Franklin Electric Co Inc (FELE) 2007 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Franklin Electric Co., Inc. fourth quarter and fiscal 2007 earnings release. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Michael Butchko. Thank you, Mr. Butchko, you may begin.

Welcome to Franklin Electric's fourth quarter and 2007 fiscal year earnings conference call. With me today are Scott Trumbull, our Chairman and CEO, and Tom Strupp, our CFO. On today's call Scott will review the key issues confronting our Company this year and our prospects as we move into 2008. Tom will review the fourth quarter and full year 2007 financials.

Before we begin, let me remind you that any forward-looking statements contained herein, including those relating to the Company's financial results, business goals and sales growth, involve risks and uncertainties including, but not limited to, risks and uncertainties with respect to general economic and currency conditions, various conditions specific to the Company's business and industry, weather conditions, new housing starts, market demand, competitive factors, changes in distribution channels, supply constraints, technology factors, litigation, government and regulatory actions, the Company's accounting policies, future trends and other risks which are detailed in the Company's Securities and Exchange Commission filings, included an Item 1-A of Part 1 of the Company's annual report on Form 10-K for the fiscal year ending December 30, 2006, Exhibit 99.1 attached thereto, and in Item 1-A of Part 2 of the Company's clearly reports on Form 10-Q.

These risks and uncertainties may cause actual results to differ materially from those indicated by the forward-looking statements. All forward-looking statements made herein are based on information currently available and the Company assumes no obligation to update any forward-looking statement.

Please note that the Company's annual report on Form 10-K for the 2007 fiscal year will be filed with the SEC this Wednesday, February 27. I will now turn the call over to our Chairman and CEO, Scott Trumbull.

Good afternoon. Tom will review our fourth quarter and full year 2007 financial results in a moment. During my quarterly conference call comments last October I indicated that we believe the factors causing the decline in our earnings during 2007 were acute, not chronic, and that the actions we are taking will result in solid earnings growth in 2008. We continue to believe this will be the case.

First, we are continuing to achieve strong sales and earnings growth in both our Fueling and International Water Systems end markets. Together these end markets represent about 55% of our total sales. In Fueling our organic sales growth, exclusive of acquisitions, was 34% during the fourth quarter, and 29% for the full year.

In International Water Systems our sales growth, exclusive of acquisitions, was 24% for the fourth quarter and 15% for the year. This strong organic growth in international during the fourth quarter was driven largely by sales increases in developing regions, which I will discuss more in a moment.

During the full year operating earnings in Fueling and International Water grew more rapidly than sales. However, during the fourth quarter we took restructuring charges in these businesses of $1.8 million associated primarily with facility consolidation projects.

So in Fueling and International Water our sales and operating earnings are growing rapidly. We have strong momentum in both of these markets and expect sustained growth through 2008. However, our growth in these markets during the fourth quarter and full year 2007 has been masked by reduced sales and earnings in the U.S. and Canadian Water Systems markets.

As those of you who follow the Company know, several years ago we made the decision to sell our Water Systems products in the U.S. and Canada primarily through distributors as opposed to large pump OEMs, and to enter the pump business ourselves. In the course of implementing this decision we entered into a settlement agreement with the two largest pump OEMs, which insured that we would supply them with Franklin motors until January 1, 2007. During 2006 these OEMs built a large stockpile of Franklin motors that they proceeded to substantially liquidate in 2007 after the supply agreement ended and we discontinued selling to them.

To put some numbers on the impact of this stockpile, in 2006 we sold $31 million to these OEMs in the fourth quarter and $115 million for the full year. We estimate that about $40 million of these 2006 sales went into the stockpile. During 2006 we notified shareowners in each of our quarterly releases of this stockpiling and our concerns regarding its impact on 2007 sales.

Our plans call for more than replacing these OEMs revenues with sales to distributors and other customers. However, because of the stockpile liquidation, and the fact that we were competing against our own motor for much of the year, as well as the slow market conditions caused by the housing recession, our sales growth opportunities were constrained in 2007. In spite of these constraints our sales to distributors and other customers in the U.S. and Canada are growing at an annualized rate of about $35 million per year.

We're now seeing evidence that the stockpile is diminishing and that our competitors are allocating the remaining inventory of Franklin motors. Overall, we view the market for residential Water Systems products in the U.S. as remaining soft due to the housing recession. In spite of the ongoing weak market, we're planning for our distributor sales to the U.S. and Canada to continue growing by $30 million to $40 million in 2008, and thus far our sales performance and expectations are consistent with this projection.

Of course, in 2008 since we're no longer running against the stockpile inflated prior year numbers, our sales growth with distributors will positively impact the top line as organic growth. In addition, as we look to 2008 we are confident in our ability to achieve very significant organic growth in our Fueling business. Fueling represented about 27% of our total sales during the fourth quarter. And as I indicated earlier, organic growth was 34%.

Our margins in Fueling are above the Company average and have improved consistently throughout the year as our volume has grown. As we look forward in 2008 we expect our Fueling sales to continue growing at a rate of 30% or greater, with the back half exceeding the first half as we approach the mid 2009 deadline set by the California Air Resources Board for the installation of vapor control equipment and the 2010 deadline for the installation of vapor monitoring systems.

As we have explained to investors, this California mandate represents a remaining $250 million to $280 million market opportunity for Franklin Fueling between now and 2010. Other regions of the world are enacting vapor control regulations as well.

I would like to take a moment to address a misconception that we have become aware of among some of our investors and analysts who follow our Company regarding an issue that has occurred with our vapor control system on the West Coast. Prior to Franklin Electric acquiring Healy, the management of Healy approved a change in the material for a diaphragm component of the vapor nozzle. The vendor had demonstrated to Healy that they wanted to change the material, and Healy tested it and approved it as being identical to the material that they had been using and converted.

We were -- this was the status quo when we acquired the company. Earlier this year -- and the nozzles themselves can only be tested by CARB for their vapor control efficiency because the test of each nozzle may take as much as a half-day in a special device that only CARB has.

Earlier this year we were testing some nozzles with CARB and found that the new material had taken the efficiency down from 95%, which was their threshold, to just below 95%. And so we agreed with CARB that we would approach the vendor and have the vendor go back to the old material and produce a large quantity of diaphragms, and that we would do a field retrofit of the diaphragms. There is no recall. We have not received any notice of violation from CARB. And between now and April 15 we will have sent contractors out to the various gas stations that have these diaphragms.

It is a simple matter of taking one component out of the diaphragm and installing another component in it, and they're down. It is a fairly simple process and there is no product recall required. There is no safety issue involved here. The performance of the product is substantially better then the performance of the product that our product replaced. So there is no damage to the environment. And the regulation has not in force yet, and won't until April of 2009. By mid-April of this year this problem will be behind us. We see it having zero impact on our sales momentum.

Continuing on. Over the past five years we focused on building our Water Systems business base in developing regions of the world. For the full year 2007 our Water Systems sales in developing regions represented about 22% of our total sales and grew organically by 19%. During the fourth quarter our sales in these regions grew organically by a very solid 28%, led by rapid growth in Latin America, Asia and the Middle East.

In January 2008 we increased our business base in developing regions with the acquisition of Schneider Motobombas, the leading Brazilian producer of residential and light commercial pumps. With sales of about $40 million Schneider has grown at double-digit rates over the past few years, and sales through a network of 4,000 distribution outlets throughout Brazil.

Overall we are forecasting high single digit or low double-digit organic sales growth in developing regions in 2008. So for 2008 we are forecasting Companywide organic sales growth to be 12 to 15% and total sales growth, including the recent Pump Brands, Monarch Pump division, and Schneider acquisitions to be 22 to 27%. It is critical that as our sales grow during 2008 we achieve fixed cost leverage. As a metric we define fixed cost as fixed manufacturing cost, including restructuring, plus SG&A costs exclusive of direct sales commission. In 2007 these fixed expenses represented about 31.7% of sales. Our plan is to reduce this percentage by 220 basis points in 2008. Thus far in the first quarter of 2008 we're checking on plan.

During the fourth quarter we neared completion of the heavy construction phase of our new 120,000 square foot pump manufacturing facility in Linares, Mexico adjacent to our submersible motor plant in that city. We're now training our workforce and qualifying equipment and expect to have the new facility fully operational within 60 days.

In addition, during the fourth quarter we completed the transfer of production of the Healy Vapor Control Systems from Hudson, New Hampshire to our main Franklin Fueling facility in Madison, Wisconsin. The Hudson plant was shut down. We also completed the in-sourcing of pipe extrusion from an outside vendor in Paris, Tennessee to the Madison facility. These two projects will reduce the Fueling business fixed cost structure by about $3 million in 2008.

With capacity available in our new low-cost Linares, Mexico motor plant we completed the rightsizing of our Siloam Springs, Arkansas plant and reduced 200 personnel in that facility. We also completed productivity improvement projects in our Wittlich, Germany motor plant, which as resulted in personnel reductions in that facility of 42.

During the fourth quarter 2007 and the first quarter 2008 we implemented selective price increases across our businesses. We believe these increases will be effective by the end of March 2008, and will be sufficient to cover anticipated cost increases for the year.

We are closely monitoring the iron ore and copper commodity price volatility and may need to modify our plans if these costs rise significantly later in the year.

While we anticipate being successful implementing these Franklin list price changes, we continue to see heavy regional price promotion activity in our U.S. and Canada Water business, although at this point it is not showing signs of being more severe than prior year. So while we are naturally concerned by the earnings decline we experienced last year, as we look forward in 2008, we expect to achieve meaningful organic sales growth in spite of the relatively soft market conditions in the U.S. We expect to benefit from about 220 basis points of fixed spending leverage. We will further benefit from the completion of several major capital projects, as well as rightsizing and productivity programs in our plants. And we anticipate enjoying earnings accretion from the Pump Brands, Monarch Pump division, and Schneider acquisitions, whose cumulative sales contribute about $100 million to our total.

We're confident that we're taking the right steps to restore earnings growth in 2008 and beyond. Now Tom Strupp, our CFO, will provide some color on our financial performance during the recent quarter and fiscal year 2007.

To further discuss remarks, companies sales for the fiscal year 2007 were a record $602 million, an increase of $44.1 million or 8% compared to 2006 sales $557.9 million. Incremental sales in 2007 related to recent acquisitions that were about $79 million or 14%, of prior year sales. Acquisitions sales growth was attributable to the full year impact on 2007 of the Little Giant Pump Company and Healy Systems acquisitions from 2006, as well as the 2007 acquisition of Pump Brands, South Africa and the pump division of Monarch Industries.

Fourth quarter sales for 2007 for the Company were a record $153.7 million, an increase of about 4%, with solid growth in international Water Systems sales outside the U.S. and Canada, and significant organic and total growth from the Fueling business. The Pump Brands and Monarch Pump division acquisitions increased overall sales by about 10% during the fourth quarter.

The quarter sales, exclusive of acquisitions and foreign exchange rate changes, declined by 9% from the same period a year ago. The Company sales volume of 4 inch submersible water well motors in the United States and Canada was significantly reduced due to the cessation of sales to the two large integrated pump OEMs that began in the first quarter of 2007. This factor was further compounded with continuing weakness in the water well industry being off in the high single digits, as indicated from Water Systems Council Trade Association data, for the fourth quarter compared to last year.

We are encouraged by the underlying expansion of our Water Systems pump productlines being sold to distributors and other customers in the United States, Canada and key international export markets.

Gross profit margin for the Company as a percent of net sales for full year 2007 declined to 28.7% from 34.3% in the prior year, a 560 basis point decline. Fueling Systems gross profit margins expanded about 90 basis points during 2007 versus the prior year, due primarily to the product mix benefit of the sales growth achieved.

Water Systems gross profit margins declined 740 basis points for the full year 2007 compared to 2006. And the lower sales in the U.S. and Canada market accounted for the full margin decline due to three principal causal factors. Approximately 25% was attributed to product mix changes. Submersible motor product sales declined significantly, with pumps becoming a higher percentage of sales. Pumps generally carry a lower gross profit margin than submersible motors. Approximately 40% was attributed to fixed cost coverage as the Company's North American submersible motor plants operated at lower capacity utilization rates during 2007 compared to 2006.

The remaining 35% was due primarily to higher freight, inventory write-downs and warranty costs, and to a lesser extent increased costs of material not offset by increases in selling prices, including the effect of continuing promotional pricing in the United States and Canadian Water Systems markets.

The Company's overall fourth quarter gross profit margin was 27.7%, down 610 basis points from the fourth quarter of 2006. The Company took charges to write down slow-moving inventory during the quarter of $1.6 million, or about 104 basis points. The Company stated in the third quarter earnings call its intention to reduce inventory levels for Water Systems products in the U.S. and Canada. The Company did reduce Water Systems inventory levels, but with the significantly lower submersible motors sales it necessitated larger reductions to production levels that reduced utilization rates for the fourth quarter compared to last year.

The fourth quarter gross profit rate was also impacted by continued pump sales growth in the U.S. and Canada, coupled with lower OEM submersible motors sales that resulted in an unfavorable mix effect. These factors accounted for the Company's gross profit margin decline from the prior year's quarter.

We want to make the additional point that during the first half of 2007 the Company experienced higher production levels to increase pump and submersible motor inventories in the U.S. and Canada for the Water Systems season, which has not as strong as anticipated. The resultant second half 2007 inventory adjustment reduced factory utilization rates and these headwinds will continue into the first quarter of 2008.

We believe that the second half of 2008 will see improved factory utilization rates as we compare against our 2007 performance due to the expected U.S. and Canada Water Systems organic growth and the stronger back half growth for the Fueling business.

Selling and administrative expenses in the fourth quarter of 2007 increased as a percent of sales to 19.7% from 18.8 for the same period in the prior year. The Company's overall selling and administrative expenses for the fourth quarter of 2007 increased by $2.6 million over the same period in the prior year. Acquisitions increased selling and administrative expenses in the fourth quarter of 2007 compared to last year by about $2.9 million. The incremental acquisition expenses were partially offset by reduced spending in the base business operations.

Interest expense increased by $1.4 million during the fourth quarter and $4.8 million for the full year versus the same period in the prior year, as the Company's debt increased for the funding of our 2007 acquisitions, pump Brands and South Africa and the Canadian pump division of Monarch Industries, coupled with increases in working capital.

Restructuring expenses for the fourth quarter of 2007 were approximately $1.9 million pretax, and reduced EPS by approximately $0.05 per share. Full year 2007 restructuring expenses were $3.9 million pretax and reduced full year EPS by $0.11 per share. Restructuring expenses included severance and other employee expenses, as well as manufacturing equipment relocation costs.

The Company's effective income tax rate for the full year of 2007 was 35.0% compared to 35.1% in the prior year. The full year tax rate for 2007 was slightly lower than prior year and benefited by onetime adjustments to the tax provision primarily for announced income tax rate reductions in Germany.

Fully deluded earnings per share for the Company were $0.23 per share for the fourth quarter, and $1.22 for the full year compared to $0.61 and $2.43 for the prior year quarter and full year, respectively. Excluding restructuring and inventory charges, EPS would have been $0.33 for the fourth quarter and $1.38 for the full year 2007.

Cash flows generated by operating activities in the fourth quarter of 2007 were $15.1 million, with approximately $11 million resulting from reductions in accounts receivable and inventory working capital. Cash flows from investing and financing activities were essentially flat in the fourth quarter compared with the prior year. So the Company ended the year with $65 million of cash on the balance sheet, $150 million of ten year fixed-rate debt, with a coupon of 5.79%, $10 million of floating-rate debt, and no outstanding borrowings on its $120 million revolving credit agreement.

This concludes our prepared remarks on the fourth quarter and fiscal year 2007 results. Now we would like to open it up for questions.

(OPERATOR INSTRUCTIONS). Matt Summerville, KeyBanc.

A couple of questions. First, just on the Fueling business, have you started to see permits issued yet for the contractors to get in there and start to perform the work? And then relative -- did you say much in the way of CARB-related revenue and 2007, Scott?

Well, I think that we converted about 1,000 stations in 2007. I think that is a reasonable estimate, maybe a little bit less than that. Yes, there were some -- I guess, I believe it was less than 1,000 stations in 2007. So we had some California related revenues in '07. What was your other question?

On where I guess gas stations are in California with respect to the permitting process?

We're starting to see activity pickup. A portion of the 34% organic growth that we saw in the fourth quarter was attributable to conversions in California. And we have increased our guidance on our anticipated sales growth for next year. That would be largely attributable to our higher confidence level that the California conversion will occur and stay on schedule. So I think we're feeling pretty comfortable about our projection of at least 30% organic sales growth in Fueling next year, largely attributable to growth in California, but not exclusively attributable to that.

Have you seen any major changes in the competitive environment? And are there any other folks that you are aware of that are far along in the process with getting certified?

I don't believe that there are other folks that are far along in the process of being certified. I think the field right now is occupied by Franklin and Gilbarco Veeder-Root. And the -- and BFT, which is -- we would identify with Gilbarco Veeder-Root. But those are the players. And I think given the timeframe likely to remain in the players in this conversion.

With respect to the U.S. and Canada Water business, how much more inventory do you need to take out of your own sort of processes? How much progress were you able to make in the fourth quarter, because Tom made it sound like that inventory reduction process will continue into 1Q '08?

Our inventories in the fourth quarter normally grow. Our plan -- in this year they declined modestly. They declined in the face of relatively weak overall market conditions. The industry in November and December was down around 15%. Our plan for 2008 is pretty much to run 2008 with inventories in our Water business about where they are now. So the plan is for our overall sales to grow in '08 and our inventories to remain pretty flat.

But the year-on-year effect, which is the point that Tom was making, was last year we went into the year, we were uncertain the size of the inventory overhang -- stockpile, and the impact of the housing recession on the primary demand for our product. We build inventory through the first half of the year that proved to be more than we needed. So we slammed on the brakes in the back half and reduced inventory, as I said, modestly. And this year we're going to hold production down. But we have reduced basically our fixed cost level by reducing staffing in Siloam Springs and also in Wittlich, Germany for motors. So we will run pretty steady throughout this year. And the net effect of that will be that our variances and utilization rate relative to prior year will show up as being pretty good in the back half and still run behind in the first half of the year.

Just two more quick questions, I guess. Scott, the conversations you're having with your distributor customers, I guess, what in those conversations has given you confidence that it sounds like the majority of the inventory overhang in that channel on small 4 inch is behind you at this point? Then I guess outside of residential, can you comment on what you're seeing in your other North American end markets right now?

The evidence that we would have that the inventories at the major OEM level are being diminished is evidence that the product is being allocated among customers. And evidence that some customers can no longer get the variety of pumps or motors that they require. I think the inventories are starting -- at least from our prospective it looks like the inventories are starting to run out on a rating by rating unit -- SKU basis.

For instance, we had a customer down in Mexico that most of their business is 115 volt motors. All of a sudden they couldn't -- one of the major OEMs had always supplied them Franklin Motors with their pump. All of a sudden they couldn't get it anymore. And in January they came to us very concerned and wanting to take on a Franklin pump line immediately. That was an indication that one of the OEMs had run out of that particular rating to supply that customer. We are seeing that more and more of that around the circuit.

Then we will hear as well that on certain ratings that the customers are being assured, or some customers are being assured, that they can continue to be supplied that rating for some period of time. So there is an still inventory there, but our read is that it is being diminished. We are also seeing -- our premise has been that our pump marketshare will increase as more and more customers are being forced to make a decision on this -- do I go with a different motor in my standard pump or do I go with a Franklin motor and a Franklin pump?

Over the last 60 days we have seen pretty good upticks in our marketshare. I'm taking that as further indication that there is some evidence the stockpile is being diminished. But we have no hard evidence. We just have anecdotal evidence that that is the case.

Ned Borland, Next Generation Equity.

A quick question here on this issue with Healy that you mentioned. Are there any incremental costs that you are anticipating associated with that in the quarter?

We, in the fourth quarter last year, took a $300,000 charge or accrual to cover a portion of the costs. The total cost may be -- it may double that. But there is also an issue of whether that would be -- that cost should be borne by Franklin or by the seller. So I'm sure there will be discussions on that issue, but in the meantime we are accruing at about that rate and that should pretty much cover it.

So I guess this motor market opportunity that you have got --.

Go ahead.

The motor market opportunity that you have got of about $30 million to $40 million, I seem to remember last quarter we were talking about a higher motor opportunity. Has the number come down in your estimation? Is that due mostly to the residential market or the competitive situation? Or I guess has it come in from the previous quarter?

We indicated last quarter $35 million to $45 million was the last projection. And we changed this to $30 million to $40 million and it is strictly on the basis of the residential market situation.

Our industry shipments were actually up in January relative to the prior January, which you could say is kind of an encouraging indication that things may be better. But January of last year industry shipments were down 35% versus -- or thereabouts. It was an extraordinary reduction versus 2006, and was by far the worst month of the year for the industry. So a bounce back in January was expected, and I think the industry may have been up low double digits in January of this year.

But on balance, especially in the Southeast and selective regions around the country, we're still saying a pretty sizable concern on the part of our customers regarding the residential housing situation and its impact on their business. And to reflect that we changed the growth production from the $35 million to $45 million to the $30 million to $40 million range.

But this is --.

That is for Western Hemisphere. You heard the overall growth projections that we made.

We're talking market opportunity, like you'll get a piece of this? This is --.

No, no. That is our projection for our sales growth in the U.S. and Canada next year. When I say next year, I'm talking about 2008.

I got it. Then on the fixed cost issue and the gross margin, is that again mostly -- it is lack of utilization, but is that mostly because of the inventory issue, were there some transfer of production issues?

In 2004, and we track this fixed cost number which I described in my comments, as a percentage of sales. In 2004 that was 29.2%. Over the last several years, as we have changed our strategy and we have invested a lot in engineering to deal with a more complicated productline, and invested a lot in sales and marketing to increase our sales force and customer service and why have you. That number has crept up from 29.2% to 31.7 or 31.3%.

As we look out though we have basically got the infrastructure in place to serve what we need to grow our business. And with the sizable growth in our business that we are expecting next year -- I think we had indicated 22 to 27% including acquisitions -- we don't see our fixed cost base going up anywhere near that rate. And so we are expecting it to come back down by 220 basis points next year.

Just last question here. What is your feeling on share repurchase versus acquisitions going forward?

At current levels we have to consider a share repurchase is as a good use of our cash.

Mike Schneider, Robert W. Baird.

I did want to address the marketshare issues. Could you give us a sense of where you think you finished? At least on a runrate basis you indicated accelerated in Q4 on marketshare in submersible motors and pumps, and where that falls relative to your initial goal? And then I guess in the organic growth assumption for 2008, what does it assumes you achieve in terms of market share?

We have not disclosed -- and for competitive reasons I don't intend to disclose our marketshare for these products. We have disclosed trends. Our share, it went out dramatically last year. And it, at least in the first month of this year, has stayed up well above -- we're talking about in the first month of this year around double where it was in the first month of last year. So we are seeing nice share growth.

I will say that it is -- when we started down this path, I anticipated it to be somewhat higher than it is right now, and was for all of last year. And I think that we underestimated going into this the size of the stockpile, and the issue of us competing with our own product through most of the year.

So I am encouraged that -- and as I said, we have no way of knowing how much product remains out there, but anecdotally it appears that it is coming down. I am encouraged that we are seeing nice bumps in share as we're picking up these anecdotal comments about the stockpile. So that to me is consistent with where we wanted to go. But our share is not where we are targeting. We still have a little ways to go to get there.

Then the large motor market, we have been focused I guess myopically for the last two years on small motors. What is your expectation now for the impact of the new introductions coming in larger motors out of Faradyne? And I guess again what are your expectations embedded in the organic growth guidance on that topic?

First of all, our competitors have had 6 and 8 inch motors in the market for years. So I would see that as kind of a market where we have faced competition for a long time and we are facing it again this year. If we do a good job with our customers, it will be steadied up some. And if we don't do a good job, it might be down a little bit. But there is not a major discontinuity occurring in the marketplace from a competitive standpoint as far as the 6 and 8 inch motors are concerned.

The high thrust motors, this is a product that is sold directly to distribution, and then from distributors to contractors. The product is not going to market with a pump assembled to it like all the other products that Paradigm has been selling up to now. The use for high thrust motors are more difficult applications, more expensive applications. In many cases applications where extreme conditions exist, either because of harsh environment temperature or minerals or sand. I think it is a tougher market to break into than just residential half horsepower water well market.

We have a long reputation of success in that in serving that market. They are more difficult products to build. So I really believe, at least in 2008, that the competitive impact in the high thrust 4 inch motors will not be great. And that we will just have to see how their product performs in the market out -- over the longer term to determine how successful they will be. And of course we have to continue improving our product as well.

Two final questions, I guess on that topic still. Pricing. As we have seen new entrants into the small motor market, obviously we saw a lot of pricing pressure that unfolded. What would you expect to be the case in '08 and '09 as those larger motors come out to market from Faradyne?

And then secondly, what is the mix of revenue today that is tied to larger motors?

Just one second. I'm going to try to find that sales number and mix number. I would say of our total sales, large motors are 10% around.

That is in the U.S. and --.

That includes the high thrust six and eight. Is that right in the U.S. and Canada. And as far as pricing goes, I really don't know -- there is no real product in the market now that -- so it is hard for me to respond to that question. I don't know how the competitors are going to price it. I haven't really had -- some of our people may have seen a motor, but we haven't really had a chance to study the product. And it is not much -- there's not much presence of that product in the market right now.

That's fair. Then just a final topic, I'm sorry, the margins. The 220 basis points of fixed cost leverage, would that include just the absence of the restructuring charges that you have -- and inventory write-offs that you took in 2007? And then how much of that do you believe, at least on a runrate basis, you already have in hand?

I think we're going to hit that number. It does -- part of it -- part of the 220 basis point change includes the restructuring, the difference between restructuring cost in 2007 and restructuring cost in 2008. But that is a relatively small part of it.

The vast majority is operational in nature as opposed to restructuring.

How much of this yet relates to future closures, Tom? Or is the 220 really almost now just a runrate of what you currently have done to date, including the restructuring and write-off?

I would say it is more the latter.

Actions taken.

Matt Summerville, KeyBanc.

Just a couple of follow-up questions. When you were talking about your runrate of share being roughly double what it was a year ago in January, was that your PMA share, Scott?

That would be PMA, pump ends and pumps and submersibles.

Then can you talk about just in terms of the small motor business, what kind of price degradation you saw in the fourth quarter? And it sounds like it is not getting any worse, which therefore means it is stabilized. And I guess if you could confirm that. And then what your relative level of confidence is that that list price increase on motors will stick?

What we are assuming for planning reason purposes is not complete implementation of the increase. My comment, and I'm not going to quantify that. It is just whenever you have a price increase there's always some degradation and competitive situations that crop up.

So when I made the comment that we believe -- as of right now, based on our knowledge of material inflation, labor inflation, that the price increases that when they are effective will be sufficient to offset cost increases, and that they should be in effect by the end of March. That is our analysis right now.

Obviously, there is some great volatility occurring in iron ore, which will play through steel, and copper pricing right now. We're going to have to track that closely to make sure that volatility doesn't exceed the volatility that we had already assumed in our plan. If so, then we may have to make some changes as we go forward. But right now the pricing that we have in place should be in place to cover our cost increases for the year. And they should be in place in March.

And as far as fourth quarter goes, we are seeing ongoing price promotions out there, but we saw a lot of promotional pricing in 2007. As it is right now, and this will depend on people's strategy, ours and those of our competitors, but as we see them right now, there is still a good deal of promotional activity. But we don't see it as being identifiably worse than we experienced in the prior year. So the year-on-year effect at this point is -- should be neutral. But, again, that is a situation we can't control.

Just one last follow-up question. In terms of TRI-SEAL, I don't think you mentioned that on the call today. Can you just give an update on how acceptance and how that launch of product is going?

We introduced in the 4 inch pump, which is our leading pump product in the U.S. and Canada for our Water Systems -- residential Water Systems business. We several years ago acquired, as those of you who followed the Company know, the Jacuzzi brands business, JBD, and they had several incumbent pump designs that were really good products and well-respected in the industry. But they had not been updated for 20 years.

There was a whole backlog of efficiency improvement and cost reductions that could be designed into that productline. Even though it is expensive to introduce new products, and we were facing what we knew was going to be a down year anyway in 2007, we decided to go ahead and launch TRI-SEAL, which is the new high-end product that would replace the Sandhandler line that we acquired. And we introduced the Series 5 pumps which is -- they wanted the best and the other is better product -- that would replace the Hurricane productline.

We launched those products in the first and second quarter of last year. Because of what is going on in the market, we are converting customers to the Franklin pumps at a fairly rapid rate. And we didn't want to convert them to our pumping system and then immediately go to them and say, all by the way, we have come out with a new product and now you have to take that. So we didn't eliminate the old product when we introduced the new product last year. What we did with our customers have said, we know you're happy with what you're buying from us now, why don't you try this, and see if it isn't better?

We expect to be by the second quarter essentially out of the old product and fully converted to the TRI-SEAL and the Series 5 productline. This will have a major impact on the complexity of our manufacturing operation and our inventory control and number of SKUs that we have active in our business. We are all looking forward to getting this done. But we have made a decision that we're not going to force our customers with an artificial cutoff date, you have to take this. We are selling them customer by customer on the new product. And that is going well, and I think that process should be over by the end of the second quarter.

Ladies and gentlemen, there are no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Thank you for attending our conference call. And we will look forward to speaking to you at the end of next quarter.

Ladies and gentlemen, this concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.