

Our goal then as it is now, was to diversify as quickly as we could using our expertise to enter new markets, which we’ve done. We have customers in the chemicals, field, Ag, construction, paper and pulp, energy and retail to name a few. The problem is gains in the new business are virtually offset by the clients in automotive and automotive suppliers.

We see sales of maintenance filters to the traditional North American auto companies as the weakest business for the remainder of the year. We still believe total filtration works and we are gaining new customers in new markets. Eventually, we will not have the drag of the decline in the automotive and total growth will be positive and profitable.

There is no doubt, we are very pleased to serve the oil and gas business around the world. We could not be happier with our Peco acquisition and the opportunities we see for the future. The integration has exceeded our expectation. We have seen and we expect to continue to see strong double-digit growth in this business.

As most of you know, one of our core strength is serving the asset market with thousands of products. Well Peco did serve the asset market; its strength were first for vessel applications and technology. Its proprietary packed self manufactured peach media is the most technologically advanced in the oil and gas industry.

Our goal is to continue to provide our customers with products utilizing pitch media, but also supply all of the other filter requirements and do with the same efficiency as Baldwin does for the engine mobile market. That means having the product on the shelf and being able to meet our customers total needs by shipping within 24-hour of warning. We’re already gaining new customers and expect a lot more by utilizing these time tested techniques.

We have opportunities in virtually every corner of the world and expect the oil and gas business, aerospace to the International Engine/Mobile as well as CLC Air profit improvements to be in our company's earning growth in the short-term.

Normally, we would not comment on 2009, till our next conference call, but in these uncertain times, I wanted to give you a brief outlet. First of all our balance sheet is strong and we have the ability to generate free cash flow. We expect sales growth in nearly all of our businesses and strong growth in the ones I just mentioned.

Obviously, we cannot predict the economy, but assuming no major changes from today’s environment, we expect 2009 to be our 17th consecutive year of earnings increases and those increases to be double-digit.

We will now be pleased to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Kevin Maczka - BB&T Capital Market.

Kevin Maczka - BB&T Capital Market

The question on the pricing actions that you’ve taken Norm, are these generally price increases that would be sustainable no matter what happens with fuel or is this more of a fuel surcharge type of a situation where you’re charging higher prices for higher shipping costs that maybe you may have to give that back as the price of oil comes down?

Norm Johnson

Virtually all of the price increases that Bruce was talking about is increase to the product price of the product. We also have some fuel surcharges that could go down, but that would be a small part of the analysis that he was talking about. On the CLC Air side of the business, it’s one of the reasons that the fourth quarter is going to be better into the future and I’m going to give you a little more detail on this one just so you’ll cryptically understand.

Our freight in the CLC Air side of the businesses currently is running at about 9% of the sale. Our problem as we talked about before because we didn’t have all of the plans integrated so we had lot of inter-company freight, but to make a long story short and this is just being implemented in the second week of September, a little bit later than we wanted, but we now got a new policy that we’ve changed to our customer, that we will pay the first 3% and the customer will be responsible for anything over 3% and I apologize again for taking so long.

So with fuel surcharges or with fuel costs that 9% could go to 8% on its own, but the point is that we’re going to have a six point improvement in margin on the CLC Air business by driving the costs from nine to there, part of that could be just as a result of the lower freight costs and the remainder will be passed onto the customer. Did you understand that?

Kevin Maczka - BB&T Capital Market

Another question just on organic growth in general, I think in Q2 and again in Q3 if I blend it, it was kind of flat, maybe a couple of percentage points negative in Q2 and a couple positive in Q3, but obviously you are looking for more like 5 to 7 in Q4 and then possibly that level of even a couple of points higher in ’09. So, I guess my question you talked about some of the end markets and regions that are still strong and those I think have been strong for you, but maybe Norman, just give a little more color on specifically in Q4 and ’09, what would drive this acceleration in organic growth.

Norman Johnson

Probably seeing the increase, getting back to our CLC Air business in North America, we also expect our dust collection although it’s a smaller business, if we were to just talk about our new nanofiber filter media that we’re getting growth and then on the liquid side of our industrial environmental segment, whether it be surfing the aerospace and we served the oil and gas market before.

So, part of that what we’re taking about in the oil and gas market is not part of Peco, it would be part of the organic growth number that you referenced and we also are doing more business in Asia and might be the growth rate want be any bigger in Asia, the percentage growth rate just our piece of business there will be bigger. As I said before we expect to slight up tick in the North American heavy duty engine market as well.

Kevin Maczka - BB&T Capital Market

And should Peco still be at 15% grower in ‘09 and is there any impact on that business that all as oil goes from 150 to 100?

Norman Johnson

Well actually Peco’s largest segment is natural gas and if I could say we haven’t got all of our budgets done for 2009 but it will certainly be a strong double-digit growth and we expect that for two reasons, one just familiar with all of the natural gas and when Peco’s come through for us it will even be more than that, but we don’t have that built into next years budget, but for a couple of reasons; one that with all of the natural gas in this country, with Barnet shale, they got a new one up in Pennsylvania, other one in Louisiana, other one in North Dakota, a lot of work being done on natural gas.

Secondly as I said in my comments, we are aggressively expanding into the aftermarket and being a full line filter provided to the oil and gas industry selling not only the Pitch product that Peco used to make and Peco had a little different approach to the aftermarket, a great technology companies, they said great vessels, but probably took two or three week to fill out the market orders. We’re not doing that in the 24-hours; we’re not quite there yet, but we are proactive. So we see that giving us a little bit of an up tick as well.

Operator

Your next comes from Richard Eastman - Robert Baird.

Richard Eastman - Robert Baird

When we look at the international business, there is some commentary in the press release about 38% local currency growth, if we call off Peco, how does that number look? I don’t know what portion of Peco’s sales are international, but I mean I don’t know if we can do that math quickly?

Norman Johnson

We kind of anticipated that question, well 15% Bruce is telling me.

Richard Eastman - Robert Baird

In the overall sales growth, kind of the core local currency without FX and without Peco, it was a couple of percentage points? Would you attribute that mostly to price?

Norman Johnson

The percentage increase?

Richard Eastman - Robert Baird

Yes.

Norman Johnson

Certainly, price would be in there and I would also attributed it to that CLC Air business that while we’re projecting an increase in the fourth quarter, we did not have an increase in the third quarter, so that would offset some the growth that we’re seeing in other markets.

Richard Eastman - Robert Baird

Yes, year-to-date, how much would you estimate CLC year revenue as down?

Norman Johnson

I think we can probably do better than estimated.

Richard Eastman - Robert Baird

No, I’ll take the number if you give me.

Richard Eastman - Robert Baird

Well, I also want to see; when we look at your overall sales and again I was just trying to get to the relative size of the international markets, that your reference are growing double-digit; how big is that piece when you look at? I mean, international is 32% of sales; what portion of that is Europe maybe is the easier way to ask the question.

Norman Johnson

Well, to answer you the larger portion was down 3%.

Bruce Klein

Let me put it this way, in local currency sales in Euros were up 15% year-to-date and in Greece they were up 12% year-to-date.

Norman Johnson

It’s important to recognize, that in Europe that one of our larger businesses even larger than the Engine/Mobile is the Facet business that we used to have or that we still have to integrate into Peco, which again serves a lot of industry that have nothing to do with trucking that are going pretty strong. So even if the engine business slowed down a little bit in Europe there’s no signs of what was then called the fastest business slowing down. That’s where you get complicated answer to some of these.

Richard Eastman - Robert Baird

I mean when we talk about the international pieces that are growing double-digit and you rattle off South Africa and China, but collectively how big is the non-Europe international business?

Bruce Klein

We have to calculate it. I don’t have it readily; if you can give me a moment.

Operator

Your next question comes from David Lebowitz - Verizon.

David Lebowitz - Verizon

Norm in terms of CLC Air, you said it’s going to be profitable in the first fiscal quarter; how much we’ll lose for the full year?

Norman Johnson

That something Dave, we haven’t broken out, but it will lose money.

David Lebowitz - Verizon

You further went on to say that in ’09 you expected to be profitable at a 5% operating margin; is that correct?

Norman Johnson

It didn’t say 5%, I said if we are targeted higher, I said at 5% we would be significantly over to 10% for the segment. What we said is going out of the year in the fourth quarter, it will be at least 8%, but I would say that I would be extremely disappointed if that business is not between 5% and 8% next year.

David Lebowitz - Verizon

Okay, now at a 5% to 8% versus a full year loss for this year, how much increment to earnings do we pick up without regard to any other part of CLARCOR? Does that come to $0.10 a share, $0.20 a share?

Norman Johnson

It’s a significant number.

David Lebowitz - Verizon

Well, significant in an accounting sense is plus or minus 5%. So you’re saying that 5% of CLARCOR’s earnings will come out of this one piece of the turn around?

Norman Johnson

We don’t disclose earning by operating company, David.

David Lebowitz - Verizon

Well, Norm just used the term significant, am I to take that in the accounting sense, Bruce?

Bruce Klein

I guess you can take it any sense you want. Well, let me put it this way; if you took it and lets assume that it broke even and if you took the sales in that business and if you took $140 million or whatever and multiplied it by 5% that would be the worse thing that could happen and you can make a guess that since we said we had lost that would be better than that.

David Lebowitz - Verizon

And the second question and looking at the four fiscal quarters upcoming, which will be your easiest comparison and which do you presume is going to be your toughest comparison?

Norman Johnson

I don’t want to play to fifth on this one, but we don’t even have our budgets in yet, in detail, certainly nothing by quarter, so we just can’t answer that question. If you ask us that question next time in the three months we will able to give you a much better answer.

I’m just getting back to Rick Eastman’s question that Europe was about 15% of international and that’s both engine and everything. So Rick they do have different growth rates. Excuse me, David thank you for that.

David Lebowitz – Verizon

Last question are you looking more into the pump business to go along with your filtration business or is that still not on the drawing board or horizon?

Norman Johnson

We certainly like to sell filters to anybody who makes pumps.

David Lebowitz - Verizon

But you don’t want to backward integrate?

Norman Johnson

Not as we speak today

Operator

Your next question comes from the line of [John Mantel] - Royal Capital.

John Mantel - Royal Capital

A few questions; one you discussed the pass through or sharing of some of the increased freight cost; could you also just by end market or segment talk about actual ASP increases, when they weren’t implemented? How successful they were? And any that have been announced, but maybe not yet growing through your sale?

Norman Johnson

Just to make sure I understand you said ASP.

John Mantel - Royal Capital

Just actual material input cost increases that you’re putting through in the average selling price of your products?

Norman Johnson

Well, it depends so much on the market, but on the Engine/Mobile side we probably had 3% to 4% price increases. I think Bruce talked before that we had with the $10 million you said raw material cost increases that we put through, but its been small double-digit increases that we put in and certainly the target has been that we will maintain margins and excluding CLC Air, obviously we’re improving margin, but we will maintain the margins through productivity improvements and price increases and based on where you saw the margins for the quarter we’ll accomplish that goal.

John Mantel - Royal Capital

I guess the next question would be the mid to upper single-digit top-line growth that you anticipate for 2009. Obviously as you’ve mentioned, you’re still in the budget review or formation process? What’s that based on; is it a GDP assumption by geographies or is there sort of an underlying share gain or pricing assumption; can you just give us some of those levers that they go into that estimate?

Norman Johnson

We expect continued stronger growth in Asia. I talked about the Peco aftermarket program as far as surfing the whole market or aftermarket for oil and gas. We expect increases in market share, because we’ll be able to combine the Baldwin and Peco products to some customer that we are leading manufacturer of sand control filters for the oil and gas markets and our strongest customer base is off short.

We are manufacturing those products in China now, serving the Chinese oil and gas companies for their drilling in the north of China Sea. Waste water business, which I commented on, we’re selling that in more parts of the world than before, so there’s really no big thing and we expect our engine business to be slightly better next year from a growth perspective than it’s been this year.

John Mantel - Royal Capital

Okay, I guess final question and I apologize if you’ve spoken about it, but there was reference in the earning release to small acquisitions that you’re exploring both here and internationally. Can you give any more detail on that sort of maybe by what markets those would began or maybe how advanced some of those profits maybe?

Norman Johnson

Most of the acquisitions we’re looking at are in the industrial environmental segment more related to the liquid and the air, but we also are looking at some companies that perhaps to do. As we said before they’re small. With one company, it’s not going to make that much difference this year, but we actually won’t even be done by this year.

We are doing the first steps of due diligence, but we’ve done due diligence on a lot of companies and they’ve fallen apart. So, we’re optimistic it’s going to happen, but at the same time there is a lot of work that has to be done.

Operator

Your next question comes from Jeff Hammond with KeyBanc.

Jeff Hammond – KeyBanc

Just want to comeback to CLC Air for a minute. I think your original target into fiscal ’08 was for a $10 million profit improvement. Can you give us a sense of where that’s going to ultimately come in this year and then I think the ultimate goal for fiscal ’09 was $14 million, our profit improvement and I just wanted to see how you’re thinking about that target as well?

Norman Johnson

For ’09 it will still be the target and for ’08 we are going to miss the target substantially; we’re not going to come close to the $10 million and part of it is because as we’ve talked about before that the equipment was slower getting in than we anticipate, we finally are starting to get that behind us.

I mentioned that freight situation, that freight went up substantially with the increase in oil prices and so if you look at the total, we did not have the improvement in that business that we expected.

I don’t know if you heard my comments or not, what we’re doing about the freight and with the plant closing, a plant in North Carolina that we’ve actually didn’t anticipate closing, we took that charge this month and we even made an additional move that we have four facilities in the Louisville, Kentucky area and we’re consolidating all of those into a new facility right across the deliver. So, to answer your question the target is still 14 going as we exit next year and it was less than the $10 million this year.

Jeff Hammond – KeyBanc

Then what gives you the confidence that our profit improvement you didn’t capture in ’08, you ultimately captured into ’09?

Norman Johnson

Well, if you look at that freight projection that I just gave and I was pretty specific about this, we have implemented it and in fact I take a look at the invoices that are going to customers and see what the numbers are, so I feel pretty confident about that.

We know that closing a plant in North Carolina, it was costing us $200,000 or $300,000 a month in losses. We moved that production to other factories where we eliminate the loss plus get the increase to overhead absorption. We’ve seen what we have coming for new products. I mean can we ever be probably based on our creditability that you justified and maybe having some doubt, but certainly the actions are there, its a matter of execution.

Bruce Klein

At least during this year even though we certainly lost some money, every quarter is sequenced and better than the preceding quarters. So the trend is clearly positive and we think we will continue.

Jeff Hammond – KeyBanc

And then you’re comfortable you’ll have all the equipment by the end of the year?

Norman Johnson

I’m comfortable we’ll have all of the equipment at the end of the year. If you take the $14 million of savings that we projected, there is one and its several machines that were going to different factories. It’s about $1 million of the savings, maybe $1.5 million, that we’re still having difficulty getting those machines to run as well as they should; that would probably be the one piece of equipment that I’m worried about, but right now if you could guarantee we’d get $13 million of the 14 next year, I’ll take it.

Jeff Hammond – KeyBanc

Okay and then just moving over to Europe, I think you mentioned some slow down in Europe; can you just speak to where specifically whether it be countries that you’re seeing some incremental slowing or end markets?

Norman Johnson

With the slowing what I’m trying to point out is primarily in Western Europe, whether you want to take the U.K. Germany, France; primarily in the Engine/Mobile side of the business we’re not really seeing a slow down in the other businesses that we serve and again not forgetting market share, but we are certainly gaining sales in Eastern Europe whether it be our dust collection business or Mobile/Engine business or the oil and gas business.

Jeff Hammond – KeyBanc

And then I think you said Europe year-to-date up 15 and U.K. up 12, were those the right numbers in terms of growth rates?

Bruce Klein

Year-to-date Euros is up 15 in local currency and selling is up 12, yes.

Jeff Hammond – KeyBanc

So, when you see that swelling, I mean is it swelling to kind of high-single digit growth rate, mid-single digits. I mean what’s kind of the pace of moderation versus what you’ve kind of seen year-to-date?

Bruce Klein

Well, right now and this could change anytime with everything that’s going on, but it would be say 5% to 10% growth. I know, if you call that mid-single digits or whatever, but…

Jeff Hammond – KeyBanc

Okay and that would be the pace you’d expect kind of into ’09?

Bruce Klein

Yes.

Operator

Your next question comes from [Adam Brook] with Sidoti & Co.

Adam Brook - Sidoti & Co

Yes, a quick question; we talked about strength in some markets and not in the other. I mean at this point, is it possible to maybe breakdown what the end markets look like as far as engine, over-the-road trucks, plus heavy-duty on road, is it possible to breakdown the end market?

Norman Johnson

Well, to give you what we’re seeing for growth in those markets?

Adam Brook - Sidoti & Co

Well, as far as percentage too, as far as the percentage of sales within that segment.

Norman Johnson

Well, if you take our Engine/Mobile business the largest percentage its over-the-road trucks. As we that business still is showing unit growth albeit smaller than we’ve enjoyed in prior years and as I said we expect that growth to be slightly higher in the fourth quarter than it was in the third quarter. The railroad business, we have a pretty high market share in that business. It’ll probably be flat for the fourth quarter.

Power generation has been a fantastic business around the world. Mining has been good, some parts of construction and if you talk the sands up in Canada, if you take big constructions like that, there’s a lot of engine filters sold into the oil and gas market. I don’t know if you’ve been down to Texas and see what’s going on in the Barnett Shale and all these other places; there’s all kinds of construction machines, so that business has been good.

Getting back to your question, heavy-duty trucks will be the largest, construction will probably be second, Ag/railroad power generation would be not all that far different, but it would be third, fourth and fifth.

Adam Brook - Sidoti & Co

And last question, if you striped out Peco, about what would have sales been domestically; as far as percentage wise?

Norman Johnson

Growth?

Adam Brook - Sidoti & Co

Yes.

Norman Johnson

Just said that a second ago, just make sure we give the same number.

Bruce Klein

Just give me a moment. I can say what it is in total, but…

Norman Johnson

Give him the total number.

Bruce Klein

The total is for the quarter about 3% excluding Peco.

Adam Brook - Sidoti & Co

Excluding Peco?

Norman Johnson

Excluding yes.

Operator

Your next question comes from the line of Kevin Maczka - BB&T Capital Market.

Kevin Maczka - BB&T Capital Market

Just wanted to touch on the packaging unit briefly; just a little more color if you could on what you’re seeing from your customers that might suggest that could be a better year, next year after kind of a sluggish year this year and the last year?

Norman Johnson

Well, it’s interesting because if you take the majority of our business and we talk about our model being 80% recurring revenue and we’re a company that had singles, there’s nothing that’s going to give us double our sales or anything like that.

The packaging business maybe different and its made up of a much smaller customer concentration and there’s also the opportunity, maybe not to hit a home ground, but at least we can be getting around the second and heading for third and while there is no guarantee, certainly we see some significant opportunities in that business, it could be real wins for us next year.

Are we cutting on those that happen for sure, no but at least there’s some exciting opportunity that could make a difference in that business. I can’t tell you what the customer is right now, but at hopefully we’ll be able to announce it in one of these calls coming up pretty soon.

Kevin Maczka - BB&T Capital Market

And then just finally just to thoroughly be the CLC Air; just to be clear and make sure I have this right; you’re going to lose money for the full year ’08. You expect to make a profit for the first time in a long time though in Q4 and you expect to do at least a 5% operating margin in ’09, is that all correct?

Norman Johnson

That’s what we said. Just to be clear about this and I don’t know how long your memory goes back and I think you’re aware that we embarked on this great endeavor and I think we’re doing the right thing or we wouldn’t be doing it, making the business right for the long term, but when we were supplying the majority of consumer branded air filters for a major company, that business was in the 70%.

So, it’s not something that hasn’t been done before, just been a tremendous change in customer base and quite frankly fixing some of the things that we should have done before with machinery and automation or whatever; so that has been done before and I guess we speak with confidence that it will done again.

Kevin Maczka - BB&T Capital Market

And Norm just again when do you expect with the plant movements and consolidation and closures, new equipment, when do you expect it all to be done?

Norman Johnson

I hope in my lifetime, no. We expect the plant closures that we’ve talked about and we don’t anticipate closing any additional plant -- that the tenders in the plant has been closed that I talked about and we’re producing all of that products in other places right now.

In the Louisville, Kentucky area we have three facilities with a distribution center, we have a plant that makes the traditional filters that are used in the commercial and industrial market and we also have a plant that makes the higher end hop more efficient filters and we have the headquarters and the technical research facilities of CLC Air.

As you can imagine, one of the problems we have and this is from the cost standpoint that our distribution center is on the Kentucky side and our plant that makes the majority of the products is on the Indiana side and we have a tremendous cost moving the finished goods from where we make it to where we ship it.

What‘s going to happen? And I’m going to give you a long answer and so you know exactly what’s going on. What’s going to happen next year is the new facility will be done, let’s say around Christmas time. We will move to distribution center first, we will then start moving line by line of the factory in New Albany Indiana. We will move the corporate headquarters of CLC Air into the new facility; that will happen in the first quarter, second quarter time period.

When we get that under our belt, we will move that higher efficiency plant that I talked about. Now, whether that’s going to be in the third, fourth quarter of next year or the first quarter of 2010, I just don’t know right yet. So, all of that will be done, all of the machinery will be installed. I said, we’re having problems on one particular machine, it’s about $1 million of the cost savings; we hired some very good engineers who have a lot of experience to work on that project, but I can’t guarantee that will be done next year, the rest of it will be.

Kevin Maczka - BB&T Capital Market

And just finally Norm, you’ve said that’s about a $140 million revenue business now?

Norman Johnson

That’s what I said.

Operator

Your last question comes from Jeff Hammond with KeyBanc.

Jeff Hammond – KeyBanc

Hey Norm you had mentioned on Engine/Mobile you said unit growth is up not as much as you like, but the unit growth was up in the third quarter and you expected it to be a little bit better in the fourth quarter; is there something you’re seeing that gives you that confidence. I just want to understand why you have a little more confidence in the 4Q?

Norman Johnson

First of all that we started to see a slight uptick in the third quarter we ended. As we started the fourth quarter that uptick continued and of course we get a forecast from our operating companies, the people who run the street and if just put on the road that’s interesting because I’m your system Sales Manager for the state of Tennessee, so, every once in a while I go out with our local sales guy here and your just starting to see more trucks on the road than you saw the first couple of quarters.

Now with that said that anytime you get into a turmoil on the financial community it’s amazing that sometimes customers being distributors will get worried, and I want to carry as much inventory or something like that and so far we have not seen that, but it could happen and in addition that I think you’re well aware the fuel prices are going down, which should help the transportation market.

Jeff Hammond – KeyBanc

Okay and that would more than offset some of this slowing in Europe?

Norman Johnson

Well, if you look at the total that Bruce gave for the fourth quarter you should get the sale range of 17% to 20% that breaking that all is where it’s going to come from, but if we can have a 17% to 20% sales increase in the fourth quarter, we think that would be pretty good performance.

Jeff Hammond – KeyBanc

Right and what is that X acquisitions currency?

Norman Johnson

Five to seven.

Operator

And Mr. Johnson I’ll turn the call back over to you for any closing remarks.

Norman Johnson

Well, thank you for joining us today. Hopefully we provided the details that you need to understand our business; that we’re confident, that the outlook looks good and I think you hears some of the growth program as well as cost saving programs and we look forward to talking to you next January. Thank you

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