A O Smith Corp (AOS) 2003 Q4 法說會逐字稿

Welcome to the A.O. Smith Corporation fourth-quarter earnings release conference call. This time all lines are on a listen-only mode. Later there will be an opportunity to ask questions, and instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder today's call is being recorded. At this time I would like to turn the conference over to Craig Watson. Please go ahead, sir.

Good afternoon, ladies and gentlemen, and thank you for joining us on this conference call. With me this afternoon participating in the call are Bob O'Toole, Chairman and Chief Executive Officer; Paul Jones, President and Chief Operating Officer; Ken Krueger, Chief Financial Officer; and John Kita, Treasurer and Controller.

Before we begin with Bob's remarks, I would like to remind you that some of the comments that will be made during this call, including answers to your questions, will constitute forward-looking statements. These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks include among others matters that we have described in this morning's press release. Slides available through our website at www.AOSmith.com will accompany this discussion, so please feel free to follow along while we conduct the call. Bob will now make a few opening comments, and Ken will discuss results in more detail.

Thank you, Craig. Before I begin my comments on our financial performance I just want to say how pleased I am to have Paul Jones join A.O. Smith as President and Chief Operating Officer. Paul's experience as Chairman and CEO of U.S. Can Company, as CEO of Greenfield Industries, and prior to that his experience at General Electric, give him the skills and perspective needed to be a real asset to the company, and we look forward to working with him.

This morning we reported full-year earnings of $1.76 cents per share or net income of $52.2 million, compared with $1.86 per share and $51.3 million respectively in 2002. Fourth-quarter earnings of $12.7 million were 13 percent higher than 2002. The fourth-quarter earnings per share were 42 cents compared with 38 cents last year. The higher net earnings for both periods resulted from strong performance in our Chinese water heater operation, better pricing in the water heater business, and lower SG&A expense.

Sales of $1.53 billion were 4 percent higher than 2002, while fourth-quarter sales of 369 million increased 3 percent over the comparable last year. The higher sales for both periods resulted from acquisitions in the motor business, a better than 40 percent rise in China water heater sales, and price increases in water heaters for steel cost, and introduction of flammable vapor resistant products.

We are disappointed with the year-over-year decline in operating cash flow from 112 million in 2002 to 25 million in 2003. A $45 million increase in inventory investment related to both our repositioning and new product launch programs, as well as roughly $10 million of restructuring expenditures related to the numerous repositioning activities in both of our businesses, account for the majority of the decline in cash flow. Ken will elaborate on this issue later in the call. Notwithstanding the disappointing cash flow, our debt to capital ratio of 32 percent was slightly lower than a year ago, leaving us in a strong position to continue to pursue growth initiatives.

On the operating front we achieved major milestones in our motor production repositioning, with the closure of three U.S. based motor facilities, the movement of production from four other facilities, and the acceleration of our production in our lower-cost operations in Mexico and China. In July we successfully introduced the flammable vapor resistant water heater. With the additional introduction in January of higher efficiency residential water heaters, we will have completed the most significant product redesign cycle in the company's history.

Though we encountered some timing issues during the year related to the introduction of the flammable vapor product, we made good progress getting back on track in the fourth quarter. Also in 2003 we launched a significant reorganization of our water heater manufacturing operations, which we expect to be completed by the middle of this year.

The motor repositioning, the new product introduction, the manufacturing reorganization at water products, and new product development for the upcoming introduction of higher efficiency water heaters all represent major accomplishments that have positioned us well for success in 2004 and beyond.

This morning we adjusted our earnings guidance for 2004 to a range of between $2.20 and $2.40 a share from the 2.40 to 2.60 per share announced at the end of the third quarter. We are concerned about the emerging raw material cost increases, particularly for steel. A major OEM customer has also experienced a sales setback that will result in a reduction in air-conditioning motor sales in 2004. Accordingly we revised our estimate lower by 20 cents to account for these two items. Ken will now take you through a more detailed discussion of the quarter, the year, and the outlook for 2004.

Sales in 2003 improved 4 percent to $1.53 billion, compared with 1.47 billion in 2002. The sales increase was due to acquisitions in the motor business, a 44 percent increase in sales at our Chinese water heater operation, and the introduction of the new flammable vapor resistant water heaters.

Net earnings improved slightly to 52.2 million from 51.3 in 2002, primarily as a result of lower interest and corporate SG&A expense. Though net earnings were slightly higher in 2003, earnings per share of $1.76 were 10 cents lower as a result of the higher shares outstanding in 2003 due to the May 2002 stock offering.

Gross margin was 19.5 percent, compared with 20.4 last year. The decline in margin was attributable to approximately 40 million (technical difficulty) of sales of acquired businesses than at the present time bear margins that are lower than those of the underlying business. SG&A was 13.5 percent of sales compared with 14 percent in 2002.

Interest expense declined $1.7 million as a result of lower debt levels compared with 2002. During the fourth quarter sales were 369 million, up 3 percent from the fourth quarter of 2002. The modest increase was the result a very strong sales in the China water heater business, as well as the additional sales from last year's acquisition of the Changheng motor operation in China.

Net earnings of 12.7 million represented an increase of 13 percent compared to the fourth quarter of 2002. The higher earnings were primarily the results of the China water heater business and the sale of flammable vapor resistant water heaters.

As Bob said, operating cash flow declined steeply to 25 million from 112 million in 2002. The $87 million decline consisted primarily of a $21 million increase in receivables, a $45 million increase in inventory, and 10 million of restructuring reserve spending related to the repositioning. These increases were partly offset by an increase in Accounts Payable of $13 million. In addition, last year's cash flow included a nonrecurring tax refund of approximately $12 million.

As we have discussed previously, we have carried an inventory buffer in order to ensure consistent customer service while implementing numerous manufacturing repositioning activities. In 2002 we finished the year with total inventory of approximately $200 million or 64 days on hand, compared with $247 million or 76 days in 2003. Efforts to reduce inventory continued to lag expectations. In addition, we prebuilt certain motors within the pump productline due to seasonal requirements.

We are committed to reducing our inventory levels in 2004. While we continue to incur an investment in in-transit inventory between China and North America, we expect that a reduction in buffer inventory tied to repositioned product in North America, focused product and customer programs to reduce delivery lead-times, and process improvement initiatives in electrical products will accomplish this reduction.

Receivables increased $21 million in 2003. Our normal day sales outstanding during the fourth quarter is 54 days, compared with this year's 58 days. The increase at water systems was due to the flammable vapor sales and higher unit prices, as well as stronger sales in China. Electrical products days increased due to international sales.

Capital spending for the year totaled $45 million, in line with our projection. We expect a similar amount of spending in 2004. Depreciation was $50 million. The debt to capital ratio was 32 percent at the end of 2003, compared with 33 percent at the end of 2002.

Now I would like to move on to a discussion of the performance in our electrical products and water systems businesses. Electric motor sales increased 3 percent to $183 million in the fourth quarter, compared to 2002, primarily as a result of the acquisition of the Changheng Motor Group and a stronger aftermarket business. HVAC and pump motor sales were flat, while subfractional motors declined approximately 10 percent.

Operating income was $8.4 million, compared with 11.7 million last year. The decline in operating income was the result of lower pricing and manufacturing inefficiencies compared with the fourth quarter of 2002. Fourth-quarter EBIT margin was 4.6 percent of sales, compared with 6.6 percent in 2002.

For the year motor sales increased $34 million to 825 million compared to 2002, driven primarily by the acquisitions of Athens Motors and the Changheng Motor Group. Though it was a soft year for HVAC, we are encouraged by the improving character of the market that has transpired during the second half of the year, particularly in the commercial segment. Coupled with a low level of inventory in the distributor channel, we believe the HVAC marketplace is well positioned for a stronger year in 2004. Having said that, we are projecting our hermetic motor business to be down modestly, as market increases will be offset by the loss of a contract by one of our major OEM customers.

For the full year operating income decreased approximately $3 million compared to 2002. The decrease was primarily attributable to pricing and manufacturing costs related to the repositioning programs. Full-year EBIT margin declined to 6.6 percent of sales from 7.3 percent in 2002.

Though we're disappointed with the delay in cost savings related to the repositioning activities at electrical products in 2003, as well as the inventory levels, we have achieved significant results considering the number of simultaneous relocation activities. During 2003 three facilities were closed; Monticello, Indiana, Athens, Tennessee, and Ripley, Tennessee. Additionally we moved significant amounts of production from four other U.S. facilities.

In China we are now producing more than 25,000 motors a day at our Shenzhen facility and have made substantial progress qualifying product for manufacture in our Chinese facilities at Changzhou and Taizhou. In December we completed the acquisition of Taicang Special Motor Company near Shanghai. Taicang is an important addition that will expand our motor manufacturing capabilities to include hermetic motors.

Water systems' fourth-quarter sales of $186 million were $5 million higher than in the fourth quarter of last year. The higher sales were the result of strong sales in China and the shipment of the flammable vapor product. These increases were partially offset by lower unit sales of commercial and residential retail product. Residential unit sales were 10 percent lower than last year's strong fourth quarter. As you'll recall, the fourth quarter of 2002 benefited from a significant customer pre-buy in anticipation of a price increase implemented to offset higher steel costs. In this year's fourth quarter there was a pre-buy related to the launch of NAECA efficiency compliant water heaters. While it is difficult to ascertain the exact level of pre-buy in this year's fourth quarter, it is clearly less than last year's pre-buy.

Fourth-quarter operating profit of 19.5 million was 4.7 million higher than the fourth quarter of 2002. The significant improvement in income is attributable to China and the introduction of flammable vapor resistant product. EBIT margin was 10.5 percent compared to 8.2 in the fourth quarter of 2002. For the full year, water systems sales were a record $706 million, 4 percent higher than in 2002. The sales growth was driven by a January 2003 price increase, a 44 percent increase in China, and the introduction of the new flammable vapor product. Sales of commercial product declined approximately 5 percent in 2003.

Operating profit of 57.2 million was slightly lower than the 58.4 million earned in 2002. Most of the decline was attributable to the product introduction costs in the third quarter, in combination with lower sales of higher-margin commercial product throughout the year. Full year EBIT margin was 8.1 percent compared with 8.6 in the prior year. Notwithstanding the year-over-year decline, we are pleased with the return to double-digit margins experienced in the fourth quarter.

As we look ahead to 2004 we have a strong base for performance. The year 2003 has been one of both challenge and accomplishment. During the year we transferred half of our domestic motor manufacturing operations to lower-cost facilities in Mexico and China. In the water heater business, we have undergone the most significant productline transformation in our history. These transformations are now largely behind us.

Profit improvement will be driven largely by the efforts completed in 2003. In the motors business we expect a full year's impact of the transition to Mexico, as well as the ramp up in China will generate pretax earnings of $15 million. In the water heater business, a full year's sales of flammable vapor resistant product, as well as the introduction of NAECA compliant product, will generate 15 million pretax.

The focusing of commercial water heater production in our McBee, South Carolina, plant, with residential product transitioned to Ashland City, Tennessee, is expected to provide $5 million in pretax impact. These three items will generate a collective 35 million pretax improvement and service the underlying drivers for earnings growth in 2004.

Having said that, two recent developments are the basis for our reduction in the 2004 forecast, to a range of earnings between $2.20 and $2.40 per share from the previous range of $2.40 to $2.60 per share. Recent raw material cost increases, particularly steel, will negatively impact both businesses, with the biggest impact on water systems. The motor business will also be impacted by a reduction in sales to a major OEM customer who recently announced the loss of a sales contract. We are expecting first-quarter earnings to approximate last year's earnings of 46 cents per share, with improving year-over-year comparisons as the year progresses.

That completes our opening remarks. We are now ready for your questions. As a reminder, please limit your inquiries to one or two questions at a time, so that everyone interested has an opportunity to participate. Operator?

(OPERATOR INSTRUCTIONS) Matt Summerville with McDonald Investments.

First, Ken, on the raw materials side, I believe you had a similar situation evolving this time last year; and you were able to pass through a significant amount of the higher steel costs via a price increase onto the customers. What has changed today that you were unable to do that? And how much of the 20-cent reduction in your earnings outlook relates to steel prices?

We alluded to two items or we showed two items as the reason for the 20-cent drop. I think if you split them right down the middle and called it 10 cents each, you wouldn't be far off. The steel situation right now is very volatile. We have done our best job at projecting as of today what the impact might be on steel cost. But to be candid, that is still somewhat of an open question. And many of our vendors are still struggling with what and how they are going to respond to the cost increases that they have had.

So having said that, clearly one of the efforts that we have got in front of us is to take a look at that steel cost impact, and what it means to our products, and what price increases we will be able to implement in recovering those costs, as well as some other material costs, freight costs, a lot of the impacts that we are faced with right now. And we are right in the middle of taking a look at that.

So for the moment what we have got in there is call it 10 cents for steel costs, and we need to take a hard look at how we are going to recover that. As well as any other change we might have on the steel side.

As a percent of your cost of goods sold in the water heater business, do you have a rough cut in terms of what steel represents?

No I don't offhand, Matt.

One follow-up and I will pass the baton. Ken, on the pension side of things, can you give us an update in terms of what your anticipation is in terms of pension income or expense for '04 versus '03? And whether it is a headwind, a tailwind, etc.?

Right now we are looking at, best estimate, is in 2003 our pension income was $11.7 million. Our estimate right now for '04 is about $7 million, in that range. So it would be about 4.5 million or so less pension income in 2004 is our best guess right now.

Okay, thanks a lot.

Scott Graham with Bear Stearns.

I have several questions. Number one, could you tell us, Ken, on the water heater side, where sales were up 3 percent, what portion of that was volume versus price?

Yes, I think we mentioned earlier in the comments that we did get the price increases that we expected on the flammable vapors side. We did however have about a 10 percent year-over-year unit decline in the fourth quarter. Really I think most of that is attributable to the fact that in the fourth quarter of 2002 we had a pretty significant pre-buy in front of the January '03 price increase; whereas this year I don't think -- while we had anticipated a pre-buy in front of the new water heaters coming out this month that are compliant with the new NAECA efficiency standards, I don't think this year's was anything close to last year's. So the unit count on the residential site was down about 10 percent in the fourth quarter.

But I am really talking for the full segment. Is there a way to combine all of the numbers and give us a total units versus price? Was it price up 4, units down 1? That is what I am looking for.

Let me give you some data points. You know the total; and you know that our residential units were down about 10 percent. Our commercial units were also down about 5 percent. And we did get the full price increase that we have been talking about on the flammable vapor side. So I don't have any more arithmetic than that right now.

It is fair to say, though, that the distribution piece was down a lot less than the 5 percent even? I will try to figure that out. Also you indicated that motors pricing remains pressured. As I am sure you guys look at the data very carefully on the water heater side, the last four reported months all show that electric water heaters are now outpacing sales of gas water heaters, which has really not happened in years. Symbolizing perhaps consumers avoiding the higher priced gas units, as well as the natural gas cost that we are seeing today, in favor of the electric.

At the same time you guys have continued to estimate $15 (ph) million in incremental operating income, which obviously is largely due to higher prices in the category and that's largely skewed to the gas side. So I'm wondering if this consumer shift makes that $15 million in your eyes -- seems to me that that number is now vulnerable.

We have not seen much of a consumer shift, and I really wouldn't anticipate any. About 80 percent of that business is replacement. Just given the nature of the hookups and the fittings that individuals will have in their houses, it is highly likely, almost to the 100 percent state, that if you have a gas heater you're going to get a gas replacement. And similar to electric.

I have not seen any great influence as well in the switchover in new housing. That tends to be more of a geographic phenomenon, where natural gas is typically used if it is slightly available; and electric is used in those regions of the country where it is not as available. I have not seen any kind of significant shift and am really not anticipating any.

The data was skewed in the second quarter by a tremendous pre-buy on the gas units, because they were changing. So it kind of mucks up the month by month analysis, Scott.

I am looking at the data right now. It is all saying that in the last four months of the year, the last four, not the middle of the year or the earlier in the year, that the electrics have been outselling the gas. And this is as you know, the gas market is larger. So this is either an anomaly or some type of consumer preference shift to avoid the higher prices. Okay, we will pass on that one as well.

My next question is, based on what you guys are trying to do in China, most of your production in China -- correct me if I'm wrong -- is production that you have purchased through acquisition. I am wondering what you guys see as the potential hurdles for transferring production from the U.S. and Mexico into China in 2004, given that this is going to be largely a new undertaking for you, going into this region of the world?

First of all, I know you are referring to the motor stuff, but I just want to say upfront that on the water heater side that is production that we have sort of grown up in China from the late '90s on.

You are right on the motor side that we picked up all of that production capability through acquisitions. Changheng, which was bought two years ago, we now have in the production (indiscernible) in that 25,000 plus per day; and it is producing C-frame motors for consumption here in the United States as well as some 3.3-inch and other product.

In our Changzhou and Taizhou facilities we are qualifying product. We do have modest amounts of production up and running and coming back to the States. And that will really be on what I will call the steep ramp for the first half of '04. It is moving along as expected, as we are getting the people in place; we are getting our drawings converted; we're getting our product qualified with customers.

We just bought Taicang Motor Company, which is the hermetic business, about 30 days ago now. So we will not have a substantial amount of hermetic production in China that is coming to the U.S. probably until very late in '04; and in any kind of strong basis really '05.

Last question relates of course to the inventory number. Part of the estimate revision for the second half of the year, largely in the fourth quarter, was that the company was going to, at the expense of some earnings in the fourth quarter, really work down inventory. And that obviously didn't happen. I know that there are $10 million of restructuring and what have you in there. But that was also in place in the third quarter if I'm not mistaken. I am wondering, going into 2004 what allowance you have made within your guidance to dial down production, to get down to the level of inventory that we would consider normal?

There is as you call it some allowance for inventory reduction in '04, Scott. But you are very correct in saying that we're disappointed in the amount of inventory that we didn't take out in the fourth quarter. So that just adds to the challenge in '04. As I said earlier, we're going to have a little higher dollar value in inventory, just because of the cost of the new flammable vapor product and the NAECA product on the water heater side. But that is what it is. It is simply higher value price.

The real issue is the quantity on the motors side. Some of that is permanent, because it is on the ocean to China. But we have obviously got far more on hand than we need on an ongoing basis. That is going to be a target area for '04; and it is going to create a little bit of a challenge to our budgeting, because we are going to be producing a little less because we need to get that inventory out.

Okay, thank you.

Michael Schneider with Bob W. Baird.

A couple questions across both segments. First, on the water heater side, Ken, you mentioned that this is the first time you have been in double digits for a while on the margin in the fourth quarter. And given that the pre-buy seems to be lesser than you expected, what does that imply then as we ramp into '04? Does the 10.5 percent margin set the base going forward? Especially since presumably you get some higher priced product as you enter the first half?

Yes, that is the base; and obviously for the full year of '04 we would hope to do better than that. We are going to face all the issues we just talked about, the steel costs, right out of the gates here in '04; as well as that is going to be the quarter when we are going to be launching the NAECA compliant product. So I expect, as almost always, the biggest challenge to be in the first quarter of the year. Having said that, yes, that is the base. We are going to beat it for the full year, but it is going to be a challenge as we look to the first quarter here.

Okay. And the hedging strategy, then, for steel. Are you hedged through midyear at least? Would we not then see the impact until the second half of the raw material?

Our management there for steel really wasn't based upon hedging. That is more for the copper and for the peso costs that we have. Our methodology for tying down our steel prices was by having long-term agreements with our vendors. As I alluded to before, they just are finding it unfortunately very difficult to live to those agreements because of the price pressures that they are getting from coal (ph) prices, from the scrap steel prices, and from the natural gas prices and all of the things that they deal with.

It is a real issue, we need to get nailed down with these guys what they are going to be able to do with the cost. And in turn what we are going to have to do on pricing on our side.

In dollar terms what do you estimate the pre-buy was last year in the fourth quarter?

I think we estimated if I recall correctly that we had about one month's worth of 30, 40, 50 gallon gas residential heaters. I don't offhand remember what that dollar amount works out to.

Okay. Is there any shift in your expectations for water heater demand for new construction in 2004 in this guidance? Because there has been some speculation that the market would be softer in '04, presumably as rates rise and coming off a record year of water heater unit sales.

Yes, there is no explicit change in our assumptions. I guess my perspective would be that, as always, this market is about 8 million plus or minus of replacement units; plus new housing. So if new housing isn't the robust kind of 1.7 million units we're grown used to, the market might fall off 2 or 300,000 units; but that effectively is a pretty small percentage of the total market.

I think the interesting/exciting perspective is that the commercial market seems to be bubbling up a little. That would be great news for us. Because as you know that is -- the higher margin business for us is on the commercial side. There is nothing explicitly been changed other than I guess I am probably more optimistic today than I was months ago on what prospects there might be for a little bit of a rebound in the commercial market.

Pricing on the flammable vapor units; have you seen any indication that you or the other key manufacturer here have given back any of the flammable vapor price increase? Either through discounts, rebates, volume discounts, whatever they may be?

I have not seen that, that there has been any of the things you mentioned.

Presumably the steel raw material price increase probably even gives you some greater leverage to push back.

While certainly we are going to have a price increase across the residential board in conjunction with the NAECA, and whether or not there is any steel dialed in there, I think that that could be a challenge. Having said that, there may certainly be opportunity on the commercial side or on the boiler side. Because as you can read every day in the paper, the steel cost is not an insignificant change.

One-off items here. First, the tax rate in the quarter seemingly took about 2 cents out of earnings unexpectedly. Any explanation there? Looks like it was about 2 points higher than the run rate for the year to date number.

I think the annual rate was 34 percent, I believe, and the fourth quarter was probably a 35 something, a little bit higher. I guess I would say probably the biggest factor was international earnings get taxed differently; and that had an effect in the fourth quarter. But nothing dramatic.

John, the rate going forward then in '04?

I think we are comfortable as we look forward to next year kind of in that 33.5 to 34 annual rate, is comfortable.

Okay. Just the SG&A level, Ken, you mentioned that it was down year-over-year about 3.7 million. Is that primarily just the bonus accrual being unwound in the fourth quarter? Or anything else in there?

You mentioned year-over-year, and you are referring to the fourth quarter SG&A. And that is the single largest element, Mike, in the corporate SG&A.

Finally, R&D for the year; was that dialed back as well in the SG&A expense, or not a component?

I don't have those numbers, but I would think it will be fairly comparable.

All right, thank you.

Matt Summerville with McDonald Investments.

Ken, you talk about the China water heater business being up pretty substantially. Do you have an absolute number for the revenues there in '03?

Yes, the sales in '03 were about $45 million for our China water heater business.

What is your expectation then in '04? Is 40 percent growth sustainable?

40 is a big number for sustainable, Matt. I think the market there, as you know, grows in that 12 to 15 percent range. We would like to grow it at least that kind of rate.

So if you look at your top-line outlook for water systems in '04, are we gravitating in that mid to high single digit range, once you factor in higher pricing from flammable vapor and NAECA, and maybe a relatively flat unit outlook when all considered in residential and commercial? Is that accurate or is that too aggressive?

When you reflect a full year's versus four months of flammable vapor sales, a full year of CAECA compliant sales, and as I said that 12 to 15 percent plus kind of growth for China, you would be looking at the high rather than the mid single digits growth for next year.

Okay. As far as the inventory drawdown in motors that will continue into 2004, when do you see that finally being resolved? Is that a first-quarter event, a second-quarter event?

I am hesitating because I think we would have all liked to think that it would have been a fourth-quarter '03 event. It is something we are going to work very diligently on, Matt. We are now coming into our high sales season so whether that makes it easier or tougher to do an inventory reduction, I guess I would think maybe a little easier. But it is certainly going to take all of the first half of the year.

Lastly, can you talk about what you are seeing right now on the acquisition front? Do you have a pipeline? What are your thoughts for '04? What kinds of things are you looking at for this year?

As you know we don't and wouldn't comment on any specific companies or acquisition opportunities. We do have a very strong balance sheet. We've still got the debt to capital in that 32 percent kind of range. We would like to expand our business probably in something that is related to things we do; either taking advantage of our manufacturing capabilities or some of the access that we have to channels.

And those are the kind of arenas we are pursuing. It is really some place we could grow our business in items that are not necessarily identical to what we do now, but very closely related.

Okay, great. Thanks a lot.

Michael Schneider with Bob W. Baird.

Just some motor questions now, Ken. First, in terms of customer wins and losses, obviously York lost a big account. Have you lost specifically any accounts in 2003, or won any accounts in 2003, that would help or hurt 2004?

Mike, again typically we don't address specific customers. However as mentioned, York did acknowledge that contract, and that is the one I was alluding to earlier. We are always pursuing other customers. I am hopeful that we have put some effort into our ability to work with distributors on the motor side. I would hope that we could do something there. Just as soon as we have a significant win, we would certainly want to talk about that.

Goodman appears to be the next major OEM now to go all or almost all scroll compressors, which seems to be helping Emerson and hurting others along the line. What is the update you can give us on scroll tech, and the ability of York and Carrier now to complete in this scroll technology?

As you know we do provide the hermetics to ScrollTech who is the scroll compressor competitor to Copeland, if you will. I am going to tell you that I'm in way over my element if I try to talk about the relative competitive characteristics of what is going on in the scroll compressor market. I am just not that close to it.

Okay. OEM indications now for the spring season, what have you at least heard out of your major customers and the biggest OEMs in this HVAC market about their outlook, optimism, pessimism for the spring selling season?

As you know the inventories are at the lowest level since I think 1998. That lends a lot of enthusiasm to the prospects for their being a good season. Having said that, just like always, we are going to need a warm April, May in the northern U.S. in order to get the orders flowing. I think if that happens we will have even a stronger year than usual, because of the low levels of inventory.

I haven't heard anything specific. I guess the general tone has been one of caution. The folks that have got low inventories, I think they are getting lined up to be able to make sure that they can fulfill customer demand. But I haven't heard of anybody actively increasing their line rates or anything.

But the conflict or the kind of the curious part of the inventory data is that while total industry inventories are low, and distributor inventories are low, OEM inventories at York etc. are at multiyear highs. So the mix of the channel inventories changed dramatically here. What do you guys read into that?

Again what I read into that is if we do have some early spring hot seasons that you are going to get -- and you have got thin inventories at the distributor level, you are going to get some very steep spike in demand. Because the buffer inventory, if there is any, is being held at the OEMs. And that probably is why there is not any widespread increase in the line rates.

Total inventories are down. But you're right, there is a bigger piece of it that is held at the OEMs. I think the only thing that that will cause is, if you will, some panic buying on behalf of the distributors if we have a hot early season.

Okay. Carrier is in the midst of closing its Syracuse plant. And presumably one of the reasons you bought their hermetic operations over in China. Could you give us a sense of whether that is a risk, an opportunity for you guys?

Bob, do you want me to tackle that one, or do you (multiple speakers) ?

I think first of all if we hadn't bought the acquisition we would have lost the business. Because they are going produce a significant number of those compressors in China. We have a significant portion of that business; not all of it, but a significant portion. So we needed to be in China in order to be able to provide the product to where it is going to be assembled. It is relatively neutral at the end of the day.

Okay, so as far as you know you have got the orders basically flowing from the U.S. over to China along with their plant?

They will be. Right. As you know and can imagine, there is a lot of work for Carrier to do, and us to do, and all of that. But that is the plan we are working on.

Okay, thanks.

At this time there are no further questions in queue.

Ladies and gentlemen, thanks a lot for joining us this morning. We look forward to updating you at the end of the first quarter.

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