Dec 5, 2007
Executives
ThomasW. Powell – Chairman and Chief Executive Officer PatrickL.
McDonald – President and Chief Operating Officer DonR. Madison – Chief Administrative Officer and Chief Financial Officer
Analysts
JohnFranzreb – Sidoti and Co. NedBorland – Next Generation Equity Research RichardLeader – First Houston Capital CraigBell – SMH Capital Arnold Ursaner –CJS Securities GeorgeGaspar – Robert W.
Baird SeanBoyd – Westcliff Capital Management
Operator
(OperatorInstructions). I would now like to turn the conference over to Ken Dennard fromDRG&E.
Please go ahead, sir.
Ken Dennard
Thank you,Mike, and good morning, everyone. We appreciate you joining us for PowellIndustries’ conference call to review fiscal 2007 fourth quarter results.
We’dalso like to welcome our internet participants listening to the call over theWorld Wide Web. Before I turnthe call over to management I have the normal housekeeping details to runthrough.
You could have received a fax or an E-mail of the news release thismorning. Occasionally there are technical difficulties experienced during thesebroadcasts, so if you didn’t get your release please call our offices at DRG &E – that number’s 713-529-6600 – and we’ll send one out to you.
Also, if youwant to be on the E-mail distribution list please relay that information, aswell. There will bea replay of today’s call.
It will be available by webcast by going to thecompany’s website. That’s www.
PowellInd.com and that’ll be available about anhour or so after the call. Or telephonic recorded replay will be available aswell, and information on how to access that is provided in the press release.
Please notethat information reported on this call speaks only as of today, December 5th, 2007, andtherefore you are advised that time sensitive information may no longer beaccurate as of the time of any replay listings. Also, as youknow, this conference call includes certain statements, including statementsrelating to the company’s expectations of its future operating results that maybe deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Actof 1995.
Investors are cautioned that such forward-looking statements involverisks and uncertainties in that actual results may differ materially from thoseprojected in the forward-looking statements. These risks and uncertaintiesinclude, but are not limited to competition and competitive pressures,sensitivity to general economic and industrial conditions, internationalpolitical and economic risks, availability and price of raw materials andexecution of business strategy.
For further information, please refer to the company'sfilings with the Securities and Exchange Commission. Now with methis morning are Tom Powell, the company’s chief executive officer, PatMcDonald, President and Chief Operating Officer, and Don Madison, ExecutiveVice President and Chief Financial and Administrative Officer.
I would now liketo turn the call over to Tom.
Thomas W. Powell
Thank you,Ken. Good morning.
Thank you for joining us today to review our fiscal ’07fourth quarter and our year end results. I’ll make a few comments about thequarter and our markets and then turn the call over to Pat and Don for moredetailed discussions.
We’re verypleased with the improvement in our quarterly and annual results. For both thequarter and the year we reported significant year-over-year revenue growth dueto continued strong demand in our electrical power product markets.
Our fourthquarter bookings reached a record $200 million. Backlog ended the quarter totallinga record $464 million.
And for the full year total bookings were $667 million. I’m pleasedto report that the rockets we can see remain healthy.
We continue to seeexcellent opportunities and we are successfully closing business at anunprecedented rate relative to the history of the company. All of ourmajor markets remain strong.
Oil and gas, utility distribution and generation –including grain power – and the transit business. We continue to see manyprojects in both the planning and the bidding stages.
These are very large,complex projects with long term time paradigms. Powell is exceptionally wellsuited to fulfill the needs of these projects and I believe we will seesustained activity in this area for some time to come.
We areprepared as well both domestically and internationally in both our ANSI and ourIEC product lines. We continue to benefit from our ability to work with ourdomestic customers on their international projects.
Generallyspeaking, business is on track, we’re doing quite well, and the outlook fromour vantage point remains very strong. Without a doubt, we’re pleased with theopportunities that are before us.
At this pointI’ll turn it over to President and Chief Operating Officer Pat McDonald. Pat?
Patrick L. McDonald
Thank you,Tom. We continued our revenue growth in the fourth quarter.
Revenues for thefourth quarter were at $150 million compared to $149 million in the thirdquarter. This puts our year-over-year growth at $190 million or 50% compared tofiscal year 2006, which was an 11-month year.
As Tom said,we look forward to the opportunities ahead of us in 2008 as orders in thefourth quarter brought our year-ending backlog to a record $464 million. All ofthe electrical power products divisions are seeing strong growth and wecontinue our ramp up of employees to satisfy that growth.
We have doubled ourworkforce from 1,200 to 2,500 people since 2004. And at the same time we havetripled our revenues during that time frame.
We havecompleted a tremendous amount of training with our new employees while dealingwith the growth of the business, and we will continue to invest in additionaltraining to bring our people skill sets up to the level necessary to interactwith our new ERP systems. I would liketo take a moment to thank all of the Powell employees for their time anddedication in 2007.
I would also like to take this opportunity to express myappreciation to our customers, some of which may be on this call, who put theirfaith in business in our hands. We will constantly strive to achieve thehighest customer satisfaction and continue to invest in new products anddelivered systems in an effort to meet their needs and requests.
Our goals forthe future are quite simple: finalize the transition of the Power/Vac productline; drive for gross profit improvements in all businesses; and prove ourworking capital turns through solid project management, milestone billing, cashcollection, and timely inventory management. Now I willturn the call over to our Chief Financial Officer Don Madison to review thefinancial results.
Don R. Madison
Thank you,Pat. As previously announced, we changed our fiscal year to September 30thfrom October 31st effective September 30th, 2006.
Therefore, a considerable period of fiscal2006 are comprised of a two-month fourth quarter and an 11-month year. Now for thefinancial results.
Revenues were $150.5 million in the fourth quarter of fiscal2007, compared to $88.3 million in the two-month fourth quarter of fiscal 2006.Revenues increased due to ongoing strength in our primary markets and thestrengthening backlog. The acquired Power/Vac product line added revenues of$19.1 million in the quarter compared to $17.6 million in last year’s fourthquarter.
Gross marginfor the quarter was 16.8% compared to 17.8% in last year’s fourth quarter.Excluding the direct impact of the acquired Power/Vac product line gross marginfor the quarter would have been approximately 20%. Overall we continue toexperience strong demand for our products and services.
Selling,general, and administrative expenses decreased to 13.8% of revenue in thefourth quarter compared to 14.5% of revenue in the fourth quarter of fiscal2006. Interestexpense in the fourth quarter was $1 million compared to $488,000 in the fourthquarter of 2006.
In addition tothe three-month quarter, interest expense increased due to interest expenseimputed on the discounted purchase price for the acquired Power/Vac productline. Interest income was $148,000 compared to $191,000 in the fourth quarterof 2006.
This results in lower levels of cash available for investment. Ourprojection for income taxes reflects an effective tax rate on earnings beforeincome taxes of 35.4%.
For the year, our effective tax rate is 35.5% comparedto 35.4% in 2006. Net income inthe fourth quarter was $2.5 million or $0.22 per diluted share compared to $2.2million or $0.20 per diluted share in the fourth quarter of 2006.
As of September 30th, 2007, our orderbacklog was $464 million compared to $355 million in last year’s fourthquarter. New orders remain strong.
Orders in the fourth quarter totalled $200million compared to $156 million in the fourth quarter of 2006 and $151 millionin the prior quarter. We ended thefourth quarter with $5.3 million in cash compared to $10.5 million at the endof fiscal 2006.
As we increased the business activity in our manufacturingoperations working capital has been required to support higher levels ofbusiness volume. During thequarter, cash provided by operating activities was approximately $20.5 millionand we invested $3.2 million in capital improvements.
Lookingahead. We expect full-year fiscal 2008 revenues to range between $625 millionand $650 million and full-year earnings to range between $1.65 and $1.90 perdiluted share.
At this pointI’ll turn it back to Tom.
Thomas W. Powell
Okay. Thankyou, Don.
I’ll make just a few rough remarks and then we’ll be happy to takeyour questions. This pastyear, of course, was not without its challenges.
The Power/Vac transition andintegration process has been difficult during this period of exceptionally stronggrowth. And as discussed in previous calls, we’ve had some performance issuesat one of our operating units, which we’ve turned the corner on at this point.We also had the challenge of implementing the new ERP system.
Thesechallenges aside, I’m proud of the organization and what we did accomplish in’07. Again we generated record bookings, both in the fourth quarter and for theyear, and we maintained and strengthened relationships with our customersthroughout this challenging period of growth and exceptional business activity.
Our growthrequires skilled people because everything we do is engineered to order. Tothat end, we successfully attracted a large number of talented people to thecompany.
I must say it’s exciting to have these new people apply their industryknowledge and watch the organization continue to adapt to new demands. The volume ofbusiness remains high and the Powell employees and all business units haveworked very hard to continue to deliver the superior level of service our customershave grown to expect.
Like Pat, Iappreciate the efforts of all of our employees and want to acknowledge theirhard work, many, many long hours throughout this past year. We continueto invest in research and development to develop broader product offerings.
OurR&D efforts continue to anticipate new demands of the marketplace and keepPowell on the cutting edge of new products for our industry. OurPowell-Ute Group continues to exceed all our expectations.
And the integrationof Power/Vac is now on track for completion in March of ’08. I believewe’re well positioned for the future with our relationships, with our people,and with our R&D efforts.
We continue to be excited about theseopportunities in our markets and about the future performance of this company. At this pointwe’d be happy to try to answer your questions.
Operator
Thank you,Sir. Ladies and gentlemen, at this time we’ll begin the question and answersession.
(Operator Instructions). Our first question comes from the line of JohnFranzreb with Sidoti and Company.
Please go ahead.
John Franzreb – Sidoti and Co.
... where weare on the Power/Vac integration and that process, what physically remains tobe done, and what’s the time line for that?
Thomas W. Powell
We missed thefirst part of your question somehow, John. What was it?
John Franzreb – Sidoti and Co.
Sure.Power/Vac, where are we in the integration process, what physically still needsto be done, and what’s the time line for that?
Patrick L. McDonald
John, this isPat. Good to talk to you again.
We are, as Tom pointed out, in the last stagesof this. We are in full assembly down in our Kurland facility ofthe Power/Vac product line.
We are moving ahead with our integration move ofthe fabricated parts now and that will continue in December and into the firstquarter of 2008. So that’s the last parts of the transition that are going tobe required to be finished up with the fabrication side of things.
John Franzreb – Sidoti and Co.
Okay. Andbased on what you know now, are you guys still sticking to your operatingmargin targets that should exceed the previous peak in cycle based on whatyou’re seeing on the current order books for the cycle.
Patrick L. McDonald
After we getthrough the transition side, as we’ve talked about with everybody, we are stillapproaching and believe that we have the capability to approach the peak of ourmargins that we have seen in the past. But we still do have to get through thisfinalization of the transition period and then get our people up to speed inthe second half of ’08 to be able to get in those margin level targets.
John Franzreb – Sidoti and Co.
Okay. Thankyou.
I’ll get back in the cue.
Operator
Thank you.Our next question comes from the line of Ned Borland with Next GenerationEquity Research. Please go ahead.
Ned Borland – Next Generation Equity Research
Good morning,guys. Just kind of a follow up question on the last one as it pertains tomargins.
If I look at the guidance on revenue and EPS, I mean, I’m looking at agross margin range of about 19% to 19.5% or so. Are we still looking at grossmargins, say in the first half, being more like 17%, 16%, and as you getthrough the transition what are we looking at in the second half of fiscal ’08?
Don R. Madison
Ned, this isDon Madison. What we are looking at, let me just lay it out quarter by quarter.We anticipate that we will continue to see improvements in our historicaloperations as we move forward into 2008.
I caution everyone from lookingsequential quarter to quarter because individual projects can’t view any onequarter. When you’relooking at the impact of the Power/Vac product line there’s going to be animprovement that we’ll reach at the end of the first quarter.
The first quarterrelative to the recent quarters will be nominally improved, will reach a setfunction improvement at the end of the December time period. That quarter willbe, the January time period will be the first full quarter we will have allassembly and test operations in the Kurland operation here in Houston.
We will makeanother improvement that will occur when we get all the fabrication here at theend of March. When you’relooking at the third and the fourth quarters of fiscal 2008 you’ll still seeincremental improvements that will be required to reach our guidance for thisacquisition because of just the training and the tenure of the employees inthis business unit.
This business unit has approximately 300 to 325 employees.The vast majority of them have no more than a year’s of service. Many of themhave less than a year of service.
So we’re still looking to have a trainingcurve that will be impacting us in the third and the fourth quarter. We thinkwe’ll be coming out of that training curve around the end of fiscal 2008.
Ned Borland – Next Generation Equity Research
Okay. That’svery helpful.
And then on Power/Vac, what kind of growth are you assuming forfiscal ’08 over fiscal ’07 given the different end markets associated therecompared to your legacy business? I just want to get a sense for how you seethat going in ’08.
Don R. Madison
At this pointin time our focus is on operating efficiencies, completing the transition, andwe’re reaching our earnings results of the business. Going forward into 2008 atthis point in time we are not looking for significant growth in this productline.
We’re looking for it to be relatively stable in ensuring that we canreach our objectives, both from a cost standpoint as well as from a customerservice standpoint.
Ned Borland – Next Generation Equity Research
Okay. Andthen the margins on Power/Vac, excluding the noise of all the integration work,but I mean, generally product line speaking, margin differential between thatand your core business.
Don R. Madison
We are stillconfident that we will reach our projections of $7 million to $8 million EBIDTAin this business once we complete the integration and get the workforce stable.Keep in mind that the EBIDTA of this business does carry a significant amountof intangible amortization and that’s why we talk in EBIDTA. From an EBIDTAperspective it will be comparable with our historical businesses.
Ned Borland – Next Generation Equity Research
Okay. Great.Thanks.
Operator
Thank you,Sir. The next question comes from the line of Richard Leader with First HoustonCapital.
Please go ahead with your question.
Richard Leader – First Houston Capital
Good morningand congratulations with the great results.
Thomas W. Powell
Thank you,Richard.
Richard Leader – First Houston Capital
Tom, fromtime to time you’ve talked about the energy bill that keeps popping up in Washington, althoughnothing seems to get done. Now there’s an energy bill in the works.
In partit’s going to raise taxes on oil companies and perhaps even impose new mandatesfor utilities to use more renewable fuels. What’s your reading on the currentenergy bill and where are you as far as the impact on Powell going forward?
Thomas W. Powell
Certainlywe’ve noted some nervousness by our major customers. All of this pre-electionrhetoric does have (inaudible), but so far nobody’s pulled the plug on anyprojects.
I hope it’s just rhetoric and none of this will, does not take placein the end. But I can’t tell you that.
I don’t know.
Richard Leader – First Houston Capital
Okay. Thanks.
Operator
Thank you,Sir. The next question comes from the line of Craig Bell with SMH Capital.Please go ahead.
Craig Bell – SMH Capital
Good morning.I had a question on backlog. You had a pretty significantly increase in thebacklog this quarter.
Just wondering, was that due to a couple of largeprojects or did you see really strength across the board?
Patrick L. McDonald
Craig, we sawstrength really across the board, but as always, and as Don pointed out, wealways have to hesitate quarter to quarter because we can have some fairlylarge projects to come in that have a tendency to skew the numbers at any onepoint in time of the quarter. But we are seeing strength across all the type ofportfolio of projects that we look at and we are booking in that accordance.
Craig Bell – SMH Capital
Okay. Andthen just on the last conference call you guys talked about your capex spendingand that the possibility that you might pull some of that into this fourthquarter from the early part of fiscal ’08.
Looking at the numbers there itcertainly looks like that happened. Number one, is that accurate that you’vemanaged to get some stuff done in the fourth quarter that was originally slatedfor fiscal ’08?
And just, too, if you could sort of talk about what kind ofprojects those were.
Don R. Madison
Craig, thecapex spending for the quarter was $3.2 million, I believe it was, and $14.3million for the year. Yes, we did pull in about $2 million worth of work thatwe had originally thought we would do in the first fiscal quarter of 2008.
Aswe tried to shore up some of the fabrication area, I’ll let Pat talk aboutspecifically what we’ve been doing in the fabrication area.
Patrick L. McDonald
Yeah, we haveinvested in some additional fabrication equipment in the turret area and thepress brake area as a result of the Power/Vac integration and also just thegrowth in volume that we have. So again, as Don pointed out, we were looking atthose originally in the first quarter of ’08.
We pulled those in to our finalfourth quarter to make sure that we get that capacity in line, ahead of theactual needs and that we’re ready and available with those pieces of equipment. As it relatesto 2008, we’re still projecting that we’re probably going to be in the $8million to $10 million capex area for fiscal year 2008 based on what we know atthis point in time.
Craig Bell – SMH Capital
Okay. Great.Thank you.
Thomas W. Powell
By the way,those things are humming and they sound really, really good.
Operator
Thank you,Sir. Your next question comes from the line of Arnie Ursaner with CJSSecurities.
Please go ahead.
Arnold Ursaner – CJS Securities
Hi, goodmorning. The question I have relates to your backlog.
A couple of questions,some questions related to the backlog. One is, what percentage of the backlogdo you expect to ship in ’08?
Number two,sub question relates to, obviously you don’t want specific numberspost-quarter, but we do have a lot of, you know, October and November arebehind us if you have a continuation of the trend. And third,given the fact you’re so busy what should we expect on the margins on backlogyou’re taking on versus corporate average, if you will?
Patrick L. McDonald
Well, we’repulling together the percentage to be shipped out in ’08 of the backlog. Thebacklog margins, as we’ve indicated, the margins were taken at or above ourcorporate anticipated levels.
So again, we feel very confident that we’re goingto be able to meet our objectives that we’re putting out in our guidance as itrelates to the margin that are sitting in the backlog right now.
Arnold Ursaner – CJS Securities
Right. Trendin October and November?
Patrick L. McDonald
Well, inOctober and November, you know, we’re finishing up this last year and it wouldbe remiss for me to be talking about October and November right now.
Arnold Ursaner – CJS Securities
Okay. And thepercent that would ship?
Patrick L. McDonald
Hang on,we’re getting it for you.
Arnold Ursaner – CJS Securities
While you’redoing that, if I can shift gears and ask Tom Powell a question, since you’re ona very public forum. You’ve indicated you intend to retire.
You own quite a bitof the shares. Can you comment on your plans, if you have any, for any orderly distribution of your shares?
Thomas W. Powell
I’ll beworking on that fairly soon to do some program selling. That’s not a greatdeal, but enough to make me comfortable in my old age.
Arnold Ursaner – CJS Securities
But your planwould be something like a 10B5 plan or would you, or are you considering apublic offering which might get you broader and better distribution?
Thomas W. Powell
Probably the10B plan.
Patrick L. McDonald
Arnie, we’vegot the number here for you on the backlog price ship.
Arnold Ursaner – CJS Securities
Okay.
Patrick L. McDonald
About 8% ofour year-end backlog will not ship in fiscal year 2008. So the vast majority ofthe backlog is scheduled to ship in the next 12 months.
Arnold Ursaner – CJS Securities
Okay. Thankyou very much.
Operator
Thank you,Sir. The next question comes from the line of George Gaspar with Robert W.Baird.
Please go ahead.
George Gaspar – Robert W. Baird
Yes. Goodmorning to Tom, Pat, and Don.
Thomas W. Powell
Good morning,George.
Don R. Madison
Good morning,George.
Patrick L. McDonald
Good morning,George.
George Gaspar – Robert W. Baird
Good morning.Expect a lot more going forward here. My question refers to the gross margin.
Ithink Don mentioned the improvement without the Power/Vac problem. If Icalculate, if you were back at 20% on gross margin against your revenue streamthe total gross profit would have increased considerably, increasing net beforeinterest income taxes, which shows $4.5 million, 3%.
That would calculate to$9.340 million or 6.2%. Can you get past 6.2% as you clear the deck totallywhen you get out of Iowa?
Everythingis in sync? Can you reach that and more?
Don R. Madison
George, Imean, I’ll go as far as your math there, but I’m trying to keep up with you,but I guess the simple answer is that we still have a great deal of confidencethat we are going to be able to achieve our standing objectives, meeting if notexceeding the last stage. The business is moving very healthy from a volumestandpoint.
Our efficiencies are in opportunity and the market price lows areremaining firm. So when you’re looking at where we were going to be able todeliver results in this market cycle that we’re currently operating in to saythat we can do better than we did in 2002 I think is a very realistic objectiveand continue to believe so.
Both for our historical business as well as theconsolidated results after the Power/Vac acquisition.
George Gaspar – Robert W. Baird
Okay. Allright.
And then there have been some questions on the backlog. My questionwould be how particular can you be with us on the backlog increase?
Can yougive us a little flavour on is it coming through your channel assembly area? Isit for off-shore installation on production platforms?
Or is it other aspectsof the industrial market? Can you shed some light on that.
Patrick L. McDonald
George, ourbacklog gain has been everywhere across the board. It’s been in the utility,it’s been in the industrial, and it’s been in every one of our positions.
So wehave, as I said in my opening remarks, we’ve seen strength across all of thedivisions and we continue to see it in the percentage relationships that we’vehad historically of our industrial to our utility splits.
George Gaspar – Robert W. Baird
Okay. Allright.
And if I could slip in just one more. Process control.
Not much profiton the (inaudible) and it looks like it’s becoming more marginalized in termsof total revenue stream relative to your overview as you’re going forwardconsidering what you’re estimating for ’08. Any thought process on either howyou can improve the picture there, what’s happening in the market, or is thereanother plan on this particular segment?
Don R. Madison
George, letme start that and then I’ll let Tom add his comments as well. Clearly that theprocess control business unit is dependent on municipal projects.
The municipalprojects is solid financing. We have seen in this past nine to 12 monthsincreased activity in the inquiry in the quotation stage and there are several projectsnow that we think are very close to being funded of which we are in attractiveposition for a potential award.
Yes, things are moving probably six monthslater than where we had hoped to have been this time last year, but clearly weare optimistic about what the marketplace is going to be able to afford us in2008. But again, keep in mind that when you’re looking at the process controlbusiness it is a longer cycle business.
So the orders that we book in 2008 willhelp drive growth in 2009.
Thomas W. Powell
Well stated,that. George, that’s a good group with a lot of talent and they just sufferedsomewhat from the lack of available business.
We had secured severalinternational projects in the last number of months, opened up a new horizon inAustralia, and fromthat viewpoint we were successful and we’ve bid a number of very largeprojects. At the current time we’re getting a lot of questions from the clientsfor clarifications, etcetera, which is always a good sign.
When they go silentthat’s not so good, but they’re asking a lot of questions. We’re optimistic about what we might be doinghere in the next several months, but of course it’s business and it remains tobe seen.
But I’m optimistic for that group toward the latter part of ’08 and’09.
Operator
Thank you,Sir. The next question comes from the line of Sean Boyd with Westcliff CapitalManagement.
Please go ahead.
Sean Boyd – Westcliff Capital Management
Hi. Congratson the quarter.
I wanted to start with, going back to that previous questionfor a second, if in terms of the guidance, let’s take the mid-point of therevenue guidance for ’08, can we assume that the process control systems isflat to slightly up or do we see that down within that guidance number?
Patrick L. McDonald
We typicallyhave not and continue not to break out individual business units in ourguidance, but I think you can draw the conclusion that with the backlog thatwe’re walking into the year with it’s not going to dramatically grow in thenear term.
Sean Boyd – Westcliff Capital Management
Got it. Which,yeah, at that $30 million level.
Okay. The other thing I wanted to hit in termsof revenue growth, you, in the past you guys have been great about giving theorganic year-over-year growth in electrical power products.
So for example,last quarter that being 28% and 20% the quarter before that. Here we’re kind ofup against that stub quarter, so what I’m wondering is can you give us anapples to apples organic growth number for electrical power products revenuesthis quarter?
Don R. Madison
Basicallythe, if you go back, we’ve talked about, doing the math here, I’ll walk youthrough the process. Clearly we had a two-month quarter last year of which wehad $17 million and change of Power/Vac product line.
This, so you would needto extrapolate that out to a three-month quarter and then compare it to thisyear, less $19.1 million of Power/Vac sales.
Sean Boyd – Westcliff Capital Management
Got it. Soit’s something in the $25 million to $26 million range versus $19 million thisyear.
Don R. Madison
Yes.
Sean Boyd – Westcliff Capital Management
Got it. Okay.That’s helpful.
And one other question then I’ll get back in the cue. When welook at the year-over-year growth in both backlog and orders, you know, to bevery blunt it’s just on fire.
It’s very robust growth. Relative to themid-point of the guidance in ’08.
So what I’m wondering is if the majority ofthat business is going to ship out in ’08 is the offset primarily Power/Vacbeing flat or do we have a certain amount of conservatism that’s in theguidance that we’re looking at? Just help me on the difference there in thegrowth rates.
Don R. Madison
Basicallywhen you’re looking at it, we still have six months of Power/Vac relocation totake place and then we have not only the training and learning curve for theemployees in the new business, the Power/Vac business in our Kurland facility herein Houston is that we’ve brought on board close to 600 employees in the last 12months. If you go back over the last 30 months we’ve nearly doubled ourworkforce, we have doubled our workforce.
So you’ve got a significant number ofpeople that are coming up the learning curve that we’re still investing intraining, we’re still investing in time and effort, and reaching theefficiencies that we set our objectives based on. So therefore,there is some variability as to how fast we’re going to come up that curve, howquickly we’ll get our workforce to productivity and effectiveness levels thatwe’re targeting, as well as jus the completion cost of the Power/Vactransition.
So there are some variabilities going into next year, but theguidance that we’ve given you is one that we believe we will be able to deliveron.
Sean Boyd – Westcliff Capital Management
Understood. Iappreciate the additional colour there, Don.
One other question, if I may.Seasonality, as we think about the business. Should we expect kind of a dropinto the December quarter with it being the first quarter of the year, and thenup from that point or would you, should we just think about the business kindof increasing linearly from the September quarter levels.
Patrick L. McDonald
Sean, thefirst quarter, if you’re looking at seasonality, we really don’t seeseasonalities with the business model that we’re in right now. But I think youalways do have to remember, our first quarter now does include Thanksgiving andChristmas, the two biggest holidays of the year.
So with that number of workingdays always taken out our first quarter will always not be as robustpotentially as our other quarters because of the number of days that we do haveout for holidays.
Sean Boyd – Westcliff Capital Management
Okay. Sooutside of holiday impact it should be fairly linear.
Patrick L. McDonald
Yes.
Don R. Madison
Well, again,I’ll only add to that, be careful with linear projections because we are aproject-based business and project-based businesses can have some lumpinessquarter to quarter.
Sean Boyd – Westcliff Capital Management
Understood.
Don R. Madison
Okay.
Sean Boyd – Westcliff Capital Management
Appreciatethe additional colour, guys. Thank you.
Operator
Thank you,Sir. (Operator Instructions).
One moment for our first question. First questioncomes from John Franzreb with Sidoti and Company for this follow up.
Please goahead.
John Franzreb – Sidoti and Co.
Guys,previously you shared with us your thoughts about the cycle and where we standin the cycle. I wonder if you could give us an update on that based on thecurrent quotation activity, what you’re seeing as far as where we are, and howmuch longer we have to go in the cycle.
Patrick L. McDonald
John, I stillsee the cycle as what we’ve been talking about. It’s elongated, it is, thegrowth, you know, the angle of the growth is not going to be as great as wehave seen, but definitely the strength of the marketplace is staying up there.So I think we’re seeing the good indications of the next couple of years.
John Franzreb – Sidoti and Co.
Okay. And oneof the things that you’re bringing the GE business on board was to maximizesome cross-selling opportunities with the GE sales force.
My understanding isthat you have not put that really in place yet. Can you kind of update us onwhere you are as far as opportunities in cross-selling the GE product line andthe Powell product lines are?
Patrick L. McDonald
It is inplace, but it is in a small, you know, area, again. What we’re trying to do withour GE counterparts in the sales organization is understand how we can best usetheir talents and their markets that they have and supply Powell product tothem.
We want that to be very targeted, very focused, and be very successful atthat as opposed to a general market launch.
John Franzreb – Sidoti and Co.
And how longdo you think until you get to a general market launch?
Patrick L. McDonald
Well, again,I’m not sure that I would say we’re ever really going to be at a general marketlaunch because when you look at the broad market segments that they play inthere’s a lot of areas that they will be very successful, they’re successful intoday, they are successful there with Power/Vac, and it is not a market segmentthat you would see a Powell/Vac product in. So again, we want to be veryselective in the market segments that we’re going to be successful on and wehave had successes with those areas that we have already focused on right now.Especially in our international area.
John Franzreb – Sidoti and Co.
Okay. Lookingat the backlog, could you just share with us how much of the backlog is intothe utility market and how much is into the industrial market?
Don R. Madison
John, wedon’t have those numbers quantified, but there’s nothing to, I have no reasonto believe that they’re not very close to what we’re shipping from a revenuestandpoint. From looking and monitoring the orders on an order-to-order basisof what I see that mix is not significantly different than our revenue mix.
John Franzreb – Sidoti and Co.
Okay. Andwhere are your export sales or foreign sales end the year at, Don?
Don R. Madison
We ended theyear at, for a full-year number, of about 34%. The fourth quarter was a littlebit lighter than the previous quarter, bringing the year-to-date average down.
John Franzreb – Sidoti and Co.
And what areyour expectations for that in the year ahead based on the current backlogfigures?
Don R. Madison
At thispoint, John, I don’t think, I’ll yield to Pat or Tom, that you’re going to seesubstantial growth from a mixed standpoint. We’re seeing a very strong domesticmarket, even in addition to the international market.
Both markets are growing,but when you’re looking at the two-year point-to-point changes I would actuallythink, or at least from my perspective, the domestic market because of how lowit was back in 2004 is actually seeing more growth than we’ve seen in theinternational markets. Not to say that the international market sucked, it justdid not get as well back in the couple three years ago as we saw here locally.
So whenyou’re looking at our long-term outlook, we are a U.S. company.
Thevast majority of our products are focused on ANSI markets and, therefore,you’re going to be 30-something% most likely for the near term.
John Franzreb – Sidoti and Co.
Gentlemen,any disagreement with Don?
Patrick L. McDonald
No. Why wouldwe?
---Laughter No, again, Ithink we go through various cycles in this business where the customer basethat we have does their projects domestically then they do some of theirprojects internationally and how successful we are is going to dictate what oursplit is. But again, slightly different.
We are an international company thatbasically follows our customer base wherever they want to go in the world.
John Franzreb – Sidoti and Co.
Okay. Thankyou very much.
Operator
Thank you,Sir. The next follow up comes from George Gaspar with Robert W.
Baird. Pleasego ahead.
George Gaspar – Robert W. Baird
Thank you.Back on the acquisition and coming out of Iowa, can yougive us any thoughts on the potential relief that might come from GE on theoriginal business acquisition and manufacturing problems that have persisted intrying to get completion out of Iowa? Can youtalk about this at all?
Patrick L. McDonald
No. Again, Idon’t think, that’s something we acquired the business and we’re moving forwardwith the business.
George Gaspar – Robert W. Baird
Okay. Andcurrent employment, what’s the current employment now versus pre the Power/Vacacquisition and how do you see it going, where do you expect it to be in 2008versus current?
Patrick L. McDonald
Well, as Don,as we pointed out, we’re a little over 2,500 right now. We’ve addedapproximately 300 to 350 as a result of the Power/Vac acquisition.
So again,over half of our addition has been in all of our other areas. We still expectthat we’re going to be in the 200 range more as it relates, across all of ourbusinesses as it relates to the volumes that we’re seeing for next year.
Operator
Thank you,Sir. The next question comes from Craig Bell with SMH Capital.
Please go ahead.
Craig Bell – SMH Capital
Yes. In thepast we’ve talked about some low margin backlog that you’re carrying, some ofit related to Power/Vac, some of the issue you had earlier this year, and you’dindicated that you hoped to have that all worked off by I think the end ofDecember.
Is that still the case or have you worked through the majority ofthat or how does that play out?
Patrick L. McDonald
As itrelates, George, to the – Craig, excuse me. I’m sorry.
Sorry, my brain’s going.As it relates to the acquisition backlog that we had with Power/Vac we’re stillon track to work through that by the end of this year. As related to our otherdivision that we have talked about and the backlog issues that we have onthere, that management team has worked very hard to mediate that and we believethat we’re well positioned to go forward with that division now.
Craig Bell – SMH Capital
Okay. Great.Thank you.
Operator
Thank you,Sir. Our last question comes from Sean Boyd with Westcliff Capital Management.Please go ahead.
Sean Boyd – Westcliff Capital Management
My question’sbeen answered. Thank you.
Operator
Thank you,Sir. Stand by to turn the call back over to management.
Please go ahead.
Thomas W. Powell
Thank you forjoining us today. We look forward to talking to you again in the next quarterwith hopefully better news.
Have a good day. Thank you.
Bye.
Operator
Thank you,Sir. Ladies and gentlemen, this does conclude the Powell Industries fourthquarter conference call.
Thank you very much for using ATT teleconferencing.You may now disconnect.