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  W-H Energy Services, Inc. (WHQ)Q3 2007 Earnings CallOctober 30, 2007 12:00 pm ETExecutivesShawn Housley - Industrial RelationsJeff Tepera - Chief Operating OfficerErnesto Bautista - Chief Financial OfficerKen White - Chairman and Chief Executive OfficerAnalystsKen Sill - Credit SuisseJeff Tillery - Tudor PickeringMike Urban - Deutsche BankPresentationOperatorGood day and welcome to the W-H Energy Services ThirdQuarter Earnings Conference Call. As a reminder today's call is being recorded.Towards the end of the conference I will announce when wewill begin taking questions (Operator Instructions). We will take questions inthe order they come in.For opening remarks and introductions, I would like to turnthe call over to Mr. Shawn Housley. Please go ahead, sir.Shawn HousleyThank you. And thank you to everyone for joining us thismorning. Quick note, a replay of this conference will be available for 30 daysfollowing the event, and as you all know, as always it's available via webcastfrom our website at www.whes.com.Before we get completely going here I want to remind youthat some of today's comments include forward-looking statements reflectingmanagement's view about future events and potential effects on performance.These matters involve risks and uncertainties that couldimpact the Company's operations and financial results and cause our actualresults to differ materially from our forward-looking statements. These risksand fully described as you all know in our Form 10-K for the year ended12/31/06.With that caveat I will turn it over to Ken White.Ken WhiteThank you, Shawn. Thank you. As usual I am joined by JeffTepera our Chief Operating Officer; and Ernesto Bautista our CFO. Along withShawn and myself we will be handling this conference and Ernesto is going tokick off the program with a financial review of the quarter.Ernesto BautistaThanks, Ken. Good morning. As noted in our press releasethis morning for the third quarter we reported net income of $34.7 million or$1.11 per share, which represents a decrease of approximately 11% from the$39.1 million or $1.25 per share we reported in the second quarter of 2007.Revenues and operating income for the third quarter were$283 million and $456.7 million. These amounts are approximately 2% higher and10% lower respectively compared to those of the previous quarter.On a segment basis our drilling segment produced revenues of$187.5 million and operating income of $40.1 million, which are approximately5% higher and 3% lower than last quarter respectively.The break down of drilling revenues by geographic market isas follows, domestic drilling revenues increased by approximately 4% andinternational revenues increased by 9%.Our completion of work-over segment provided revenues of$95.5 million and operating income of $21.7 million, which are approximately 3%and 17% lower than last quarter respectively.I will now cover certain balance sheet and other financial data.As of September 30, we had cash of $14.6 million, current assets of $410.6million, total assets of $983.1 million, current liabilities of $128.4 million,long-term debt of $158.1 million, and equity of $618.1 million.As a result of these changes our net debt to netcapitalization was approximately 19% as of September 30. During the thirdquarter, we incurred $5.9 million in research and development costs and madecapital expenditures of approximately $47.7 million.On a segment basis capital expenditures were as follows forthe third quarter, $28.4 million for the drilling segment, and $19.2 millionfor the completion of work over segment. Our current outlook for the full 2007capital expenditures spend has increased to approximately $190 million.Lastly, our effective tax rate for the quarter wasapproximately 36%. We would expect that our tax rate for the fourth quarterwill range from 37% to 38%.Jeff will now brief you on certain drivers of this quarter'sperformance.Jeff TeperaThank you, Ernesto. As always I will be discussingoperational highlights for the quarter, by product line within both segments.Our MLWD directional drilling and motor revenues increased 2% for the quarter.Domestic revenues were flat sequentially and international revenues increased11%. Domestically we saw a significant increase in our coalbed methane and ourhigh-pressure, high temperature land work.However, this gain in revenue was completely negated by thedecrease in offshore activity in which the rig count dropped almost 40% towardthe end of the quarter.Internationally the North Sea and the recovery in Canadadrove most of the 11% increase in revenues. Rental toll revenues decreased 2%in our drilling segment and 1% in our completion of work over segment.The decrease in offshore activity during the quarter was amain cause for the decline in rental tool revenues. Drilling fluid revenuesincreased 14% for the quarter and completion fluids increased 8% for thequarter.Our geographic expansion efforts into the Rockies as well asthe Fayette shale drove most of the increase from the prior quarter. Pays tollwireline and wireline rental revenues increased 3% sequentially as the landmarket continues to be the main driver. However, we do expect fourth quarteroffshore activities to increase.Coil tubing revenues decreased 13% for the quarter. This wascoming off a record quarter in which everything that could go right did. Thedecrease this quarter was a combination of utilization, job content, and pricing.We have experienced quarters in coil tubing over the pastfew years in which we see lower utilizations and job content and every dollarloss goes right to the bottom line. Historically when this has happened, thefollowing quarter returns back to more normal levels.We do expect a modest increase in coil tubing next quarter.That's it.Ken WhiteThank you, Jeffrey. My remarks may be a bit longer today. Myview is when you have a quarter where you miss a guidance, you need to be sureand especially sure and careful that we provide the proper explanation and themarket and all of those in the audience understand exactly where we are, whatour outlook is.And reporting our results for the second quarter our mostprevious quarter, I remark that the results of that quarter once againhighlighted our high operating leverage with its high fixed cost component aswe had achieved our highest level of earnings per share of $1.25 which was upfrom $1.16 on a mere 2% increase in total revenues.But beneath the modest gain in total revenues back in Q2,was a much larger increase in revenues from high margin service lines, whichdrove our increase in income, which turned out to be about 11%. This quarter wealso saw a 2% gain in total revenues, but EPS as Ernesto noted backed up of 10or 11%.This time however we had the reverse effect as our revenuegain was driven primarily by lower margin service lines. The point to note hereis that when you have been operating at relatively high utilization levels, evenmodest changes up or down in revenues can have a disproportionate impact onincome, especially when they occur in high margin services.This is the first quarter in some time where the impact hasworked against us. While our biggest decline was in coil tubing, I hadcautioned you to remember that as Jeff noted that coil tubing was coming offits biggest quarter ever in terms of operating income.We have experienced volatility in this subsegment before,but it has normally been on the upside as it has been one of our top performingbusinesses over the last five years and was especially critical and crucial toour success during the period of time when Pathfinder was commercializing muchof its new technology.When we did have a down quarter in coil tubing as we did inthe fourth quarter of last year, it was more than offset by gains in otherservice lines. Unfortunately that was not the case in the quarter just ended.We knew going into Q3 that coil tubing would have adifficult time matching or exceeding their record performance of Q2. But wewere anticipating increases in our drilling segment, which did not materializeand sluggish activity in the Gulf played a big part in this.Overall, I think it is important that we provide to you ourview on how we look at the domestic situation today. Frankly, I believe thesomewhat sluggish period we are now experiencing can have a positive effect.In my 30 plus years in the business I have observed thatmost of the serious declines in activity that we have experienced have almostalways occurred after periods of uninterrupted growth and optimism. Our currentupswing in domestic drilling activity commenced in early 2003 is now in itsfifth year of improvement.And, we have found that prolonged periods of increasingactivity without interruption can from time-to-time lead to revenue capacityadditions, which may outpace the industry's ability to absorb those additions.We are seeing some of that emerging now but not in all of our segments.However, coil tubing is one of the segments where we seethis happening. However, I want to emphasize that we feel very comfortableabout the competitive position we have in this business. I do believe thelonger-term health of our domestic business will benefit from these occasionsoft periods, as it may lead to more rational behavior in capacity investment.Also the situation domestically today is not much different,in fact very similar to the situation, we had at this time last year as we areentering the winter period with plenty of gas in storage and once again thereare worries about the lack of a severe coming winter and concerns are beingexpressed about that possibility.I certainly hope that those concerns are being developed bythe same sources that provided this year's Hurricane projection. How can thecurrent sluggishness -- could the current sluggishness lead to a long-termdecline in domestic drilling?I don't think this is really likely, unless it isaccompanied by an economic contraction that reduces demand as it has beendemonstrated over the last decade and especially over the last five to sevenyears that when domestic gas supply will react negatively in the fairlyshort-term to a slow down in drilling.So I hope that characterizes for you how we're looking atthe situation today and now I want to respond or provide some insight into howwe are reacting to this present outlook. First of all, we remain extremelypositive, perhaps even enthusiastic about where we are headed.I base that on my belief the current anxiety that exists inthe business is in my view a keyto ensuring a good future business climate. Asa result, specifically, we intend to continue to invest in our M/LWD capacityand in our new technology at Pathfinder, where we simply have not seen new orexcess capacity come on stream in any meaningful amount.In addition we plan to stay the course in the Rocky Mountainregion still an emerging business for us because irrespective of the problemswe see in the Rocky Mountain with the discount in gas prices and the concernabout the pipeline, finishing the pipelines on time, etcetera, etcetera, webelieve that reserve base has to be developed, exploited, in order for thiscountry to maintain its gas supply.In addition a key to us is going to be to continue to focuson and exploit our new contract in Saudi in which we still believe the maincontribution from that will occur beginning in '08. We also will continue toemphasize providing services and technology to the non-vertical drilling marketwhere the outlook is today and stays very positive.Lastly, and something we haven't talked about as much duringthese last few years of upswing, is you may see us take a bit more aggressiveposture in terms of our acquisition philosophy.We have been quiet over the last couple of years except forsmallish type deals, but as values become more realistic, we may take aslightly more aggressive posture. As to our near term outlook, our guidance of$1.07 to $1.12, basically reflects a continuation of present conditions in mostof our service lines.Although it does assume a pickup in our LWD job count in theGulf of Mexico as the upcoming jobs that we have booked for the next severalweeks reflect an increase from the low counts we experienced in September andearly October.Also our guidance is using a tax rate of 37% to 38% versusthe 38% we had in the quarter -- 36% in the quarter we just ended. That ratedifferential added about $0.02 to Q3, so that quarter would have been $1.09using the forward-looking tax rate. So pretty much, that pretty much summarizeswhere we are. We're now prepared to answer any questions.Question-and-Answer SessionOperator(Operator Instructions) We will take our first question fromKen Sill with Credit Suisse. Please go ahead.Ken Sill - Credit SuisseYeah. Good morning.Ken WhiteGood morning.Ken Sill - Credit SuisseStill isn't it yes? Okay. On the outlook I guess so Q4 looksrelatively flattish. Are you expecting or is your guidance incorporating anykind of typical seasonal slowness for the holidays and stuff or are you guysgetting any indication how that's going to work out?Jeff TeperaUsually we only see that on our completion side, our workover side of the business, and we're contemplating that today. And, so in ourguidance we are expecting these normal holiday times for Thanksgiving andChristmas primarily for our coil tubing and our wireline businesses.Ken Sill - Credit SuisseAnd I guess the key is you trying to look at next year.You've spent a lot of money growing your capacity, you're talking about SaudiArabia adding next year. Could you talk about what you see growing as you moveinto '08 in terms of your business lines and in terms of capacity and are you seeingany kind of pricing pressure anywhere except for I guess coil tubing?Jeff TeperaYes. I mean, I would say today let's exclude MLWD right now,but on the coil tubing we've seen some pricing pressure during this quarter.We've experienced rental tool pressure probably starting in the second quarter.We discussed that last quarter. Specifically on coil tubing, we saw pricingpressure primarily from our land areas, a little offshore but primarily land.I would say that what you're seeing today, the capacitythat's being added in coil tubing is more land based rather than offshorebased, so I think, what we've seen in this quarter we'll see a little more ofover the course of the next year again if we sit on this same type of rig countarea, the 1700 because capacity in coil tubing has probably gone up 25 to 30%since January 1, of this year.So, I think next year as long as if we're sitting, Ken, onanywhere between 1650 and 1750 rigs, you'll continue to see some pricingpressure in coil tubing and I think you'll start seeing some probably in thewireline area as well. Rental tools, I think, we've seen some and we'llcontinue to see a little bit again, if we can on the same base because you'reseeing a lot of supply coming to the marketplace.On our measurement logging and drilling, we're not seeingthat. We don't really anticipate seeing it either. You might get is in littleareas where you're not using technology in the whole on land, where you're notusing high pressure, high temperature, not in the coalbed methane world or anyof that.We might get a little flush down from Canada. We'reconcerned about that and to the Rockies, but overall in our MLWD, we feelpretty certain about that going forward that we're not going to see muchpricing especially in the high tech areas where you're not seeing too muchsupply being added.With that we're going to continue to expand domestically thecoalbed methane. We're very strong in it. We'll continue to expand in thatarea. We'll go to the eastern side to the Appalachians; we'll continue toexpand our international exposure as well.We're aggressively growing Saudi as well as our other areaswe are going to be in Brazil, North Sea, Cairo, et cetera. We're expanding ourmarket share where we're at with new technology. And that's been what we'vebeen trying to do over the last couple of years and been very successful.If you look at 40% of our business today is MLWD. We'regoing to expand that. We don't expect we'll see pricing pressure there.However, in North America if we sit on the same number of rigs, I think youwill continue to see pricing pressure in the area of rental tools, wireline andcoil tubing in our business lines.Ken Sill - Credit SuisseAnd how much of your revenue this quarter was domesticversus international?Jeff TeperaWe're still sitting about 90/10. We'll be; since, we havethe big domestic piece it is about 90% domestic, 10% international.Ken Sill - Credit SuisseAnd how much of the domestic was offshore?Jeff TeperaOur domestic piece today is about 25%. 25% is offshore.That's the revenue side of it. You are probably talking about 35 to 40% on theoperating income, though.Ken WhiteAnd where many of our higher margin service lines are used.Jeff TeperaWe feel good about offshore. Offshore is still a very goodplace for us. We're doing very well. We saw a slowdown in September, in earlyOctober. We're starting to pick up a little bit on the LWD side and what we seeon the board is starting to get pretty heavy, too, so, we feel good aboutNovember/December.It just started out a little slow in October. That's really,when you look at the guidance of $1.07 to $1.12, it is really comp to play itsreally looking at this offshore area that was sluggish during September andOctober.We do expect that to pick up. If we weren't having thisproblem, I am sure we would be between $1.15,$1.20, but we're having thislittle softness where you only see the rotary rigs we're working offshore gotas low as 45 in the Gulf of Mexico.Ken Sill - Credit SuisseYes. And then as you look at the growth, you're growing inEgypt, Saudi Arabia, some of these other markets, where do you expect yourinternational revenue to end up, U.S. is going to be flat, you're up in theRockies, but you still expect to be 90/10 or do you expect that internationalcomponent to start growing?Jeff TeperaI think it is going to continue to grow. I would expect aswe increase our international revenues next year probably in the areas betweensay to date 25 and 35% somewhere in there, year-over-year. So, we do expectinternational growth, but when you have such a high base concentrated NorthAmerica, it is hard to offset that.I still expect; even with the flat rig count I continue toexpect increase in our MLWD domestically as well, as we continue to explorethese unconventional areas that we have kind of stayed away from due to us nothaving enough tools, people, etcetera. So, I do believe on a flat rig countwe'll continue to grow that side of the business even into next year.Ken WhiteAs long as the gas price is sufficient for the players andsay the coalbed methane, the other unconventional plays to stay active, we feelgood about that portion of our business. If someone says is it immune from gasprices, no, I wouldn't say that and I don't know what really is, but I feelvery comfortable about what we're doing there in the whole non-vertical area.We feel like we have very excellent potential going into thecoming year given the back drop of what we see happening without having to havegas prices soar, just so long as they don't fall apart.Ken Sill - Credit SuisseFinally, to press some on that last the point on U.S. up inMWD, LWD, in a flattish rig count how much growth do you think you could see indemand for directional MLWD?Jeff TeperaI would say, you can still see probably another 5 to 10% inflattish rig counted in MLWD domestically. That's market share gains, that'sjust expanding into new areas that we haven't historically been. It iscontinuing to explore this non-conventional side as well.Ken Sill - Credit SuisseOkay. Thank you.OperatorWe'll take our next question from Jeff Tillery with TudorPickering. Please go ahead.Jeff Tillery - Tudor PickeringHi, guys.Ken WhiteHello.Jeff Tillery - Tudor PickeringJust wanted to follow-up on the guidance you laid out for Q4and make sure I understand it correctly, so you're assuming kind of flatcurrent conditions in all the business lines except for some improvementoffshore in LWD with kind of jobs that you have lined up already. So noimprovement from October levels from the coil tubing and wireline businessesoffshore. Is that fair?Jeff TeperaI would say quarter-over-quarter, what we expectsequentially, when we say not much of improvement, we're not looking atsignificant improvements. We expect a modest improvement in coil tubing. Weactually expect a modest improvement in wireline quarter-over-quartersequentially and a lot of that comes from offshore.On the MLWD side, we actually look for a slight decreasejust because of the slow start we started in October with the rig count as lowas 45, but again we started to see that pick up since then. So, its really abalance of, hey, we look at a flat quarter, coil tubing and wireline being alittle bit on the up and MLWD a little pulling back slightly.Jeff Tillery - Tudor PickeringOkay.Jeff TeperaPrimarily again, on the MLWD it is primarily just from thefunction of September was not great, October is not started from a very lowbase of 45 rigs, I think it will probably work back up to 60 or somewhere inthere.Working in the Gulf, but we've seen it on our board thatwe've added a lot of LWD jobs coming up over the course of the next two tothree or three to four weeks. Therefore I would think you are going to see theoverall rig count offshore start pulling up a little bit, too.Jeff Tillery - Tudor PickeringAnd you laid out in the coil tubing business you sawutilization to job content and pricing all hurt a bit in Q3. Can you give aorder of magnitude of pricing or order of magnitude of utilization changesequentially?Jeff TeperaYeah. I mean if you look at it you're looking at pricing,again. In select areas you saw pricing go from almost down 10% but in someareas you saw no pricing. So, overall it?s pricing 5% or 6%, somewhere inthere.From an order of magnitude on utilization, it?s probablymore job content I would say than utilization. We just, during the secondquarter we saw some jobs that you get on high pressure jobs, deep jobs thatthey're having problems with the well, and you might spend two weeks on it andit is $1 million ticket. We didn't see that so, that's what we call content. Wejust didn't see a high content.Again, we've explained this. If you look at the secondquarter, the second quarter was a big quarter for us in coil tubing. Ouraverage -- it was probably 2.5 million above our average in operating income,and this quarter we're 2.5 below.We think we'll get closer back to the mid-range, but offsetby a little bit the pricing that we've seen. So, it was more content, and Ithink again usually in the fourth quarter we see a little bit more contentadded as well on work over work, and we expect that again, so we'll see, we'renot really betting on that today.Jeff TilleryOkay. And the last question, you mentioned potentially beingmore aggressive on M&A opportunities going forward. Can you lay out whattypes of things you're interested in, I mean would you buy in an environmentwhere coil pricing is going lower and utilization is going lower, are youinterested in assets? What type of opportunities would you consider looking at?Ken WhiteThis is Ken. First of all, we are not going to do anacquisition to do an acquisition. If you look at the -- we developed thebusiness since we went public. It has to make sense, it has to fit into ourproduct or service offering.It?s either an extension of the existing offering wherewe're already providing a related service and it would be a natural for us orit would extend geography, both, domestic or international. Those two keys Ithink, to get a say something that would represent something unrelated to whatwe're doing now would have to have some very unique characteristics.To me if you see us do something and there is probably alikelihood that we'll look at -- we'll certainly look more, in my view we'll bea more serious looker in the near term. It will be something that I think themarket would find a logical step for us as opposed to, oh, gosh, why are theydoing that.The gosh why are we doing that deal is not a W-H style, andit is not where we're headed, but because we've been asked before in earliercalls, well, Ken you've been awfully quiet on the acquisition front, we havedone some very smallish type deals that have either been an integration moveacquiring a supply or extending a service in a small location has been reallybecause of value, and being able to justify the values.I am not suggesting that values are falling apart, but Ithink in line -- any time you see some of your product lines and services goingthrough periods of price decline, I think lead times will shorten in some ofthe products we acquire on our CapEx program. You start to see a bit morerealistic values available on the acquisition front.It's a long answer, but that's what I want you to -- what Iwant you to see in terms of expectation is if we do announce something, do getsomething done, you would say that's a logical move for W-H, not oh, my gosh,what are they doing there?Jeff Tillery - Tudor PickeringThank you, guys, very much.Operator(Operator Instructions) And we will take our next questionfrom Mike Urban with Deutsche Bank. Please go ahead.Mike Urban - Deutsche BankThanks. Good morning, guys.Ken WhiteGood morning.Mike Urban - Deutsche BankKen, wanted to follow up on the M&A comment a littlebit. In terms of the pricing that you see out there for deals and opportunitiesfor deals, are you actually seeing prices and asking prices coming down or isthat something that you would just expect given that as you said whenever yousee some weakness in business lines that's??Ken WhiteA little of both. Some of it is based on some evidence wehave and some is an expectation based on the conditions because let's face it.This period of time where we've seen the rig count flatten out, declinemodestly, offshore decline more than modestly.We have been into this only for a relative brief period oftime. Gas prices have been a little sluggish, but the outward prices are stillpretty firm. We have these conditions are not long in the tooth, they'rerelatively new.But, in the past my experience has taught me thatopportunities to grow your business via acquisitions sometimes presentthemselves as these conditions become more accepted. And by that, I am notmaking any projection here on how long this malaise is going to continue.I don't know, but I am only saying these conditions appearto be providing us an opportunity to take a little bit more aggressive posturewith respect to an acquisition.Mike Urban - Deutsche BankOkay, got it, that's good. And Jeff, on your comments aboutQ4, just want to make sure I heard you right, you're expecting sequentiallyMLWD to be down a little bit just because of the slow start there, and thenactually an increase in coil tubing and wireline?Jeff TeperaThat's exactly right, essentially be a flat quartersequentially. I think once you get back to -- you get the Gulf back to, if itgoes back to the levels it was in July and August of 70, 75 rigs working in theGulf. I think that puts us back into that area of we're back to $15, $20,somewhere in there.But right now with the slow start to the Gulf, I don't thinkyou're going to see that.Mike Urban - Deutsche BankOkay. And then on the coil tubing and wireline side, I meanis it -- what do you see picking up is that that quick and a critical mix issuethat you were talking about that offsets some of the pricing pressure that'sout there?Jeff TeperaI think part of -- Wireline has done well, and wireline willcontinue to do well. We just seen -- I think you're going to see a little bitmore workover work getting done in the Gulf.And that's what we're seeing coming up in the course of thequarter. So, Wireline has been good for us, East Texas, West Texas, to beexpansion in Oklahoma and to the Rockies. So sequentially it?s been growing 2%or 3% per quarter and probably will continue to do that.On the coil side it fluctuates a little bit more, and Iexpect to modest -- we expect an increase because of the decrease primarily,but we have seen a big decrease it started off well in October.I think offshore is going to do well. We don't have as muchcompetition, we don't have as much supply being added and, in addition to thatwe're getting into a new area offshore, we're getting into deepwater.So, we're actually on some deepwater jobs scheduled on somedeepwater jobs and we're getting into the deepwater arena on coil tubing, and Ithink that will help with the increase for the quarter.Mike Urban - Deutsche BankOkay. That's great. Thank you. And then finally, I 100%agree on the strategy with the Rockies I mean that's definitely the right moveto stay the course there. I guess the question is, is that something that is hurtingyou right now or is it just not contributing the way you would have hoped givensome of the slowdown in that region?Jeff TeperaI think it?s contributing about what we expected. I meanwe're just getting started in the Rockies. We?ve three coil units. We haveapproximately I think six or seven wireline units.We?re I mean, we're doing pretty well in the Rockies. It?s alittle slow there, and I think it is going to pick up, and I think we're goingto do really well there. The rental tools I believe we just started on therental tools, I think it feels the effect a little bit more on the drillingside of the program, so but again, we're just getting started in the Rockies.So, I think overall we're very happy with our Rockies. It isnot hurting us, is it adding the exact incrementals we wanted, no, but it isnot hurting that much. So, overall we'll continue to add rental tools, a fewmore coil tubing units next year, wireline units next year, we'll expand intodifferent basins, and I think the Rockies will perform very well.What we have seen recently is a big pickup in our MLWD, ourdirectional work in the Rockies as well. Why? I don't really know why, butagain, the Rockies has been a little bit sluggish over the course of the lastthree or four or five months.So, overall, hey, we expect the Rockies to be very strongfor us next year and the years to come. We're going to add a lot of assets upthere over the course of the next couple years, and again I think as we see theGulf flatten and decline a little bit the Rockies will become our biggestplayer in this Company, and as you remember back in 2001 90% of our revenueswere generated in the Gulf.So, all of our expansion efforts have been pretty muchorganically to the land market and our Companies have done a pretty good job ofdoing that.Mike Urban - Deutsche BankAbsolutely. That's all for me. Thank you.Jeff TeperaVery good.Operator(Operator Instructions) And we do have a follow-up questionfrom Ken Sill with Credit Suisse. Please go ahead.Ken Sill - Credit SuisseHi, Jeff, you just talked about adding a couple of coiledunits in wireline in the Rockies in '08.Jeff TeperaYes.Ken Sill - Credit SuisseHave you guys added any coil tubing units in the last coupleof quarters?Jeff TeperaWe added one in September of this quarter. It made our thirdone to the Rockies. That?s we?ve -- I think that's our -- that might be ouronly one we have added this year.Ken Sill - Credit SuisseYes, I hadn't really heard of you guys adding any at all.Jeff TeperaYes, we were only going to add two coil tubing units allyear long and we have another one coming that might get pushed over to January.So, no, we really haven't. So, if you look at the sequential gains we've had inrevenue on coil tubing, it has primarily been utilization and pricing over thelast five quarters just because we just haven't added too many coil tubingunits.We'll add a couple next year at least two, maybe a few more,we don't know yet. We're watching the market today because our analysis showsthat we started the year at I believe 298 coil tubing units and we'll end theyear at about 385 in the U.S.So, that's a big increase in coil tubing units when you seea rig count that essentially flattens out somewhat.Ken Sill - Credit SuisseYes, I just kind of wondering rather than adding would youconsider moving other units around or you're actually -- or is what you'retelling us things are still acting pretty busy?Jeff TeperaYes, things were still pretty, I mean its all a game, coiltubing is a utilization game and today we're pretty busy. About 40%, 45% of ourexposure is to offshore which we like because, and we did see a pullback inoffshore. That could have been hurricane related. It could have been otherthings related.So, I think overall you're going to see a pick-up in ourcoil tubing. Pricing is going to push back a little bit. Certain areas, SouthTexas, Barnett shale is going to get over exposure because that's whereeverybody's adding capacity, but in certain difficult environments you're notseeing that.So, I think overall our coil tubing will do fine. Maybeeventually there will be some consolidation in coil tubing with some of thesesmaller players getting in as well. Ken Sill - Credit SuisseAnd then one thing we haven't talked about is the 3D RotarySteerable systems. Where are you guys sitting now on a capacity basis? Andwhere do you think you will be for '08?Ken WhiteOur capacity situation hasn't really changed, Ken. We'restill moving towards matching our capacity we have in our large hole size,12.25 with the 8.5 that should be being accomplished between now and Q1.That would -- it is a range because we do occasionally losesome in the hole. That would be in the 10 to 12 range, and so we're -- thathasn't changed. We don't have any aggressive plans right now to meaningfullyadd to that in the near term until we see what the outlook is on drilling.We are, however, taking a fairly a little bit moreaggressive posture than some of our other LWD sensors and some of the newtechnology that's rolling out, but and we've deployed the 3D systems also asyou know we're operating that in the U.K. and in the North Sea as well as here.Ken Sill - Credit SuisseAre you still in the kind of 4 to 6 strings right now of --or sets of tools?Jeff TeperaNo, no, we're actually can do up to about 14 to 12.25 jobsto day and almost 10, 8.5, a majority of that 8.5 work we're doing today isactually in the North Sea/Egypt area so actually the tools have beenfunctioning very well. We'll continue to add that capacity, as Ken said, to theprivate 12 to 13 range by the end of the year.Ken Sill - Credit SuisseOkay. And as we look at the Saudi Arabia business, you'restill running a couple of rigs there?Jeff TeperaYea, that's exactly right. I think, you'll see us over thecourse of the next couple of quarters add a little more content. We're comingout with new sensors adding to the area we think is going to give us a littleadvantage over there over the course of the next six to nine months.So I think, probably the end of the first, second quarternext year you're going to see our business ramp up pretty significantly overthere. So right now we're running in that 2 to 3 rig area.Ken Sill - Credit SuisseYeah But you would say kind of more of a Q2 ramp startingoff the year strong?Jeff TeperaYeah, I think it?s going to be, I think the fourth quarterevery quarter I believe is going to be sequentially higher. I just think you'regoing to see the bigger ramp in the second quarter, when we put some of our newsensors over there rather than the first quarter.Ken Sill - Credit SuisseAnd then finally, on the CapEx, I know you don't have a --you haven't given us what you are going to do next year. But essentially youguys have been spending all your free cash flow to grow, so you don't have anyfree cash flow.Is that still the plan as you look forward? Is that what wecan read through to you'll either be growing your capacity or spending themoney buying things?Jeff TeperaI think that's probably correct. It is either on the buyside or on the organic growth. We'll be looking at our CapEx budget here overthe course of the next month and of course we'll update you on January.But right now I think, we're really analyzing where thisNorth American market is taking us. We definitely don't to want to oversupplysome of the areas that we see that could get oversupplied, but we're definitelygoing to as Ken said stay the course in the Rockies as well as on the MLWD sideand what you might see is where we would have spent some money in coil tubing orrental tools we push over to more logging while drilling for internationalexpansion.Ken WhiteAnd invest where we don't see the capacity additions comingin like we did with some areas.Ken Sill - Credit SuisseOkay. Thank you.Jeff TeperaThank you.OperatorGentlemen, at this time there are no further questions. Mr.White, I will turn the conference back over to you for closing comments.Ken WhiteMy closing comment is that I will look forward to addressingthis group again at the end of the next quarter. So thank you very much.OperatorLadies and gentlemen, this will conclude today's conferencecall. 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  Asbury Automotive Group, Inc. (ABG)Q3 2007 Earnings CallOctober 30, 2007 2.00 pm ET ExecutivesKeith Style - Vice President of Finance and Investor Relations Charles Oglesby - President and Chief Executive Officer.Gordon Smith - Senior Vice President and Chief Financial Officer.AnalystsEdward Yruma - J.P. MorganRod Lache - Deutsche Bank SecuritiesRick Nelson - Stephens, Inc. Joseph Amaturo - Buckingham Research Group Rich Kwas - Wachovia Capital Markets, Llc. Matthew Fassler - Goldman SachsMatt Nemer - Thomas Weisel Partners PresentationOperatorGood day and welcome everyone to the Asbury Automotive Group third quarter 2007 earnings results conference call. Today?s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Vice President of Finance and Investor Relations, Mr. Keith Style. Please go ahead sir.Keith StyleThank you, good afternoon everyone and thanks for joining us today. As you know this morning we reported third quarter 2007 earnings. The release is posted on our website at www.asburyauto.com. If you don?t have access to the internet or would like a copy of the release faxed or emailed to you please contact Gail Falotico at our Corporate Office. Gail can be reached at 212-885-2520. Before we start, I would like to remind everybody that the conference call today will include some forward-looking statements that are subject to certain risks and uncertainties which are detailed in the company?s 2006 10k report as well as other filings we have with the SEC. In addition, certain non-GAAP financial measures as defined by the SEC may be discussed in this call. To comply with SEC rules, reconciliations of non-GAAP financial measures have been attached to this morning?s release. We also from time to time update the website with additional financial information, so any interested party should check the website periodically. The purpose of today?s call is to discuss Asbury?s third quarter results. Our agenda will be as follows, Charles Oglesby our President and CEO will begin with a few introductory comments. Then Gordon Smith our CFO will add some financial highlights. Charles will finish with a few concluding remarks and after that we?ll be happy to take your calls. Now I?d like to introduce Charles Oglesby our President and CEO. Charles. Charles OglesbyThanks Keith and good afternoon to everyone and thanks for taking time to join us today. As many of you are aware, Asbury has delivered excellent results over the last 11 quarters. Our past performance has been largely achieved through growing our high margin businesses, used vehicles, fixed operations and finance and insurance. And during the quarter we have continued our growth in fixed operations and F&I. In addition, our performance in new vehicles was very solid considering the retail environment. To some extent we have set ourselves up with some pretty difficult comps particularly in used vehicles. I?m sure there?s concern regarding our used vehicle operations and I will address the cause of the third quarter decline, the actions we have taken and what we expect in the future. In addition to our solid performance in new vehicles, fixed operations and F&I, we have positive momentum on several other fronts. With our latest acquisitions we have now acquired $350 million in revenues this year exceeding our annual target of $200 million. And with the progress of our share repurchase program, we have now returned almost $50 million in capital to our shareholders this year. We?ve also entered into a partnership with DealerTrack and plan to convert all of our stores to its Arkona DMS system. And let me be very clear, while I?m disappointed in our performance in used vehicles this quarter, I have the utmost confidence in our team, our portfolio of stores and our model. Looking at the overall results, EPS for continuing operations was $0.58, up 7% over $0.54 last year and Gordon will discuss results in greater detail in a few moments. But adjusting last year?s performance for non-operating items we were down slightly on an EPS basis with EPS being $0.59 last year. Our results were heavily impacted by the challenging retail environment in many of our markets in both new and used vehicles. The pace of the quarter was inconsistent from an industry perspective with weak new vehicle sales in July and September surrounding a relatively strong August such that the industry?s overall US light vehicle unit sales were down over 5% for the quarter. Asbury?s performance on new vehicles again benefited from our favorable brand mix and we significantly outperformed the industry with new light vehicle unit sales down just 2% on a same-store basis but our heavy truck business again weighed down our performance in the third quarter down approximately $0.02 on an EPS basis.For the year to date heavy truck business is down approximately $0.06 of EPS and as we?ve discussed, this business benefited significantly in 2006 from an increase in sales ahead of tighter emission regulations that took effect last January. Our new heavy truck unit sales for the third quarter were down 25% and the related gross profit was down 28%.Industry analysts were initially projecting a turnaround in the heavy truck market during the third quarter but now that turnaround has been pushed out as far as the second quarter of ?08. In response to the slower market we have reduced support personnel, revised pay plans and bought both new and used heavy truck inventories in line with the market. However, we expect to experience negative bottom line comps in our heavy truck business at least through the end of the fourth quarter. Turning to used vehicles we have enjoyed industry leading results over the past couple of years with third quarter gross profit improvements of 29% in ?05 and 11% in ?06 making our comps there very difficult. A portion of the improvements in our past performance were related to weather events in some of our markets but a substantial portion of the growth was a result of our focus on technology and our regional used vehicle teams. With respect to this quarter, there are several factors that lead to our reduced sales volumes. First, the post Katrina hurricane impact a year ago made difficult comps this year in our Mississippi and Houston markets which experienced a used vehicle gross profit decline of 21% on a combined basis. Second, weakness in our Florida markets spilled over from new vehicle sales and the used vehicles and as we?ve discussed several times over the last year, our Florida management team has done an excellent job of offsetting weaknesses in the new vehicle market by growing the higher margin businesses. In the third quarter however, the continuing decline in the states retail environment finally took its toll on the performance of our Florida operations with used vehicle profit down 13%. Despite the current weakness, our long-term view of the Florida market is favorable and demographic trends remain positive.And finally, our sub prime initiatives have been instrumental in driving our gains in used vehicles and in fact, due to our past successes in the sub prime market, we might say that we?ve placed a bit too much emphasis on sub prime. And there are certain components that need to be in line to put together a sub prime deal. And in the current market, we?re seeing pressure on the model in several areas. The customer is more cautious. Inventory is more expensive. And the lenders are making sure all the i?s are dotted and the t?s are crossed.These issues in combination have lead to reduced sales volumes as well as pressure on margins and I?m happy to report that our used vehicle teams have made progress in aligning the inventory to the current market reducing our used vehicle inventory by 5% but we?re not finished. We?ll continue to focus on reducing our used vehicle inventory into the fourth quarter. And however, given the current market conditions, and our difficult comps, we expect used vehicles to be flat to slightly down during the fourth quarter and into the first quarter of ?08. Finance and insurance remain a bright spot in the quarter. With a 2% increase in same-store F&I income, F&I on a PVR basis increased 9% or $81 to $989 PVR. The continued improvement from a year ago reflects increased sales penetration of our warranty and insurance products and an increase in the average length of finance contracts. We continue to look for opportunities to grow our F&I income further and continue to focus on improving the performance of the bottom third of our stores. In the third quarter, we were able to raise the low tide substantially with the bottom third of our stores improving 24% on a PVR basis. Our fixed operations again turned in solid results with same-store revenue up 2% and gross profits up 4% for the quarter. The overall gross margin in parts, service and collision repair improved 110 basis points from a year ago. The warranty business remains soft with a 9% decline in same-store gross profit and as you know the decline in warranty business is an industry wide trend reflecting the higher quality of new vehicles. In response we are sharp in our focus on building our customer pay business by providing up to date, comfortable facilities, quick, personalized customer service and additional service bay capacity to accommodate the continuing growth in vehicles on the road amongst our luxury and import brands. We have focused and continue to focus on encouraging our customers to keep coming back to our dealerships for all their service needs even after they?re off warranty. Our results in the customer pay business reflect these efforts with same-store gross profits up 7%.During the quarter we acquired a Honda and Dodge dealership in the Tampa area. In addition, in October we acquired a BMW Mini dealership in Princeton, New Jersey. While we generally acquire stores in our existing markets, under our tuck-in strategy such as the stores in Tampa, our points of light strategy allows us to reach outside our markets for large well run luxury franchises. The Princeton store is an example of what we would look for as a point of light dealership; a high volume, luxury franchise with an exceptional facility and solid management. As is our typical approach with adding domestic franchises, the Dodge acquisition is a strategic cost play. As our existing Chrysler Jeep franchise in Tampa will soon be moved into the better located Dodge facility. As I mentioned earlier, our acquisitions for the year-to-date now total approximately $350 million in annualized revenues substantially exceeding our target of adding at least $200 million in annualized revenues from acquisitions. Another highlight was the announcement earlier this month of our partnership with DealerTrack to convert the dealer management systems in all our dealerships to its Arkona DMS platform over the next three years. Once fully implemented we expect that this web based technology will reduce our direct DMS calls by as much as 70%. The transition to this new technology has been planned to minimize the risk of implementation and takes into consideration the obligations on our current DMS agreements. And we currently have three stores in pilot programs, and the transition to the new technology and the training of our employees has gone very smoothly. We are very satisfied with the support we have received from DealerTrack and all aspects of this transition. DealerTrack shares our vision for having a fully integrated end-to-end technology solution for our stores and our customers. Arkona?s DMS systems are open to integration with other technology vendors which will enable us to integrate tools like our [desking] solution, CRM musical inventory management and F &I menu selling to create a totally seamless, paperless deal for them. We believe this will generate significant efficiencies, increase the productivity of our employees and speed up the entire deal process and enhance the consumer car buying and service experience. And now I?d like to turn the call over to Gordon Smith to review our financial performance in more depth.Gordon SmithThanks Charles, good afternoon everyone. Income from continuing operations increased 5% for the quarter to $19.2 million or $0.58 per share, up from $18.4 million last year, or $0.54 per share. As Charles mentioned, when you take into consideration the impact of non-operational charges disclosed last year, which totaled $0.05. EPS for the quarter was down slightly. Our bottom line performance was aided by a tax benefit of which I will address in a few minutes. However, it?s important to note that the tax benefit was almost fully offset by non-operating charges and SG&A during the quarter. This quarter marks the first time in nearly three years that we were not able to deliver productivity on our adjusted expense ratio. Obviously in a difficult retail environment, particularly one characterized by an inconsistent pace of business it was a challenge for us to react to conditions in our local markets. What the numbers for the quarter do not reveal is the actions we took late in the quarter. With our recent management teams reducing our advertising plans by more than 10% and performing an in-depth review of our dealerships, staffing levels to ensure that we are properly positioned to head into the slower selling system. SG&A expenses on a comparable basis declined 160 basis points to 77.1%. However, as I mentioned earlier, our results for the quarter included $1.8 million in charges related to an abandoned real estate development project and a legal settlement cost, contributing 80 basis points, or nearly half the deterioration. Excluding these items, our SG&A deterioration dropped to 80 basis points, which can be largely attributed to the reduction in retail sales. Many aspects of our variable cost structure improved in the quarter. With personnel expenses down 30 basis points, sales person compensation down 50 basis points, and F&I compensation down 60 basis points. All of these are considerable improvements over last year, but not enough, as increase in gross profit did not offset the increase in our fixed expenses. As Charles mentioned, transition to the Arkona DMS has already begun, starting with our next call we will provide you with details of our progress including the numbers of dealership transition, cost incurred, and a forecast of future costs and benefits associated with our transition. On average, the payback on this transition cost is less than six months, and total annual savings once fully implemented are currently estimated at $3.5 million. The last item I would like to address on our results is the benefit to our tax rate. As you have heard us discuss on prior calls, we have continued to make progress in our back office consolidation efforts, including our national payroll system. We are beginning to reap the benefits of our efforts in this area, as the national payroll system has allowed us to accurately report worker comp opportunity credits, especially the Katrina credits, one of the principal drivers of our tax rate benefit. In addition, as a result of a tax reorganization, we were able to utilize some of our NOL carry flows, further reducing our rate. As a result, our effective tax rate for the quarter was 32.3%, compared to 37.5% last year. Planning for the next quarter, we expect the tax rate around 37.3% Turing to the balance sheet, cash and cash equivalents total $41 million at the end of the quarter compared to $129 million at year-end 2006. We have used our cash to fund our acquisitions, activity and buy back approximately 50 million of our stock. During the third quarter, we invested $12.1 million in facility expansion and real estate bringing our total investments for the year to $41 million. For the full year of 2007 we expect capital expenditures to total approximately $60 million to $65 million of which $15 million is a reserve for maintenance CapEx. The remaining balance will be used for new facilities, including real estate and capacity expansion. We intend to finance between 50% - 60% of these expenditures through sale lease back transactions. We have made substantial progress in improving the debt to total capital ratio over the last few years. However, during 2007, we have aggressively repositioned the balance sheet and have actively repurchasing our stock. Both of these activities have resulted increases to the debt to total capital ratio with our debt refinancing at a 120 basis points and our share repurchase program adding 210 basis points. Our debt refinancing completed in the first quarter of the year, served to reduce of our average cost of debt 200 basis points from 8.6% to 6.6%. On our share repurchase programs, we have bought back approximately 6% of our stock though the end of the third quarter, or 1.9 million shares. Under our current share repurchase program, we?ve repurchased 638,000 shares in the third quarter, at an average price of $21 per share, and through today, we have repurchased approximately 1 million shares, at an average price of $21.50. As a result of these activities, our debt to total cap ratio currently stands at 45.6% and taking into consideration current cash balances, the net debt to total cap ratio is 43.4%. The capital structure remains solid with almost 95% of our long-term debt obligations fixed. Nothing outstanding under our $125 million revolving credit facility as of the end of the quarter, and approximately $50 million available under our used car facility. Looking at new light vehicle industry, DSI based on selling days, was 64 days, up seven days versus last September, and overall inventory up 10%, a disappointing result. By category: luxury brands rose 4% to 53 days, while luxury inventory in total was up 19%; mid-line import brands were most affected by the weak new vehicle market, as DSI rose 11 days to 60 days, overall, mid-line imports inventory was up 18%, largely due to our inventory mix; Honda, which is up industry-wide, over 25%, is the largest component of mid-line imports for Asbury. Lastly, mid-line domestic brands were up 18 days to 100 days supply, versus last year. However, overall inventories were down 8%. With respect to the dealership portfolio management, we continue to evaluate our lowest performing stores for potential disposition. Currently, we have identified three small stores that will be placed on the market during the fourth quarter. The capital release from the sale of these dealerships will be put to use in other areas of the business, where a better ROI is available. Turning to guidance for the year. We have lowered our previous EPS guidance range of $2.20 to $2.28, to a range of $2.10 to $2.18 from continuing operations. The reduction in our guidance reflects our third quarter performance, continued softness in the heavy truck segment, lower expectations for our used vehicle performance, and further softening of the Florida market. This range excludes costs associated with the debt pre-financing, and the retirement benefit paid to our previous CEO, which we recorded in the first half of the year. With that, I?ll turn the call back over to Charles for some closing remarks. Charles Oglesby Thanks Gordon. In summery, I?m satisfied with our performance, in light of the challenges we faced during the quarter, as our balanced business model provided considerable stability in a period of weak retail sales. As a management team, we have taken aggressive steps to ensure that we are well positioned for future success. And I remain confident, that our operating model, which allows our regional management teams to react to local market conditions, while enjoying the savings of our shared infrastructure, will continue to prove an effective approach to managing a large retail organization. I?d like to turn the call over to the operator for a few questions.Question-and-Answer SessionOperatorThank you very much. (Operator instructions) And the first question comes from Edward Yruma with J.P. Morgan.Edward Yruma - J.P. MorganHi, thanks for taking my question. Charles, I know historically, you?ve prided yourself on having an operational decentralized model, and given some of the inventory pressures, are you taking more of that control in-house, and providing some governance to that. Charles Oglesby Edward, the inventory is certainly a concern for us as mid-line inventories rise. I would say that our model has always been great communications with our local CEOs. They are much more familiar with the needs in their local markets. Overall as an organization, we will look very favorably at reducing our inventories. So the communication style has not changed, but from a local standpoint, the opportunity for reduction in inventory, they will take advantage of it. Edward Yruma - J.P. MorganAnd help me understand a little about your comments around sub prime and some of your historic successes there, and maybe some of the weakness you are now seeing. I couldn?t help but notice while I was in Florida recently, that they were very heavily advertising some of the sub prime promotions with your Coggin group. When did you start pulling back on that business in the quarter, and how long do you expect that to persist for? Charles Oglesby Well, the sub prime market is being affected in a number of different ways, Edward. That market is traditionally a solid market. There are some unique events that are going on now; part of it is that the fleet inventory that was returned to the market is a lot less than it used to be. So that market is more expensive. So normally, you?ve got to have the right customer with a substantial amount of down payment, and the lender looks to be behind book of what their inventory is. Those conditions are really not the same today. That?s a part of it, where it?s down. We?re also finding that from a sub prime customer, that their cash is a little less today. Their disposable cash is going into other areas; higher gasoline, groceries, mortgages, different aspects of their budget. In the past, they may have been able to afford a $275 payment, while today they can afford a $210 payment. So that puts pressure on the margin, as well as the type of vehicle that you have available for that sub prime market. We are, that is still a major part of our business, but part of the inventor positioning, we may have been out of alignment with that, so we?re repositioning some of our inventory now so that we can look at a traditional prime market and continue in the CPO market as well. Edward Yruma - J.P. Morgan Actually, one follow-up if I may. I think that you?ve historically said that sub prime is about a third of your business. Is that about right, and is that the piece that was entirely affected, or was it a smaller subset of that sub prime bucket? Thank you. Charles OglesbyThat still is about the same size of our market. However, each piece has been impacted by that. But the sub prime, we certainly didn?t take as much advantage of it as we have in the past. Gordon SmithIt was 30% of our business this quarter. One could argue that given the emphasis that we put on that business, we would have expected it to be a little higher than it was, but that didn?t materialize. Edward Yruma - J.P. MorganThank you very much. Operator And moving on, we will hear from Rod Lache of Deutsche Bank Securities.Rod Lache - Deutsche Bank SecuritiesGood afternoon. A couple of things, just looking at the margin deterioration in the used business, when you said that used would be flat to down in Q4 and Q1 were you referring to units or revenue or gross profit? How should we be thinking about the outlook for that business?Charles OglesbyWell on a comp basis we expect that we will be down. There has been margin pressure on use throughout the year and a part of that is because of the wholesale market being up some, so we have stabilized on our comps, we have very strong comps in the past, we've been as high as 12-12.1% and last quarter I believe we were at 11.6%, so we improved from a low of 11% back up to 11.6%. But we are expecting continuing margin pressure because as used market declines, as the new does, there still is a supply of inventory in the market, and as that supply works through the market, there will be pressure on margins. Rod Lache - Deutsche Bank SecuritiesAnd, can you just explain what's happening in the wholesale business and how that?s related here? Looks like there was a bit or and erosion there and wouldn't the tighter inventory be a positive for the wholesale business? Charles OglesbyYes and that's what we are doing right now is we want to increase overturn right on inventory, so our inventory was at a certain level and as the market declined, we had a surplus of inventory so as we are working through that inventory we received some wholesale losses on that. But that is what we continue to do, is reduce that surplus. And as you know that's kind of tricky because at the same time we are taking trade-ins on new cars because as the incentives continue on new vehicles a lot of customers will move from used to new. And so we will be taking those trade-ins as well. But getting the inventories down is absolutely one of the initiatives that we are working on. Rod Lache - Deutsche Bank SecuritiesOk and can you just lastly give us what your exposure is to Florida and California as a percentage of the total? Gordon SmithOn a total NOI basis Florida is about 30% in the third quarter of our income. Excluding the headquarter cost, 30% of region income is associated with Florida. Charles OglesbyIn California we have four stores so it?s a small exposure. Rod Lache - Deutsche Bank SecuritiesOk, thank you. OperatorWe will take our next question from Rick Nelson from Stephens, Inc. Rick Nelson - Stephens, Inc.Can you talk about a timeline for rolling out Arkona and how quick you expect to see benefits?Charles OglesbyWe expect, we are rolling out now, we expect about 50% of our dealerships at the end of next year, and then we still have some obligations on our old contract through 2011 but we'll more then likely speed that up. And we are certainly starting to receive the benefits of this relationship in every store that we get it in we receive those benefits immediately. So about 50% by the end of next year. Rick Nelson - Stephens, Inc.There was discussion about Florida, I was wondering if you could address their markets particular strengths or weakness? Charles OglesbyWell certainly our Texas market is probably one of our strongest markets right now and we've noticed some of the weakness through Mississippi and Arkansas and the rest of our markets are about flat. However one of the ways that we kind of measure our performance in our local markets is whether we gain share or lose share in our franchises. And we generally have been gaining share even in a declining market which again that is a great measure of what our local general managers and our local regional teams do in those markets. Rick Nelson - Stephens, Inc.Any comments on October sales which are seen to date for the industry? Charles OglesbyRick, we really don't want to comment on this quarter. Rick Nelson - Stephens, Inc.Thank you.Operator And our next question comes from Joe Amaturo with Buckingham Research Group. Joseph Amaturo - Buckingham Research GroupGood afternoon. A couple questions. Could you just tell us what y our expectation is for the Florida used vehicle market for the fourth quarter that you have out there for your full year guidance? You said it was down I think 13%? Gordon SmithWe are looking for a similar performance in the fourth quarter. Joseph Amaturo - Buckingham Research GroupAnd as it relates to the Katrina impact, could you just discuss what the impact is year over year during the fourth Quarter? Charles OglesbyThat would have been in our Mississippi and Houston stores and they were down 21% in gross this quarter versus last quarter. Joseph Amaturo - Buckingham Research GroupIs there any effect rolling over into the fourth quarter as well, is my question? Gordon SmithI would expect a similar softness in the fourth quarter, maybe a little bit less, but of similar magnitude. Joseph Amaturo, Buckingham Research Group Next, could you just discuss what percentage of an overall heavy duty dealerships gross profit comes from service and parts and comes from new vehicle sales? Gordon Smith Yes we'll get that. Charles OglesbyOne of the things I'll share with you while Gordon is looking at that is our focus is to get 100% absorption rate out of our heavy truck franchise and as we are making the changes in that facility today, as I've mentioned we made substantial structural changes from an operational standpoint with personal, with pay plans, with reduction of inventory and as that starts to improve we'll see some tremendous benefits from that franchise. We still like the franchise, it?s had a difficult time, we've made again some operational changes in it, we've really brought the expense structure down and as we move forward into the future and if rates start rolling again we are expecting some real good things from that franchise. Gordon Smith It?s about 30% of the gross profit of the motor trucks business Joseph Amaturo - Buckingham Research GroupHave you seen a ramp up in service and parts with a decline in the sales and is that something we should expect going forward? Charles OglesbyOn a go forward basis what normally happens whenever the sales decline in heavy truck normally you would expect the improvement on the fix side. We went through a period of time where that did not happen and when trucks really were just not moving and so the service was not being provided as well as there are a lot of new trucks on the road today that were pulled forward last year. So as those trucks start coming in for service we do expect and increase on the fix side from a parts stand point, and we have a very strong wholesale parts department there as well, we sell parts more that just to our own locations, and so we are expecting a lift and actually we are beginning to see some of that. Gordon Smith For the quarter our fix operations was only up 1.5% but Charles?s point is that a lot of that is as a result of when we pulled forward as many new sales as we did there's a lot of new trucks and they haven't started to roll though the shops yet. But we would expect that to ramp up in the coming months and into next year. Joseph Amaturo - Buckingham Research GroupI guess it fair to assume another $0.02 hit in the fourth quarter from heavy duty as we've seen kind of quarterly throughout this year so far? Gordon SmithYeah, that is what we are expecting. Joseph Amaturo - Buckingham Research GroupThen lastly based on your debt (inaudible), how much stock could you buy back, currently? Gordon SmithRight now about 14 million of stock at this point. Joseph Amaturo, Buckingham Research GroupOk, thank you. OperatorAnd moving on we will hear from Rich Kwas with Wachovia Capital Markets.Rich Kwas - Wachovia Capital Markets, Llc.Good afternoon. Gordon, could you comment on the comment you made regarding reducing support personnel near the end of the quarter. What type of impact you expect in the fourth quarter and how much more do you have to go in terms of fixing the overall expense structure? Gordon SmithWell I think plagiarism is a great thing and one of the things we're asking everybody to do is really look at the bottom 10% of your employee base and those are the ones that are a real drag on the operation. So we're actively looking at that and trying to take that piece out of the business. As a starting point obviously with retail sales being down as much as they are, we have to actually look at the management layer of the company. We?ve set a lot of these stores out for much higher volume rates and with the lower demand at this point in time it makes a lot of sense to start hitting that pretty actively. As you know personnel is about 30% of the overall cost structure of the business, so that is where we will be looking and looking hard. We just started the process in September, not much of an impact. Hard to measure at this point how much we have. We've made some assumptions that overall our cost will be at least flat on an SG&A percentage basis in the fourth quarter versus last year on declining revenues to kind of mute the impact and what's further is most of the impact being seen in the first quarter and beyond. Rich Kwas - Wachovia Capital Markets, Llc. And in the new guidance what sales assumption are you making for 2007? Gordon SmithFor 2007? Rich Kwas - Wachovia Capital Markets, Llc.Yeah, I mean your previous guidance was a sales range was 15.9 to 16.7 if I recall. Gordon Smith Yeah that?s correct. Rich Kwas - Wachovia Capital Markets, Llc.So what is the new number? Gordon SmithWe're looking at it about 16 at this point in time. If you look at a lot of things that are being published by some of your guys is that with consumer confidence at where it?s at people are expecting a relatively soft Christmas and that's the biggest. When we look to the fourth quarter as you know, the last week of the year really makes or breaks the quarter and it?s the part we are most concerned about at this juncture. I think it was Wachovia that just published today on consumer sentiment being down very significantly on October, which doesn't bode well for the Christmas selling season. And we are trying to take some of that into account. Rich Kwas - Wachovia Capital Markets, Llc.And on import margins, particularly Honda, what are you seeing? One of your peers talked about import margins getting worse sequentially from the first part of the year. What are you seeing? Are you seeing the same trend and incrementally in Q3 were they much worse than Q2 and what do you expect going forward? Gordon SmithAs far as breaking it down, obviously with the incentive money on Honda we saw margins improved about 120 basis points, that?s about $230 a vehicle. We have seen some deterioration in Toyota, our margin on Toyota was 6.9; in the third quarter of 2006 it was down to 6%. Of the other ones they are pretty much about the same we saw from last year, BMW being the exception versus last year with the three series that?s up about 7% which has been fairly constant throughout the year. So a little deterioration in Toyota. It will be interesting to see how Honda holds up with the new accord going into the fourth quarter but their margin should stay about thesame where they have been. For the first two quarters of this year they were 7.6-7.7 and as I said it was [8.8] in the third quarter so we expect to be back down in the 7.5 range in the fourth quarter. Rich Kwas - Wachovia Capital Markets, Llc.What did you say was the benefit of the buy and bonus for the Honda program this quarter? You booked almost all of that right? Gordon SmithWhich state? Rich Kwas - Wachovia Capital Markets, Llc.What was the overall benefit to the gross margin of Honda this quarter? Gordon SmithWell in terms of a per vehicle basis that margin improvement is about $236 a vehicle. Rich Kwas - Wachovia Capital Markets, Llc.And that was all retro right? That included the volume you booked earlier in the year too? Gordon Smith Yeah pretty much. There was a little in the second quarter but most of it was recorded in the third quarter. That's correct. Rich Kwas - Wachovia Capital Markets, Llc.Ok, great, thanks so much. OperatorOur next question comes from Darren Kennedy with Goldman, Sachs. Matthew Fassler - Goldman SachsHi, it?s Matt Fassler here. One question I had was about the new heavy truck market. If I?m not mistaken it?s been down about 40-50% in your brand mix I think, each month, all year long. Is there something new that seems to be pressuring that business or is this just really as it seems that it just caught you off guard now? Charles OglesbyI would say that it caught us off guard. What we've been working on actually is again getting that business in line with where the market is and setting it up for more success in the future. There were some basic changes that we needed to make. We needed to make some strategic decisions last year that at the time we made them were great decisions and that was to ramp up on inventory because we had the opportunity to get some inventory that others did not because of our performance we had in the past. And as the market-because we expected that to be that inventory to be at high demand cause there just wasn?t anymore of it with the new admission regulations. It ended up not being the case and so we?ve had to work through that inventory. So, we?ve had older inventory and there is not much new inventory on the market because as you?ve seen the production rates on heavy trucks has been down. So we?ve worked through that inventory and really done a great job of reducing probably over $40 million worth of inventory we?ve been able to move out of. So, it hasn?t caught us off guard, I?d say the duration was a little more surprising to us, and in talking with the analysts and with some of the manufacturers there, they?re expecting early second quarter next year that we should start to see some improvements. Gordon SmithWhen we first put the plan together late last year and to the first part of 2007, the expectation was the first half of the year that retail demand would be off very significantly, somewhere in the neighborhood of 40 to 50%, and we did see that, and that was the result of the pull-forward on the emissions. What somewhat took people by surprise is really the credit crunch, the economic environment in the second half hasn?t supported a rebound up to the new trucks. It?s all caught upin the same stuff. We?re all reading about the macro environment. It took everybody a little bit by surprise. So it is softer than what we anticipated it to be and plus the tough comp with all the pull forward, a lot of that was in the fourth quarter last year, so those are the factors that contributed to it. Matthew Fassler - Goldman SachsSo you?re really saying that you had expected the recovery by now, but the weakness is just the persistence of that is a little different? Gordon Smith Exactly. Matthew Fassler - Goldman SachsOkay and then moving the use to sub prime it sounds like you?re going at this - it does not appear that its because some of the common concerns I?ve heard like, are the lenders really pulling back or is this just some kind of consumer you believe impinged more the consumer more broadly and also as well as the clean impact on inventory making it so there?s less sub prime product? Charles OglesbyWell the sub prime lenders from their perspective, they?ve got a very mature model they?ve been in this business a long time and they?ve been in the collection business a long time. What we are seeing from that aspect is that in the past they may have been more lenient with their guidelines and today they?re not, they?re being more strict and adhering to their guidelines and the consumer is, it?s more difficult for that customer to meet the current guidelines. So, we?re kind of seeing a combination of events there. Matthew Fassler - Goldman SachsSo it?s effectively a tightening of standards, the policies really haven?t changed, it?s just that they?re getting, they?re watching them more closely. Charles OglesbyYes. And the inventories as we mentioned, there?s less of that, that prime inventory available today and what is available is more expensive so it doesn?t quite fit the model as easily as it did before.Matthew Fassler - Goldman SachsAt least in some markets, I know you said it works better in some markets than others, it certainly helps sales. Where do you think that this got ?that pursing this business has gotten you in terms of incremental growth in years, what kind of comparisons should we be concerned about as you cycle that? Charles OglesbyWell when you look at the growth that we experienced the last two years some of that has been a result of weather conditions in our other markets because we had some explosive growth in Florida in ?05 after the hurricanes there. A lot of it has been because we implemented software technology two and a half, three years ago and with implementation of our used car teams. I don?t know if there?s as much low hanging fruit, as we had to gain in the past. So, when we look at the comps and the soft market we didn?t stop selling cars. This is basically the same team that performed all of these 11 quarters of great performance in the past so we just didn?t follow up a log unfortunately and this happens. So it?s a number of conditions that came at the same time that made this performance look as it does. So, on a go forward basis that?s why we?re seeing flat to down on the used car side. Matthew Fassler - Goldman SachsLook I guess that Houston was one of your main markets in sub prime, didn?t you say something about the costs being up there. What was the metric you discussed, was it a 30% relative to the rest of your business? Charles OglesbyNo, I think that what I said ?The post Katrina with our Houston and Mississippi, our growth was down 21% because of the comps that we in ?06 because of Katrina, they were up. Matthew Fassler - Goldman SachsRight, they were up, it was up significantly. I thought that was a result of your effort going into sub prime there. Charles OglesbyYes, that?s true. There was a very strong effort and we still have a strong team in that Houston market. Matthew Fassler - Goldman SachsOkay. Thank you. Operator And our next question comes from Matt Nemer with Thomas Weisel Partners. Matt Nemer - Thomas Weisel PartnersHi good afternoon. My first question is can you provide the new vehicle margin per unit excluding the Honda Accord bonus payment? Is there a way to back that out? Charles OglesbyFor just Honda? Matt Nemer - Thomas Weisel PartnersI?m sorry for everything other than Honda. Just trying to get a sense of the underlying new vehicle gross margins excluding that bonus payment. Charles Oglesby I can get you that calculation; I don?t have that one off the top of my head. Matt Nemer - Thomas Weisel PartnersOkay fair enough. Then I didn?t hear but did you provide any detail on the abandoned real-estate project? Charles OglesbyYeah, we were looking to do a fairly substantial Greenfield project down in Florida, we got a long way into the project, but the insularly costs with doing the project just overwhelmed our ?it started not to make sense. The city was asking for incremental improvements to the roads and all that costs that we didn?t anticipate seeing at the beginning ended up making it uneconomical to continue with the project and that?s why we eventually abandoned it. Very painful, but it was the right business decision to do and to stay where we are. Matt Nemer - Thomas Wiesel Partners Got it. And lastly, it?s my understanding that Arkona is more streamlined than the ADP Reynolds or UCS solutions that it was typically prior to this year used by either smaller stores or single point stores. Are they making significant improvements or changes to the software this year or are they doing any custom work for you to roll this out, to create synergies between stores? Charles OglesbyYes, as we had great and in depth conversations with DealerTrack and Arkona about being able to serve the needs of an organization of this size and with the improvements they have made and are continuing to make it with the cost savings, which was only part of the driver. The other part was the vision that we shared with DealerTrack and that is to create a seamless process where not only customers, we have a tremendous customer benefit, but our employee benefit as well so that we can create speed and efficiency in the sales process and service process and follow up process. So, we have a tremendous vision of where we will end with this dealership with DealerTrack and Arkona. So the cost savings and their ability to serve our needs as well as just this tremendous vision that I personally had for 20 years in thisbusiness and have not seen an opportunity for a large retailer and an IT partner to come together and create something of this vision in the past and we had the opportunity to do that and they shared that same vision. So, absolutely yes, they can serve what our needs are and on a go-forward basis it will continue to improve on efficiency and in the speed of the process. Gordon SmithWhat we?re looking for Matt, it really is a seamless process of where we input customer data wants and it follows the customer all the way through, through the fixed department and then out the other end in terms of doing the next transaction with the individual and to that end DealerTrack has committed a substantial amount of their RND efforts to making that happen, including on the DMS side. Let?s be fair they?re not where they need to be in terms of that product today, but they have the resources and the commitment and with our help they?re gonna get there and they?ve committed quite aggressively to making that happen. It?s not that it?s a bad product today we?re just going to make it better. Matt Nemer - Thomas Weisel PartnersGot it, that?s helpful thank you. Gordon SmithAnd just to add on to that a little bit Matt, the way that I look at it, the savings Matt that we?re getting from the DMS, I think that?s really the tip, I think you?ve heard me say this before, but that?s the tip of the iceberg, when you look at a seamless processes. One of the metrics we?re looking at typically takes a customer about four hours to get through the dealership once he?s serious about buying a car. With this, when we?re successful with this process we can at least halve that time if not even beyond that, so lots of savings, which translates into at that point pure sales people that can do more deals and so on and so forth. You can see the domino effect of having an integrated system like this and that?s what gets us excited about going forward with DealerTrack. Operator We will now hear from Rich Kwas from Wachovia.Rich Kwas - Wachovia Capital Markets, Llc.Hi just to follow up in terms of the guidance in the fourth quarter what are the big swing factors with the 8 cents spread? Gordon SmithI?m not sure I understand your question Rich. Rich Kwas - Wachovia Capital Markets, Llc. Well when I think about the applied guidance for the fourth quarter here with the 210, 218 guidance for the fourth quarter, what gets you to the 210 versus what gets you to the 218, what are the assumptions? Gordon SmithYeah, I think that is purely on the retail side of the business, you know as I said, a lot of it comes down to what happens in December and more specifically in last week or so of December. If the Christmas season is soft that gets you into the lower end of the guidance. I think it comes down to that in particular, that?s the reason for the wide, you know the pretty wide spread in the guidance at this point in time. You know we?re not quite sure where that piece is going to fall out. Rich Kwas - Wachovia Capital Markets, Llc.Okay and then on the 3.5 million total pre tax savings, that?s the annual savings going forward? Gordon SmithRight. Rich Kwas - Wachovia Capital Markets, Llc.Okay then that?s 3.5 million going forward and when do you expect to get the first piece of that in ?08? Gordon SmithYou can?t do this, but excluding the costs to transition at the stores we will start to see as Charles said during 2008. My expectation is we will see about 35 - 40% of that savings starting in the second half of 2008. Rich Kwas - Wachovia Capital Markets, Llc. Thank You. Operator At this time we have no further questions in the queue. I will turn it back over to our host for today for closing remarks. Charles OglesbyWell we appreciate everyone joining us today and we are, just to kind of summarize, we are very excited about this particular market that is challenging. We?ve seen these kinds of dips before and the market has always rebounded. We don?t ever know how long it will take for it to rebound but we know that it does and the long-term trends are very positive and we?re very positive on our company and the leadership in particular in our field organizations as well so thanks for everyone joining us today. Operator And once again this does conclude today?s call thank you for joining us and have a great day.Copyright policy:All transcripts on this site are copyright Seeking Alpha. 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  FMC Technologies, Inc. (FTI)Q3 2007 Earnings CallOctober 30, 2007 9:00 am ETExecutivesRob Cherry - Director of Investor RelationsPeter Kinnear - President and Chief Executive OfficerBill Schumann - Chief Financial OfficerJohn Gremp - Senior Vice President of Energy SystemsCharlie Cannon - Senior Vice President of FoodTech andAirport SystemsAnalystsBrad Handler - Wachovia Capital MarketKevin Simpson - Miller TabakGeoff Kieburtz - CitigroupDan Pickering - Tudor PickeringKurt Hallead - RBC Capital MarketsRob MacKenzie - FBRKen Sill - Credit SuisseDavid Anderson - UBSJim Crandell - Lehman BrothersJoe Gibney - Capital One SouthcoastPresentationOperatorGood morning and welcome to the FMC Technologies Third Quarter2007 Earnings Release Teleconference. All lines have been placed on mute toprevent any background noise. After the speakers remark there will be aquestion and answer session (Operator Instructions).In the event of technical difficulties during this call, wewill post updates at www.fmctechnologies.com/earnings.Thank you. Your host is Rob Cherry, Director of Investor Relations. Mr. Cherry,you may begin your conference.Rob CherryThank you Operator. Good morning and welcome to FMCTechnologies' third quarter 2007 earnings release conference call. Our pressrelease and financial statements issued yesterday can also be found on ourwebsite. In the event of a disruption of service or technical difficulty duringthis call, information will be posted at our website atfmctechnologies.com/earnings.During our call we will reference earnings from continuingoperations. In 2006 we disposed of the Floating Systems business and a smallFoodTech product line was divested in the third quarter of 2007. Historicalresults have been revised to reflect these operations as discontinued.I would like to caution you with respect to anyforward-looking statements made during this call. Although theseforward-looking statements are based on our current views and assumptionsregarding feature events, future business conditions and the outlook for usbased on currently available information, these forward-looking statements aresubject to certain risks and uncertainties that could cause actual results todiffer materially from those expressed in or implied by these statements. Irefer you to our disclosures regarding risk factors in our annual report andour other SEC filings.I will now turn the call over to Peter Kinnear, FMCTechnologies' President and CEO.Peter KinnearGood morning. Thank you for participating in our thirdquarter 2007 conference call. On the call with me today are Bill Schumann, ourCFO, John Gremp, who heads our Energy Systems Group, and Charlie Cannon, whoruns our FoodTech and Airport Systems.I will give you some highlights on the third quarter and anupdate on our outlook for 2007. Bill will provide you with additional detailson our financial performance, and then we will open up the call for yourquestions.Before I get into the details on the quarter, if you've seenour press release, we announced our intent to spin off FoodTech and AirportSystems into a separate publicly-traded company and a tax-free distribution toour shareholders.These are very well managed businesses and industry leadersin their respective markets, but are outside our primary oil field focus. Dueto the growth of our energy businesses over the past several years, they havebecome a smaller part of our total company, and we now feel that they wouldprosper more as an independent company.The company would be focused on the food and airporttransportation markets; it will have its own capital structure more suited toits financial characteristics, and will have its own Management. CharlieCannon, the current Senior Vice President for FoodTech and Airport Systems willbe the CEO, and Ron Mambu, FMC Technologies' Vice President and CorporateController will become CFO of the new company.This separation will also allow FMC Technologies' Managementto focus entire on our rapidly growing energy businesses. As you know, FMCTechnologies was itself a spin-off, and we believe that separate managementfocus will improve the future performance in both companies. We expect thespin-off will be completed by mid 2008.Now let me discuss our third quarter results. Our dilutedearnings per share from continuing operations were $0.60 in the quarter, up 46%from the prior year quarter. Inbound orders for Subsea were $766 million, up$490 million from the prior year quarter. Year-to-date, Subsea inbound ordersare $2.4 billion, already exceeding Subsea orders for all of 2006. Our Subseabacklog reached yet another record at $2.6 billion.Energy production revenue was up 21%, and operating profitwas up 43% from the prior year quarter on the strength of both Subsea andSurface Wellhead businesses. Subsea revenue was up 17% from the prior-yearquarter. And we continue to forecast revenue to be approximately $2.2 billionin Subsea for 2007.Revenue from our Surface Wellhead was up 31% from the prioryear quarter with most of the growth coming from outside of North America. OurEnergy Processing Systems revenue was up 14%, and operating profit was up 41%from the prior year quarter, largely due to the strength of our Fluid Controlbusiness.Our Fluid Control business, including WECO/Chiksanbusinesses remained strong with sales up 25% from the prior year quarter,driven by strong field demand. We do anticipate, however, slower growth ofservice company capital spending in 2008. Overall, our energy businesses intotal have seen more than a 40% compounded annual EBIT growth since 2001.In the quarter, our Subsea order value per well wasapproximately $18 million. This puts our year-to-date order, Subsea order rateper well at $19 million, and this compares to $14 million per well in 2006 and$9 million per well in 2005.This metric demonstrates the success of our strategy toexpand our Subsea scope on the seabed, and in particular on our efforts onSubsea processing. When we talk about Subsea processing, we include anyactivity involving separation, pumping, and/or compression of oil, water, andgas on the seabed produced from a Subsea well.Some of the Subsea processing activity is replicatingfunctions traditionally done topside, while other Subsea processing isessential to make the economics work for a new field. Given the importance ofSubsea processing, I'd like to briefly review some of our initial projects to giveyou some context regarding how this market may evolve.We have won four Subsea processing projects and are activelybidding on a fifth. The first was the Statoil Hedro Tordis project, which isnow in the water and scheduled for startup this quarter. This is a brownfieldapplication where the topside processing facility could not handle theincreasing water production from the Subsea wells.FMC supplied 200,000 barrel per day Subsea separation systemto break the oil, water, and gas and the sand produced from the wells. Theexcess water is re-injected into the formation. Statoil Hedro benefits from theincreased recovery from the reservoir estimated at 19 million barrels.The second and third Subsea separation projects, which wehave won, are greenfield applications with Shell; one in Brazil and one in theGulf of Mexico. The drivers for these fields are heavy oil and low reservoirpressure, thus presenting the need for artificial lift for these projects, FMCsupplying Subsea systems to separate the gas, and then pump the oil and waterto the surface.The Subsea separation of the gas mitigates the risk ofcavitation of the Subsea pumps, thus enabling a commercial development of thefields. Our fourth Subsea processing project, also a greenfield application, isour recently-announced award from Petrobras for the Cascade Chinook fields inthe Gulf of Mexico.Its drivers are heavy oil and low reservoir pressure,similar to the Shell projects. The Subsea solution here calls for the use ofsubmersible pumps installed at the seabed to boost production from the Subseawells.Additionally, we are bidding on a fifth Subsea processingproject for Total's Pazflor field in Angola. This project has a requirement forthree Subsea separation systems to support 49 Subsea trees. The driver in thisfield is to mitigate the potential formation of hydrates in the pipeline.Here the Subsea separation will be used to first remove thegas, and then the flow will be boosted topside with Subsea multiphase pumps.The key point about Subsea processing is that it is being used to solve manydifferent field challenges, both for brownfield as well as greenfieldapplications.We are still in the early stages of Subsea processing, butwe are very encouraged and excited about the initial number of projects and themarket position that FMC has established so far.Overall, the outlook for deepwater developments remainsrobust. The new deepwater rig additions over the next several years will add tothe capacity to develop future Subsea fields, and supports the secular growthtrend that we believe exists for Subsea equipment.The combination of our traditional Subsea completionbusiness, and the growth opportunities of our new Subsea processingtechnologies, coupled with the strength of our other energy businesses,positions us well for future growth. So in summary, our third quarterperformance was very solid.Our Subsea backlog yet again grew to a new record of $2.6billion. Our Energy Systems operating profit was up 42%, and we reported a 46%increase in earnings per share from the prior year quarter. The strength of ourenergy portfolio gives us confidence to again increase our earnings guidanceper diluted share from continuing operations to a range of $2.16 to $2.21 for2007.I should point out these numbers include both FoodTech andAirport Systems. And with that, let me now turn the call over to Bill Schumann,who will provide you with some further details on the quarter.Bill SchumannThanks Peter. Let's look at some of the highlights of ouroperations. Energy Production sales were $684 million in the third quarter, up21% over the prior year quarter, primarily due to the growth of Subsea, whichwas up 17%.Surface wellhead also contributed to the revenue growth, up31% from the prior year quarter. Approximately 80% of surface wellhead salescame from outside North America. Subsea sales were down somewhat from thesecond quarter. This is due mainly to the weight of newer projects in ourbacklog, and the timing of revenue recognition under our percentage ofcompletion accounting method in that business.Our projects typically record lower revenue in their earlystages, and the large amount of new projects that are in the early, primarilyengineering phase, led to the slight decline in revenue from the secondquarter. The Energy Production segment generated EBIT of $70.4 million in thequarter, up 43% from the prior year quarter.Energy Production operating profit margins were 10.3%. Werealized a margin improvement in Subsea, both over last year and the priorquarter. We continue to expect double-digit margins in the segment for the fullyear 2007. Inbound orders in Energy Production were up with Subsea orders up$190 million from the prior year quarter, and up 81% year-to-date.Subsea backlog, as Peter mentioned, was a record $2.6billion. Energy Processing sales were up 14% over the prior year quarter, ledby the continued demand for our Fluid Control products. In fact, Fluid Controlrevenue, which includes our WECO/Chiksan product line, was up 25% over theprior year quarter and grew 11% from the second quarter of this year.The Energy Processing segment generated EBIT of $38 millionin the quarter, up 41% from the prior year quarter. Again, the operatingimprovement from the prior year quarter was the result of higher volume inmargins in our Fluid Control and Measurement businesses.We expect Energy Processing profit margins to be around 18%for the full year 2007. Inbound orders for Energy Processing were up 4% overthe prior year quarter, and up 16% sequentially. Backlog is at $357 million, up31% from the prior year, and strong Fluid Control Loading System andMeasurement orders.FoodTech revenue of $146 million was up 39% from the prioryear quarter, due to increased sales of food processing, cooking, and freezingequipment. FoodTech operating profit was $14.1 million, up 44% from the prioryear quarter on strong volume in cooking and freezing equipment.With backlog at a near record level, we expect FoodTech's2007 full year profit to exceed last year's levels. Airport Systems revenue of$109 million was up 22% in the quarter, mainly on increasing demand for groundequipment.Operating profit was $11.7 million, up 38% over the prioryear quarter, again on a higher volume in our grounds system equipmentbusiness. With backlog up 33% from the prior year quarter, Airport Systems isalso expected to see increased full year profitability over 2006.As for the corporate items, we have seen benefits from thetiming of foreign currency activity in the quarter. Other expense net of$800,000 decreased $4.2 million from the prior year. Our comparative resultsreflect $8.9 million in increased net gains due to the mark-to-market of equityinstruments, foreign currency, and restatement gains and losses.Partially offsetting these increased net gains wereincreased stock-based compensations and LIFO inventory expense. We expectfull-year 2007 corporate expense to be up, while other expense net should belower than last year, reflecting the gains from the third quarter.The tax rate for continuing operations in the third quarterwas 33.8%, which is up over last year due to country mix. We anticipate thatour overall tax rate for 2007 will now be 33% for the full year. Our net debt was$159 million at quarter end, down $107 million from the second quarter.The decrease was driven in part by reductions in workingcapital. We spent $26.6 million in the third quarter to repurchaseapproximately 600,000 shares of common stock. Since initiating our repurchaseprogram, we've repurchased a total of 15.8 million shares out of our totalbuyback authorization of 30 million.We averaged 132.6 million diluted shares outstanding duringthe third quarter. In the quarter, we spent $49.3 million for capitaladditions, mainly in the Energy Production Systems business to fund theadvancement of capacity additions and in Light Well Intervention Systems.For the full year 2007, we now estimate our capital spendingto be approximately $160 million;the increase from our previous estimates isdue to investments in the Light Well Intervention Systems. Now let me talk alittle bit about our intent to spin off the FoodTech and Airport Systemsbusinesses.As you know, FoodTech is one of the world's leading technologyand solution providers to the food processing and convenience food industries.It produces systems and equipment that sterilize food, extract juices, portionprotein, and cook and freeze all types of foods. Airport Systems manufacturesand service products that keep airport ground operations running smoothly fromtouchdown to takeoff.These include cargo and baggage loaders, aircraft towtractors, de-icers, ground power and air, as well as passenger boarding stairsand bridges. We also service this equipment long with baggage systems in theairport. Both businesses maintain leading technology and market shares in theirrespective businesses.We estimate that the two businesses will contributeapproximately 20% of FMC Technologies' total sales in 2007, approximately 19%of EBITDA and 17% of EBIT, and 16% of net income. These numbers are currentestimates, and will be finalized as we prepare final financial statements --excuse me, separate financial statements -- for the two businesses.The numbers include the two segments as we report them,along with estimated expenses from corporate items that were not previouslyidentified with these two businesses. Over the next few months, we will prepareseparate audited financial statements for the two businesses, file a Form 10 onthe new company for review by the SEC, and file Private Letter Ruling Requestswith the IRS to support the tax-free nature of the distribution.We also expect the new company to put in place financingarrangements to borrow approximately $200 million that will be paid to FMCTechnologies as a dividend. We anticipate that this will allow the new companyto attain an investment-grade credit rating.FMC Technologies anticipates using the dividends torepurchase stock. FMC Technologies' shareholders would then receive tax-freedividend consisting of 100% of the equity ownership in the new public companycomprised of the FoodTech and Airport Systems businesses. This process shouldbe complete by mid-2008.As Peter mentioned, we're increasing our 2007 earningsguidance to $216 to $221 per fully diluted share from continuing operations.This estimate does not include any estimates of the transaction costsassociated with the spin-off, most of which will primarily impact 2008.We anticipate continuing to report FoodTech and AirportSystems in continuing operations until the distribution. Well, it was a goodquarter; in summary, we had strong Subsea inbound orders, which are now up 81%over last year. Our backlog is again at record level with Subsea at $2.6billion.Energy System's operating profit was up 43% from the thirdquarter of 2006. We reported a strong quarter of earnings at $0.60, up 46% fromlast year. We have increased our guidance and as I?ve mentioned before from --to a range of $2.16 to $2.21, and we've announced our intent to spin off theFoodTech and Airport Systems businesses in a tax-free distribution toshareholders.That concludes my prepared remarks. Now operator, could youplease open up the call to questions.Question-and-Answer SessionOperator(Operator Instructions) Our first question comes from theline of Brad Handler from Wachovia Capital Market.Brad Handler - Wachovia Capital MarketThanks. Good morning.Peter KinnearGood morning, Brad.Brad Handler - Wachovia Capital MarketI guess, I'll just ask, I mean I think you've given a lot ofinformation about the spin and the logic and I appreciate that, but I guessI'll just come back to is just to try to get a clear sense for why now afterobviously a number of years of discussion by many interested parties on that?Peter KinnearGood question Brad. I mean, this has been something thatwe've had under evaluation for long periods of time as to what we should do andwe've had some discussions with our Board off and on about it, and I think wejust reached a position this year, where we felt it was an appropriate decisionto make and the Board -- our Board was very supportive of that, and so that'skind of where we ended up.Brad Handler - Wachovia Capital MarketThe main part of what you mentioned, of course, was theissue of managing two very, or I guess, three very different types ofbusinesses. I guess, what you're saying is you feel that youPeter KinnearI think?.Brad Handler - Wachovia Capital MarketYou personally will have a lot more time to focus on theEnergy business; is that an important part of the logic?Peter KinnearI think it goes two ways. I think, the new Management of ourFoodTech and Airport businesses will be much more focused, and on the spinoutof those businesses and I think add value in that regard.And I think from the Energy side, we will be much morefocused on our day-to-day Energy businesses, and so it's a kind of adouble-pronged benefit from our standpoint.Brad Handler - Wachovia Capital MarketAnd then, I guess maybe just help me, I know Bill you weretrying to give us a flavor for it I guess, but from a capital structure orcapability standpoint, how do the two companies potentially differ?Bill SchumannWell, the combination of FoodTech and Airport is not growingas quickly as the Energy business. Maybe that's probably obvious, and we atleast initially are planning on starting them with about $200 million of debt,which is roughly two times their EBITDA.So, we think that's a more highly-levered company and itwill also probably pay a fairly significant dividend and won't have significantcapital requirements. That's kind of what we were alluding to when we talkedabout the capital structure of the new company.Brad Handler - Wachovia Capital MarketRight. Okay. Well that helps me understand a little bitbetter. Thanks, I'll turn it back.OperatorThe next question comes from the line of Kevin Simpson fromMiller Tabak.Peter KinnearGood morning, Kevin.Kevin Simpson - Miller TabakThanks, and congratulations I guess to Charlie for a new CEOrole and to Peter what looks like a good move into separating the Companies.A question on WECO/Chiksan. I was just wondering, how goodyour visibility is into 2008. It's one of the areas that I'm more cautious onand I know you're not into giving guidance yet Peter maybe for next year, butI'm just wondering?Peter KinnearIt?s a good point.Kevin Simpson - Miller TabakIf you talk about a slowdown, do you think do you haveenough visibility to say that you will have good growth in the first half andthen not so sure on 2H or can you even say that you might be able to growthroughout next year?Peter KinnearWell I mean it's an area of that certainly, we have someexposure to North American activity and we're watching it very carefully Kevinas you can appreciate.With regards to the service company activity, we still havepretty strong field orders in terms of spares and repair activity. We -- themulti-stage fracing activity for type gas is still pretty active; there arestill rigs doing that, it's a big source of revenue for us.We're a little concerned about Canadian royalty issue, whathappens there. And as I mentioned in my comments, we anticipate some slow downin the '08 CapEx by the service companies.And the offset of that is our international activity isquite strong. So, I always say our network is still pretty optimistic thatwe'll have a pretty good year in '08 for fluid control Chiksan/WECO.Kevin Simpson - Miller TabakOkay. Can I pin you down though? It's pretty significant ifyou have an up year or it?s going to be a outstanding year in '07?Peter KinnearYes I think, I mean it will be slower growth. And, we'restill doing our budgeting Kevin, we haven't finalized all that so it's kind ofpremature maybe to make a specific comment at this point.Kevin Simpson - Miller TabakOkay. And two other questions; one in Subsea, can we assumethat you'll return to kind of a mid-20s type revenue growth for 2008 and that17% is just a function of the percentage of completion issues in the earlystage of so many projects?Peter KinnearYes, I mean, we have very strong backlog at $2.6 billion,and just kind of unusual quarter where we had the revenue recognition wasn't asstrong. There are still a number of big projects yet to be decided.This year the order rate for Subsea has lagged a little bit.There are a number of big projects (inaudible) and Nigeria still we thoughtwould happen and they're close Total Pazflor for 49 wells, Shell's Gumusut inMalaysia is going to get decided.Chevron Gorgon and Australia is going to get decided;DB-Block 31, all these big projects that probably represent 150 trees theindustry anticipated those being awarded in 2007, but sort of slipping a littlebit but those projects are still going forward.There's lots of activity, as I mentioned new rig -- newbuild, the new deepwater rigs coming out is going to be favorable. So you couldsee a dip in order in the number of trees year-over-year, but we still thinkit's a very strong segment for us, and we're in-bounding some key projects andreally a building backlog, so we don't see any concerns from that respect.Kevin Simpson - Miller TabakOkay. And one last one; very big increase on the surfaceside in the quarter, was there anything unusual in the quarter, and do youthink you can maintain a kind of north of 20% revenue growth rate in thatsegment of the business?Peter KinnearWell, I mean we had a very good international activity. Evenour North American activity, we've added some technology based in North Americain addition to our surface tree business in around the fracing dual area treesaver type products, and year-over-year, we got some benefit from theacquisition of Galaxy, which is active in the oil, sand, so?Kevin Simpson - Miller TabakAnd, so maybe not at this level of year-to-year run rate,but still your outlook would be for continued good growth for surface?Peter KinnearYes, I mean we're very strong, as Bill mentioned 80% of ourrevenue comes internationally and the rig count, international rig count I meanI think over the last 4 or 5 years has been growing 7% or 8% a year, and wehave a very good positions in the Middle East in those markets that are veryactive.Kevin Simpson - Miller TabakOkay. Thank you; good quarter. That's it for me.OperatorNext question comes from the line of Geoff Kieburtz,Citigroup.Geoff Kieburtz - CitigroupCan you hear me okay?Peter KinnearYes, Geoff, good morning, how are you doing?Geoff Kieburtz - CitigroupI'm fine, operator, it sounds like she's breaking up alittle bit. On Fluid Control outside of WECO/Chiksan, what is included in theFluid Control segment?Peter KinnearWell, we have our new high pressure pump for the servicecompanies that we've introduced, and that's going well. We're just, as wementioned, introducing that this year.And that's mostly the fittings and valves; we also have somesmall reciprocating pumps that we make for oil and gas and we do some manifoldwork topside manifold work for fluid control. The bulk of the activity is theWECO/Chiksan product line.Geoff Kieburtz - CitigroupOkay. So, when we think, when we hear you say 25% revenuegrowth and Fluid Control we can think that's pretty much the WECO/Chiksanrevenue growth.Peter KinnearYes, that?s correct.Geoff Kieburtz - CitigroupOkay. And margins at WECO/Chiksan, what has the trend beenover the past several quarters?Peter KinnearI'll let Bill respond to that.Bill SchumannIt moves around a little big Geoff, but it's been verysteady. As you know, Fluid control was become a high margin business withinenergy processing, and it's been steady.What you've seen in the total is frankly, and I'll have totake the blame for this. I've underestimated, we've underestimated the size ofthe Fluid control business, and that's what's driven the margins from 17% to19%, not necessarily increases in the Fluid control margin. It's the mix morethan it is the actual margin.Geoff Kieburtz - CitigroupOkay. And in an environment where you're expecting the topline growth to slow, what would you expect margins to do from the currentlevel?Bill SchumannWell specifically for the fourth quarter, we tend to havemore business coming out of the other businesses within the Energy Production,processing segment, loading, measurement, material handling.So, that will depress margins a bit absent any anticipatedchange in Fluid Control margins, but as we go forward into next year; we wouldexpect margins probably to stay approximately the same level.Geoff Kieburtz - CitigroupOkay. And on the margin subject, you mentioned in the Subseabusiness that the revenue was affected by the percentage of completionaccounting. How does that affect the margins in the Subsea business?Bill SchumannWell, it shouldn't affect it at all. And one of the things,when we start a project, the initial phases are primarily engineering.And so we don't accumulate a lot of costs on a project. Andthen as we get into the kind of middle of the project when we're procuringequipment and taking delivery of equipment, we kind of have a big ramp-up incost and consequently that's the time when we're recognizing a lot of revenuequickly.And then towards the end, when it's in assembly and test,again we're not incurring much cost, and consequently are not recognized in alot of revenue.Now over that entire cycle, if we do things perfectly weshould have the same margins.Geoff Kieburtz - CitigroupOkay.Bill SchumannOn that particular project.Geoff Kieburtz - CitigroupOkay. That's what I thought; I just wanted to confirm that.And you've mentioned several times in call this morning Light WellIntervention, mostly in the context of your capital spending plans. Can youupdate us on what's going on there and what kind of increase in capitalspending you've planned for that?Peter KinnearHi, Geoff, Peter. Yes, earlier this year, we announced twoadditional Light Well Intervention systems; one for, a second one for Statoiland one for BP that we have, we were awarded contracts for.But CapEx on each of those system is around $20 million to$25 million, and so that's -- and they'll be ready for deployment mid '08. So,that's ramping up now in that capital spending; that's what Bill mentioned.Yes, these contracts, this will be third contract; again,our strategy to add more value into the Subsea arena in terms of doingdifferent activities and Statoil has a Subsea base of over 250 Subsea trees, sothey're an ideal customer to deploy this technology.Geoff Kieburtz - CitigroupAnd what should we think about in terms of an annual ratefor revenue or EBIT on a Light Well Intervention system?Peter KinnearYes, I think on the revenue side, we?ve depending on theutilization of the system; these are price on a day-rate basis with someguarantees for activity. But I think they run $8 million to $12 million, inthat range, per system per year.Geoff Kieburtz - CitigroupOkay. Great, thanks very much.OperatorYour next question comes from the line of Dan Pickering fromTudor Pickering.Dan Pickering - Tudor PickeringGood morning guys.Peter KinnearHi Dan, how are you doing?Dan Pickering - Tudor PickeringDoing just fine, thank you. Question one about the FoodTechand Airport spinout. You mentioned putting $200 million in debt on it and thenusing that $200 million at the old, if you will, FMC, for share repurchase.Is that going to be basically a mechanical process; will yoube opportunistic on that share resale? I'm asking because your stock purchasethis quarter was obviously at much lower levels than where we are today.Peter KinnearYes, Dan, we'll try to be opportunistic, but we do want toretire the shares, and if we can't be overly opportunistic between now andthen, we'll probably just do it mechanically.Dan Pickering - Tudor PickeringOkay. All right, and then Bill or Peter or anyone chime in;when we look at the new stand-alone FoodTech Company, and Airport sort of howdo you think about comparable, who do you look at and say these are going to beour peers in the marketplace?B>Peter KinnearDan, I wish it was real simple. They aren't really anydirect comparable, so you can imagine it. There's no company out there thatcombine food processing and airport systems.But there are a group of kind of peer-play food servicecompanies that, therefore little bit different in our food processing business,the food service, those wouldbe Middleby and Otis, AGA Food Service and anIcelandic Company called Morrell.On the airport side, there weren't there aren't any publicpeer-play public competitors. But there are a number of diversified companiesthat seem to have food service, food processing, and maybe even some airportequipment businesses, like ITW or Dover, United Technologies, and IngersollRand, Manatore, and even a Dutch company called Stork.So, if you take a look at that group of companies, youmight, you'd probably get an EBITDA range of 8 to 11; I mean maybe as low as 7and as high as 12.Dan Pickering - Tudor PickeringOkay. That's helpful. Last question, we look at the Subsea business,what sort of incremental margins or incremental profitability do we think aboutfor that business as we step into '08? I mean, we see the aggregate margins forthe business at 10%; how do you think about the incremental margins in thatbusiness?Bill SchumannWell, Dan, we're continuing to build our backlog and athigher margins than we've had in the past. And the real challenge for us is toexecute those projects, and we've got $2.6 billion of backlog and I wouldexpect that to be higher by the end of the year going into 2008.So, we've got a challenge of execution and leverage,levering our SAR infrastructure with more projects.But I would expect kind of increases in bottom line, EBITmargins, in the order of what you've seen over the past couple of years, whichis on the order of 1%.Dan Pickering - Tudor PickeringOkay. So, your resulting growth in margin ought to continueat 100 basis points a year trend.Bill SchumannYes I think so; now I have to caveat that we haven't reallyrolled up budgets and looked at it from the bottoms up. But that's what wewould expect from the top down.Dan Pickering - Tudor PickeringOkay, thank you.OperatorYour next question comes from the line of Kurt Hallead, fromRBC Capital Markets.Kurt Hallead - RBC Capital MarketsHey good morning.Bill SchumannMorning.Peter KinnearGood morning Kurt.Kurt Hallead - RBC Capital MarketsHey, just wanted to kind of follow up, I guess there's someof data out this morning by Quest, once again making some adjustments to theirkind of tree forecast. What kind of credibility do you put in their forecast.And I know it's pretty much the only thing that's out there,which always makes me skeptical. So I just toss my books, but what's your thinkon the Subsea forecast relative to what you know is out there?Peter KinnearYes I think they're, they have some difficulty like anybodyin forecasting given the movement of some of these big projects. I think theircurrent forecast is around 450 to 500 Subsea trees to be ordered in 2007, whichis down from their initial forecasts, which were probably 550 to 650 earlier inthe year.Now, your part of that is these big projects that Imentioned earlier on Total Lucent, Total Pazflor, Shell, Gumaset, Chevron,Gorgon and BP Block 31 that have kind of shifted out of '07 into '08.So, it's a timing issue. We do our -- I mean we have ourin-house database and we track all our customers and all projects they have.So, quest is a resource for the industry, but obviously we supplement that withour own internal market data and market intelligence as to what's going on inthe marketplace.But, their accuracy, as you know, hasn't been that great butit's difficult year-over-year to pin each project in which quarter or whichyear it's going to fall.Kurt Hallead - RBC Capital MarketsOkay, the other thing I had for Bill, you referenced againthe fact that you have a number of different projects that are in the earlyphases right now along with your revenue, so I guess it would be safe to assumealong those lines that revenue should be accelerating as we move into 2008?Bill SchumannYes it should be; you're right Kurt.Kurt Hallead - RBC Capital MarketsAnd then the other multiples you guys used, I guess on theAirport Equipment business, there was a one of your private competitors got --one of your public competitors last year went private at 8 times EBITDA on theairport equipment side.You guys are using somewhere between 7 and 12 on the EBITDA;that would imply that your Energy multiple probably is lower than probablylooking most people are probably thinking out there right now.So, how would you, is that 7 to 12, you gave a few differentkind of estimates on the Company, so you wouldn't use like a Tyson or a Hormelor somebody like that as comp for the food equipment business?Bill SchumannWell I don't think so Kurt. We're in the -- we're suppliersto those two companies that you mentioned. I think the others -- the others arekind of food service industry. They tend to service restaurants and fast-foodtype establishments.We tend to be, to have as customer?s large food processingcompanies, Tyson's being an example, Hormel being an example, Uni Lever andothers. But I think the companies that I mentioned are closer to the kind ofbusiness that we participate in rather than the food companies.Peter KinnearWe're also, we're kind of forecasting this isn't going tohappen until the middle of 2008 and there are a lot of variables that are goingto move around in between in the meantime.Kurt Hallead - RBC Capital MarketsGot you, okay. Then just lastly, in terms of your revenueand maybe EBITDA, what's your percent exposure to North American natural gasrelated, and then more specifically what's your exposure to North Americapressure pumping?Bill SchumannWell we've got our Wellhead business and Energy Production.That's about little bit less than 20% exposed to North America. In order ofmagnitude, that's about a $500 million business.Fluid Control is about it looks like it will be closer to$300 million this year. About that we bill about 55% domestic in that business,but a lot of the billings go to Company staking grounds to take than shipinternational. So our exposure to North American net business is probablycloser to 40%.All thought again, those are, out of the total, those arefairly low in numbers of our total exposure to North America, not necessarilygas but North America.Peter KinnearBut the Fluid Control business don?t remember 75% of theFluid Control business is parts and supporting field activities, and 25% is newconstruction. So, as long as there's drilling activity and fracing activity,we've still got a pretty solid base of revenue in North America.The recab has been flat this year, and just because of thecomplexity of these frac jobs, these multi-stage frac jobs, our, the equipmentsuse very, in very severe conditions, it's wearing out quicker.And so we're getting a benefit because of the mix up inactivity in the US market that unless you understand the business, you wouldn'tnecessarily see.Kurt Hallead - RBC Capital MarketsOkay great, thank you.OperatorYour next question comes from the line of Rob MacKenzie,from FBR.Rob MacKenzie - FBRGood morning guys.Peter KinnearGood morning Rob.Rob MacKenzie - FBRPeter I wanted to try and see if you could in light of thequest data, the quest revision, if you could give us your best guess based onthe book as you see it right now; what industry-wide orders might look like interms of your view right now for '08, and also how FMC stands at this point.Peter KinnearWell, I think -- let me answer the first one. Year-to-date,we've had a pretty good percentage of the market activity. In the quarter, Ithink we had, the quest that just came out, I think we had 47% of the orders,and year-to-date, they're about 43%.Last year, we're targeting around a 40% share, so we'redoing a little bit better than we anticipated. Obviously it's lumpy because ofthe bigger projects you can gain or lose share, depending on individualprojects.We still track in our time horizon is we track theseprojects kind of out over the next 15 months, and right now, we have aroundhigh 300s in terms of potential projects and probably order value of $6 billionout there.So, we're still pretty optimistic that '08 is going to be agood year, and we have these five big projects that are yet to be awarded, andthey could fall in, some of those could fall into the tail end of '07.And some might roll into '08, but we're still prettyoptimistic about the plus our revenue per well, or per tree, we're ramping upour activity, so from an FMC standpoint we're probably in pretty good shapeprobably.Rob MacKenzie - FBROkay, and then following up on that, can you give us anupdate on where the bidding process stands on the past four contract right now?Peter KinnearWell, I can tell you that there are three bidders, andthey're still in discussion with Total. We, I think we've said publicly before,Total is a good customer of ours. We've done quite a bit of business with Totalin Angola itself.And so, we would anticipate that would help us in this --but it still it to has -- yet to be, decided and Total has to go through theprocess of getting Senegal, who are their partners to sign off first and thenSenegal's agreement to proceed with the project.So these things just take a long time and they seem to sitout there for a number of months before they get decided.Rob MacKenzie - FBROkay, and then my final question is on Subseaprocessing/separation, I know Petrobras has talked about using that on somewells in Brazil. Can you just give us an update or a feel for how much moreinterest you've seen in potential projects that are now being talked about withTordis basically starting to come on line soon?Peter KinnearYes I would say in generally, I think this will be a goodindication once Tordis is up and running maybe get six or nine months under itsbelt, I think this will be a really, we're very enthused about this because wethink it will be a showcase to the industry of handling issues like increasedwater production, water in the wells.You talked about Brazil; Brazil had the same issue. Theirwells are now starting to produce a lot of water; they're in deeper depth thanthe Statoil Tordis project is, so we're going to have to look at a little bitdifferent types of technologies.But you have to say that this is a pretty good trend for theindustry to start using subsea processing or separation on the seabed andassuming that it proves to be economic and it doesn't have any glitches, we'revery optimistic that we'll see more and more of this as we go forward.Rob MacKenzie - FBROkay thanks, I'll turn it back.OperatorYour next question comes from the line of Ken Sill fromCredit Suisse.Ken Sill - Credit SuisseYeah. Good morning guys.Peter KinnearGood morning Ken.Ken Sill - Credit SuisseSo I just wanted to run back by the spend just to make sure,I'm hearing, what you guys are saying. So, if you look at the FoodTech andAirport Systems, blended multiple in roughly 8 to 10, 8 to 11 times EBITDA, Iguess is what you're thinking. And that?ll get spun out directly toshareholders with $200 million dividend.Do you think that your, I guess, multiple for what's leftwill actually expand or do you think that your multiple is probably going tostay about where it is? Or do you have an expectation there?Bill SchumannWell, you're asking us to predict something that it'sobviously kind of difficult to forecast, but the remaining businesses will havea higher growth rate than the current collection. And you would anticipate thatthe margin would expand a little bit based on that. That's our guess right nowKen.Ken Sill - Credit SuisseYeah, I guess my only concern is you guys are alreadytrading at the highest multiples of any stock out there in the group. But Ithink, it does make a lot of sense from a business perspective.And then, why don't you go back on the, you know, everybodyis here trying to figure out what '08 is, and I know it's a little bit early,but essentially you're saying that you think that the process system marginsand that kind of 17% to 19% range are going to be sustainable into '08? Do youhave a view on that?Peter KinnearYeah, that's based on Fluid control holding up, but we wouldassume that those margins are sustainable, yes.Ken Sill - Credit SuisseAnd your current guidance is expecting a little bit ofmargin detriment in Q4 because of mix?Peter KinnearRight.Ken Sill - Credit SuisseAnd then if you look at production, you're kind of creepingup there on margin, so 10% to 11% this year, and I?m assuming the 100 basispoints creep you could see that coming in '08 and '09 and beyond, or becauseyour backlog actually goes out pretty far?Peter KinnearYes well, we would think, I'm just going to stick with '08right now.Ken Sill - Credit SuisseYes I understand.Peter KinnearYou're right, our backlog is beginning to stretch out longerthan it has been in the past.Ken Sill - Credit SuisseOkay. And then do you expect getting into, we still have todeal with the Airport and FoodTech for the next few quarters, so you'reexpecting them to be up year-over-year, but do you expect kind of typicalseasonality in Q4 for those 2 businesses?Bill SchumannWell actually, yes. The Airport business tends to peak inthe third quarter based on deliveries of deicers in advance of the winterseason.The FoodTech businesses have tended to be seasonal in thesecond and fourth quarters but this year, we had a big order that we weredelivering in the third quarter, so I wouldn't expect the fourth quarter toshow the seasonality in FoodTech it has in previous years Ken.So we would expect that fourth quarter for the combinationof those 2 businesses probably be flat to down a little bit versus the thirdquarter.Ken Sill - Credit SuisseOkay, that makes sense. So, and then obviously, we're allsitting here trying to figure out the slippage on some of the big West Africaprojects. At what point do the orders slip so much that you start pushingrevenues from '08 into '09 or is that a big driver what's going to happen inthe near future, what orders come in the next 6 months?Peter KinnearI don't think it's going to be a big driver. I mean, we haveplenty of backlog to work on and if we slip a little bit into '08, it's notgoing to be a big deal for us.Ken Sill - Credit SuisseSo you guys are actually fairly full for '08 given whatyou've already got on the plate in production systems; is that fair?Peter KinnearYeah, I mean, we have a pretty good workload; I'm not sure,we're not saying we can't take more work.Ken Sill - Credit SuisseI wouldn't want to imply that. Okay, so some of these delaysagain, it may be an issue of acceleration lever or anything, but it's notreally something that you're expecting is going to impact what's happening in'08; it could be, if it slips into '09, that's not a big deal at this stage.Peter KinnearRight, yes.Ken Sill - Credit SuisseOkay, thank you very much.OperatorAnd your next question comes from the line of David Andersonfrom UBS.David Anderson - UBSGood morning; I just wanted to kind of go back on the Subseaawards. Peter, if I heard you right, I think you were saying you thought awardscould actually dip perhaps a little bit this year.With these project delays, is there any, from our perspectivewhat do you think is the cause of it? It's certainly not on the manufacturingside; I mean, you guys don't have any problems in trees and umbilical don'tseem to be much of a bottleneck. But what do you think is the cause behind someof these project delays?Peter KinnearWell, I think the international, particularly in WestAfrica, the international company has to queue its project up with incompetition of other projects as an NPC or a Senegal decides which projects getbought off in which timeframe.So part of it's just the competitive dynamics of theinternational oil companies and how they get their project approved. I mean,there's lot of things in terms of the technology; there's lot of things, interms of there are other international partners on the project to get approved,and you've got to go to get Senegal.And Senegal and NPC as an examples, they may not agree withthe local content that the oil company has decided that they want to doin-country, and they may push back and say, "No, no you've got to go backand get your vendors to agree to more local content", and that may take 3to 4 months to get put in place or 5 months. I mean, it's just a verycomplicated cycle to get these projects approved.So I mean it's just the fact, that's just the way ithappens.David Anderson - UBSNow, if right now, let's say we're assuming something on theorder of like a 500 tree market right now, I mean, do you think this market cangrow substantially above that for the next couple of years?Peter KinnearWell I'm still pretty, personally pretty optimistic on theoutlook given the number of new deepwater rigs coming in here. And if you thinkabout the international oil companies looking for new fields, they have focusedin on deepwater where they're finding pretty big finds, and big discoveries.So the trend has been very positive over the last number ofyears and I mean we had this Gulf of Mexico lease sale 205 that the industryspent $2.9 billion, I think in lease commitments.So I mean, I would say it's still pretty bullish in terms ofthe secular trends we've seen will continue.David Anderson - UBSOkay, and on your Subsea backlog, another nice increasesequentially in our $2.6 billion. Can that continue to grow over the nextseveral quarters? Do you expect it to continue to grow or do you think it kindof flattens out somewhere around here?Peter KinnearWell, it really depends on the timing of when projects getawarded. I mean, if we, and we?ve stated I think before the Pazflor, just thatone project is $800-plus million. So I mean, if that comes into the backlog inone specific quarter, you could continue to build backlog.David Anderson - UBSOkay fair enough. And one last question on that spin-off; isthis, is your stand-along Company, is it going to be accretive on returnmetrics? It's pretty obvious on the growth side, on the margin side; but whatabout return metrics?Bill SchumannI'm not sure I understand the question.David Anderson - UBSWell, like return on capital; will your return on capitalbefore and after, does that go up?Bill SchumannI haven't looked at it; I believe it does.David Anderson - UBSOkay. And you felt like you talking about a couple hundredbasis points a year?Bill SchumannMaybe 100.David Anderson - UBSOkay great, thanks gentlemen.OperatorNext question comes from the line of Jim Crandell fromLehman Brothers.Peter KinnearGood morning Jim.Jim Crandell - Lehman BrothersGood morning. Peter what is the average value of a subsidyseparation units for the jobs that you've won to date?Peter KinnearNow we really haven't broken out that data and it reallydepends on the application and the complexity of what's required on the seabed.Jim Crandell - Lehman BrothersCan you give a range?Peter KinnearWell, the only published data and I think the only thingwe'd want, really want to talk about is the value per well, and obviously thevalue per well has gone form the $9 million -- as I mentioned earlier -- the $9million range in '05 to $14 million per inbound order in '06, and year-to-date,we're running at $19 million. And that adds our mix of subsidy processing increases,that's the driver.Jim Crandell - Lehman BrothersOkay; for Pazflor is it your understanding at the point, areyou and the other two competitors do you think bidding these subsidy separationunits and the subsidy trees together?Peter KinnearYes, Total has early on they decided that they would put allthe trees and the subsidy processing in the package as one bid. And that'swhat, and they're still sticking to that.Jim Crandell - Lehman BrothersOkay, so 49 trees and 3 Subsea separation units, I wouldthink would be about $800 million.Peter KinnearWell that could be the case; I mean, they're looking youknow, we've got local content issues and it just depends on how much --obviously, the manufacturing country is more expensive for us thanmanufacturing in an established situation.Jim Crandell - Lehman BrothersThis is sort of second hand information, and I just got itfrom a client Peter, and if you haven't seen it, it's maybe unfair to ask youto comment. But Quest not only is cutting their '07 estimate but cut their '08estimate by 23% and cut their '07 to '11 forecast by 13%. So I mean, '08 seemslike an unusually large reduction and probably by the pushing out of theexisting contracts.The contracts that you would have sought would have appearedin '08, are the delays of the '07 projects, do they have implications for thedelays of the '08 projects, and have you gotten more cautious as to when theseawards will come?Peter KinnearWe haven't analyzed all the data. We saw the reduction in?07, which was pretty obvious given that these 5 big projects have slipped outprobably in '08. You know beyond that I mean, we track our own, as I mentionedearlier, our own database, Quest does a reasonably good job.It's just hard to predict the timing and there are newdiscoveries every day that people have in their portfolio. I think there is 530odd deepwater discoveries; about 25% are actually in production and some are inthe process of bringing on production. And this cycle between discovery andstartup is a 4 or 5 year cycle.So the oil companies, there's only -- if you look at the 5big oil, majors last year, in '06 only 2 had increasing production. The other 3had declining production, so the international oil companies, if they don'tplow back and reinvest, I mean they're going to be in a situation where they'vegot declining revenues and declining production.So it's kind of a Catch-22 for them; they have to bring onsome of these fields; they have to, the avenue where they've turned to isdeepwater, so year-over-year you could see changes, but I think that the trendis still very positive for deepwater subsidy.Jim Crandell - Lehman BrothersIs there really, is the things that's really causing thedelays Peter, the government delays, particularly the West African Governmentdelays?Peter KinnearWell, that does tend to be the bottleneck. I mean there'ssome inflation in the industry for equipment associated with these deepwaterfields. I mean the rig rates have gone up, the costs for new FPSOs has gone up.We have raised in our subsidy pricing has gone up, but you look at theeconomics, I mean they're, you hear numbers in the range of $14 to $18 offinding and developing costs.If they can bring a field on for $14 or $18 a barrel, andthe market price is $70 plus, they're making a lot of money. There's no reasonfor them not to go forward with the se projects.Jim Crandell - Lehman BrothersFinal question Peter, the -- if you look back 6 to 12 monthsago over the projects that you would have thought would be 2008 awards, and Iknow you put dates on the awards, and were to look at it now have you pushed,do you think 25% of your potential awards in '08 out into '09, and do you thinkthat the projects are looking at that kind of delay? Have you pushed back yourown internal expectations of these big projects?Peter KinnearWell, as I mentioned, we track all these projects on ourown, and we obviously deal directly with oil companies and have pretty goodcontact in terms of what's going on and I mean the delays here have probablybeen a little bit unusual in that some of these we thought would have come onsooner.But I mean you know, like we did win about like BPs Car wasit was pretty straightforward, and Norway came on the radar screen, BP went outfor commercial tender; the Petrobras Cascade project was pretty much on trackin terms of execution.Another one that got delayed, Chevron Gorgon for examplethey had a lot of issues around environmental issues in Australia that they hadto get sorted out before it got sorted out, and that project seems to be gone.It's not been announced who's going to win it yet, but it was on our radarscreen for an early '07 decision and was probably got pushed back.You know Shell, again that was a lot of internal discussionsbetween Shell and Petrobras to get that project sorted out. So it just varies;some go quickly and others take a longer time to come to fruition.Jim Crandell - Lehman BrothersOkay, all right, thank you very much.OperatorYour next question comes form the line of Joe Gibney fromCapital One Southcoast.Joe Gibney - Capital One SouthcoastGood morning guys, how are you?Peter KinnearGood morning Joe.Joe Gibney - Capital One SouthcoastMost of my questions have been answered; just wanted tofollow up on one minor one. Just wanted to check on the status of the Malaysianfacility expansion, if you could just give us an update on the timing andprogress there.And also Peter, if you could touch a little bit on howquickly you have to add people to meet the large growth demands we've hadrecently; any personnel constraints that you see over the next year obviouslyas you build your backlog and capacity?Peter KinnearJust let me answer Malaysia first; the plant was finishedtowards the end of '06 and we got it operational probably in the first quarterof this year, so it's manufacturing product and for our customers in the FarEast. We, the staffing level is probably a couple hundred people in the plantalready, so we're in pretty good shape for Malaysia, and it's turned out to bea real nice facility for us.And on the people side, sorry, on the people side I mean themarket is still very tight for experienced people in terms of project managers,project engineers, offshore service technicians, in that arena it's stillpretty tight.We have brought on a lot of new grad mechanical engineersover the last number of years to help supplement our activity in terms ofmanpower and capabilities. But it and the supply base is still pretty tighttoo. And so I mean, executing our projects is not easy; it takes a lot of hardwork and effort to make all that happen.Joe Gibney - Capital One SouthcoastThanks guys; I'll turn it back.OperatorWe have follow up question from the line of Geoff Kieburtzfrom Citigroup.Geoff Kieburtz - CitigroupThanks, just wanted to come back on the backlog. Can youtell us out of the $3.7 billion backlog, how much is expected to be realize asrevenue in '08, and how much '07, '08, and I guess -- I don't know if you canbreak down '09?Bill SchumannGeoff this is Bill; we're going to realize about 30% of it in'07, and obviously some of the remaining goes into '09; I don't happen to havethe number on that, but hopefully we'll get some more backlog that we canexecute in '08 also.Geoff Kieburtz - CitigroupOkay.Bill SchumannBut the good number is about 30% of it.Geoff Kieburtz - CitigroupAnd would that apply to the Subsea backlog as well, or wouldthose numbers be any different? Bill SchumannIt's not quite that high on Subsea, but as 2.6 of the 3.7it's got to be pretty significant.Geoff Kieburtz - CitigroupYes, so a little bit under 30% in '07; any difference in the'09 and beyond?Bill SchumannWell, I think the subsidy backlog is the only backlog wehave that stretches to '09, but again, I don't have a real number on that. Ijust know we have some in '09.Geoff Kieburtz - CitigroupOkay, and given these delays do your bids for these variousprojects have a time limitation on them? Is there a point at which if adecision hasn't been made, you effectively withdraw your bid?Peter KinnearYes, we have a validity date that expires and you know,depending on the circumstances, obviously we will reprice it yes. And you know,we have cost inflators in the seas in our contracts, so normally when we have abid Geoff that may be outstanding for 9 months, we kind of pre-escalate thecosts that we get in and we pre-escalate it and we bid on that basis, so we'reprotected with some, through the process into the award.Geoff Kieburtz - CitigroupOkay, are there any bids that are coming up to thatexpiration date? Peter KinnearYes, but I mean we always have some that come up to theexpiration date, but I don't think we want to be specific on that.Geoff Kieburtz - CitigroupOkay, all right thank you.OperatorAnd your final question comes from the line of Brad Handler,Wachovia Capital Market.Brad Handler - Wachovia Capital MarketThanks for letting me back on. I just, a follow up aboutprocessing please, the Cascade and Chinook fields; that was originally intendedto, or I think maybe you thought it was going to be a separation, it was goingto include separation and it wound up just being boosting if I have it right.To what extent is that a phenomenon that is like to recur?Maybe in other words, is it downsizing of the processing needs? Maybe it's justabout adding some color as to that project and to be have some of the othersare progressing that way?John GrempThis is John; on Cascade, it has to do with gas volumefacture, the amount of gas versus liquid. In the case of Cascade, the gas levelwas low enough that they didn't need to separate before they boostedproduction.So I think it's, I don't believe it every envisionedseparation; maybe in the early days there was a separation component, but ithas to do with the gas volume, gas liquid ratio. And so the case of ShellPerdido and BC10 they have a higher-level gas and you need to separate some ofthat gas out and so they can utilize the pumps to boost it. That's thetechnical reason why one processing system includes separation, the otherdoesn't.Brad Handler - Wachovia Capital MarketOkay that's helpful, so my guess is then you'd steer me notto makesome conclusions that we were broader than still specific answer as towhether or not separation is as likely to be as large or anything along thoselines? John GrempWell I think that goes back to Peter's point; depending onthe solution that you're trying to solve, the processing can be very complexlike in the Tordis field where you've got liquid gas separation, water, oilseparation, sand it's very complex, and then you've got Cascade which isrelatively simple. So you have to be careful on the assumptions on processing.Brad Handler - Wachovia Capital MarketFair enough, okay that helps thanks.OperatorAnd that was the final question. Do you have any closingremarks?Rob CherryYes, thank you Operator. This concludes our third quarterconference call. A replay of our call will be available on our websitebeginning at 2:00 p.m. Eastern Daylight Time today. If you have any furtherquestions, please feel free to contact me.Thank you for joining our call today.OperatorAnd this concludes today's conference call. You may nowdisconnect.Copyright policy:All transcripts on thissite are copyright Seeking Alpha. However, we view them as an importantresource for bloggers and journalists, and are excited to contribute to the democratizationof financial information on the Internet. (Until now investors have had to paythousands of dollars in subscription fees for transcripts.) So our reproductionpolicy is as follows: You may quote up to 400 words of any transcripton the condition that you attribute the transcript to Seeking Alpha and eitherlink to the original transcript or to www.SeekingAlpha.com.All otheruse is prohibited.THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATIONOF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHERAUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATETRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THEREPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. 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  Jarden Corp. (JAH)Q3 2007 Earnings CallOctober 30, 2007 9:45 am ETExecutivesMartin Franklin - Chairman and Chief Executive OfficerIan Ashken - Vice Chairman and Chief Financial OfficerJim Lillie - President and Chief Operating OfficerAnalystsBill Chappell - SunTrust Robinson HumphreyGreg Badishkanian - CitigroupCharles Strauzer - CJS SecuritiesReza Vahabzadeh - Lehman BrothersJoe Altobello - CIBC World MarketsJon Anderson - William BlairKarru Martinson - Deutsche BankJustine Ho - Grandview CapitalCarla Casella - JPMorganPresentationOperatorGood morning ladies and gentlemen, and welcome to JardenCorporation's Conference Call. This morning's call will begin with Managementmaking some formal remarks. When they have concluded, a question-and-answerperiod will follow (Operator Instructions).I will now turn the call over to Erica Pettit of FD.Erica PettitGood morning, and thank you for joining us. This morning'scall to discuss Jarden's third quarter 2007 financial results will begin withManagement making some formal remarks. When they have concluded, aquestion-and-answer period will follow. The operator will instruct you again onthe procedure at that time.In accordance with regulation FD, or Fair Disclosure, wewill be webcasting this conference call. You can access the webcast atwww.jarden.com through November 13, 2007.Any redistribution, retransmission or rebroadcast of thiscall in any form without the express written consent of Jarden is strictlyprohibited.Please note that on this call the Company may discuss eventsor results that have not occurred yet or have not been realized, commonlyreferred to as forward-looking statements.Such discussion and statements will often contain words suchas expect, anticipate, believe, intend, plan, and estimate. Theseforward-looking statements are within the meaning of the Federal Securitieslaws and are intended to qualify for the safe harbor from liability establishedby the Private Securities Litigation Reform Act of 1995, including statementsregarding the outlook for the Company's markets.The demand for its products, estimated sales, segmentearnings, earnings per share, cash flow from operations, future revenues andgross margin requirement and expansion, achievements of financial and strategicobjectives, the success of new product introductions, closing costs andexpenses, and the impact of acquisitions, divestitures, restructuring, securityofferings, and other unusual items, including Jarden's ability to integrate andobtain the anticipated results and synergies from its acquisitions, includingthe K2 acquisition.These projections and statements are based on Management'sestimates and assumptions with respect to future events and financialperformance and are believed to be reasonable, through, though are inherentlydifficult to predict.Actual results, which may differ materially fromforward-looking statements, will be dependent on various risks factors andrisks, including those described from time to time in the Company's filingswith the Securities and Exchange Commission, including the Company's Form 10-Kand recent Form 10-Q.The content of this webcast contains time-sensitiveinformation that is accurate only as of this broadcast, October 30, 2007. TheCompany undertakes no obligation to make any revisions to the statementscontained in our remarks, or to update them to reflect events or circumstancesoccurring after this conference call.And now, with that, I'd like to turn the call over to MartinFranklin, Chairman and Chief Executive Officer. Martin, please go ahead.Martin FranklinThanks very much, Erica. Good morning, ladies and gentlemen.With me on the call today is Ian Ashken, our Vice Chairman and Chief FinancialOfficer, who will review the financial results. Also on the call is Jim Lillie,our President and Chief Operating Officer.We're going to use a slightly different format for the calltoday, particularly as we know there are a number of other companies reportingearnings this morning. Rather than having extended prepared remarks, I willprovide a brief strategic overview of our business and ask Ian to provide amore detailed review of our financial results.We will then open the call up to questions, so that we cananswer any specific questions analysts or investors may have. Jarden recordedanother quarter of earnings growth, with as adjusted earnings per share of$0.94, compared to $0.90 in Q3 of 2006.This growth was based on the success of our acquisitionstrategy, expanding margins, and effective working capital management. Wereported our strongest sales quarter ever, with sales of $1.3 billion, comparedto sales of approximately $1 billion dollars last quarter and in Q3 2006.The increasing size of our company adds to the diversifiednature of our product portfolio. While we are number one in the majority of ourcategories we serve, no individual category is material to Jarden as a whole.It is disbalance between market leadership and niche marketsthat we believe gives Jarden a unique position in the mid-cap consumer productsgroup and a qualitative edge when competing with other players in any givenmarket.On balance, the third quarter finished slightly better thanwe anticipated, with our ability to protect and expand gross margin in aninflationary cost environment and price-sensitive retail market, offsetting thepressures on the top line.From a strategic perspective, our goal is to move our grossmargins from the mid-20s to close to 30% in order to create the financialcapacity to spend investment dollars on new product innovation and brandsupport, which in turn drives retail sales and consumer interest in our corecategories.We are proud of the outstanding performance of our businessesin this area on a year-to-date basis in 2007. The more challengingmacro-economic environment, which we see extending into 2008, presentsopportunities to leading niche suppliers like Jarden, by creating anenvironment where we can further distinguish our company from our competitors.Our strategy is to focus on margin discipline and not tochase some profitable revenue simply for revenue's sake, while staying true toour long-term growth and financial goals.Retailers today are looking to offer consumers better valueand differentiated products and we are helping them achieve this aim, while notsacrificing our brand equity for short-term revenue gains. Our success in thisarea during Q3 was demonstrated in a number of categories, such as our Volkl TigerShark adjustable ski and Saltwater Gulp fishing bait within Outdoor Solutions.Specialty consumer appliances, such as the next generationof Margaritaville Frozen Concoction Makers and the Rapid Bath pet products inConsumer Solutions, political party playing cards and organic fire logs inBranded Consumables, and state-of-the-art military and marine antennas inProcess Solutions.The highlight of the quarter was undoubtedly the closing ofthe K2 acquisition on August 8. As I mentioned in my letter to shareholdersearlier this year, Jarden is built on our products, our people, and our brand.K2 has outstanding elements in each of these categories and,coupled with Jarden's disciplined financial approach, we believe there arenumerous opportunities to expand margins, increase investment spend, and driverevenue synergies when the macro-economic conditions and weather justify theseapproaches.The immediate margin expansion in 2008 will come fromintegration activities, with the second level of improvements coming fromapplying lean manufacturing, Six-Sigma-type productivity improvements to K2'smanufacturing base and leveraging the return on their SG&A expense.We are actively looking for a new President of our OutdoorSolutions segment and I have interviewed a number of outstanding candidates,which is a testament to the exceptional growth opportunity we and thecandidates see in the future of Jarden Outdoor Solutions. We anticipate being able to announce the successfulcandidate before the end of the year.Next month we will complete our 2008 budgeting process andwe are once again anticipating another record year of performance. We stillneed to deliver on the remainder of this year. In particular, we are focused onour 2007 cash flow goal of approximately $300 million of cash from operations,bringing us into the new-year with plenty of liquidity for future growthopportunities.I'd now like to hand over the call to Ian to review ourthird quarter financial results before opening the call up to questions. Thankyou.Ian AshkenThank you, Martin. As in previous quarters, during myfinancial review I will, in most cases, exclude from my commentary the non-cashFAS 123R stock compensation charge, the amortization of acquired intangiblesand reorganization and integration expenses noted in our earnings release.Our goal in presenting as-adjusted numbers is to enhancecomparability with period-over-period numbers, as well as with other consumerproduct companies. During this quarter we've also adjusted for theprofit-in-inventory elimination arising from the K2 acquisition and thenormalization of our effective tax rate to its new estimated long-term rate of36%.As Martin mentioned, the diversified nature of our productportfolio in a difficult consumer products market allowed us to deliverimpressive results for the third quarter, with as-adjusted EBITDA, or segmentearnings of $176 million, compared to $137 million for the same quarter 2006,an increase of $39 million, or 28%.Overall as-adjusted EBITDA margins of 13.3% showed a slightincrease over the year-over-year quarterly comparison and a close to 100 basispoints improvement over the second quarter. The increase from Q2 to Q3 reflectsthe seasonally strong nature of Q3, as well as our focus on protecting marginsin order fund further product innovation.We are pleased to report as-adjusted fully diluted EPS of$0.94 for the quarter, exceeding both last year and the street's estimate. Inconform to analyst presentation; starting in 2006, we will not exclude the FAS123R charge from our as-adjusted result.We intend to take the necessary action during the fourthquarter to bring the annual FAS 123R expense in 2008 down to $0.20 or less.Thereafter, our goal is to maintain the FAS 123R charge at no higher than 6% to7% of as-adjusted EPS, with stock incentive awards still being largely based onperformance, rather than time invested in stock. Including the FAS 123R charge,as-adjusted EPS for Q3 would have been $0.80.Our growth in as-adjusted EPS includes the impact of thehigher share count arising from the K2 transaction. On a full-quarter basis inQ4, we expect a fully diluted share count of approximately 79 million, althoughthis is obviously somewhat dependent on our share price during the coursequarter.Cash flow from operations continued to remain on track inthe quarter, and for the nine months ended September 30, 2007. For Q3, 2007cash flow from the operations was $5.4 million, and on a year-to-date basis wecould look at cash flow from operations of over $23 million. On a year-to-datebasis in 2007 we have absorbed about $24 million in reorg andacquisition-related cash payments, compared to more than $30 million last year.Q4 will continue to be our strongest cash flow quarter and,with our goal of approximately $275 million of cash flow from operations inthis quarter, we will bring our overall net debt-to-EBITDA ratio from a littleover four times to close to three-and-a-half times at year end. When we talkabout our net debt-to-EBITDA ratio, we use the debt on the balance sheetagainst an annualized as-adjusted EBITDA run rate.However, for bank financial covenant purposes, while we usethe same EBITDA number, the debt is lower, as our $250 million assetsecuritization facility is not considered indebtedness for bank purposes. Asmentioned on our last conference call, our 2008 Q1 cash flow from OPS should bestronger than in previous years.As the dated receivables from the K2 winter business startto be collected. This will have the impact of helping to flatten out ourworking capital cycle during 2008, but we will still generate the vast majorityof our cash flow from OPS in Q4.Jarden's reported year-over-year Q3 net sales curve cameprimarily from the K2 and Pure Fishing acquisitions, with certain specialty andinternational sales also growing, offset by declines of sales to certaindomestic retailers.As mentioned on the prior conference call, towards the endof Q2 we saw some major customers start to aggressively manage inventory downagainst their prior forecasts. And coupled with a tougher domesticnon-specialty retail market, this has negatively impacted domestic sales. Wehave planned our business for these tougher domestic conditions to continue forthe time being and have managed our inventory and discretionary spendaccordingly.However, we continue to believe that the average long-termorganic growth rate for the company will be 3% to 5%. We have achieved over 5%organic growth in 2005 and 2006 and, while we will be under the low end of ourrange in 2007, in the long run we believe the average will settle in ourindicated range. Branded consumables experienced less of a sales decline thanin the second quarter and reported strong segment earning margins of over 15%for Q3.Whether this segment returns to organic growth in Q4 islargely dependent on the weather, as this significantly impacts the sales offire logs. While fire log sales are less than 3% of Jarden's overall sales, Q4is the seasonally strongest quarter. Jarden Consumer Solutions reported flatsales against a strong Q3 2006 column.While segment earnings were down slightly in the quarter,for the nine months ended September 30, 2007 as-adjusted EBITDA margins wereimproved to 12.3% from 11.5% in this segment. We anticipate JCS's yearfinishing with between 13% to 14% as-adjusted EBITDA margins. The growth inJarden Outdoor Solutions sales and segment earnings margins was primarily dueto the K2 and Pure Fishing acquisitions, as well as the Coleman Europeanbusiness, offset by a decline in domestic sales.As-adjusted EBITDA margins for this segment grew to 14.5%for the three and nine-month periods ended September 30, compared to 8.5% and11.3% for the same periods in 2006. Jarden's as-adjusted gross margin for Q32007 improved to 28.2%, versus 26% in Q3 2006, due to the inclusion of the K2and Pure Fishing acquisition, a change in mix within existing retailers, priceincreases, benefit of integration-related activities, and improved operatingefficiency.Our as-adjusted SG&A costs were about $220 million and$146 million, or 17% to 14% of net sales from third quarter of 2007 and 2006,respectively. The increase from the prior year primarily reflects the inclusionof K2 and Pure Fishing and planned increases in marketing, advertising, andpromotional expense.Depreciation and amortization for the quarter was $26million, compared to $16.1 million in the same quarter last year capitalexpenditures for the quarter and year-to-date were $18.1 million and $55.4million, respectively. We expect capital expenditures to approximate D&Afor the full year and continue at the level of less than 2% of revenues.Interest expense for the quarter ended September 30, 2007was $43 million, versus $29.6 million in 2006, the increase primarily due tothe indebtedness incurred to fund the K2 and Pure Fishing acquisitions. Oureffective tax rate was 36% for the three and nine-months ended September 30,2007.Improvement from the 36.5% effective tax rate we've had forthe last couple of years is due to our geographic income mix and the K2acquisition. In 2007 we estimate that we will pay slightly greater than half ofour booked tax and cash taxes as a result of our growing internationalprofitability, where we do not have NOL's to offset the notional taxes.Our actual reported tax rate in Q3 2007 was 38.5%, thedifference from the effective tax rate being primarily the excluded andadjusted items and some one-time permanent differences. At September 30, 2007our net current assets were $1.4 billion. Net indebtedness was approximately$2.7 billion, our total booked stockholders' equity $1.5 billion, and equitymarket capital approximately $2.5 billion.And now I'd like to hand the call back to Martin and we'llbe happy to answer any questions during the Q&A session at the end.Martin FranklinThank you, Ian. I'd actually like to open the call to anyquestions, since we have no more formal remarks. Thank you.Question-and-Answer SessionOperator(Operator Instructions) Our first question comes from BillChappell with SunTrust Robinson Humphrey.Bill Chappell - SunTrust RobinsonHumphreyGood morning.Martin FranklinGood morning, Mr. Chappell.Bill Chappell - SunTrust Robinson HumphreyI wanted to talk a little bit about Branded Consumables,just kind of the trends going on there. You did have a little bit of benefit, Iguess; of an extra month of the fire log business, so surprised that was down alittle bit. Maybe you could talk about what you're seeing there and how thatshould play out over the next couple quarters?Martin FranklinYeah, I mean some of--there are two impacts. Some of itsweather and some of its specific retailers. I mean, I think overall thatbusiness is fine, but the reality is you have, we have a slow start to theseason. And everyone's been tracking the weather. You can see what it's like inthe Northeast.So we're off to a slow start. If you remember last year, wehad a slow start as well. So again, there's nothing on our--there's nothingsort of outstanding to us in terms of what's going on with that business. It'sjust a se--it's really just seasonal in nature.Ian AshkenI'd also say, Bill, that in terms of some of the customersin that segment, as Martin touched on, I mean, we're not--there's nothingcomping as there was in Q2, different at, for example, Home Depot.But that sector is definitely down year-on-year and we'redown with them. It doesn't really change our outlook for the longer term inthat business, but we're obviously reasonably excited.Jim LillieYes, Bill, I would just add a third component to that is Ithink all retailers are just managing their working capital and their inventoryclosely. And so they're not loading in at levels they have historically loadedin the past, but there's nothing systemically wrong with the category itself.Bill Chappell - SunTrust RobinsonHumphreySure. And then also, I guess, on the K2 business, with theweather in mind, I mean it's surprising that it's off to such a strong start.Is it market share gains? Is it just you had really?Martin FranklinThe reality is that's nothing to do with the weather. That'ssimply the loading in of inventory. So that they have the skis in the storeswhen, going into the selling season. Cause if you ski, what you know is thatthese people tend to not buy their skis until it starts snowing, and as soon asthe snow hits people go out and buy their skis. And so they load up inventoryand it's really got nothing to do with the weather.Where we are doing better than we expected is obviouslycoming off of a poor season last year. The fact that Volkl and K2 had, I think,relative to some other companies, had good sell-through at retail and are notsitting on excessive inventories going into the season, and have products thathave hi, I think good demand aspects to them. The sell-in has actually beenpretty healthy.Bill Chappell - SunTrust RobinsonHumphreyOkay. And then just two housekeeping. Am I right in sayingthat once you used to think that '08 was going to have about $0.30, $0.32 ofFAS 123 charges and now you're saying under $0.20? And then also, is there anyway you can kind of give us a rough idea of what the monofilament business willdo to Process Solutions? Is it a $50 million business? Is it a $100 millionrevenue business? Just for modeling purposes?Ian AshkenI'll have to get back to you on the second part of thatquestion, because the answer is I don't know that off the top of my head. Interms of the first one, you're correct. I'm not sure what different people inthe Street have, but for next year in '08 we're definitely looking to have$.020 or less FAS 123R charge.Bill Chappell - SunTrust RobinsonHumphreyOkay, great. Thanks.Martin FranklinThank you.OperatorNext we'll go to Greg Badishkanian with Citigroup.Greg Badishkanian - CitigroupGreat. Thanks, and congratulations on a really nice quarter,guys.Martin FranklinThank you.Greg Badishkanian - CitigroupYes, my question is just first with organic sales growth.Sort of looking at maybe flattish organic? Is that kind of in the ballpark?Martin FranklinThat's right.Greg Badishkanian - CitigroupOkay. And last quarter it was down low-single digits onmodeling. So what led to kind of a little bit of acceleration there in yourorganic growth?Ian AshkenI think it's primarily the shift between Outdoor Solutionsand Consumer Solutions, in the sense that where we got hit hardest in Q2 was inour Outdoor Solutions business, which Q3's a seasonally slow quarter for theColeman business. It's obviously with the addition of K2, Q3 and Q4 are bothstrong.And if you look at Jarden Consumer Solutions which, at thebeginning of their season, although they were flat year-over-year, Q3 of '06was a very strong quarter for them, in terms of that we had a number, if youremember, heating and bedding sell-ins earlier, which haven't happened thisyear with the retailers looking to manage their inventory.So, I think that in terms of--obviously Branded Consumableswas down, but was down less so. Outdoor Solutions was sort of stable and JardenConsumer Solutions produced a good quarter.Greg Badishkanian - CitigroupOkay. That's helpful. And looking out at K-2, now that youhave it under your belt, how's it performing relative to what you expected? Andare there more opportunities than maybe you thought going into it?Martin FranklinI mean, obviously it's too early to know how good it's goingto be, except I could say that we've had no surprise, no negative surprises.We've had a few positive things that have come out of this. I think that, giventhe amount of time that we had between signing and closing, we really did hitthe ground running in terms of getting the integration geared up.We've already shut the headquarters and done all of thatintegration. We've already moved pretty aggressively on integrating Shakespeareand Pure Fishing together. There's a lot that's been done in a relatively shortperiod of time and there's still a lot to do.So we're tracking well, very well I'd say, against the $25million to $50 million of savings that we expect to get over the next couple ofyears, and I think on balance we've got no regrets. We think this is the rightthing for the company. It hit the financial metrics we were looking for and Ithink it's got some upside.Greg Badishkanian - CitigroupThat's good to hear. Just one final question, you mentionedbasically not going for unprofitable business, and that probably had a littlebit of a hit to your top line, but it helped your profitability. Is that, canyou give us some examples of that, and is that the primary benefit to the grossmargin side that we're seeing?Jim LillieGreg, this is Jim. I'll answer that. I think more, you couldcharacterize it by saying that if there are targets out there for our revenue,it doesn't make a lot of sense for us at the end of the quarter to lowerprices, impact our margins, to meet some kind of artificial target.Greg Badishkanian - CitigroupYes.Jim LillieIt makes more sense for us to maintain the discipline sothat retailers don't then expect us to do this on an ongoing basis, much like acar dealership would at the end of the month or end of the quarter.Ian AshkenGreg, this is Ian. I'll give you a specific example of this.You asked for one. What we typically do is we agree at the beginning of aseason to mark down dollars with retailers that will and they can then allocatethose over a particular product line.Last November, if you remember, Mr. Coffee went on amarkdown and that's just where they allocate the dollars. So, when they comeback to us and say, look, we'll give you another promotion of, I'll just useMr. Coffee as an example, 5 million, but we want X percent more markdowndollars, which then changes the metrics for other retailers, which would thenbe (inaudible).Well, we don't at the moment do that, because we want tostick to the disciplines of having agreed to at the beginning, and as Jim said,once you've done that, if you do go down a somewhat slippery slope, it makes itmuch more difficult for following years to hold the line and to do what wethink is right for the category.Greg Badishkanian - CitigroupOkay. That's helpful and good to hear. Thank you.OperatorOur next question comes from Charles Strauzer with CJSSecurities.Martin FranklinHi, Charlie.Charles Strauzer - CJS SecuritiesHey, good morning. Quick question for you, it's probably forJim. Picking up on the K2 talk and the integration, $25 million to $50 millionin cost savings and, Jim, you've had this for a while now. Are you finding anyadditional opportunities there that make you more comfortable with the range,maybe something that could take us above the range, that kind of thing?Jim LillieWell, you know we're 90 days, less than 90 days in, on theintegration, Charlie. And so, while I know everybody on the call would love meto change the metric, it's a little too early to do that. But, as Martin said,we really have not had any unpleasant surprises, diligence was very thoroughand I think, if anything else, what we really learned is there's really solidmanagement teams out there and they're operating their businesses very well. SoI think we have a healthy run rate, but I'm not quite ready to give a numberyet, despite Martin trying to get me to give a number.Charles Strauzer - CJS SecuritiesThat's fair enough. And Ian, just a couple of quickquestions for you. Blended rate assumptions we should use for Q4 and also sharecount assumption and D&A assumption, if you could maybe share that with us?Ian AshkenYes, I think that the, in terms of the share count, 79million is probably a good one to go with. D&A--obviously in our asadjusted numbers we back out the intangible amortization. So although, fullquarter D&A was $26 million, as-adjusted $23 million, that $23 million willprobably go to about $26 million, given that we're going to have K2 for a fullyear, I'm sorry, for a full quarter.In terms of interest, if you read the newspapers, everybodythinks interest rates are going to go through the floor. We don't manage ourbusiness that way and, as it is, we're about 58% fixed. So even if there is aninterest rate reduction, it will be, yes, only a less than half impact on us.So I think that an interest expense probably in the range ofabout $55 million for Q4 is a reasonable estimate. If rates do come down, thenwe'll get some benefit from that.Charles Strauzer - CJS SecuritiesGreat. And then, Martin, just the last one for you. Justwhen you look at the overall debt environment, credit environment, M&Aenvironment, give us an update there on what you're seeing from propertiesavailable, competition for those properties, the credit markets easing ortightening for you and?Martin FranklinI think that you saw some recovery in the bond market. Imean you only have to look as far as our own bonds. And in the last week itsort of went south again. And I think that that's going to be, it's going to bea while before the debt markets settle down.I think that there is a time lag in the middle market, whereprice expectations have not really come down yet, and people who have pulleddeals because they think that if they wait they'll get a better price.And if the market doesn't recover, and frankly I don't thinkit will recover to levels that it was, say, a year ago, what you will find isthat people will start accepting more moderate valuations in the absence ofalternatives and the hunt for liquidity.So I think there is a bit of a lag. I said before, and I'llsay again, that I think that the next five years will be a period forcorporates, which will be different from what you've seen over the last fiveyears, which is transactional activity being led by all the oil firms.And I think that corporations is going to be at a strategicadvantage, given their size. I think there's a flight for safety companies withbigger balance sheets and more diverse assets will be able to get betterfinancing terms.So I think that we'll be in a good position from anacquisition standpoint in the next six months, a year. But we're sort of takingour time. As you know, we're focused on generating the cash that we want togenerate for the balance of the year, to give ourselves quite a bit offirepower going into 2008.Charles Strauzer - CJS SecuritiesExcellent. Thanks a lot.Martin FranklinThanks.OperatorNext we'll go to Reza Vahabzadeh with Lehman Brothers.Reza Vahabzadeh - Lehman BrothersGood morning.Martin FranklinGood morning.Reza Vahabzadeh - Lehman BrothersHow do you feel about inventory for your products at retail,relative to consumption trends you've seen?Martin FranklinWe're actually in pretty good shape. Our sell-through hasbeen good and one of the things for example, the ski business, as I mentionedbefore, is a good example of that where you could have issues relative to whereretail trends existed.And if you didn't have good historic sell-through it couldget a little sticky. I think where we've been good in our business is we'vemanaged our inventories on a go-forward planning basis, but our retail turnshave been healthy.So we're not looking at channels that are full of inventory.And so I obviously we feel pretty good about it.Reza Vahabzadeh - Lehman BrothersBut I assume you did see some inventory pull-back, anyways,by your customers, despite your decent sell-through?Martin FranklinYeah, but I think it's not so much the sell-through as theretailers taking a cautious view on their overall businesses?Reza Vahabzadeh - Lehman BrothersRight.Martin FranklinAnd keeping fewer days of inventory in anticipation of aneconomic slowdown.Reza Vahabzadeh - Lehman BrothersGot it. And then how should we think about your input costoutlook, especially vis-à-vis China, Yuan, and the VAT tax situation?Ian AshkenHi Reza. It's Ian. I think that if you go back and our viewof '08 isn't that it's going to be the--I don't want to call ithyper-inflation, but high increases that we saw in '05 and '06, but I alsodon't think that it's going to be '07, where we started the year and thoughtthat costs would be about flat.They will definitely be up in '08. What you've got toremember is that, if you go back to the beginning of '05, when really oilprices started to going up, to use that as an example, the increases between'05 and '06 going from 35 bucks to 70 bucks a barrel is a 100% increase.So even now, if we're going from the beginning of this year,let's say from 73 to low to mid-90s, in percentage terms it's not the same.Obviously these are increases in that we're going to have to continue to managethrough them.But it's not the same as it was, and we don't anticipate itwill be the same it was, within '05 and '06.Reza Vahabzadeh - Lehman BrothersSo the net-net, you're expecting modest inflationarypressures on input costs in '08?Ian AshkenYes, I think we are and we definitely believe we're in aninflationary environment. It's just going to be beyond commodities. You'regoing to see it on the labor front coming out of China and obviously a lot ofpeople are reassessing where the right place is to, from a cost perspective, tomanufacture things and offsetting that against the infrastructure and the needto be able to get product from A to B on a timely basis, given that retailersreally don't want to keep a lot of inventory.Reza Vahabzadeh - Lehman BrothersGot it. Thank you.OperatorNext we'll go to Joe Altobello with CIBC World Markets.Joe Altobello - CIBC World MarketsThanks. Good morning, guys.Martin FranklinMorning, Joe.Ian AshkenMorning, Joe.Joe Altobello - CIBC World MarketsFirst question. I just want to go back to Reza's question onthe retail environment. Could you elaborate a little more there? I mean itsounds like, as you said, some retailers are pulling back on inventories.Is that the vast majority of it, or are we starting to see aslowdown in terms of consumer spending? Martin FranklinI will tell you that from what we have seen. I mean and youcould see this in Q, in our Q3 performance, retail performance has actuallybeen fairly healthy. As it been the sort of robustness that you've seen in thelast 18 months going backwards?Absolutely not. I mean it's a tougher environment. But thecustomers are still there. There are pockets of real weakness. I mean obviouslythe homebuilders and all of the things that have tied to the sub-prime marketare suffering.I think that products, where you've got new products, orproduct innovations, when we've come out with new products they have gottenshelf space and they've sold through well. So the customers are still there forbuying things that, if you like, there are real wants and needs.But at the same time, I have to say, we've been focused onkeeping our costs under control, getting the margins for the products that wesell, and obviously you saw that in Q3.I believe that when you are the market leader, and I keep ongoing back to this, when're you're the number one in the market you're in abetter position to protect your turf, if you like, when retail demand overallgets a little tougher, than if you are the third guy on the roster who'sstruggling to get some space.Joe Altobello - CIBC World MarketsOkay. So it sounds like the weakness is not reallybroad-based. It's certain pockets here and there that are more weak thanothers.Martin FranklinYes, I think so.Joe Altobello - CIBC World MarketsOkay. And then second, in terms of, Ian, your commentearlier about holding the line on markdowns in terms of the markdown dollars,if you do that how does that impact your relationship with the retailer? And doyou lose shelf space?Ian AshkenI think, in terms of the relationship with the retailers,it's part of the give and take of life. There's nothing personal about this andobviously we're seeing it at the moment in our Outdoor Solutions business wherethe season didn't end up the way we want, but we're talking to retailers now.August-September is a big time for send the programs for Q1next year. It's back to talking business as usual and what we hope, and ourgoal is, that our products and our brands speak for themselves, so that theretailer's still good about the programs we've put in place for them, becausethat's the whole. We've got to keep them, they're our customers, just as theend consumer is their customer.So there's nothing, I think, that's a knock-on. It's justmaybe a different strategy at a different time.Joe Altobello - CIBC World MarketsOkay. So you guys don't anticipate any continuing orlingering effects from this into '08? Ian AshkenI can only tell you what we're seeing at the moment, and theanswer is no.Joe Altobello - CIBC World MarketsGot you. Okay. And lastly, if I could, the FAS 123R chargefor next year you're saying less than $0.20. What has to happen in 4Q for thatto occur? I mean, is there a charge involved, or a write-off involved?Ian AshkenWell I think it's something we're still looking at, butthere are a number of variables in place that we need to look at. For example,obviously our performance shares, the current criteria is $48 to $50 bucks ashare which, with the stock the way it is today, we wanted and that we feelthat those targets are attainable, so we want to leave those performancetargets out there.Under the binomial lattice model there are various thingsthat we can do to extend out a period of time and try and make the chargethings from '08. We are going to include it and not back it out, as I said inthe prepared remarks. We want to make sure that it is as comparable as possibleto what other companies have done.So, will there be a charge in Q4? Probably. Do I know whatit is at the moment? No. But in terms of our sort of longer-term strategy inmaking sure that the stock incentive program reflects the pay-for-performanceculture that we've always had, that's our goal.Joe Altobello - CIBC World MarketsOkay. Thanks.OperatorNext we'll go to Jon Anderson with William Blair.Jon Anderson - William BlairGood morning.Jim LillieHi, Jon.Jon Anderson - William BlairA question on gross margin. You showed nice improvementthere in the third quarter, I think about 220 basis points. And I was justwondering if you could help me understand how much of that was driven by theaddition of the K2 businesses.And how much was kind of improvement within the corebusiness and integration and costs savings, etcetera.Ian AshkenI think, Jon, over half of it was to do with the K2. And myestimation is that somewhere between--north of 50 basis points was just due toimprovement in gross margin. The thing that I want to make clear is that someof that gross margin improvement is also from improvements that we've alreadyseen in the K2 business on an apples to, a year-over-year comparison.Sure, we'd like to obviously look for the credit for that,but we were pleased about is that our overall business has continued themomentum of seeing gross margin improvements in at least 50 basis points on aquarterly basis which, in today's environment, is testament to the performancesof the businesses, as Martin said in his prepared remarks.Jon Anderson - William BlairIs that kind of how we should think about things goingforward over the, during the next couple of quarters, as you kind of continueforward with K2 and Pure Fish?Ian AshkenWell, if you remember, Q4 last year we showed 100 basispoints improvement. So, I think that you will see a significant improvement inQ4, but I think more of that will be to do with the mix of the businessescoming in.And in 2008, we haven't yet finished our budgeting processto see how much of the cost increases we're going to have to absorb, as versuswhat we'll be able to pass on through pricing on new skewed. So it's a littlebit premature to talk about that on a 2008 basis.Jon Anderson - William BlairGreat. Thanks a lot.Martin FranklinThank you.OperatorOur next question comes from Karru Martinson with DeutscheBank.Karru Martinson - Deutsche BankGood morning. In terms of the competitive pressures thatyou're seeing out there, are you seeing others go for these types of short-termmarket gains at unprofitable levels?Martin FranklinWell, I'll give you a Coleman example. It's probably, wecould have chased dollars in Q2 and then I'm going to go back to Q2 rather thanQ3. We could have found revenue for Coleman by marking down productaggressively and trying to get promotional shelf space, and we just elected notto do that.We didn't think it was the right thing to do for the brand,and we let some of the mass merchants do that with private label product, tomove their own inventories out, but we weren't going to play in that effort. SoI would tell you, rather than just picking on another company, some of theretailers decided to do that with their own private label that wasn't turning.Karru Martinson - Deutsche BankOkay. And in terms of K2 and the strong sell-in here, do youfeel that you're taking market share, or is it just that your inventory levelswere below expectations here?Martin FranklinI think it's too early to tell. I mean there's no questionthat the buzz around the brands that we bought has been very strong. You don'thave to dig very deep to ask, you can ask around on that. And these things dogo in cycles and we're in a good position right now.How that's going to affect our overall performance for thefull year is too early to tell. A lot of that's got to do with Mother Nature.But I think that we're well positioned if the conditions are right to have a goodyear in that segment.Karru Martinson - Deutsche BankAnd just to go back to Reza's question, you talked aboutinflation coming out of China, but I was wondering if you had any additionalinsight on the VAT impact?Martin FranklinThere's nothing has changed on the VAT. Obviously Januarythe first is the effective date and there is jockeying for position, as in allthings political, as to what exactly will and won't be included. But there'snothing really new to report on that since Q2.Karru Martinson - Deutsche BankOkay. And just lastly, on Branding Consumables, are we stillseeing a decline in the poker-related sales or are we kind of through thatperiod now?Martin FranklinI mean, I think you're through it in the sense that we'regoing to start comping against the lower periods. So, we're actually beenpretty focused on revamping our efforts at U.S. Playing Cards, and I'm hopingthat in 2008 you're going to start seeing some fruits of that labor.Karru Martinson - Deutsche BankThank you very much.Martin FranklinThank you.OperatorOur next question comes from Justine Ho with GrandviewCapital.Justine Ho - Grandview CapitalHi. I just wanted to ask if you have pro forma data, proforma EBITDA possibly, or if not that, then perhaps what was the adjustedEBITDA coming from K2 and Pure Fishing in the third quarter?Martin FranklinNo, we don't have, and we don't give out, pro formainformation. The SEC doesn't particularly like it and we've been consistent onthat for the last five years.Justine Ho - Grandview CapitalOkay. So in general then, is it a good, in general, wouldyou say that K2 performed fairly well and your business, excluding K2 and PureFishing, on the top line was somewhat flat, but margins improved?Ian AshkenYes, that's exactly right. Our business was overall, as wesaid, pretty flat negative or pretty flat organic growth. With K2 and PureFishing adding to, we showed $300 million in sales increases. Within the grossmargin improvement of 220 basis points, 50 basis points plus came from theexisting businesses and the rest is really from mixed shift coming in of thenew businesses.Martin FranklinBut we also made improvements in gross margins in thebusinesses we bought.Ian AshkenYes.Justine Ho - Grandview CapitalOkay. Great. Thank you.Ian AshkenThank you.OperatorWe'll take one last question from Carla Casella withJPMorgan.Carla Casella - JPMorganHi. My question is on working capital, the use of cash therethis year. I'm assuming a big portion of that, as you mentioned, is K2. Can youjust comment on whether the use of working capital for receivables andinventory this year was greater than it was in K2 last year? Last year I thinkK2's total use of working capital was about $69 million.Ian AshkenThe answer is I can't, except to say that nothingsignificant has changed in K2's business from a sort of qualitative point ofview. One of the things that we're looking at, and we believe that there isroom for improvement, but you haven't seen it in Q3, is in K2's workingcapital.The turns obviously were a lot less than Jarden's. There'scertain fundamental dynamics that are different in their business to Jarden's,for example, the ski industry dating, and you collect those receivables in Q1.And obviously with more foreign business, where the receivables take-in tendsto be longer, you will also see that extending out.Having said that, in '08 we expect to show working capitalimprovement from the way K2's run their business in the past.Carla Casella - JPMorganOkay, great. That's very helpful.Ian AshkenOkay. Thank you.Martin FranklinWell if there aren't any more questions, thank you very muchfor your time. We're happy that we were able to, I think, produce a decentquarter in a relatively tough environment and looking forward to hopefullybeing able to do more of the same when we report our full year. So thank youvery much and look forward to reporting to you then. Bye, bye.OperatorLadies and gentlemen, that does conclude our conference callfor today. 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