Koninklijke Philips NV (PHG) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Genlyte Group Fourth Quarter and Full Year 2006 Earnings Conference Call. Also, welcome to those of you listening on our webcast.

[OPERATOR INSTRUCTIONS]

This conference will begin with an overview of the 2006 fourth quarter and full year results by Mr. Larry Powers, Chairman, President and CEO of Genlyte, and Mr. Bill Ferko, Vice President and CFO of Genlyte, followed by a question and answer session.

[OPERATOR INSTRUCTIONS]

Before we begin, let me remind you that today's discussion may include forward-looking statements. These statements are based on our view of the world today, and, therefore, are subject to risks and uncertainties which are discussed in more detail in the company's most recent Form 10-Q. Obviously, actual future results may vary.

We will shortly hand over to Mr. Powers.

Thank you, and welcome, everybody, to our fourth quarter and full year conference call. Let me begin by talking a little bit about the fourth quarter, and then really the month of December in particular. I was pleasantly pleased at how strong we finished the year in relationship to kind of what we saw in October and November. I became a little bit concerned, and many of our divisions were somewhat concerned, thinking that the year might progressively get weaker, because it seemed like we did see, for a period of time, a little softening in our business. But I was very pleased with the results that ended up in December, and it was a much stronger month than even myself and most of our general managers had predicted.

We had one kind of a negative problem during the month. Ledalite, one of our linear lighting companies out in Vancouver, British Columbia, had a strike that lasted about three weeks of the month and, obviously, caused them to not be able to ship as much, and their profitability was significantly impacted. But they did respond very nicely the last week of the month and actually turned into what appeared was going to be a pretty significant loss for our company into a profitable month, and they did a very nice job of overcoming that very difficult situation.

The other thing that impressed me, having done this for a lot of years, with our year last year, and the fourth quarter, again, was that all of our divisions in Genlyte, with the exceptions of -- exception of two divisions, ended up the year with positive sales and earnings. And when you have as many companies as we do, to have all of them but two end up with a very positive year, to me, was a very bright sign.

And the reason that the two of them ended up, one of them was one of the more recent acquisitions that we had, and their earnings -- their sales were actually up slightly. Their earnings were down a little bit. And that was due partially to purchase accounting, or they probably would've been about equal or maybe slightly ahead of last year. We had one other division that struggled a little bit with some issues that we hope we will get corrected early in this year, a very good company, and they earn very good profitability for us, but they struggled the last three or four months of the year. But it was only those two divisions, out of all of our operating companies, that were below prior year. So that was a very, very positive note for me.

I look back over the year. We made three acquisitions, which we still have a lot of work to do to get these companies where we want them, but all of them appear to be very good acquisitions that will certainly add to our future, both in sales and earnings, and I think they'll be very, very good companies for us and add to the total group of companies that we have. We're also continuing to aggressively pursue acquisition opportunities as they come available to us. We have one right now that we think we're relatively close to, and a couple of other possibilities down the road.

So the interesting thing about acquisitions, people are always asking me are we looking. We're always looking and always willing to talk and looking for opportunities of things that fit. Some of the multiples are extremely high these days, and we are not going to do things that we just don't think make sense, that are accreted to the company almost immediately. We just are not interested in something that isn't profitable, nor are we interested in having any divisions that aren't profitable. And, again, I'm happy to report for the year that we did not have any divisions in Genlyte that didn't earn a profit for the full year, with the exception of one acquisition that we made very late in the year. And, again, that related primarily to the purchase accounting.

Now, as we look to begin this year, and it's pretty evident, you can see the results, I personally am very pleased. It's hard not to be pleased with the overall results of the company when we look at our sales being up, the strength that we had in the company overall, being up 22.5% for the year. About half of that was the result of acquisitions, and that's actually a part of our long-term strategy.

We've always looked to grow the company, we hope, by a minimum of 10% each year, with half of that -- we always state that we want at least half of that coming from systemic growth with current divisions and the other half of that coming from acquisitions. Well, some years, obviously, as we did this last year, we're able to do a little better with acquisitions, and some years not as well, but in total, we've held pretty true to that strategy. That continues to be our strategy going forward, and we continue to look, and hopefully we'll find some good companies to acquire.

But on the home front, looking at our current companies, we've got a lot of exciting new products and that that we're introducing in 2007. At Lightfair, which is our major industry event that takes place in May, we will have many of our companies there. Most of them will have a significant array of exciting new products, a lot of new LEDs. You know, LEDs, it continues to be almost a buzzword in our industry. Everybody is every excited about it.

There's a lot of -- or still haven't seen a lot of volume coming from it. But as the prices come down and as the efficiencies go up and we see more and more opportunities to get it in more what I refer to as mainstream-type products, we will definitely see the volume on LED-type products grow. Today, we have it in landscape lighting. We have it in some under-cabinet lighting, in some display lighting and lots of other little niche products, but most of the products that contain LEDs today are still relatively low-volume products, and, therefore, aren't adding a significant amount of volume or profitability to our business. But we think that it has the potential to do that down the road.

So, and I also report that we just have completed the first month of the year, January, and we're off to a reasonably good start. You know, it depends on who you talk to and what you want to believe relative to the commercial market these days, but we still see commercial construction relatively strong, and we think it's going to stay that way at least through the first half of the year. I'm not sure what's going to happen beyond that.

We have definitely seen significantly softening in the residential side of our business, which, as you can see from our numbers, is still a relatively small portion of our portfolio, so we're not as adversely affected by that as some companies who have a larger, more significant position in the residential market. Although I'm also a believer in that if the residential market stays soft, it will have a negative impact on some of our, what we refer to as light commercial-type work. A lot of things, such as schools and branch banks and office buildings, and there's a lot of things that follow the residential market. People -- they kind of build where the people move to. And so strip shopping malls, and these are all kind of key parts of our business, tend to really boom when residential construction is booming. And if residential construction stops, there's a lag there, but, eventually, some of that light commercial market will stop also.

So, all in all, very, very pleased with the year we had in 2006, and somewhat cautiously optimistic about 2007. I think if a couple of the acquisitions come to fruition, we still have some significant opportunities to improve a couple of the acquisitions that we made last year. Those companies should continue to strengthen. And the only real, again, real negative that we see at this time is from our residential business is going to continue to be somewhat soft, and we don't see that coming back any time soon. But, again, remember that it is a relatively small portion of our business in total. So, all in all, a great year.

And I think, with that, I'll turn it over to Bill Ferko and he can talk to you a little bit more about some of the specifics of our financial performance. And then we'll be happy to answer any questions that you might have. Bill?

Okay, thank you, Larry, and good morning, everybody. As you saw from our release, our fourth quarter sales were $379.2 million, and they were 22.7% higher than the $309 million that we reported for 2005. The recent acquisitions during the year of JJI, Carsonite and Strand accounted for approximately $45.5 million of the sales during the quarter, which is about 65% of the total increase.

Overall, we believe that approximately 5% of the sales increase for the fourth quarter, and close to that for the year, was attributed to price increases, which offset a lot of cost increases that we incurred during the year. And then the balance of our sales growth was related to the acquisitions and volume and product mix.

Incidentally, recently, Genlyte, as well as two of our other competitors, have announced another price increase that's effective during the next month, or a couple of them are at the end of March, early April. And that hopefully will offset continued cost increases that we're continuing to experience.

Year to date, our sales of $1.485 billion are 18.6% higher than last year, and the recent acquisitions accounted for approximately $106.7 million, or just under 46% of the total sales increase.

In the area of gross margins, of course, these price increases have helped offset cost increases. And then mix as well as acquisitions have helped. And so for the fourth quarter, gross margins increased to 40.3%, compared to 38.3% last year. Again, we're very pleased with the success of recent product introductions, and we look forward to product introductions that will occur during Lightfair in May of this next year. Our year-to-date gross margin of 39.7% is 2.5% higher than the 37.2% that we achieved last year.

For the full operating profit results, our fourth quarter operating profit of $51.8 million is 33.8% higher than $38.7 million in the fourth quarter of 2005. Excluding acquisitions, operating profit would've increased 24.6%. The operating margin increased to 13.7%, compared to 12.5% last year. And that's attributed to the gross margin improvements that we had, somewhat offset by increased operating expenses, which increased by 80 basis points compared to last year, to 26.4% of sales.

The fourth quarter operating profit does include $325,000 worth of stock-based compensation related to the expensing of stock options. And then the other important thing that occurred during the fourth quarter is increased selling expense and commission expenses. Between the increased selling and commission expenses, it accounted for approximately 150 basis points. And then there were some other cost reductions that brought the average operating expense increase down to 26.4.

For the year to date, our operating profit of $208.3 million is 39.5% higher than the $149.3 million we reported last year. It should be noted the year-to-date operating profit includes $969,000 of stock-based compensation expense. And, for your modeling purposes, we expect to incur, assuming the same number of stock options are issued once a year, as we do them typically around April of the year, for budgeting purposes, or modeling purposes, the stock option expense would increase to $2.5 million for 2007, compared to the $969,000 from last year. That's not saying we're going to issue the same number of stock options. It's just that's how it would model out if we did.

In the net income area, net income was $32 million for the quarter, which is 36.6% higher than the $23.4 million we reported in the fourth quarter of 2005. As Larry indicated, and as our press release indicated, strike-related costs accounted for $354,000 pretax. You should note, there were some issues from last year that we did not incur this year and that depressed earnings a little bit from last year. Last year, we had $3.2 million worth of SG&A costs related to the San Marcos plant consolidation and San Leandro, and about $1.4 million worth of startup inefficiencies in the fourth quarter, as well. And then -- however, in the -- in addition, we had $1.3 million worth of foreign currency exchange gain related to the translation of U.S. dollar-denominated investments and receivables held by the Canadian division in the conversion of the Canadian earnings at a higher exchange rate.

The effective tax rate in the fourth quarter decreased to 35.8% compared to 36.6% last year. The tax rate is lower due, as expected, due to larger deductions for the domestic manufacturing deduction, as we have a significant number of manufacturing facilities in the United States, and the new Section 199 domestic manufacturing deduction is beneficial to Genlyte, as well as the transition from the extraterritorial income adjustments in the past. And with the continued phase-in of the Section 199 and the elimination of the ETI deduction in 2007, we expect the 2007 tax rate to remain constant, or consistent with what we incurred in 2006.

Year-to-date net income was $154.5 million, which is 82% higher than the $84.8 million we reported in 2005. Year-to-date net income increased, as we've pointed out all year long, by $24.7 million due to a one-time provision -- tax provision benefit that we recognized during the first part of 2006 and a $4.4 million after-tax currency gain related to the return of capital from Canada. The net income without these items would have been $118.6 million, or about 39, almost 40% higher than last year.

Earnings per share of $1.11 are $0.29 cents higher than the $0.82 we reported last year, which is an increase of 35.4% for the quarter. And year-to-date earnings per share of $5.37 are $2.38 over last year's $2.99, for an increase of 79.6%. The year-to-date earnings per share includes this first quarter recognition of the $24.7 million tax provision and the $4.4 million tax gain, which are $0.86 and $0.15, respectively, so that the earnings per share, excluding these items that we just listed above, comes to $4.36, which equates to an increase of 45.8%, taking out these unusual items.

Cash generation area, we're very pleased with the cash flow that we've had this year. Our fourth quarter cash flow from operations, net of capital expenditures, was $83 million, compared to $61 million last year. Our working capital, which excludes cash, cash equivalents and short-term investments, is $181.7 million, or an increase of just under $46 million from last year, and this is primarily due to acquisitions. Working capital as a percentage of sales is 12%, or a slight increase from last year.

Accounts receivable are $202 million, or $15.4 million higher than the $186.7 million that we had last year. As a percentage of annualized sales, accounts receivable are 13.3% versus 15% in December of 2005. Inventory increased by $42 million, again, primarily due to acquisitions, to $194.8 million, from the $152.6 million in 2005. However, as a percentage of sales, of annualized sales, it came in at 12.9%, compared to 12.3% last year.

Fourth quarter capital expenditures came in at $9 million, which is $2 million higher than the $7 million we reported last year. And then year-to-date cash flow from operations was $119 million, compared to $92 million last year, with full-year capital expenditures of $27 million, which is about $12 million less than the $39 million we reported last year. Last year, if you'll recall, we had a significant investment we incurred during that year, $18 million to fund our San Marcos, Texas manufacturing facility that we built during the year.

At the end of -- in the area of debt, at the end of December, we closed with net debt, or debt less cash and short-term investments, of $71 -- so the net debt was $71.2 million, compared to a net debt position of $154.5 million in September, and $70 million during December 2005. So we're almost at the same place that we were at the end of last year, and, in the meantime, we've accomplished three acquisitions that have been fully funded and essentially paid for. Total debt, then, came in at $147.9 million, compared to $166.4 million in December of 2005.

That's the end of my formally prepared comments, and we'll be -- open the line up for questions.

Thank you, Mr. Ferko.

[OPERATOR INSTRUCTIONS]

And your first question comes from the line of Rob McCarthy, from Banc of America. Please proceed.

Good morning, gentlemen.

Good morning.

Good morning.

My first question surrounds kind of the operating margins in the quarter. It looks like, excluding some nonrecurring items from last year, actually your margins actually declined by about 50 basis points, from 13.5% -- to 13.5% from 14%. And perhaps you could talk about maybe the increased selling costs you saw in the quarter, as well as what kind of margin you saw in association with the acquisition of JJI.

Well, the margin on JJI, there's no question, is lower than our average margin at this point. They have a lot of facilities and a lot of things that we plan to take actions over time that will significantly improve those margins. But their margins are --

Are they mid single digits, essentially?

Well, they're high single digits, actually.

High single digits. Okay. And so, if you attributed, under my analysis, this kind of -- this deleveraging of volume, you would assume it's just basically the mix in association with this acquisition?

I think that's basically true. And it ebbs and flows with some of our divisions and big jobs and whatever. But in the fourth quarter, we had these three acquisitions. One of them, which we actually -- the Strand acquisition, which we actually recorded a slight loss because of purchase accounting, and we think that will be a very good acquisition for our company and become a very profitable company for us. But the transition there is a problem.

And then if you also look at what happened to Ledalite, which is a very profitable division for our company, doing extremely well -- that's a company that its margins, Bill, I can't remember the exact dollars, but we were affected significantly by -- what was that? Like $350,000 or something, I can't remember. So that's going to have a -- had a negative impact, because they would've contributed significantly more had they not had that strike.

That strike. Okay, so --

So you take the three acquisitions plus Ledalite, I think virtually every division in our company -- I actually don't have that right in front of me, but I review that very carefully -- I think -- I know over the year virtually every division in our company grew their gross margins and their EBIT percentage. So that's a number that I look at constantly, with the exception of a couple of those flukes. And, again, JJI being one, and then those -- a couple of those other acquisitions. And then Ledalite, which, overall, had a very good year, but they were adversely affected in the fourth quarter with that strike.

How big is the sales in association with Ledalite?

Well, the company -- we don't really report the company total because of competition reasons. I don't necessarily want our competition to know how much we do in that linear lighting business. But, you know, so I'd rather not give you that number.

Okay. But you would describe the decline or deleveraging effect on incremental margins primarily due to this acquisition integration. And is there anything in terms of the core operations that surprised you, in terms of variable selling costs, or perhaps you could give some more color around that?

No. I think, all in all, I was actually very pleased that, again, if you look at the prior year and some of the things that we had -- we had some one-time positive things that happened in '05 that didn't reoccur this year. So, all in all, we were actually pretty pleased with the quarter.

I mean, one of the challenges you have, we came off an extremely strong third quarter. I mean, from time to time, the way our business falls, we get some big jobs where our margins really shoot up, we have an unbelievable quarter. And lots of times it's difficult to replicate that, so you kind of have to look at it over a period. And if you look at our year-over-year improvements in the company in total, we made nice strides ahead in 2006.

On that point, though, Rob, I mean, one of the things that we've talked about all year is the -- some of these purchase agreements, or purchasing agreements, that we've had, where we had a -- I wouldn't call it a hedge, but we were locked in at purchasing some of our materials at prices over a few months. And as we got toward the end of the year -- and those, the nice rates, if you would, that we had on buying some of those materials, basically started to renew at higher cost. And we anticipated that when we had price increases earlier in the year, just like we're anticipating it right now with some other cost increases that we have facing us in 2007. So, I mean, there's a little bit of a mismatch between the price increases and the cost increases from a month-to-month perspective.

You think that will reverse, then, in terms of results.

Well, I mean, hopefully, the next price increase, which we've announced it as effective basically during the next month, will offset some of the -- those cost increases, and some of the cost increases that we're looking forward to, and we're not --

Now, in terms of the segments, are you going to provide segment detail in terms of operating income and revenues for the three segments you previously disclosed?

It's all very preliminary. In fact, some people have asked why we haven't published detailed financial statements. And the auditors -- you know, years ago, they would sign off on the day of the release, but nowadays they keep going until the 10-K. So there's minor changes moving around from line to line. And we have some preliminary segment information --

If you could share it with us, that'd be great.

Well, for the quarter, probably which is what you're most interested in, the sales in the commercial segment increased 30.7%.

Okay.

Residential segment decreased 10.6%.

10.6%.

Yes.

Okay.

And industrial and other segment increased 20.3%.

Now, do you have any margins in association?

Again, these are all very preliminary numbers. But, for the quarter, again, the margin in commercial is 13.8. This is operating profit margin.

Right.

Residential, 15.7, and industrial, 11.1.

11.1. Why was it so soft in industrial?

So, again, it's a lot of the acquisition segments, if you would, are falling into that industrial sector.

Are they? Okay.

And the other thing about our industrial sector, too, is, it is more of the, what we refer to as commodity, high-volume type products that we don't add substantial value beyond our competition. When you get into the commercial business, where we can sell our higher-margin, higher-performance type products, we always do better there.

And how -- in the quarter, what was the rough percentage breakdown between commercial, residential and industrial, in terms of sales? Just because that'll give us a better view in -- with the acquisitions.

Well, I can give you what we've got. Preliminary dollars in commercial are $283 million.

Okay.

Residential $43.3 million, and industrial $52.7.

$52.7.

[Inaudible].

And those are the revenues, right?

Those are the revenues.

All right. And then, I guess, given your comments for being cautiously optimistic about 2007, do you have any preliminary view in terms of how we should think about modeling purposes for '07 in terms of official guidance or some kind of walk or some kind of assumptions for top line or bottom line?

As you know, we don't give out guidance. And your -- you guys have seemed to do a better job at that than we do [inaudible].

Well, until the most recent quarter. So, okay. Well, fair enough. I'll pass the baton for now.

Okay. Thanks.

And your next question comes from the line of Peter Lisnic, from Robert W. Baird. Please proceed.

Good morning, guys.

Good morning.

Sorry if I missed this in the prepared commentary. I think they figured out I was a Bears fan, so they decided to cut me off the call. But, Larry, you talked a little bit about the market, and then I heard January was off to a good start, and you were looking at the first half being strong, but were, it sounded like, a bit worried about the second half of the year.

Well, I -- not necessarily. The caution that I gave is that, historically, if you look at residential construction, and with the softening of residential continuing, we usually have six months to as much as a year lag, and then you'll see some of the, what I call, light commercial business, also stopping -- start to fall off. You take strip shopping malls, and things that kind of follow the residential market -- people go out, or they build all these new homes, and all this big residential starts -- and they build a strip shopping mall. They put in a new branch bank. They build a -- they -- there's some restaurants and even some hotels. I mean, everything follows there.

Well, if that residential market stays soft for an extended period of time, at some point, you have to think that, particularly, that light commercial market is going to start softening somewhat. Now, we haven't seen that. The projections overall this year for commercial are pretty strong. And, assuming that it stays strong, I think we'll do very well. But I'd just give a little caution that kind of our sweet spot is in a lot of high-end hospitality, high-end restaurants and hotels and things that have a tendency to follow residential construction at some point.

And can you give us a sense as to what your exposure is to that light commercial segment?

Well, when you say exposure, I mean, if you ask me, I can't tell you the exact percentage of our business. It's hard to break it out that way. But the areas where we do very well is in retail is probably our single biggest single segment that we have. And I'm talking about retail construction of all types and that. And then, if you look at hospitality is another significant position that we have in the marketplace where we do very well. And we do very well in the high-end hospitality. I mean, we're not in the fast food restaurants, or the low-end hotel chains and that kind of things. We don't do well there. But we do very well in the upscale hotels and those types of markets. And, again, we don't -- I don't -- I can't give you a specific breakout of percentages and that, but we just kind of know where our sweet spots are.

And then, obviously, office construction is very important to us. And certain types of office construction is more important than others. I happened to go down and meet with a big developer here yesterday that's building some very nice high-end all kinds of condominiums and apartments and that kind of thing, and their business looks very good for this next year. So I was very encouraged when I talk to these kind of people.

And just, can you continue along those same lines? Anecdotally, what are you hearing from your customers in regards to 2007? We've heard your commentary, but I'd be interested to hear what you're kind of hearing from customers as well.

Well, I just attended, a couple of weeks ago, week before last, the NAED, which is National Association of Electrical Distributors, Western Conference, so that's the whole western part of the United States, and those distributors, and most everybody was very, very upbeat. And I went right from there -- that convention was held in Las Vegas. I went from there to the, what is really a residential show at the Dallas Trade Mart in Dallas, Texas, at the World Trade Center there.

And all except a few states, even the residential people were -- they were more optimistic, actually, than I thought they would be, seeing the new starts for housing. These are lighting -- primarily lighting showrooms and that from around the country. And there was only a couple of areas that I heard really gloom and doom. One was the state of Michigan, the reps and people I talked to from up there just said that state is pretty bad shape. Residentially, it's pretty bad in a few major markets like Miami.

When we were in Las Vegas, I was out there with a couple of very big projects that we've got going on out there. MGM has got a huge project out there. We're involved with another company, the International Gaming -- I can't remember what the third name of it is -- it's IGP, I know, is the symbol for the company, I can't remember what the third -- but they're building a huge corporate office building there that we're involved with them on, and then, so there's still a lot of nice things going on. But in places like Las Vegas, Phoenix is another, those residential markets are pretty dang soft right now, and some people are pretty concerned. But, all in all, from the distributors' standpoint, both lighting showrooms and the electrical distributors are still doing very well. And lighting showrooms are reasonably upbeat for the year.

Okay. All right. That's good on that commentary. If -- Bill, if I could just ask you about the price increases that you're planning to put through, if I remember right, or heard you right, this year -- or in 2006, I should say -- you got about 5 points in price. Is it safe to assume a similar kind of price realization for 2007? Is that kind of how you're thinking about --

Well, the price increase we have announced, which was effective toward the end of January and in February, was -- it really depends on the brand and the product line. It ranged between, I think it was like -- I'd have to figure this out -- but it was like 4 to 6% is kind of the median, if you would. But the total range was like 0 to 12%. I mean, there were some lines, like some of the unique pole lines and things like that, where the material costs are going -- skyrocketing -- that we've had to go up even more. So it really kind of depends on the mix and the brands, etc.

And it also depends on our competitors. And, so far, two of our competitors -- there is four large companies in the lighting industry, as you know, two of those large competitors plus a fifth company out there have all done something. So it depends. There's still some out there who haven't done anything yet. So it depends on what they do.

Yes, the word's kind of on the street that we believe that everybody is going to announce, but we haven't seen it. And the other thing that's a little disappointing to us is, some people have announced price increase now that's not going to go into effect until, like March 1. I don't know if I --

March 31 and April 1.

Yes, March 31 and April 1. I've never quite seen people do it quite that way before. Usually, price increases are implemented in a shorter time frame. And so there's some -- I think there has to be some caution as to how much of that price increase we're going to be able to get. I mean, we need it. I mean, our costs have definitely gone up and that. And we're certainly hoping. We will get some price increase, but it just depends on what happens overall in the marketplace.

What's your take on those deferred price increases by competitors? Is that potentially a move to, I don't know, gain share, or is it just a change in practice? It sounds somewhat odd, the way you put it.

I wish I could tell you that. I can't answer that. We, our whole management team, we've all thought that it was somewhat strange that people would delay the price increases that much, particularly based on material costs and that. You know, what typically happens in our industry is we have major components, like ballast and steel and a lot of these major components, that generally we have some kind of contracts or some kind of pricing protection through the end of the year, and then these price increases go in. So if you don't get a price increase early in the year, and you've got all these cost increases, it's just reasonable to assume that your margins are going to deteriorate. And, so, unless they know something different than we've got or they're better at something than we are, we don't quite understand it. But so far that's what's happened.

Is there any chance it could be in response to the, what I'll call, less disciplined competitor in the industry and what they're doing?

Again, I can't really comment on that. I don't really know. I mean, it's just -- I would just be speculating. I have an opinion, but I don't know that I should share that opinion.

Okay. That's fair enough. Thank you.

Okay.

And your next question comes from the line of Matt McCall, from BB&T Capital Markets. Please proceed.

Thanks. Good morning.

Good morning.

Good morning, Matt.

Bill, you provided a little bit of a breakdown by -- for the company as a whole for volume and mix and then price. Can you also provide any more color on the segments where you saw the most price and the most volume?

Boy. You know, I really don't -- I've given you kind of what happened to the margin, when you compare to those prior periods.

Right.

The pricing, obviously, we do better with the proprietary, unique products that -- the new products that carry higher margins, and we've continued to emphasize that area. On the more -- the lower-end stock and flow commodity-like type items, you get less success in price.

Right.

It's more a matter of what the competitive forces are. So it -- I really can't comment too much beyond that. I mean, it's just so much detail that I don't have anything.

Okay. What about capacity utilization overall for the company? Where does it stand right now? Maybe -- I know there are some structural differences between the different segments, but maybe comment on, by a segment-by-segment standpoint, where capacity utilization overall stands.

Well, we --

Do you want to --

Well, yes, I mean, we've got huge capacity opportunities, let's put it that way. I mean, it's -- we don't have any of our plants that are even running two full eight-hour shifts. So, I mean, obviously, when you have -- most of our plants are basically running a 40-hour week, with a little overtime scattered in here and there on Saturdays, the end of the month, that kind of thing. But we certainly have a lot of capacity. And that's one of the things that we're taking a real look at that we want to do over time with some of these recent acquisitions that we've made is to look how we can better utilize some of our better facilities and start getting out of some older, more inefficient-type operations, and that's a plan we have over the next couple of years.

The unfortunate thing about that, when you acquire companies, you also acquire leases and buildings and things that you have to figure out what to do with and that, so we're working on all that now, but, over time, we'll do a better job, and those facilities that aren't up to state or state of the art, we'll phase them out and we'll move product -- you know, we have a couple of major moves planned this year, and possibly more to come, just kind of depending on how some things fall in place and whatever.

The couple of moves that you have planned this year, I know that there have historically been a couple of moves periodically. I mean, should we just keep the kind of same cost savings that you've reported year over year in mind when we start to look at what the benefit could be from those moves?

You know, there's a bit of a lag factor, as you know, Matt. For example, last year, we were going through the shutdown of our San Leandro facility and the startup of the San Marcos facility. And initially there's extra cost and inefficiencies related to the move. And then you get it in place, and then there's some continued inefficiencies even though they're going through a learning curve. And then you start to see the benefit. So it's kind of a dip down and then a recovery and then you start to get a good return on investment for this project.

Right.

So it takes a while. And, actually, during the first part of this next year, it -- there will be some projects just getting started. So it actually may be a decrement, if you would, for a couple of months, and then hopefully by the end of next year -- we've got one that's under way right now. There's a transition from one of our facilities in the Midwest to something out in California. And so we've incurred a little bit of cost related to that, and hopefully in the next couple months they'll start to see some efficiencies related to that. It's almost a -- with 30, I don't know how, like 35 facilities, it's kind of a continuous process that we're going through.

Okay.

I think the other thing I might point out, I probably should've mentioned it in my overview, for the first time in our history, too, we're taking a very serious look at starting up our own manufacturing plant in China. We haven't committed any dollars to this thing yet. We're -- it's kind of in the investigative stages right now. But we do believe that, in the long term, to compete in some of the businesses that we're in and not lose margin, we're going to have to be in China, and not just as a -- having a vendor supply us with products. Obviously, we buy a lot of decorative products. We buy a lot of parts out of China now.

But we do believe that it may become necessary for us to build -- and I don't think a joint venture -- I mean, there's a lot of different issues. I've kind of investigated this thing pretty thoroughly and spent a lot of time on it and talked to a lot of people that have done it. I've personally been going to China and that myself since, like, about 1980. So I've got a fair amount of knowledge and experience over there. And I think the only way to do what we want to do is going to be really start a greenfield plant in China, and/or, hopefully, we could -- if we could find a building that's built that's adequate or something, but -- and that will require, obviously, some expense.

I even have a lead on a couple of people now, somebody, possibly, that could run it, that's got a lot of good experience and that, that we've had some history and that with, and so we'll be exploring that this year. I don't -- I wouldn't guess, at this point, we'll have any major expenditures this year, maybe toward the latter part of the year, just because of the time it takes to get this up and going and that. But we are exploring that possibility. And I do believe that it's something that's going to be a necessity for us in the long run.

And, Larry, just to follow up on that, would that be a plant that would supply the Asian region, or are you talking about --

No.

Or is it going to replace some of your, maybe, residential suppliers that you use to source North American product?

It would be a combination of all of the above. But it would primarily be a plant that we would set up to produce product for the U.S. market in some of the higher-volume downlighting, HID, in some areas that have just become extremely competitive, and we no longer can just buy those parts and pieces and expect to compete with -- and we've got some -- even some of our distributors, I've mentioned this in calls before, where some of our distributors are now starting to source product over there themselves. And some of them have asked us to get involved and source it for them. Well, I don't want to source it for them and just be another distributor that you don't make any margins on. I think that's a losing strategy. And the only way I'd supply it for them is if we have our own facility where we can supply them product that we can make a decent margin on and it makes sense for us to do that.

Okay. Okay. And one final question, it looks like -- you mentioned it sounded like a pretty healthy acquisition pipeline. But if I look at my model, it looks like there's a net -- a potential for a net cash position to occur maybe first part of Q1 -- or Q3. I know you can't really speak to what the -- what's going to happen from an acquisition standpoint, but could you foresee that ever happening, and, if so, would you focus more on, maybe, some share buybacks? Just give me your thoughts about what you see besides acquisitions as a use of that cash?

Well, first of all, we're going to focus that cash on growing our company and acquisitions and moving the company forward. That's our main objective. Now, if we get to the point where we end up with a lot of additional cash, and when we can't find the opportunities and that, we're not going to invest it stupidly, then kind of all things are there on the table. We could look to buy back shares or whatever. Right now, it's focused 100% on growing our company, introducing new products and good acquisitions. That's what we hope for.

And, you know, we've got to make some -- we'll have to make some expenditures, capital expenditures. Like I mentioned, this China initiative is going to cost us some money. There are some other opportunities that we might have even in Mexico, and some other things we might want to do. But I just promise you we'll do a good job of managing the cash. We won't let it just sit around and go to waste. And we'll look at the alternatives, if that -- if we get in a real positive cash position.

And just to follow up, did you give a CapEx outlook for '07?

Well, we have one. Bill, what is the budget off the top of your -- do you remember what it is?

Yes, I mean, it'll be probably just a little bit more than we spent this year. It'll be around $30 million -- $30 to $35 million next year.

Okay. Thanks. Thanks, guys.

And your next question comes from the line of Christopher Glynn, from CIBC World Markets. Please proceed.

Good morning. How you doing?

Good morning.

Hi, Chris.

On the JJI margins, it seems like some of the numbers that you gave for the sales and profit for the acquisitions the last couple quarters indicated margins in line with the company, or even above, if you back out some of the inventory step-up type charges. Am I wrong there, or -- just relative to, you talked about high singles in this quarter. Did something change, or restructuring activity's starting there, or --

Well, I think that -- when we talked about that, I think -- I'm not sure that we said that they were going to be as high as you have indicated. We believe that they will get there. I mean, I believe that the JJI company should be equal to and/or slightly better than our overall margins. But, again, you've got to realize this is a company that has lots of small operations scattered throughout the country. And we've got to gain some efficiencies, and we've got to do some things.

We did have -- they did suffer to some degree this year because of the purchase accounting and that, and the additional amortization that we have to account for. And so until we kind of get some of the moves and some of the things done that we need to do, they will probably be slightly below. But in the long term, our objective is is that they will be higher than -- equal to or higher than our average margins. They're all niche kind of companies, which really should, for the most part, command very good margins.

Okay. And then on the Ledalite issue, you mentioned the $354,000 in costs. And then a little while ago you referred to their contribution would've been significantly more if you didn't have the issue. Does that mean something above and beyond the 354 that you called out?

No, that's -- I mean, that's basically what it would've been. I mean, but that 354 that we were shortfall in EBIT because of their strike.

Okay. And then, if we could just get a little bit more detail in terms of the efforts to integrate the acquisitions. To what extent have you started some things that are resulting in some of the costs that Bill described in detail, kind of the chain of costs, then inefficiencies, then getting benefits. To what extent might that process have started up, and maybe with which ones?

There's a good bit of work that's been done in the planning area, Chris. I mean, we -- some of these things we need to be sensitive to -- you know, we haven't done public announcements and that type of thing on, and you just have to trust us that there's planning that's underway. But, as I indicated, there's a project already that we've embarked on to move one of the JJI divisions from the Chicago area out to California. The headquarters for the JJI operation that were in Greenwich, Connecticut, have been -- the lease there ended at the end of the year, and the people that were there are in a transition mode. They're actually working out of one of the factory facilities until we can transition things.

There's a project we're working on in Germany, where the lease for two of our buildings in Germany expires at the end of the year, and we need to get going on that project, to figure out what we're going to do there. So there's numerous projects like that that are probably -- there's more that we have that we're talking about that are less granular in detail.

Well, and if I can just add to that, some of these plants and that that we have, obviously, we have leases on them. And it doesn't make a lot of sense in some cases to go lease another building and move them until the lease expires. Or if we're going to move them in with another facility, in some cases, we can move a little quicker than that. But we have a pretty aggressive plan. And, really, most of it will be completed within two years. But -- and that really relates primarily to the leases on the buildings. If the leases all expire, we've got several places where we won't be renewing old leases, and we've got old facilities, and we'll be either putting them in with an existing facility and/or we'll find a new and better facility to put them into.

Okay. And, then, Larry, in terms of the retrofit opportunity for the install base of some of the energy-efficient fixtures, you've talked about a lot of the divisions putting out sales collateral and working with the federal government. Could you just give an update on that, and if that could be a meaningful layer in '07 to the company's performance?

Well, we hope so. We've put a lot of work into it. A lot of our companies have done a very nice job of working to try to make it easy for people to understand this new tax credit that they can get, how to calculate it or what to do about it. And we're getting more and more interest all the time. And we're starting to see some mileage. It's just still really hard to tell how much you're going to get out of it. The federal government is one of the large owners of a lot of these old buildings, a lot of federal courthouses and that. They're somewhat slow to move.

The good thing about that -- I don't know if -- I think we might've announced this in the last call, I don't remember -- is that that tax credit has been extended for one more year, which I think is very positive, because these things take some time and get the momentum up and going. And it seems like we just get them up and going and then they expire. And so that's going to continue through '08 now, which I think will be positive.

Just how much benefit we're going to gain from that this year is just really hard to tell. I know we've got several of our divisions that are working aggressively on it. They've got people specifically assigned to it. We've got specific websites. We've published some new literature. We're doing a lot of training and that. And, again, I just can't tell you exactly how much mileage we're going to get out of that. But we think it still has a lot of potential.

Okay, great. Thanks very much.

And your next question comes from the line of Alex Rygiel, from Friedman, Billings, Ramsey. Please proceed.

Good morning, gentlemen.

Good morning, Alex.

Can you comment on when the last time all of the four largest lighting companies actually announced price increases at the same time?

It was in May of 2006, effective early June.

And how did that -- how was that accepted in the marketplace two, three months later?

Well, I mean, reasonably well. It just depends. You know, a lot of people, and one of the things that I think helps us to some degree is, in some cases, we don't have a lot of contracts with some of the big people, like the Wal-Marts, the Home Depots, some of those people. It's not that easy to get immediate price increases from some of those kinds of people. They take a very strong stance.

In fact, we just had an issue with a big customer that we told them that as of -- after January 1 this year, we would not accept any more orders from them at old pricing. And they just continue to send orders in, but we've now -- we're now sending them back. So it kind of depends on the nature of the customer and the business, but, I mean, I think overall last year, everybody recognized that materials had gone up. Everybody knew the price increased. And I think all of the lighting companies, major lighting companies, got some price increase as a result of that. It depends on the type of products as to how much you get. It depends on your market position. It depends on a lot of variables. But I think everybody was able to obtain price increase.

Great. And as it relates to inventory, can you comment on your customers' inventory levels today, as well as your inventory on your balance sheet?

Well, our inventory on our balance sheet is the best that it's ever been in the company's history. I mean, if you would've told me years ago -- I think our total inventory's down around 14% -- I remember when I was with Genlyte, when I -- right after I -- 13%, Bill tells me, it's even coming down -- I mean, that, to me, is phenomenal in our industry. Because it used -- we used to think that if we could ever get it under 20%, we'd likely died and gone to heaven.

Well, and relating to the distributors' inventory, they don't stock that much inventory anymore. So much of our business, and I don't think we're that much different than most of our major competitors that participate in the commercial job business, the majority of our orders are produced to order, and therefore you don't have a lot of finished goods inventory. We have a lot of parts -- steel, ballast, aluminum, acrylic -- those types of things, but I don't think anybody has an inventory problem where you'd worry much about seeing people out there with excess inventory.

The only exception to that today might be on the residential side. We've -- we constantly warn our residential business here in Louisville to watch their inventory, because if sales go down, you have those containers, most of the decorative products that are coming in from China, and so you're buying those two and three and four months out, and you've got to watch that very carefully, because it is very easy for that finished goods inventory to go very quickly in a time when business is turning down. But we're watching it very carefully.

I'm -- I think our inventory is in very good shape. We have very rigid policies as it relates to getting rid of slow-moving and obsolete inventory. That's always a big issue with us every time we make an acquisition, that we end up with making these people, or trying to get the people to write the inventories down and that before we acquire the companies, and then we do it shortly thereafter if it's not done, to be sure that our inventories are always very clean and very good.

And, understanding that you don't have 2007 guidance, could you at least comment on whether or not you anticipate volume growth in 2007?

Do I anticipate -- I would tell you that somebody would have to shoot me if I ever anticipated I wouldn't have volume growth. The answer is absolutely yes. I believe that we're going to have volume growth. We're going to work very hard to do that. Now, is it going to be what it was last year? I mean, I would be elated if I could sit here at the end of next -- or next year at this time and tell you that we grew 20% again in '07. I don't know that. But we certainly do anticipate volume growth. There's nothing that would indicate to us that we shouldn't have volume growth this year again.

And based upon the price increases in June and the price increases that will be implemented in February, is it safe to assume that you'll probably see 4 to 6% year-over-year pricing gains as well?

I don't know. I think that might be a little aggressive, just personally. I would look more in the 3 to 5% range, just based on what I know. Some of the materials that we had anticipated were going to go up pretty significantly have subsided to some degree. I mean, you've seen it even in gas, in trucking expense, in some of these expenses. So if I were to guess, I would guess it's going to be more in the 3 to 5. That's actual realized gain. A lot of our pricing, we ABC when we go up on our pricing, so some items will certainly, in some of our divisions, will go up, will need price increases as high at 10%. But when you look at it in total, I would be elated if we could get another 5% overall. But that may be a little bit of a stretch, I think.

Fuel and copper have softened a little bit. But copper -- or, I'm sorry -- aluminum is still up there. So that's something that we need to recover some of those cost increases. As Larry said, I think a lot of it depends on competitive forces, as well, and hopefully our competitors will figure out their situation as well.

Very helpful. Thank you.

And your next question comes from the line of Cliff Walsh, from Sidoti & Co. Please proceed.

Good morning, everyone.

Good morning.

Good morning, Cliff.

Can you just comment -- I just have one quick question on the JJI margins, again. Where would you say that the differential is, compared to the overall company? Are we talking on the gross margin side, or SG&A, or maybe a combination of both?

First of all, in the SG&A, the commission expense for the JJI division is higher than average. But, on the other hand, they do not have a direct sales force. They use reps for all of their direct sales force. So a lot of it depends on the mix of the businesses and how they go to market, as well as the types of products that they sell, and that type of thing.

They've got some divisions now that perform extremely well and do very well. They, unfortunately, have got a couple of divisions that are really struggling, and those are the ones that we are aggressively working on right now to either consolidate and take out cost and get them operating, and that's what we have to do. And we're -- I mean, we have a pretty good history of doing that. We'll do that, we'll get that done pretty quickly. It's just a matter that you've got all these facilities, you've got them kind of scattered out. It takes us a little bit of time to be able to get that all put together. But we feel pretty optimistic that we'll get that back on track pretty quickly.

Okay. And you're thinking this is going to be more of like a two-year thing with the leases and everything that's kind of constraining the -- some of the improvements, potentially?

Well, it -- they will start improving before two years. I mean, we --

Oh, no, certainly not. But, yes, I --

But it's going to take -- it's like -- we're looking at about a two-year process to kind of complete all the things that we need to do, I think, just because of all the leases. We had this situation in Germany. We had to give notice to the building at the end of this year. We'll be moving that. We have a couple of other situations here in the States where we have a couple of years left on some leases and that, and we'll be looking at opportunities to consolidate, or, again, at least improve the situation.

And we had a couple of their facilities, one, in particular, that we think has tremendous potential for our company, that we plan to really expand and put some money into and really turn it into a world-class facility. It's in a great part of the country. And we plan to add a lot of volume to that. And that's an operation right now that's really kind of struggling. There's two small companies in there. It's kind of a big plant. It's kind of old and tired. But we own that facility, and we're going to renovate it, and move some other production in there. And I think it'll end up being a top-notch operation for us long term.

One of the nice things about all of the acquisitions that we've done this year, the JJI acquisition, the Strand acquisition and the Carsonite acquisition, is that the core business that they sell into is the commercial markets. And our exposure to the residential markets, which, as you're all aware, is a -- it's a soft market -- but our exposure to that market as a percentage of our total business has actually decreased. So that's something to keep in mind, as well.

And can I assume that with some of the acquisition opportunities you're looking at now, it's more on the commercial-industrial side, rather than residential?

Yes, it's -- we have one company that we're looking at right now that we're getting fairly close to that does have a -- some nice high-end residential products. But, again, the predominance of their business is in the commercial side. It's not a real large company. But it's safe to say that we're looking primarily at commercial-type companies that fit our current strategy and product portfolio. So we're not -- certainly, at a time like this, I wouldn't be looking to make major expansions. Unless something really new and exciting came along residentially, we wouldn't be looking to do much in residential at this time.

Okay, great. Thanks very much, guys.

And, gentlemen, I'm showing no further questions at this time. This does conclude the question and answer session, and we will shortly hand over to Mr. Powers for any closing remarks.

Well, I just want to thank all of you for participating in our conference call this year. Again, we're very pleased with our results in 2006, and we can assure you that we're going to do our best to continue to have -- keep our record intact this year and continue to grow our sales and earnings in 2007. We hope the market helps us a little bit and we don't see any significant downturn, but right now it looks to be a reasonably healthy market, and we're going to be out there doing our best every day. So, again, thank you for your participation.

Ladies and gentlemen, as a reminder, this conference has been recorded, with an audio archive copy becoming available in approximately three hours on Genlyte Group's website at www.genlyte.com. Thank you for your participation in today's event, and this does conclude the presentation. You may now disconnect. Have a great day.