Koninklijke Philips NV (PHG) 2007 Q3 法說會逐字稿

Good day and welcome to the Genlyte Group third-quarter earnings conference call. Also, welcome to those of you listening on our webcast.

At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded with an audio archive copy becoming available approximately three hours after the conference on Genlyte's group Web site at www.Genlyte.com.

This conference will begin with an overview of the third-quarter 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 you over to Mr. Powers.

Good morning, everyone, and welcome to our third-quarter call.

As I stated in the release that we already put out this morning, I was actually quite pleased with the overall results in the third quarter. What happened to us in this quarter was kind of interesting and unique to us. First of all, July was very soft for our company. Our sales was actually below prior year. We never really know in the middle of a summertime what's happening because, lots of times, we have people on vacation and construction projects get slowed up and whatever. So we always are interested to see what's going to happen the next couple of months.

Unfortunately, for us this year, Augusts came back a little stronger and then September was overall a very good month. You know, having said that, we did have three of our commercial divisions that really hurt us in this quarter. They just, for whatever the reason, did not perform very well, particularly in July and August, and their business started picking up in September but they weren't able to ship the product, but their business does look very good for the fourth quarter. So we are anticipating that particular group of companies, which again I wish I knew the exact answer as to why they didn't perform better, because the sectors that they operate in were up reasonably good in the quarter and they should have performed better. But we do look for them to have a much better quarter in the fourth quarter, so I think our overall performance in the fourth quarter year-over-year is going to be better than what you saw in the second quarter.

One of the other things that has really started to help our company and I think is going to really help us going forward in our markets is that, because of the diversification of some of the acquisitions that we've had over the past three or four years is helping us to start to do a lot more business in other parts of the world that we've never done business in before. As an example -- and I'm excluding, by the way, Canada. Most of you know that we are the number one lighting company in Canada. We have a very large market position there and they are continuing to perform relatively well this year. But if I exclude Canada -- I am also excluding Mexico but if I look at Europe and a little bit of Asia, we don't do business all over Asia but we do it in a few parts of Asia. We're going to do about $75 million worth of business there this year, and that's going to just continue to grow exponentially and we will do well in excess of $100 million in those countries in the next year. That's a result of our acquisition of Vari-Lite and [InStrand] and then of course when we bought JJI, we've got a company called Hoffmeister in Germany. That's encouraging to me, though, that we can start doing it looks like significantly more business in Europe and Asia than we've ever done before. Virtually in the past, it's been very insignificant for us and we've hardly done any business there.

The other area is in -- you know, we acquired a company, Shakespeare, which manufactures fiberglass poles and that is primarily in the utility, municipal lighting market where they furnish these lighting poles. That also gives us a little broader base that is so closely tied to the commercial construction market, although part of Shakespeare's business is tied to the residential construction business to a limited degree, because they do manufacture some decorative poles that are sold into large retail developments. That business is relatively soft at this time.

The other thing that has happened for us and really in helping our margins significantly is, last year at LIGHTFAIR, as we stated in the release -- we introduced a lot of the exciting new products. These new products are really starting to take hold, and the nice thing about that, not only does it help to keep our sales up at a time when the residential market is for soft, but it also helps us to keep our margins up because these exciting new products that we've introduced command higher margins and up until somebody knocks us off -- and that usually happens somewhere down the road -- but in the interim, we're able to command higher margins on these exciting new products. All of the products we are introducing, all the new products that we're introducing, all of them have an energy story. We're just not introducing hardly any new products today that we don't talk about the need for energy conservation and show how these products will help to reduce energy costs.

One of the things that I think is exciting for the overall lighting market over the next few years, even in spite of some of the weakness in the economy and particularly the weakness in the residential market, is the opportunity for retrofit. I believe that our country is starting to get more and more energy conscious all the time. I think we realize that we're paying close to $3 a gallon for gasoline and that's probably not going to go down, or not going to go down significantly any time soon. Energy bills are going to be up again this winter, big-time it looks like. I think people are going to really start getting serious. That presents some great opportunities for us in the retrofit market at a time when the overall construction business may in fact have slown that a little and be in a slowing phase. Although if you look, one of interesting things, the AGJ's construction report just came out recently. So far this year through August, commercial construction or rather I should not commercial -- nonresidential construction -- and they actually have it broken out by segment -- but it's up 14%.

Now, the fact that lighting is on the end of that construction cycle still bodes reasonably well for our business continuing to be relatively strong, I think at least through the first quarter or first-half next year, depending on what happens to the overall economy. So we are still somewhat optimistic about the opportunities, both in the retrofit market and this new construction that's putting place is going to need a lot of lighting fixtures in the near future.

One of the other things that we've done, we've actually created a healthcare grouping of products in our company. We see healthcare as expanding and growing very rapidly. We took one of our stronger salespeople and put him in charge and we are developing some new literature and everything geared to healthcare market. I think we're going to get a lot of traction on that and it is going to help us going down the road to again offset some of the weakness we might see in some of the other markets.

On the manufacturing and restructuring front, we are continuing to look for those opportunities and we will be announcing; we haven't announcement it publicly to our employees or anybody, so I can't get very specific. But either very late this year or most likely going into the first quarter of next year, we've got one major consolidation that will take place. We are refitting a plant right now where we are updating it and kind of putting in some new equipment, some new materials and that so that we can consolidate basically three operations into one. We already announced, I think earlier, the Hoffmeister consolidation in Germany. They are in a very old, multiple-storied, two or three-building plant that's very inefficient. They will moving in the first quarter of next year. We're ready to move now but the facility that we're moving into, the Company has to vacate it. It will be a much newer, much more modern facility, be on one location. We should be able to significantly improve our productivity out of this plant in Germany.

We are also going to be in the process of combining some of our divisions that we think can work more closely together and look to take out some cost and some overhead in that in some of these divisions as we go into next year. Again, I can't give you a lot of specifics because a lot of these haven't been formally announced to our people, but we will have and continue to look for opportunities to restructure and I think restructuring really is too strong a word -- but really group like companies together where we can reduce our manufacturing costs, reduce our overhead, become more efficient in our facilities.

So I mean, all in all, I am reasonably bullish on particularly the fourth quarter. Our backlogs are up; our business looks reasonably well. We had a meeting with all of our management a week and a half ago and they all feel that we're going to have a pretty good fourth quarter. I think, even though residential is going to continue to decline and it is soft, when you look at it quarter-over-quarter, our residential really started slowing significantly in November of last year. So when we compare November and December this year to prior year or '06, I think you are going to see less of a downturn. Again, they are continuing to struggle. We've done a good job of cutting our costs. Our residential division is still reasonably probable although not at the levels that it was a year ago, because of the significant loss of volume that we've had in that particular sector. I mean, I think it's anybody's guess as to how long residential is going to stay soft. We don't see it improving I think anytime in the near future, but all in all, I am reasonably pleased with the quarter. We obviously would like to have grown our sales more and again, one of a couple of our divisions (inaudible) kind of fallen on their face, we would have done better and I think we will do better in the fourth quarter.

So with that, I'm going to turn it over to Bill and let him go through some of the specific financials with you, and then we will get back with you and be happy to answer any questions that you might have. Bill?

Okay, thank you, Larry, and good morning, everyone. As you saw in our release and as Larry discussed, our third-quarter sales of $418.8 million were 2.1% over last year, although it should be noted that orders during the quarter were 9.3% higher than the third quarter of 2006. Year-to-date our sales of $1.222 billion are 10.5% higher than last year.

Third-quarter operating profit of $65.4 million is 6% higher than last year. The operating margin has increased to 15.6% from 15% last year, primarily due to the effect of price increases and the product mix of higher value-added products. Our third-quarter gross margin increased to 41.2% compared to 40.4% of sales in the third quarter of 2006, again primarily due to premium product mix, price increase and continued cost controls.

Operating expenses were 25.4% of sales and 50 basis points higher than 2006. The drivers of the increased expenses are increased selling expenses, the commission rates, research and development and foreign currency translation losses.

Our third-quarter currency loss due to translating our Canadian division's working capital from U.S.-denominated investments and receivables -- so the loss in the third quarter was $2.8 million versus a third-quarter 2006 gain of $4,000. However, the conversion of the Canadian division's operating profit at a 7.3% higher exchange rate resulted in the benefit of $843,000.

Our year-to-date operating profit is $183.6 million or 17.3% higher than 2006. Our operating margin has increased to 15% compared to 14.2% last year on a year-to-date basis. The year-to-date currency loss due to translating the Canadian working capital transactions to U.S. dollars was $5.4 million versus a $989,000 benefit during 2006, year-to-date.

Third-quarter net income was $40.1 million, and it increased 5.7% compared to the $38 million in 2006. Our third-quarter net interest expense was $1.6 million lower than the third quarter of last year, despite funding $24.3 million for acquisitions and the repurchase of approximately 354,000 shares of Genlyte stock for $26.7 million during this past quarter.

Our third-quarter effective tax rate was 37.1% compared to 35.6% last year. The fourth quarter -- I know a lot of you're going to ask me this so I will go ahead and tell you now. The fourth quarter rate is expected to increase to 38.1%, which will result in an effective full-year rate of 37.3%.

The year-to-date net income then is $112.5 million compared to $122.5 million in 2006. I think most of our investors understand that, in 2006, we included a one-time tax provision benefit of $24.7 million and a $7.2 million foreign currency exchange gain excluding -- and excluding these items, the year-to-date net income increased 20.5%.

In the earnings per share area, our third-quarter EPS was $1.38 compared to $1.32 last year, or 4.5% higher. The year-to-date earnings per share are $3.87 compared to $4.26 in 2006. The 2007 year-to-date earnings per share is 19.1% higher than 2006, excluding the previously discussed $24.7 million tax provision and the $7.2 million exchange gain recognized in the first nine months of 2006.

Third-quarter cash flow from operations was $64.5 million, less the plant and equipment investments of $8.3 million and thus provided $56.2 million, compared to third-quarter cash flow from operations of $46.8 million and plant and equipment investments of $6.5 million, generating $40.3 million last year. Our third-quarter working capital less cash, cash equivalents, short-term investments and short-term debt, increased 6.5% to $238.7 million from $224 million in September of 2006.

Our accounts receivable balance was $255.2 million or $9.4 million higher than the $245 million we reported in the third quarter of 2006. As a percentage of annualized sales, it increased to 15.2% compared to 15% in 2006. The good news is inventory decreased $18 million -- $18.1 million to be precise -- to $177 million compared to $195.1 million in September 2006. As a percentage of sales, it decreased to 10.6% compared to 11.9% of sales in the third quarter of 2006.

Year-to-date capital expenditures -- I'm sorry, third-quarter capital expenditures are $8.3 million, which is $1.8 million higher than the $6.5 million in 2006, and year-to-date capital expenditures are $26 million compared to $17.7 million last year.

In the area of debt, we closed September of 2007 with net debt, defined as debt less cash and short-term investments, of $46.1 million, compared to a net debt position of $154.5 million in September of 2006. Total debt was $128.4 million compared to $191 million last year.

That's the end of my formally prepared comments. We will open the lineup for questions and answers. Operator, if you could start accepting questions, please.

Thank you very much. We will now poll for questions from analysts. (OPERATOR INSTRUCTIONS). Robert McCarthy, BOA Securities.

You know, first, congrats on a little bit of a relief quarter here; it definitely was not the disaster that some people were expecting. Could you talk a little bit about how -- amplify some of your comments about how you exited September in terms of the order rates and particularly remind us how the compare works going into the fourth quarter in terms of where you would expect to see maybe some orders translate into some nice topline going into the fourth quarter?

Rob, this is Bill. The order rate during the month of September was 7.3% over the order rate of last year. Orders for the quarter, as I discussed earlier, were up 9.3%.

As you will recall, we had a surge of orders in June of 2006 related to the price increase that was effective in the middle of June in 2006, and so we received a lot of orders actually the day before the effective date of the price increase. That holds some volume into the early part of the third quarter last year. Obviously, we couldn't get all of that shipped in June and a lot of it shipped during July and even August of 2006.

So you know, as I think everybody expected, our sales on a relative basis were a little bit slower, particularly in the first couple of months of this year's quarter relative to last year. However, it did come back. We had some pretty nice orders during those months relative to last year, during July and August. Then I think the pace somewhat normalized during the month September when we were two years essentially comparable from an orders perspective, and this year, we were up 7.3% as I just indicated.

Did that help?

Yes, no, that does help. Then on the profitability line, could you talk about what's going on structurally in terms of the acquisition integration, and how should we think about kind of margins overall exiting, at least conceptually, for Q4 '07? Because I think last year, you did get a couple -- you did have some headwinds particularly in the commercial side with some of the step-up and some of the acquisition integration charges.

This is Larry. Bill can comment. But I think we should have a reasonably good fourth quarter, because we are continuing to improve most of those operations that we acquired. We still have quite a lot of work to do on JJI because what is happening there -- and I think we've said this before -- we are still in some fairly old facilities in that where we are obviously not going to spend a lot of money on some of those facilities, and we will be either updating -- in fact we have a major project going on right now where we are really modernizing one facility and we're going to consolidate three plants into that or three operations into this one facility. It will be a very nice plant. We still have more of that to do next year, but there won't be a lot of that that will happen, only the part of this one company in the fourth quarter of this year, so I think our margins -- we shouldn't see a lot of cost hits or anything for that in our margins in the quarter. It should continue at about where you've seen them now in the third quarter.

How would you characterize your views on commercial construction right now? I mean, would you say cautiously optimistic or how does it feel? Does it feel like 1995? Does it feel like 2000-2001? What are you seeing in terms of your week-to-week kind of order rates, absorption rates? Are you going to start thinking about cutting out some capital labor out of some divisions? How does it feel right now?

Well, right now, it feels relatively good, but it kind of comes and goes. It's pretty lumpy in that there are a lot of big projects out there. The one thing that we are seeing is a lot of the smaller, day in/day out contractor business, where a contractor runs down to the local distributor and picks up 24 down lights and some exit signs and some outdoor fixtures for this little project she's got. Some of that business is starting to slow. There still are a lot of major projects. Offices is relatively strong. You know, this whole suburban retail area right now is still reasonably good.

Now, there's parts of the country that where they got hurt, got hit earlier and harder with residential construction, and you're starting to feel little bit of softness in some of those markets, but overall right now, it still feels relatively good.

Any comment on the developers in terms of funding costs (inaudible) the credit shock? Any anecdotal commentary there from speaking to your customer base on that?

Not so far. There was one major acquisition that took place in our industry here recently, and we've been asked to help them with a little bit of -- they want to pay us 60 days late or something for a short period of time until they complete this acquisition. Then we watch the credit very carefully because that's one of the first signs, if we see people starting to pay slow and that means the contractors aren't paying and that. But we haven't really seen much of that in the activity. I just came back from one of the major buying/marketing group's annual convention, and depending on what part of the country you're in and exactly what type of business you are in, they are still doing relatively well.

How about price increases? I know we've gone through a round of price increases in lighting fixtures in kind of the summertime frame; there was some delay on that. Could you maybe comment on any kind of share shifts or what you are seeing there?

Well, I think, right now, that the price increases -- you know, we all went out with price increases, and I think we are all going to get some gain. Are we going to get all that we want? I don't think so, because I think there are some companies that aren't doing as well as others, and usually those that aren't doing as well as will scramble a little bit more and then they will lead with price. But right now, most of the big companies are behaving reasonably well, and I think everybody is kind of seeing as an opportunity, and we need the price increases because we are continuing to see cost increases, there's no question. But so far, we've been able to at least offset and probably a little more than offset our -- with price increases, our cost increases. We actually -- you saw it during the quarter -- we gained a little bit.

Have you halted the share loss you started to see in your industrial segment in the third quarter? I mean, that you saw in the second quarter?

You know, I don't -- it's just hard to say. I can't tell you that we are gaining, but I don't think that we saw any significant loss in the third quarter, although one of our divisions, as I pointed out in my overview, seemed to perform extremely bad and we're not really sure why. They don't think it was price. I don't know; they just happened to have a quarter that was not very good.

I suppose you're not going to disclose which division?

No, we're not going to do that (multiple speakers) because we got all of our competitors and everybody listening, so I don't want to disclose! But it was disappointing; it was disappointing to them, too, but they are a lot more optimistic about the fourth quarter. Their order input did pick up in late August and in September, and they got a better backlog and they do feel much better about the fourth quarter. If they would have just been even with last year, the actually were down in the quarter -- if they would have just been even with last year, we would have had a really nice quarter, and that was disappointing to all of us a little bit. Again, we don't have any logical explanation for it, really.

One last question on residential -- it looks like you were actually flat in the quarter, which I think was a positive surprise. I mean, could you talk about -- you did have some commentary that suggested some stabilization, at least of the decline. Can you talk about what's going on there? I mean, if anything the fundamentals have only eroded to the negatives even going further, so shouldn't we continue to see weakness for another (inaudible) down there?

Again, it's just hard to say, but it feels very weak, by the way. The one company that we have that's strictly residential is our decorative residential business here in Louisville, and their business was down substantially. Part of the business -- it's somewhat difficult for us to capture some of the downlighting track, some of the outdoor business and just how in that market segment -- is just how it breaks out. Is really difficult for us, so I'm not sure the numbers are 100% accurate. We do it the best we can, but as an example, distributors that buy it into stock and then if it goes to a little commercial project, there goes (inaudible) it's hard for us to pick up. But the overall residential -- I mean, the residential housing market is still pretty dang soft, there's no question about that.

Peter Lisnic, Robert W. Baird.

It's actually John Haushalter on for Pete. Just to ask you a couple of things -- if you look at the environment, it sounds like you are confident on kind of a growth or at least a pretty solid demand for kind of the first quarter, first half of '08. Are there kind of costs you guys have held off kind of going in and actively taking out costs because of kind of the growth environment over the past years, and could you accelerate that into any kind of slowing growth?

Oh, yes, we will definitely accelerate it if our growth -- I mean, I've got some divisions right now on a complete austerity program, you know, anybody that is strictly related to the residential business. And we can definitely accelerate it.

One of the things that we've been pretty good at, if you go back and looked at us, those of you that have followed us for a lot of years, historically we've reacted very quickly and pretty severely in taking out costs as things, as market adjusted downward, and we will do that. We measure and we get all of these monthly figures every month. We know exactly what percent comp is to sales and what percent it is to EBIT and we measure every cost every way you can measure it. So we are very, very quick if we see a division that starts going -- their business start softening, they immediately have to come in with a plan as to how they're going to take out -- all of our companies every year, when we put together our budgets, we put together a contingency plan as to what do you do so that they are really prepared to take out their costs very quickly, they don't have to sit around and guess on what they are going to do; they pretty much have a plan in place. It's just a matter of executing it, depending on how much their business softens.

John, I might also point out that, given the way that we are organized and that a big part of our business is a make-to-order type of business versus a make-to-stock or a stock-and-flow oriented company, it's fairly easy for us to balance the production with the labor demands for that production. At any given day, we can be reducing staffing in one area and increasing staffing in another, just in line with as the orders come in.

The cellular (inaudible) manufacturing systems that we have make that, relative to a system where you have 50 people or 100 people on an assembly line and you either layoff one or you layoff -- if you are going to layoff one, you've got to layoff all of them type of thing. We are not structured the way, generally. So it's relatively easy to manage the production requirements on a daily basis and structure accordingly.

Okay, thank you for that color. Then just kind of moving on, something I noticed you guys talking about was kind of adding almost a dedicated marketing towards kind of the healthcare market. Just are there other verticals that you envision doing that and to kind of gain share and would one of them be the retrofit market, kind of give the opportunity there?

Well, we've been involved in the retrofit market. One of the things that we've had some people just really focusing on are two big divisions, being Lightolier and Dave Grites Capri/Omega. They each have this national accounts sales force and we kind of direct these people. They have a pretty significant (inaudible) of people, and we direct them to go after specific markets depending on kind of the market conditions and that. So we've had a major push on this energy for some time. We've got a lot of our divisions -- our supply division is heavily involved in going after business based on some of these new government incentives they have for rebates and that to lower your energy costs and that. So we are all over those areas and we will continue to do it and stay after areas that we think there's opportunities.

If it softens in one market, we have a choice. We either have to lay off sales and marketing people were we have to redirect them into those markets that we think there's more opportunities, and we do that very quickly.

Okay. If you were going to characterize retrofit, I mean that's something where you could shift significant resources and given the opportunity (inaudible) there?

No question. We will do it in a heartbeat.

There's some major pushes going on not only in our company but even through trade associations like NIMA and NAD and these people, to try and make people more and more aware of the retrofit and try to get some real mileage over what's going on at the government, and then try to get the government off their [duff] and moving forward, because there's still lots of opportunities. I mean, our government is still one of the largest owners of commercial real estate, or not necessarily commercial but real estate in this country, and they still have a lot of very old, inefficient lighting in many of these buildings, and there's some opportunities there if they ever kind of get aggressive in going forward. They are doing some things but they just don't do it as fast. We all know the story behind the government now; they always want to do things but they never have the money in order to justify doing it.

Okay, thank you. I will get back in queue.

Matt McCall, BB&T Capital Markets.

This is [Sean Connor] on the line for Matt. Did you guys quantify how much acquisition revenue was in the quarter of your total?

No, we haven't quantified that. The only acquisitions that are benefiting the quarter now are the Carsonite acquisition that we did in September of last year.

Which was very small.

Relatively small, it's like about $1 million, not even $1 million a month. Then the Hanover Lantern acquisition that we did in January of this year, that was like about a $24 million, $20 million to $24 million business. So the acquisition benefit is starting to drop off since we haven't done anything recently.

Okay. Can you guys comment on the current M&A pipeline? Any change in recent months, anything out there that is attractive or --?

Well, it's becoming more and more difficult. We have a couple -- we're looking at kind of three opportunities right now. One of them looks pretty imminent. They are not large, but they are nice kind of bolt-on types of companies. I think we will -- in fact, we are actually hoping that we would have one of them completed that we would have been able to announce today. I think one of t he -- I do know, I'm not even sure myself exactly what the delay is. But there's a little bit of delay. But we should be announcing one pretty quickly, and we are continuing to look for all kinds of opportunities for both companies that can be just kind of bolted on, but we look at some of them more as a product line addition then we do actually as companies. But there are some of those out there. Then we continue to look and talk with other companies that we think may be potential acquisitions.

Are these in the non-res segment or are they in some of the other?

They are all in the non-res segment. I can buy so many residential companies right now, it would make your head swim but I'm not interested!

We talked about it. We might look as, we think the cycle is bottoming out, we think that residential is on the up-tick, there might be a few niche kind of companies that add some specific market opportunities that we might consider acquiring in the residential market. I don't want just another company that you go and buy a bunch more products in China and bring them over here. I mean, we are into that business ourselves and we've got all the opportunities we need there. There are some good niche residential companies that have been -- they are for sale right now. The problem with them is they are really headed south and they still want to command big dollars because they've come off of a very good market, so they think that they should command of the high price and we're just not going to do that. We're not going to buy at the bottom of the cycle and pay a big price for companies that have got nothing but more downward pressure on for the next year or so.

Looking out into next year, and I know you talked a little bit earlier about the residential market and I guess the flattening term used in the press release (inaudible) more related I guess to the comp of the prior year, as that I guess decline is less severe, are we seeing the bottom on that segment's margins yet?

Well, again, it's hard to say -- although we have an ability to respond there because we manufacture most all of those decorative products and that that are pure residential in China, so it's just a matter -- we don't have a lot of overhead associated with it. We will continue to cut costs and watch that, and I don't think our margins will go significantly lower. I mean, obviously, if the volume continues to decline, it becomes a challenge, but I don't think they will go significantly lower than where they are in the residential market now.

Christopher Glynn, CIBC World Markets.

I think earlier in the call, you mentioned that the fourth quarter margins should be fine, looking kind of like they did this quarter, because no costs coming through from some of the footprint moves. I guess that leaves it an open question. What kind of impact might we expect as you move into consolidating three to one and a couple of the other pieces you described?

You know, Chris, these are relatively small moves, depending on when we accomplish all of them. We've identified about $400,000 to $500,000 worth of expenses that we will be recognizing sometime during the fourth quarter or the first quarter of next year. It all depends on exact timing of when all of this activity takes place. That's the only exact amount that was identified right now that would be expensed.

In addition, Larry discussed the Hoffmeister move that will probably take place during the first quarter of next year. Some of that cost is in purchase accounting and other costs will be hitting the P&L. So, as we get closer to that and get it -- more clarity or can get some granular numbers to it, we can certainly let everybody know what those will be.

Okay, that sounds like a pretty reasonable amount of expense. Any comments what the payback on that is? It sounds like it would be pretty quick.

It's going to be very quick, I think particularly in Hoffmeister. Assuming the German economy stays decent and whatever, that should be a real, I think a very quick payback. Because they are in a really old, inefficient facility over there, and we just think our productivity is going to pick up significant. We are introducing new products over there; we're trying to grow that business. I think it's going to be a pretty quick turnaround. I would certainly say that we would pick that up mid next year. It's not going to be something that's going to take years to do it; we certainly should recover all of that expense I would think next year.

Okay. On the share repurchase with the stock having spent sometime down in the quarters, a good bit below where it looks like your average price was, I'm just wondering why you didn't buy back more or use more of that repurchase authorization. Maybe there's a simple answer there.

I mean, I don't know if we can give you a real good commentary. We are committed to buying back stock and the stock continued to go down and we just kind of watched it. We obviously bought back some and we probably wasn't aggressive -- we knew we would get this comment from some of you. Some people probably think we should've been more aggressive and maybe so. We will continue to monitor that and we have a commitment to go forward and buy more back. I don't know what much else I can say to you other than that.

Okay, fair enough. Just the last one -- the foreign exchange translation losses and then the smaller gain on the translation of the operating profit, I guess that would be in the SG&A -- probably most of it in the commercial segment, if we want to think about some kind of an adjustment?

Yes, that's correct.

Okay, thanks, Bill. Could you just remind me again what the impact was for the operating profit translation? I don't think it was in the press release. (multiple speakers)

Operating profit translation? So in the quarter, the currency losses were $2.8 million. That's included in operating expenses. The operating profit translation at the higher rate resulted in a benefit of $843,000, and that will be ongoing.

(inaudible) swing.

In the working capital translation, that's probably not (multiple speakers)?

That's a one-time (multiple speakers) the $2.8 million is a one-time type thing, as the working capital gets translated.

Okay, great. Thanks very much.

Alex Rygiel, Friedman Billings.

Two quick questions -- first, is it safe to come to the conclusion, or help me to better understand. Are you looking internally more aggressively today about consolidation and taking out costs than maybe 12 months ago and/or, are you looking more internally today more aggressively than looking externally for growth?

Well, I would say we're looking for both, but there's no question that when you get into tighter markets -- you know, as an example, I will give you a couple of examples that I can talk about, I think, openly because our divisions somewhat know about it. But with the strengthening of the Canadian dollar, we have six manufacturing plants in Canada and we produce a significant amount of product in Canada. Well, as that Canadian dollar stays strong or continues to strengthen even further, there's a fair chance that we're going to be able to producing products at some other facilities cheaper than we can at some of these facilities. So we will look at opportunities and say, where can we produce them at the lowest cost? We want to provide excellent service. One of the things that we've done in Canada that has kept us clearly number one there is we provide outstanding service but we also want to be sure that we're not putting ourselves at a competitive disadvantage because we've got US companies now, because of the weaker U.S. dollar, that are going to try to come in and take market share from us. We're not going to allow that to happen, so if we have to -- and we also don't want to take margin away from our business. So if we find that we can produce some products cheaper in plants south of the border than we can north of the border, we're going to work a lot more closely together and look to get some of our Canadian counterparts with our U.S. counterparts, and get those divisions working much closer together than we have in the past.

We've always kind of kept Canada separate, unique, on its own. Now with the strengthening of that dollar, we see an opportunity to bring the working relationship much closer together and look at where we can produce and be sure that we're going to produce those products in the most cost efficient manner.

Then I mean on the other front, we're still going out. If there's decent acquisitions and opportunities to go, we're going to continue to be aggressive in new product introductions. We still believe the lifeblood of our company is to continue to lead and come out with a lot of new products.

One of the things I probably should've mentioned in my overview, we have some lot exciting potential opportunities, even as it relates to the China Olympics that's coming up, with some of our products that are specified that we're working on over in that part of the country that present some pretty exciting opportunities for us.

Lastly, given the sizable free cash flow that you're generating today, your share repurchase program looks fairly conservative in my eyes. Is there a way for us to think about how you think you will be deploying your free cash flow over the next couple of years? Any thought as it relates to do you think you might be buying back more stock or using more free cash flow to grow the business?

Well, as long as I'm the president (LAUGHTER) -- it's an interesting discussion that we have regularly at our Board meeting, obviously, but I have a real strong belief myself, personally, in that I would rather use that free cash flow to grow our business if we can.

Now, if we get to a point, obviously, and we can't find opportunities and we don't find new product opportunities, new markets or acquisitions, then we have a responsibility, obviously, to manage that cash, and then we will look for what we think is the best opportunities. If that a repurchase or whatever, I just want to assure you that we will work very hard to be sure we utilize that cash the best we can.

We've always been a company in recent years -- when I first became the president of this company back in 1993, we had an extremely weak balance sheet at that time. I certainly like the fact that we have very strong balance sheet and we want to keep a strong balance sheet and that, but we also do recognize we've a responsibility to manage that cash to the best of our abilities. We will look for opportunities to grow, opportunities to introduce new products. If we still have lots of existing cash, obviously we will look to buy back shares or do whatever we think makes sense to make best utilization of that cash.

One quick follow-up, Larry -- assuming that you're still in your role in five years -- and I hope you are -- what do you think your exposure to the international market will look like? Will it be 30% or 40% of the total corporate revenue? Will it be less than 10% like it is today?

Well, the only thing I can tell you is I've had a goal for a few years now, and it excludes Canada, because if you looked at Canada today, you know we have 10% or plus 10% of our business in international, but we really look at Canada as a North American company (inaudible) want it outside North America. Our goal is to have a minimum of 10% of our revenues coming from international sales. Now, if opportunities open up, we're kind of getting our feet wet in Europe right now with Hoffmeister and that; it could presents additional opportunities.

We are also doing a little bit better in Asia. I've spent personally a fair amount of time in Asia a year and a half or so ago, and right now, they don't have any lighting performance criteria. They just specify a whole bunch of light fixtures and nobody pays any attention to it. And until they come up with some good performance criteria where high-quality, energy-efficient-type products that we sell, we are not interested in that market because we're not interested in just selling a bunch of hardware and that. But I do think there's going to be some opportunities that are going to open up for us.

One other thing that I should've mentioned that I didn't mention -- most of you know what is happening in Dubai. Some people say as many as a third of the cranes in the world are there; I don't know if that's true or not. But there's a lot going on over there, and we just put on a sales representation in that country that hopefully is pretty well connected. We just sent a whole group of our sales management over there to train these people, and we see some exciting opportunities in that marketplace, at least for the short term. How long that's going to last, I don't know. And we will continue to look for those kind of opportunities. We are excited about growing and going after markets and anything where we think that we can sell our high-quality, energy-efficient type products where people like high-quality, American-made goods.

Very helpful. Thank you very much.

Cheryl Cortez, SIG.

I was just wondering if you had any outlook on raw material costs going forward.

Well, yes, our guess is probably about as good as anybody else. We have been told by some of our ballast companies that we can expect a price increase the first of the year. The other commodity markets have kind of been up, down and all-around. But I don't think there's much question that there's going to continue to be some pressures, primarily because of this international demand on steel, aluminum, copper. We are seeing it all the time, and so far, we've been able to offset any of those costs and raw materials in price increases, and that would be our goal going forward. We watch these commodities very carefully.

Fortunately, right now, it's somewhat stable, but that changes very quickly. You just never know, with oil reaching an all-time high here recently, and of course copper continues to be very high, we're not sure exactly but we will monitor it and hopefully be able to react to the market. If it continues to go up, we will have to have price increases go up along with it.

Thanks a lot. The rest of my questions were answered.

Shawn Boyd, Westcliff Capital.

Just two quick questions, on the question earlier about the organic growth. You all mentioned backing out Carsonite and I believe it was Hanover. Were both of those reported in the commercial segment?

Pretty much -- just a small amount of Hanover Lanterns, maybe, what is it, about -- I don't know. Maybe it is more about 25%, 30% of theirs. I'm not sure right off the top of my head, but 25% to 30% at Hanover Lantern's would be in the residential segment. They produce some residential products. They've gotten more in more into the light commercial work, but they still do have some residential business.

I got it, okay. The other question for you -- on the commercial side, you mentioned -- or you just mentioned commercial right there and earlier you talked about day-in/day-out contractor business\. Can you just give us a feel for, within that commercial segment, how much of that is, let's call it light commercial versus the larger projects?

Well, the big growth that we're seeing right now, there's no question in the commercial market is in the larger projects. It feels to us like the smaller day-in/day-out business is probably relatively flat to maybe up a little bit.

We're not -- I was just recently in L.A., in fact just last week. I talked to a lot of our distributors there to try to get a feel from them. Their feeling was very similar to mine, that their day-in/day-out contractor business, they kind of review it to be quite flat. Their major commercial business is still very robust, a lot of quoting, a lot of architectural firms and engineering firms and that are very actively engaged these days, so it seems like the major projects there's no question are doing better than some of the smaller day-in/day-out stuff.

It's really hard to know exactly and put a percentage and that on that but if I were to just give you my best guess, it would be to say that smaller contractor business, day-in/day-out stuff is probably flat to up slightly, but the major commercial business is up probably 5% to 10% would kind of be a range I would give you.

Okay, and that color is helpful. So out of the $327 million in the quarter here in commercial, or call it $300 million a quarter that we're getting out of commercial, what percentage of that is the smaller commercial jobs?

Well, it's a relatively -- I don't know. I would guess it might be 25% of our business. It's really hard to tell. We have one of our divisions that's focused 100% on that, and they are about a $100 million division. Our Lightolier, Daybright, Capri/Omega our two big commercial divisions, they really do focus more on the major commercial jobs. I mean, they obviously get involved in some of these smaller projects too, but they really are focused on a lot of the major projects. (multiple speakers)

You should keep in mind also that these larger projects that are underway, with the big jack-up cranes and larger projects, that the tenants who will be moving into those projects are going to be coming out of some of the maybe smaller -- what otherwise would be stock-and-flow type of refurbishment projects. So, this may be a temporary slowing, I think, in the stock-and-flow and the leases that otherwise might be renewing right now in a space that a tenant is already in, where they are just waiting until their new, larger building finishes up. Then they would be doing the lighting in that larger building. So there's obviously a trade-off. When tenants are moving from one used building to another used building, there's going to be generally less than there would be where they are moving into a -- less to do than when they are moving into a larger high rise or a larger heavy commercial project. So there's a substitution, I guess, is what I'm trying to say, that can go on between those two.

I got it, okay. My other point, or my other question was just on the overall margins. You guys have mentioned a few different times on the calls here that you've got some headroom as you see different businesses flow, you feel like you can put forth some initiatives. We are running great margins here at 15, I don't know, 15.5%. Can you give us just a feel? Is there 100 basis points of headroom there or is there 400? I mean, just a magnitude here of what we have in potential improvement there.

It's really hard to say, and the reason being is it depends. If I knew exactly what the market was going to do and which divisions were going to be stronger, we have some of our divisions that do extremely well and we have others that obviously aren't that good, and it depends. Right now, it just so happens that the divisions where we've got good margins and that are the companies that are growing and doing reasonably well.

Now, we have virtually all of our divisions up in double-digit margins except for just a couple of little blips here and there, so they are all doing reasonably well. It's just hard to say but I mean, you know, if everything goes perfect we have some significant upside. But it never all goes perfect at the same time, you know? You get some potential problems somewhere, get a major lawsuit. I mean, you never know so I don't want to mislead anybody by thinking that there's huge upside potential. But I think we've had consisted improvement in margins, and I think there's still room to make some improvement in margins, assuming that our business stays relatively strong.

Overall, I think there has been somewhat of a paradigm shift in the industry where, you know, we've done a better job as an industry at educating architects and end-users on the benefits of more effective and better, efficient, more energy-efficient lighting. It has resulted in an understanding of the value of better-performing lighting. That's not just for Genlyte but for our competitors as well. So I think the margins in the entire industry have come up.

Now, will that understanding, the value perception, remain and will architects and engineers continue to specify higher value-added products which really helps Genlyte because we have this tremendous premium mix of products? It's hard to say. I think that the entire industry, though, is doing a better job at selling the benefits of higher value-added lighting and thus for margins for the whole industry are higher than they previously had been.

The only caution I would give on that statement that Bill just made is, if all of a sudden business gets a little softer in our industry, we have a tendency then for people to lead with price and you never know. There could be periods of time where people are scrambling to keep their plants open and I mean if business is soft and they lead with price, and then obviously that puts a lot of pressure on margins.

I got it. Okay, thank you.

[George Milas], Lord Abbett.

Two quick questions -- can you remind us a little bit about the last price increase and when that was effective, and roughly how much it was?

Also, the second question is regarding the -- Larry, you said I think two or three divisions were not doing so well, especially in the early part of August, or July and August. How often does that happened? I mean, these blips, variability in performance -- is that sort of a normal thing, or is that totally unusual?

Well, it's reasonably unusual when the overall market in our the divisions -- we usually see our companies track each other fairly similarly. If you look at that division by division, they just usually don't perform that much different, so it's quite unusual to see one of our divisions just have a pretty weak quarter. We haven't seen that in quite some time. I was very shocked at it myself. I mean the general manager running it, he's one of our seasoned guys and does a good job and that business has been doing very well. Their margins were good, by the way, but just for some recent, it's like I kept kidding him and telling him that it looks like they went to sleep and didn't want to take any orders or anything for a couple of months there because their business -- I mean, that business was down. It was actually off double-digit for us in growth. That's very unusual to have that. So you know, I don't have a good explanation. None of us have a real good explanation why. It's just that the jobs didn't happen to hit for that division that quarter and that. But that is an anomaly; that is not usually a very frequent occurrence.

Again, it gets back to that price increase that took place in June of last year which it made the numbers really difficult to compare for July, and even for August for Genlyte.

Regarding the first part your question, George, with respect to the price increase, we did announce a price increase. I believe it was in the middle of July, effective as of the end of July. Maybe it was early July, effective the end of July. I believe a couple of our other competitors also -- we were not first; one of our competitors was first, and we filed shortly thereafter. But there was one of the large larger lighting companies that delayed the increase until the end of August. That had an impact of basically I think taking some of the wind out of the sails of everybody that had previously announced. So again, when it goes back to that stock in full business, which was relatively soft, it probably made the price increase less successful, less effective, especially on that stock-and-flow side, than it otherwise would have been.

On the proprietary products, on the specification products, we were probably -- again, it takes a little bit longer to see the benefits of that because it's architectural work and it takes a few months for it actually to work its way through the system. We expect that we will have some reasonable success with the price increase on those products.

Regarding price increases as a whole, if you recall, we had a price increase that was announced during the winter months of last year that we received some relief, basically covered cost increases. The price increases that seem to have been the most effective are the ones that take place during late May/early June, which is going into -- it's right at the beginning of the construction season, the heavy, the stronger months of the year -- June, July, August, September -- for the years of I believe it was 2004, 2005 and 2006, all three of those years, and we had a price increase in late May/early June, essentially an entire price increase that was announced stock and carried forward.

So it's hard to say what's going to happen. As Larry indicated, we have some of our ballast manufacturers now telling us that they are anticipating a cost increase effective in January. I don't know if we will be able to put that off until the June/May timeframe or not, but a lot of it comes down to negotiations.

Okay, but the price increase which was announced in mid-July on the contract business really hasn't hit your numbers yet in a way?

It takes awhile for that to work its way through the system.

Robert McCarthy, BoA Securities.

Yes, just a couple of follow-ups. I will make it quick because I know it's getting late. Does the price and volume in the quarter -- could we get it by segment or at least for the overall company? Obviously, we have the acquisitions you've talked through, and maybe you could just touch on the FX effect as well.

Yes, I would really rather delay in sending that out right now, Rob.

Okay, will we be able to get it later today do you think or when you file the Q?

Perhaps when we file the Q. (multiple speakers) going to be due within, I don't know, a few days here, so --.

So it's just tough to get the sense of the price for the volume right now?

Yes.

Okay. Then just on the share repurchase again, I just would remind you all that (inaudible) trading around 7 times EBITDA and south of 11 times, so definitely you look at a lot of acquisitions out there but you seem like a pretty good buy right here. So any more further commentary on share repurchase? Do you think that's definitely a priority to look at going forward?

No, the price dropped significantly during the last couple of weeks of September or of October, actually, when we basically go into the blackout period as earnings are coming together. So in another day or two here, that will -- that blackout period will expire and there will be some opportunities going forward. But that is something that we have to keep in mind.

Any thought about perhaps even raising the authorization?

Well, we have plenty of room under the current authorization. The bigger issue is the blackout periods that occurred. I mean, we could've done more if we weren't in blackout period so the authorization is not the issue. I mean, the authorization, I think once we use up the current allotment, would not be -- I don't know, we would have to go back to our board, but I mean, it would be not that difficult if, assuming leverage, assuming we don't do some other acquisition in the meantime, is in line -- we could certainly do another authorization.

Just one final points on acquisitions -- I mean, are you seeing any increased activity or interest on new technology for LED, or energy-efficient fixtures, the controls? I mean, do you see it a market where you have the product suite to internally develop that product, or do you have to do some more acquisitions there?

No, I think -- I man we're right on top of the whole LED thing. You know, it's getting a lot of hype and it's coming. I mean it's going to come but it's still not a major factor in what we call general elimination. It's still primarily in the small, niche type markets. As it's there, we're going to be there. We're working with all the various LED companies. We have plenty of opportunities. We've introduced probably 350, 400 LED products. Right now, we're not getting much mileage on them but some of the LED companies recently told us that by the end of this year, they're going to be up to 100 lumens per watt; that's getting pretty exciting. We just crossed 70-watt LED lamp here just recently.

So it's coming, but it's not -- it's certainly not anything. Everybody is just running to clamor to buy up LED fixtures right now. We are staying very much abreast of it. We've got a whole LED division. We've got our guys working in every front and we are contacting. I mean, we are totally involved in it and we will be there. I don't think we really need any acquisitions or anything to do it, because most of the LED companies are willing to work with us at this point no different than they were when they were lamp and ballast companies, and provide a lot of the lamps or the LEDs themselves and the drivers. Of course, we're very good at putting our own optic systems, our own controls and that in it. So we are fully engaged in it, and we will be right there. If it becomes a bigger and bigger factor, you can bet that we will be right there and a bigger and bigger factor with it.

One final one -- just on GE's restructuring, do you still see them putting a level that's been required, given this potential change at the margin, that could occur with respect to more energy-efficient LED product? I mean, do you think they're going to still be a really highly engaged player going forward? Any views on the restructuring they've done?

Well, I mean, they are restructuring. I know those guys pretty well and I talk to them very regularly, and the restructuring really is to just get out of those old incandescent plants. You know, the incandescent business is going south, as I think everybody knows, being replaced by PL and soon to be replaced by LEDs.

Now, GE, in all the discussions that I've had with them personally, say that they're going to invest. They want to take a lot more money and invest it in new technology and LEDs and more energy-efficient type products and not continue to spend their money and fiddle around these old, inefficient, incandescent plants. So I don't know for sure, but I think, based on what they're saying, they look like that they are -- they are wanting to continue to spend money and go forward in the lamp business.

Thanks for your time.

Christopher Glynn, CIBC World Markets.

Yes, a little more commentary on the international strategy this time than previously mentioned, going from 75 this year to maybe 100 next year -- A few components there. It sounds like Dubai is getting a little more focused, and then you've mentioned Hoffmeister. I'm just wondering if the Dubai, if you would ship that from the U.S., and then how the Strand is being reintroduced into the European market and if the $100 million might be a little conservative?

Well, I hope it is conservative. I think we will easily do that number and if Strand really takes off, we just have got our warehouse and our operations set up there, and our sales teams out selling and so it's kind of getting their feet on the ground and running and it could be conservative. You know, they were an English company to begin with and they have an excellent name over there, and we have most of the original management in that back. I shouldn't say the original management, not that the (inaudible) overall company but that ran their sales and marketing and that over there. We have hired a lot of those people back; they are working for us, so we are familiar with the product line. I think the opportunities are going to be tremendous and I do not know. I am being somewhat conservative but I think we could easily do $100 million over there next year, over there in Asia and it's possible we could do significantly more than that.

Okay. Where does the product come from that is going to go into Dubai?

Most of that will come from U.S. facilities. You know, we obviously produce some things in the Far East and that, but most of those products will be coming out of this country.

The interesting thing, as all of you know, with the U.S. dollar being so dang weak, it makes us extremely competitive with anybody around the world producing products in this country and then certainly taking them to Europe; we can compete very nicely. Europe, particularly in England with the Pound being as strong as it is and then obviously with the euro being where it is, we love to compete with the Europeans right now.

Thanks very much.

This does conclude the Q&A session. I will certainly hand the call back over to Mr. Powers for closing remarks.

I would just like to thank everyone for participating. I just again give you our assurance that we're going to do everything we can to continue to grow our sales and earnings and to do the best we can to increase the value to our shareholders. So again, thank you all for participating today.

As a reminder, this conference has been recorded with (technical difficulty) archived copy becoming available in approximately three hours on Genlyte Group's Web site at www.Genlyte.com.

This does conclude today's call. Thank you for joining us, and have a great day.