Hubbell Inc (HUBB) 2007 Q4 法說會逐字稿

Good day, everyone. Welcome to the fourth-quarter and full-year 2007 earnings release call for Hubbell, Inc. Today's call is being recorded. Now, for opening remarks and introductions, I would like to turn the call over to Mr. Tom Conlin, Vice President of Public Affairs with Hubbell Incorporated. Please go ahead, sir.

Good morning to all of you. We released our fourth-quarter and full-year earnings this morning at about 7 AM, and those earnings and that release are available to you for a number of sources. The easiest way is to go to the Hubbell Web site at Hubbell.com and excess the complete release by clicking on the Investor Information tab at the top, then Financial Releases on the drop-down menu. It's also available from the usual wire service.

This conference call is available today by telephone, and it's simultaneously being webcast also from the Hubbell Web site. Audio replays of the conference call are available in three ways. First, you have a telephone replay of this call starting two hours from its conclusion, and that replay will be available for the next week. To access the telephone replay, dial 719-457-0820 and enter the pass code, which is 5456476. You may also hear the replay on the Hubbell Web site again from the Investor Relations tab and the audio archives on the drop-down menu, or you can have this audio as a podcast by downloading it from Hubbell.com, once again on the Investor Information tab at the top.

Let me refer everyone listening to the call today and those who hear a replay to the paragraph in our press release regarding forward-looking statements. That release and this call may contain some expectations based on some assumptions on the future and Hubbell's performance in the future, particularly regarding our earnings. Clearly, these comments are forward-looking. We may also make some comments here today during the call or answer questions which may include forward-looking statements. All of these involve inherent assumptions with known and unknown risks and other factors that can cause actual future results to differ from what we may discuss or project here today. So please note that paragraph in the press release, and I'd like to consider it incorporated into the call here this morning by reference.

I'll turn the call over now to Tim Powers, CEO of Hubbell Incorporated, for some comments on our fourth-quarter results.

Good morning, everyone. Let me begin with some comments regarding the highlights of our results for 2007. Then I'll let Dave Nord take you through some of the details, and I'll come back to discuss the markets for what we see in 2008.

Hubbell reported the highest sales, net income, earnings per diluted share and cash flow from operations in our 120-year history. The results are directly attributable to the focus, hard work and dedication of our 12,000 employees.

The fourth quarter was a strong finish to an excellent year. It continued to build on the improvements in operating performance that we have seen over the first three quarters of this year. The results have been accomplished despite the continuing challenge in the residential business.

Sales in the fourth quarter of $614.7 million and operating profit margins of 11.2% were up more than 4 full points from a similar period last year, contributing to earnings per diluted share of $0.82, up 71%. This brings our full-year sales to over $2.5 billion, up 5%, and, more importantly, operating margins up 2 full points to 11.8%.

We continue our focus on three key elements. Price realization, cost containment and productivity improvements have been clearly effective in our drive to increase our operating margins and continued strong cash flow. Free cash flow was more than twice net income in the quarter and 134% for the year.

Selling price increases continue to be an important contributor to our margin improvement efforts, although this will be less of a contributor in 2008. Programs to increase productivity and reduce costs are achieving success and contributing to margin expansion. The markets for our products remain consistent with our expectations.

Order volume overall in nonresidential construction and industrial maintenance and repair markets continued to show growth but at slowing rates. The residential market continues its decline and will probably show negative comparisons throughout next year.

The markets served by our Industrial Technology segment, particularly the international markets, provided strong demand in specialty communications and industrial applications. From my perspective, a strong quarter and a great finish to an excellent year, one that provides a solid foundation to the market challenge we are likely to experience in 2008.

Now, I'll have Dave give you more details on the results and come back with some views on the markets and next year. Dave?

Good morning. Let me take a few minutes to go through the consolidated results on P&L and cash flow, and then we'll get into a little more color on the segments.

First, on the P&L in the fourth quarter, sales were $614.7 million, which is up 4.4% from last year's fourth quarter. Selling price increases accounted for about half of the increase with the remainder due to a combination of acquisitions and foreign currency translation, offset by continuing lower residential volume.

Gross profit margin was 29.5%, up nearly 2 points from last year. This is principally driven by a price realization in excess of commodity cost increases and productivity improvements.

Selling and administrative costs as a percentage of sales were 18.3%, up from the 18% we saw in last year's fourth-quarter. The workforce reduction costs that we referred to in the fourth quarter negatively impacted this line by 50 basis points, so on a comparable basis, it's down slightly year over year. Net interest expense was $3.7 million, higher than last year's $3.1 million, due to cash investments that we used for acquisitions and our higher share repurchase levels this year.

The effective tax rate in the quarter was 25.2%, higher than last year's by 3.3%. As we note, in the quarter, we had a $0.05 benefit associated with adjustments, principally around settlement of the open tax years. Absent that, the rate would have been 29% in the quarter.

Net income -- so all of this results in net income of $48 million, which is up $18.8 million or 64% from last year's fourth quarter, and earnings per diluted share of $0.82, up 71% from the $0.48 we reported last year.

For the full year, we finished with sales of $2.53 billion, up 5% from the $2.41 billion reported last year; net operating profit margin of 11.8%, more than 2 points higher than last year's 9.7%, due to the selling price increase in excess of commodity costs and improved productivity, including freight and logistics and cost containment initiatives executed throughout the year. So net income finished at $208.3 million, up $50.2 million or 32% from last year, and earnings per diluted share of $3.53, up 35% from the $2.59 we reported last year.

Turn now out to cash flow. In the fourth quarter, cash flow from operations was $114 million, double the amount from last year's fourth quarter due to improved working capital performance and higher earnings. Capital expenditures were $11 million in the quarter, down $8 million from last year's fourth quarter, as last year had the higher spending associated with the new Lighting headquarters building and the spending on the implementation of our enterprise reporting system. So free cash flow in the quarter of $103 million compares to $37 million last year.

Acquisition expenditures in the quarter were $50 million, principally for the PCore acquisition in our Power segment that closed on October 1. Share repurchases in the quarter were $19.7 million for a little over 300,000 shares.

For the full year, cash flow from operations was $335 million, a significant improvement from last year's $140 million, due to better working capital, primarily in inventory, and higher earnings. Trade working capital as a percent of sales for the year was 19.8% compared to 22% last year. Capital expenditures for the year were $55.9 million, down $30.9 million from the '06 levels, as we completed the Lighting headquarters early this year and had significantly reduce costs associated with our enterprise system implementation. So free cash flow for the year of $279 million compares with $53 million last year, 134% of net income, well above the 100% target we set earlier in the year. Cash used for share repurchase for the full year of 2007 was $193.1 million for the purchase of 3.6 million shares, compared to $95.1 million for 2.1 million shares in '06. So the balance sheet finishes the year strong with good cash flow performance, some deployment of that for share repurchase and acquisition. But we finished the year with net debt of $119.4 million compared to $138.7 million at the end of 2006.

Let's turn now to the segment results in the fourth quarter, on the Electrical segment first -- sales of $388.7 million, essentially flat to 2006. But included in there is the residential lighting business, which was down 24%.

Operating income was $30.8 million, up $11.7 million or 61% from 2006. Operating margin in the quarter of 7.9%, up a full 3 points from the fourth quarter '06. This includes the impact of the incremental fourth-quarter cost reduction costs year over year and the drag from the lower volume in the residential lighting business. Combined, these two impact the margin in the segment by nearly 3 full points year over year.

Within the segment, we had volume increases in wiring and electrical products, while the lighting was down, principally for residential. The wiring growth was mid single digits, essentially flat operating profit. Due to the impact of the product quality issue that was resolved in the fourth quarter, we mentioned on the last call earlier in the quarter there were some continuing costs associated with that and the charges associated with the workforce reductions.

On the Lighting side, some growth in the C&I business, while residential was down 24%, as I mentioned. Operating profits, though, increased 54% due to good price realization in excess of commodity cost increases and productivity improvements, including strategic sourcing and value engineering.

The electrical products component of that segment had 18% volume growth, a big driver being in the harsh and hazardous markets. Operating profit more than doubled, due to price increase in excess of cost, productivity gains and some favorable product mix.

Turn now to the Power segment. Sales were $159.6 million, up $12.8 million or 9% from last year's fourth quarter; operating profit of $23.2 million, up 61%. The PCore acquisition contributed $7 million of sales in the quarter. Price realization in excess of commodity cost was about $2 million in the quarter. Productivity improvements from strategic sourcing initiatives, as well as some good product mix, contributed to the increase.

On the Industrial Technology side, the story there continues that we've experienced throughout the year with sales of $66.4 million, up $13.2 million or 25% from last year, with operating profit of $14.6 million, up 78%. The acquisition we completed in the fourth quarter of last year in Australia contributed about 5 points of the sales increase.

The operating margin improvement was broad-based, due to all of the things that we focused on this year, higher volume, price increases and productivity.

So I'll turn now to the full year just to close out '07 on the segments. Electrical sales of $1.63 billion, up 1%, with operating income of $151 million, up 21%; margin of 9.2%, up from the 7.6%. That includes the negative impact of the residential decline that the Electrical segment faced. Within the segment, there are similar trends as in the quarter with volume increases at wiring and electrical products and the full year down in lighting, principally due to residential.

On the Power side, sales of $636.6 million were up $62.9 million or 11%, and operating profit of $97.3 million, up 28%. The Lenoir City acquisition that we completed in the middle of 2006 and the PCore acquisition late in '07 contributed about two-thirds of the sales growth and about a quarter of the operating profit growth compared to 2006.

More significant than the operating profit increase was very good price realization and good management of the commodity cost increases, as well as productivity improvements, including the strategic sourcing In freight and logistics.

In the Industrial Technology side, sales finished the year at $257.4 million, up $48 million or 23%, and operating profit of $51.1 million, up 53%. The Austdac acquisition accounted for about 10 points of the sales increase, and the operating profit increase attributable to all of the things that we have focused on throughout the year -- price, cost and productivity.

So with that, I'll turn it back over to Tim.

Thanks, Dave.

Let's review the outlook for our markets. The manufacturing sector will continue to show growth, but at very modest levels. With continuing strength in the energy sector both domestically and internationally, we will provide some ongoing support in this area.

On the nonresidential side, the overall market will slow to low single digits, perhaps being flat to 2007 for periods during the year. The residential market will continue to be difficult. I believe the market will decline at a rate of 25% to 30% next year. This would put single-family housing starts at 700,000 to 800,000 unit level with a possible bottoming late next year. Of course, since our business is at the end of the construction cycle, we won't see any turnaround in our residential business until 2009.

The utility market continues to grow but with some bias toward transmission versus distribution. I think the fundamentals of this market support continuing modest growth. The two variables to our economic outlook continue to be the unfolding crisis in the credit market and the price of commodities, particularly energy, each of which is contributing to the slowing US economy.

So what does all of this mean for next year? In 2008, we expect sales to increase 4% to 6%, excluding any effects of the fluctuation of foreign currency exchange rates. Sales increases compared to 2007 are expected to be relatively balanced across our three segments.

Within the Electrical segment, the acquisition of Kurt Versen wilt essentially offset the continuing decline in the residential market in 2008. The full-year impact of 2007 acquisitions is expected to contribute 2% to 3% to these amounts.

Operating margins are expected to improve by 1 point compared to 2007. In 2008, we will continue to focus on the same areas as in 2007 -- price, productivity and cost. These key initiatives are expected to benefit operating margins, including the expansion of global product sourcing initiatives, improved factory productivity and the continuing improvements using lean processes.

The tax rate increase from 26.7% in 2007 to 30.5% in 2008 is due to the completion of the 2004 and 2005 federal tax audits in '07 with the absence of the R&D tax credits and higher US earnings in 2008.

Earnings per share in 2008 is expected to be in the range of $3.70 to $3.90.

With that, we will open it up to questions.

[Nicky], if you would repeat the procedure for asking a question, we will proceed to that.

(OPERATOR INSTRUCTIONS). Bob Cornell, Lehman Brothers.

Yes, you mentioned the electrical was up in earnings nicely year over year, but it wasn't as strong sequentially as I might have thought. You mentioned the cost reductions, that type of thing. Could you go back over what actually happened in the fourth quarter in electrical wiring and lighting, Hubbell electrical products, and give some more visibility into what really is going on there?

Sure, Bob. I think one of the things, as you look at it at the high-level, and I think you probably focused on the margin sequentially from Q3 to Q4 down about 3 points. Just about half of that is associated with the cost reduction, so -- and then another big piece of it is we have a normal trend, as we've talked about, from Q3 to Q4, where volume is down and you lose some on the conversion there.

The other driver is on the residential side. Residential continued to decline. We saw some pressure on margins in the residential business as we finished the year, some attributable to some product returns, so put some pressure on the margins there.

Actually, you sourced most of that stuff, so it's not that volume-sensitive. So why do you see the pressure on margin in the resi business?

I think one of the reasons you see that pressure is that, while we do source the product, there's still a cost infrastructure, particularly the direct sales force, that we haven't taken any actions to reduce the direct sales force anywhere near the level of the volume decline because you just can't do that. So there is a negative margin drag with volume; you can't cover it all. (multiple speakers)

So you passed the critical mass point of view; I get it. For awhile, you were able to hold the margins, but now the volumes are down so much, you've got an infrastructure cost that's impacting the margins.

I think it's one of those things you just in steps rather than on a sort of flowing basis, and we continue to trim our overhead costs and adjust them as we can in step function. But certainly, when you're getting 25% and 30% year-over-year declines, it's not a smooth movement.

So, Dave, are you finished with that answer? Because the follow-up is, in the guidance, what do you have anticipated for the electrical business in terms of growth in sales and OP and that type of thing?

The growth -- most of increase in the margins are going to come from the Electrical segment because that's clearly the segment that still has -- is still trailing the market. I think we've seen, on the Power and Industrial Technology, some very good performance. So I think their improvement year over year on the margin side will be very modest and more focused on the volume growth for them.

On the Electrical segment, we're looking at more of the improvement and getting that segment up probably close to 1.5 points, since that's about 60% of our business, with mid single-digit volume growth.

One other question, sorry -- just an update on Spokane Bristol?

We have commenced the restructuring and the moving from Spokane. Bristol is operating normally.

Are you starting to move product again to complete that move?

Yes.

You don't expect any adverse impact on margins as a result of that?

No.

Jeff Sprague, Citigroup.

Just a couple of questions -- first, Tim, just a point of clarification. You said next year a couple times when you were talking about resi. Did you mean '08 or '09? I'm just a little unclear whether you really --.

'08. We're saying that new housing starts are going to be down 25%, and really a big chunk of our residential business, the residential lighting business, is key to that particular part of the residential market. I think it's going to decline perhaps more than current forecasts out there predict. But in our view and in our plan, that's what we have, 25% reduction.

Therefore, you have got some pressure into '09, just given the lagging nature of your business?

Yes. We have a four to six-month lag to housing starts on the lighting side of our business.

Dave, you kind of bounced around this a little bit, but I'm just trying to tie together some of the pieces of the revenue composition in the quarter. I guess if I look at -- you now, Power revenues were up 9; it looks like maybe PCore added that $7 million; it was maybe 5 points. So that leaves me with kind of 4% core. Can you give us a sense of price versus volume in the power business?

Yes. Of the 9, about half was from the acquisitions. The other half was a combination of price, probably about half of that, maybe about 2 points of price, with the rest currency, a little bit of currency, and then volume. As we've mentioned, we had a little incremental storm volume from the ice storms in the Midwest.

So volume is basically flat in power?

Yes. On the distribution side, you could say there is continuing softness in the market right now. I mean, we're just seeing that as a continuing situation.

It sounds like Electrical volume is basically flat, although, again, that's largely tied to lighting. Can you give us a sense of volumes, ex-lighting, in the Electrical segment?

No, that's right. They are without flat on core volume, ex the resi.

Okay, that's flat, ex-resi. With resi, your core volumes are down how much in Electrical?

About 3%.

Tim, just a bigger-picture question maybe on that -- I mean, you continue to highlight prices and opportunity. Just I guess the question mark some of us have, certainly I have, is just with not a lot of volume growth and an economy that's maybe faltering a little bit. How do you really feel about being able to get price on flat volumes?

We think that, next year, that price will be half of the impact that is this year, more in the 1-plus% range. Certainly, there are products that are very much impacted by energy costs. Really that's the key driver at the moment for -- oil year over year, even though it's down from the quarter, it's been up significantly. So it's a driver in the operation of our plants and inflation for us. But I agree with you. In a softer market, it will be less of an impact, and that's our view next year. It will be there, but it will be smaller.

Can you tell us how much the C&I lighting business was up in the quarter?

C&I was up a couple of percent, mostly on price.

Maybe just one last macro one for me -- Tim, you were maybe, a year ago, a little more bearish on commercial construction, kind of ahead of the market, expressing any concern. Now, your comment of flat actually sounds a little more optimistic than some of the big forecasters like AII and Portland Cement and all these guys who are putting out. Could you just give us a little more color on how you just see the complexion of the whole commercial cycle playing out?

Sure. I think, if you're looking at awards, you're looking at a negative number which has implications for '09. But if you look at put-in-place, it's closer to flat or flat. That's where you sell the product. I think that we're still looking at a relatively level playing field for '08. As we finish up the jobs that have been started for some time, I think it indicates that '09 will be a year of declining put-in-place activity for the non-residential market. Then again, that's subject to what is going on in credit markets, which still has a big impact of how much the US economy is going to move forward and at what rate.

I'm sorry, maybe I'm going on, but maybe just one more different topic -- any -- the weakness in the D part of T&D obviously understandable with kind of the resi tie. Any change in the complexion of the demand on the more projects side? There has been some decent MRO activity, but anything beyond that apparent?

I think we see a steadily slowing growth in the business in general with the exception of the residential business, which is continuing to decline at a pretty good pace. So we are taking the kinds of actions you would expect us to, which are adding to our portfolio, buying back shares. We have done an excellent job of generating cash this year and putting that you work. So you can expect to see us perhaps more aggressive in the M&A area, certainly to combat the slowness in the general economy.

Christopher Glynn, Oppenheimer.

The top line growth in the quarter came in at about 4%. I think the guidance was 4% to 8%. What didn't happen in the quarter? Maybe specifically I'm thinking of the timing of non-res project completions, perhaps.

I would say that the last two weeks of December were slower than we anticipated they would be. But I wouldn't attribute -- I would attribute that more to distributor actions than anything. Certainly, maybe they are becoming more conservative about their level of inventories, but we saw it in a number of our businesses, where, even though we calculate very closely Week Three and Week Four of December and what the fall-offs might be, they were a little bit bigger than normal. But January is coming back to our expectation, so I think it's just a general indication of the level of concern of all of us on the US economy slowing down.

Chris, also just as a point -- our view was that it was 4% to 5%, if I recall. Our guidance was 4% to 5%. So it's a little bit -- we're on the low end of that. But, while there was some slowness, it wasn't really a significant -- we're talking in the $5 million to $10 million range. So (multiple speakers)

I must have misremembered.

Yes, not a big surprise, but, you know --.

There's nothing out of the ordinary in all of this.

Okay. On the 4% to 6% top line for next year, I guess just stepping back, you had 5% this year. We would certainly expect slower next, but I guess the acquisition is the delta there -- the acquisitions?

Yes, that acquisition is about half.

With regard to Power Systems acquisitions, PCore and Lenoir City, it was about two-thirds of the top line, only a quarter of the operating profit, first year in there. What's kind of the swing factor in them coming up to segment level margins in '08?

Well, PCore has initial purchase accounting matters which is holding back its earnings, but Lenoir City has already attained earnings equal to the average of the segment. So I think you'll see PCore, as the year goes along, strengthen its margin and get up to at or above the segment margin.

On Kurt Versen, can we get a little detail on the size of that business and the margins? I believe it's a pretty high-margin business?

It is a high-margin business, and it's an excellent addition to our lighting lineup. It is the probably best-known indoor specified down light business in the US market. Certainly, it's just another brand that will help lock some specifications and help us win some jobs. It's located in New Jersey and has very good access to the New York City market, which we are expecting will strengthen our position there. The New York City market we would expect to be pretty good over the next couple of years, as there's a number of construction projects that are expected to take place. The business is in the $50 million range in sales, but quite good margins.

Could we revisit -- I think you might have commented on the third quarter. But what kind of benefits expecting from the workforce reduction in '08?

Generally speaking, it's a little bit less than a one-year payback, and it was $7 million.

Jeff Beach, Stifel Nicolaus.

Congratulations on a good quarter. A couple of things -- in Industrial Technology, the sales continue to boom, the margins continue to move to all-time highs. Is this the orientation around basic industry and a lot of energy infrastructure, and is it likely we're going to see this kind of strength continue into not necessarily this pace of growth, but is this likely going to be one of your best performing segments in a weak economy in 2009?

Yes. The answer to that is clearly yes, the underlying support for infrastructure investment in the energy-related sector and also, as you know, we have our test business of Hipotronics in Haefely, and the expansion of utility infrastructure. Particularly on the transformer side is where they participate. This is a world leading market share company for this test equipment for transformers. There continues to be huge demand for this product, and we don't see anything happening in but upward movement on this for 2008.

Residential lighting with the volume continuing to drop -- can you make a commentary about the profitability of that business? Is it still holding in the double digits?

Yes. The answer to that is yes. We think it will be in the low teens for 2008. We are managing as best we can our infrastructure costs. The hardest part in something like this is maintaining your inventories in balance while you are keeping business at a declining rate of 20% or 25%. But I think we're doing a pretty good job on that score. The good news for us is that the forecast is for a turnaround in 2009. So hopefully, we can see the end of the decline for this very strong business segment for us. I hope that bodes well for our improvement in profit in '09.

The last question -- pretty strong stock buyback in 2007. But as the stock price has gone lower, it didn't look to be a high level in the fourth quarter. Are you looking here and trying to weigh M&A against stock purchases, or is this a price level where you anticipate being very aggressive?

Well, for one thing, certainly we had the impending purchase of Kurt Versen at $100 million. So for us, it was lining up the money for that. Certainly, we think that the share price is, as all companies would, not valued correctly. It looks like an opportunity. I think all stocks are on sale at the moment, just from the mentality of the market. So take that for what it's worth.

Steve Gambuzza, Longbow Capital.

On the share repurchase question, how much have you incorporated into your guidance for 2008?

What's included in there is essentially an amount to offset dilution, roughly 1 million -- 1.2 million shares. So take the price times that, $50 million to $60 million right now.

So there's really no net reduction in share count included in your (multiple speakers)?

That's correct; that's correct.

Presumably, if acquisition opportunities don't materialize doing the course of the year, you might look to use some cash flow to buy back stock?

Correct.

I just was wondering if you could expand on two comments in the release. The first was the $0.07 charge for workforce reductions in the quarter. Could you just elaborate on what exactly that is?

Sure. We had an early retirement plan or offering to our employees and, looking at the softness in 2008, wanted to see if we could reduce our overhead costs incrementally. So that's what the nature of the cost reduction was; it was broad-based across the Company and it was 100 or so employees. It was not some huge magnitude thing, but it was senior employees with lots of seniority and fairly well-paid.

Do you get the sense that that action is complete, or would you expect similar initiatives in 2008?

Right now, if the economy acts as we think it will in our guidance, I would not expect other major actions. However, if the economy softens, then certainly, like all other companies, we would move quickly to further reduce our overheads matching further weaknesses.

I was hoping just to get a little more color on the comment regarding weakness in distribution-related utility products. I was wondering. It seems like -- I can certainly understand why certain products that might be tied to new customer connects would be weak. But, given the overall trends and the utilities are continuing to grow their reliability-driven distribution spending, which is, from my understanding, the majority of the CapEx. It just seems kind of at odds with what the industry is talking about. I'm just wondering if there might be some channel issues in terms of inventory issues within the distribution channel that is causing some of this weakness for you.

No. I think you probably have it right, and I don't think there's any channel distribution issues. Certainly, it's the lineup of your product and where utilities are spending money. Where they are spending money today is in automation systems of meter reading and the kinds of things where you can automate a substation and electronic feedback as to the performance of your system. So we make a lot of bread and butter parts that go with upgrade and retrofit, but if you're doing automation, you're going to be focusing your attention more on software and interconnect. That seems to be where part of the money is going, along with, I would say, a reliability drive at the moment to replace and upgrade power transformers.

So I think, if you're talking about the range of power transformers above 20 MVA, you're seeing continued extremely strong demand. If you're talking about distribution transformers, which would be more in the range of what goes near homes, you are seeing a tremendous weakness. So it really is where utilities are investing their money right now. I agree with you that they are spending more money, and they will continue to spend more money. So I think we're just having some softness related to the dramatic decline in residential, but I think that, certainly, they will continue to spend more money in '08 than '07, and I think they will spend more money in '09 than '08. So there's (multiple speakers) kinds of things like that are still going upward.

What percentage of your utility sales go through distribution versus direct sales?

I would say probably 75% of our utility business goes through distribution because it's the nature of our products that fit that. As you move up in the apparatus level, so to transformers and things like that, those are direct sales. But what our utility distributors provide for, public utilities, is logistic support for things that take up an enormous amount of space and for which there are thousands of different SKUs. So, what they do is keep a lot of that in stock and delivered to the job site and to the depots what is needed for line crews on a pretty short-term basis.

So I guess what would you look for in terms of a signal that perhaps industry spending might be -- which continues to be robust -- might start shifting more towards your product set?

Well, I think, for one thing, we're enjoying an increasing amount of transmission business. The total spending in the T&D area historically is about 80% for distribution and 20% for transmission. That transmission component continues to grow. I think that we will continue to see flatness for awhile while housing continues to contract. I think the utilities will shift their spending pattern to the kinds of things that are bringing them better reliability and efficiency to their grid, which is substation automation, which is replacing and upgrading small amounts of transmission lines in the 50 to 100-mile length. Say you would see upgrades from, say, 144 KV to 345 KV. That kind of thing you can witness at just about any crossroads you come to in the United States. So a lot of that going on.

Where the amount has slowed down is in underground utility components that would be for residential and, in some parts of the US, above-ground. But about half of our business is repair and replacement, at least half, and so that part is going to go on regardless. So, I think just the flattening is the incremental impact of slowing housing starts.

[Stuart Tavin], Mason Capital.

I have a question about the share buybacks. In the fourth quarter, how many A's and how many B's did you buy back? Then a follow-up about the price differential between the A's and the Bs. Starting in the third quarter and continuing into the fourth, the A's were priced at a significant premium to the B's. I'm just curious why you would continue to buy those shares when the B's are lower-priced and more liquid. Thank you.

I don't have all of those details here in front of me. I will tell you that we buy under -- as you are aware, we have a 10B5 program that applies to both the A's and the B's, which we put in place last year. So some of the purchases are happening under that program automatically. But I can get back to you with the specifics regarding the A's, B's and the price.

But philosophically speaking, would you continue to buy A shares as they are at a premium to the B's, given that there were enough A share purchases that presumably not all of them were related to the 10B51 program?

We will continue to buy both shares. Normally, we would buy a great deal more of the B's than the A's; that would be typical.

(OPERATOR INSTRUCTIONS). John Emerich, Iron Works Capital.

Thank you. I'm pretty new to the story. I just had a couple of general questions. Your forecast -- if you take out a little bit from contribution from acquisitions during '07 into '08, you're still forecasting some level of organic revenue growth in '08. Is that correct?

Yes.

Okay. Total company -- the run rate today has obviously gotten smaller. What is your current exposure, percentage of total revenue, to both residential and nonresidential construction?

Nonresidential continues to run about 40% of our business. On the residential side, including all business, not just the residential lighting, we have moved down from 15% last year to 12% in '07. I think you can expect that, with the trends, particularly in lighting, to probably move down 1 point or 2 for '08.

I guess I should ask a question of clarification because some of that is for res and non-res -- would be new construction, and a chunk would be the replacement market, I guess?

Yes, but you would say that, by and large, new construction drives the day. I would say probably more than half of our business is related directly to new construction.

That's helpful. Do you have any international exposure, either director or through export?

We have very small -- if you consider Canada and Mexico as the home market in the Americas, North America, then we only have 6% or 7% of our total revenue that's outside of that. We're primarily a NAFTA company.

We have no further questions at this time.

Our thanks to everyone that called in, and we'll speak to you in about three months.

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