A O Smith Corp (AOS) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to A.O. Smith First Quarter earnings conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session, and instructions will be given at that time. If you should require assistance during the call, please press star then (0). And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host Mr. Craig Watson, Director of Investor Relations. Please go ahead.

Good morning ladies and gentlemen and thank you for joining us on this conference call. With me this morning participating in the call are Paul Jones, President and COO, Ken Krueger, Chief Financial Officer, and John Kita, Treasurer and Controller. Before we begin with Ken's remarks I would like to remind you that some of the comments that will be made this morning during this call, including the answers to your questions, will constitute a forward-looking statement. These 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. I would also like to point out that we have posted slides on our website, so feel free to follow along while we conduct the call. Ken?

Thank you Craig. First quarter earnings were $10.8m compared with $13.7m in last year's first quarter. Earnings per share were $0.36 compared with $0.46 earned last year. As we discussed in our last conference call, the earnings decline was primarily due to steel and other cost increases, as well as expenses related to multiple conversion programs at Water Systems. First quarter sales were $417m, compared with $388m in Q1 of last year. This 8% increase was due to higher after market motor sales, price increases related to the introduction of the Flammable Vapor Ignition, a NAECA compliant product at Water Systems, as well as higher international sales in both businesses. Our gross profit margin declined to 18.8% from 20.2% last year as a result of the Water Systems conversion disruptions and higher costs for steel. SG&A increased primarily because of higher selling and advertising costs at Water Systems. As a percent of sales, SG&A increased to 14.1% compared with 13.9% last year.

Cash flow, which is subject to seasonal fluctuation, was weak in the first quarter as higher sales relative to the 4th quarter, particularly in the motor business, drove receivable levels higher than at year-end. Though we expected higher receivables, receivable growth at Electrical Products was higher than it should have been. The most significant factor in increased receivable base was a concentration of sales growth with larger distributors and pump customers. These distributors and customers typically have longer terms, with some seasonal terms having an impact as well.

Total company days sales outstanding increased to 63 from the normal level of around 57 days. Inventories of $247m were flat compared with year-end, as lower finished goods inventories were offset by higher levels of raw material that resulted from steel related pre-buys. Although dollar value was flat, inventory days improved by 8 days during the quarter due to higher sales levels. Because of the growth in working capital, cash flow from operations was a negative $12m, which was similar to last year. Capital spending totaled $10m compared with depreciation and amortization of $13m. We are projecting full year capital spending to be similar with last year's level of approximately $45m. Lower than projected depreciation of just over $50m. As a result of the negative cash flow our debt to capital ratio increased slightly to 33% during the quarter, compared with the year-end ratio of 32%.

Now I'd like to move onto a discussion of the operating performance in our Electrical Products and Water Systems businesses. Sales of $224m at Electrical Products were 5% higher than in the 1st quarter of 2003. Sales increased in all served markets except HVAC which declined 5% due to the loss of a sales contract by an OEM customer. Operating earnings declined to $17.1m from $17.8m last year. Relative to sales, operating margin was 7.6% compared with 8.3% last year. Higher steel and freight costs and the under-absorption of fixed costs resulting from inventory reduction efforts more than offset the first quarter benefits of the company's repositioning program. The increase in freight cost was primarily driven by higher fuel costs and more stringent transportation regulations. Steel and copper make up a significant portion of our material costs and both markets have been increasing dramatically over the past four months. On the steel front we took quick action when the market surcharge reached $30 per ton in late January. And implemented a 3% price increase which became effective in mid-March. Unfortunately, the steel market has continued to spike up with recent market indications of surcharges of $100 per ton or more. As a result we will be working with our customers over the next several weeks in order to establish price levels that allow us to recover these costs.

Copper is the other material seeing nearly unprecedented cost increases. Because we have hedged our annual requirements, we don't have any cost exposure this year. In addition, we have past due contracts with a number of our customers where they hedged the exposure with us. However, this cost increase will affect pricing. Either currently because the customer has elected to float with the market, or in 2005 if customers elect to tie down next year's copper at current prices.

The primary repositioning program at Electrical Products has been completed, and we are expanding manufacturing output in the new lower cost locations. In previous conference calls we projected incremental pre-tax savings from this program of $15m in 2004. First quarter repositioning savings-we're on track, though they were masked my higher raw material and freight costs. We continue to project full year savings of $15m before taxes. Water Systems first quarter sales of $193m were 10% higher than in the first quarter of last year. The sales increase was driven by the introduction of new Flammable Vapor Ignition Resistant water heaters as well as initial shipments of heaters meeting the new NAECA mandate for greater energy efficiency. While this drove a dollar increase in sales, total residential unit volumes declined approximately 7% in the quarter. Commercial sales were flat in the quarter.

On a brighter note China sales increased 60% in Q1 to $11.9m, from $7.1m last year. Operating profit declined to $8.8m from the $12m earned last year. Operating margin was 4.5% compared with 6.2% last year. Though steel costs were an issue in Q1, the majority of the decline in earnings at Water Systems resulted from the simultaneous implementation of programs that included the conversion of residential water heater products to meet new efficiency standards, standardization of the A.O. Smith and State residential product lines, relocation of production between the Ashland City and McBee plants, and an information systems conversion. These programs have particularly affected the Ashland City plant in Tennessee. Production levels declined significantly in January due to these conversions despite an increase in manpower and overtime. Production levels have been restored to pre-conversion levels and during the next 6-8 weeks we intend to maintain this production level, while reducing manpower requirements and overtime expense.

Consistent with the motor business, steel costs continue to rise throughout the quarter, and accounted for a portion of the decline in Water Systems operating earnings. We've announced a 6-9% price increase that will begin to take effect in June. Accordingly higher steel costs will continue to adversely affect Water Systems results during most of this quarter, but are not expected to be an issue in the 2nd half of the year.

As I mentioned, one of the conversion programs involves the standardization of both State and A.O. Smith product lines, in connection with the introduction of the efficiency product mandates. Standardizing the basic design will allow us to build product in plants closest to their end markets maximizing manufacturing and shipping efficiencies. Secondly, these products, while having a standard chassis, will allow for customized configuration further along in the assembly process. This program will allow us to streamline our manufacturing operation and maintain the most up-to-date products for all brands. Additional synergy initiatives include the consolidation of our standard commercial manufacturing operation in our McBee South Carolina facility. Also by the end of the 2nd quarter, the [water] operation will be capable of manufacturing and shipping all State residential brands, in addition to A.O. Smith, which will yield significant savings in logistics expense for products delivered to the west coast. Both the Flammable Vapor and NAECA products are now in the marketplace and though masked by conversion disruptions, contributed nicely to 1st quarter sales and earnings. We continue to project at least $15m of incremental pre-tax benefit from these products in 2004.

Regarding the 2004 outlook, announced price increases will help offset higher steel costs, but will not take effect until later in the 2nd quarter. We also believe the operating issues related to the conversion programs at Water Systems will moderate as the second quarter progresses, but we do not expect them to be eliminated until quarter end. Consequently, we expect 2nd quarter earnings will range between $0.50 and $0.54 per share, compared with the $0.57 per share earned in the 2nd quarter last year. And as we discussed a couple of weeks ago, as a result of lower 1st quarter earnings, and the decrease in the 2nd quarter estimate, our full year estimate is now between $1.90 and $2.00 per share.

Notwithstanding recent disruptions and material cost pressures, our financial position is strong, and our cost saving, new product and process improvement initiatives are on track. We continue to be very enthused about our longer term prospects and we look forward to reporting on our continued progress throughout 2004.

That completes our opening remarks and 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?

Thank you. And ladies and gentlemen if you wish to ask a question please press star then (1) on your touchtone phone. You will hear a tone indicating that you've been placed into queue, and you may remove yourself from queue at any time by pressing the pound key. If you're using a speakerphone please pick up your handset before pressing a number. Once again, if you have a question or a comment, please press star then (1) at this time. Our first question will come from the line of Michael Schneider from Robert W. Baird, please go ahead.

Good morning. Ken, maybe you could address just material costs first. Could you give us a sense, maybe by division how much material costs were actually up in dollars year-over-year?

Sure, it actually was fairly equal between the two operations, Mike, and we had said back in January that we had anticipated steel price increases and cost increases. We probably had expected something in the range of $2m, we probably got something closer to $4m across the company in the first quarter.

But evenly split.

Pretty evenly split.

Okay. And in the motors division specifically, outside of the loss of the [your] customer Goodman what do you believe HVAC was up or down?

HVAC, if you exclude that, was about flat to up a little bit.

Okay, and then, I guess, how do you reconcile that with, at least what we heard yesterday from American Standard and what Carrier and the others are intimating about volumes in HVAC being up nicely in residential. Is there still disruptions or manufacturing delivery problems or something like that that would prevent you from showing this mid-single digit growth that the OEMs are actually showing?

Actually, the delivery disruptions that we talked about were in the water heater business. There was very little of that late in the 4th quarter as related to us bringing up Mexico on the motor side, and that's largely behind us. I don't have anything particular I can attribute it to, obviously we don't have market data yet for the 1st quarter, I'm not disputing anything that I saw on the Train Report [ph] or any other ones, but it's got a lot to do with the timing of you know, who's got inventory, who doesn't. As I said we were flat to modestly up and I think that's not far off from what else I've heard.

Okay. I'll get back in line. Thanks.

Thank you.

And our next question is from Matt Summervale [ph] from McDonald Investment [ph] please go ahead.

Thanks, good morning, Ken. A couple of questions. First in Electrical Products in the 1st quarter, can you tell us-the core growth that you had in the quarter-how much was volume and how much was pricing? And then also how much on a dollar basis Goodman detracted from the first quarter, and what you expect Goodman to detract from the 2nd quarter.

Sure Matt. Good morning. I'm trying to remember all the questions-the Goodman impact in the first quarter was about $6m which is not inconsistent with what we had said before, which was $20m - $25m for the year. Again remember there's some seasonal impact in the first quarter in the HVAC industry.

And then unit volume versus pricing?

It virtually was all unit volume in the first quarter. The price actions that are being put into place in reaction to the steel costs really aren't going to get any traction until the second quarter.

And then in order to offset that $70 a ton delta, that you basically are now encountering with respect to the surcharges and the pricing levels that you had set historically, what kind of increase do you need now to offset that in percentage terms, and given anything that you can tell us from the conversations you're having with customers, what gives you the confidence that a second round of price increases will stick here?

Obviously that kind if increase, the difference is not insignificant, Matt, and just because we're having those conversations with customers as we speak, I'd just as soon not get into a discussion of what percent is required because it varies based upon the amount of steel in any given motor, and a number of other factors. So to talk about an overall percentage price increase while we're in the midst of working that out sort of customer by customer, I'm just not prepared to do that right now.

Okay, thanks. I'll get back in queue as well.

Thank you.

Thank you. Our next question is from Scott Graham from Bear Strearns, please go ahead.

Good morning, I have several questions. It sounds to me as if the motors issues that were encountered in the middle of last year have been licked, yes?

They are largely behind us, Scott. We've got both our Mexican plants coming up in efficiency and the production levels in our Chinese plants continue to increase.

So there was no margin drag from this business, in the business, from that issue from a couple of quarters ago.

There was no margin drag from those efficiency issues. The one modest drag we had in the first quarter-we talked about inventory being flat-we were actually successful in bringing finished goods down about $9m in the motors business. And in the last year's first quarter we were bringing inventory levels up, so the difference between the two-there was a little bit of drag from absorption of fixed costs because of the inventory reduction efforts.

Okay, so you're now increasing production in both Mexico and China, yes?

That's correct. We're increasing production in China. Mexico is more an effort to become more efficient in producing the volumes that we now have.

Okay. I want to try to understand something. I think I heard you say that in the water heater business, residential volumes were down 7%, commercial was flat. Would suggest to me that overall volumes were down about 5%, suggesting that you guys got 15 points of pricing in the quarter? Or was there some acquisition in there from China? What am I missing there?

You need to factor in the China increase which was about $5m. The remainder of it was, you know, a full quarter's Flammable Vapor sales and the beginning of the NAECA mandate sales.

Okay. So, is the $5m-remind me when that acquisition occurred.

China wasn't an acquisition, it's just continued growth of our Chinese water heater business. As we said before, it's up about 60%. If I remember the number it was up-the sales were like $12m compared to $7m.

Acquisition in China-that was in the motors business then?

Yeah, the acquisitions in China were in the motors side and that was basically to establish production capacity. There's a little bit of sales into the indigenous market, but it's not-there's no significant change there year-over-year.

Okay. Could you tell us what the FX [ph] translation amount was in both inventory and accounts receivable?

It would have been insignificant, Scott. I really, I don't know the number, but we don't have a lot of receivables or inventory in either Europe or China.

That's nominal. Okay, I'll get back in the queue. Thank you.

Thank you.

Thank you. Once again, if you do have a question or a comment please press start then (1) at this time. And we have a follow-up from the line of Matt Summervale [ph] please go ahead.

Yeah, Ken, two follow-ups. In the Electrical Products you talked about the performance of the HVAC business, can you walk through on a unit basis, what you saw in the other key market verticals that you talk about with respect to Electrical Products in terms of the volume growth, and whether or not those trends are expected to continue.

Yes, obviously with the overall increase and with what we talked about in HVAC, we had a good quarter in a lot of the other industries, particularly in the distribution side, that was up about 15% year-over-year. The general industries, which again is things like the garage door openers and hobby compressors, that was up in the 13% kind of range. And our ventilation business, which is primarily bathroom vent fans and range hood fans, that was up in the 8% kind of range. So overall, if I remember correctly, on balance we had about a 10% year-over-year increase in sales in segments other than HVAC.

Okay. And then, secondly, in terms of, how much cost do you estimate that you encountered in water heaters, or the Water Systems business in the 1st quarter excluding raw materials associated with all the other stuff that you mentioned earlier on in the call? And then how much of that cost do you expect will continue through the second quarter?

Yes, we had actually budgeted and planned some costs in the first quarter, because again, we have effectively four conversions going on at the same time. We had projected probably more in the $2m range as excess cost related to that-we probably got more like $4-$5m in costs related to that. And that's again, while we're still working to get the overtime down and get the manning levels more in line, and so it will have some impact on the 2nd quarter, we expect it to diminish during the quarter and be largely behind us by the end of the 2nd quarter.

Okay, thank you.

Thank you.

Thank you. And our next question is a follow-up from Michael Schneider, please go ahead.

Ken, I want to walk through the margin on the electric motor side for the quarter. You reported about $17m in operating income. If I presume that you should get, call it 2% price at some point, that would mean really during the quarter you're hoping to recover about $4m in operating income just on price increase alone. And then you mentioned that there was some inefficiencies with reducing inventory by $9m during the quarter. To me that all says that you're operating somewhere on a scrub basis, admittedly, in the low twenties in operating profit and at a run rate right now which would be over 10%. Is that-are those the type of numbers we should look for in '05, presuming less disruptions and a more stable manufacturing process?

Yes, when you say '05, that's about the right timeframe. As we've said before, our long-term goal in this is about 12% and we get into the kind of double digit range in '05-that would be a good target. However, having said that, no one has set the expectation for that near-term, because the big impact for the steel costs and other material costs is going to come here in the second quarter, and we won't have all the price increases in place to offset that. So that will continue to be a drag during the second quarter.

So does the margin on a percentage basis go lower than the 7.6% you've reported this quarter in motors, for the second quarter?

No we would expect the second quarter, because that's traditionally our strongest period, that the margins would probably be in that range or up a little bit from what they are in the first quarter.

Okay. And then, switching gears to water heaters, the McBee plant, that is-well should at some point be out of the residential production process, that's right?

It will at some point Mike because of the multiple conversions we had going on and the difficulties that we had in Ashland City in the first quarter-we have delayed taking down the last residential line in McBee, and will not take that down until we're comfortable that we've got an efficiently operating plant in Ashland City.

So what is your current timeframe for taking that down?

I don't have a timeframe, I don't know right now, obviously it's going to depend upon our success over the next month or two in bringing Ashland City up the efficiency ramp.

Okay. And what are the roadblocks in the Tennessee plant to getting efficiency up? What was unexpected?

This is Paul Jones. Part of it is field deliveries. We are not having big difficulties-the steel is coming in a little late, that's causing some disruptions. And then all the things that Ken has already talked about, all the changes that we've made and the standardization, and the consolidation into the Ashland City-it's not a smoothly running plant yet, although it has been showing steady improvement since all those changes have gone into place. So the effort there is on the front end scheduling and material related processes, to make sure we have the material to get the assembly lines running a little more smoothly every day as we move forward.

And how much excess inventory in water heaters do you think you have as a result of the move from McBee to Tennessee?

I don't know that we have any excess as a result of that move, Mike, we've obviously got a little bit of duplicate of inventory until we get that last line in McBee moved, but it's not significant, it's not more than $2m- $3m dollars.

Okay, and just addressing specifically, you said residential volumes were down 7% Ken. Is that just missed deliveries and wholesalers going elsewhere? Or are these accounts that you've actually lost on a contractual basis?

No, as we mentioned in the last call, we had some delivery issues in January or early February, where for wholesalers who had multiple sources of product we may have lost an order or two. There's really no loss of customers, more loss of orders because of some of the disruption issues that we had.

So if you look on a monthly basis, given this business really isn't that seasonal, what did January, versus February, versus March look like in the residential business?

It was pretty much a slow steady incline. It wasn't steep, but it was a pretty steady improvement.

Which gives you confidence that there wasn't some systemic market share loss?

Yes.

Okay, and then, based on the guidance of $1.90 - $2.00, what's your cash flow from operations forecast that comes as a result of that EPS range?

We had said in our annual report that we were expecting $120m - $140m. As you're aware we reduced earnings a little-we've reduced earnings since that. We would say the low end of that range would be what we think is realistic.

Okay. Which assumes that working capital is basically a push?

Correct.

Okay, thank you.

Thank you, and our next question is from Ken Herson [ph] from Midwest Research, please go ahead.

Good morning gentlemen. I was wondering if you had established margin targets for both segments for the full year?

Our long-term targets for both business, we talked about previously is the 12% kind of operating margins. On the Water Systems side as we get the disruptions behind us in the second quarter and as the steel price increases take effect in June, I would expect that in the latter half of the year you'll see margins in the double digit kind of range. On the motor side we will continue to see, again, the impact of steel, typically the first half of the year has got a little more volume just from seasonal trends. So while they've been operating this quarter right at about the 8% level, I wouldn't anticipate it getting any much higher than that during the rest of the year.

Okay, thank you.

Thank you, and our next questions of a follow-up from Scott Graham, please go ahead.

What do you expect the standardization of your water heaters manufacturing, as well as the couple of other things you guys are doing-what is the cost structure implications of that once all of this noise is past us?

Yes, thanks, Scott. I think we had talked about, coming into the year, that we expected the benefit to the year of the standardization to be roughly $5m. Now, that's really net of some of the costs to implement it, so on an ongoing basis after that, it's going to be more in the $7m-$8m kind of range.

Okay. And could you also tell us-now, the price increases in water heaters are-on the NAECA is across the board, right?

That's correct. I mean, there's some small units that-I think it's below 20 gallons, and some larger units, I think it's above 80 gallons, that aren't subject to NAECA, but effectively about 80% of the residential water heaters are subject to NAECA.

Okay. What is-if you were to look at your water heater business really in total-and I'm certainly not going to ask you to go more in detail than that, although if you want to offer it, it would be great, but what is your earned contribution margin-price increases of July of last year, of NAECA this year, and then obviously with the pure price increases coming in the near-term, to offset the raw materials cost that's a different matter. But with the other two, obviously we had changes in production to get to those price increases. So what would be your, sort of contribution margin on the business now in front of raw materials related price increases versus what it was last year? Or the last 18 months.

Yes, let me just make some general comments to that, Scott, because there's a lot of moving parts there. I think historically we had talked about residential contribution margins being in the 15%-25% kind of range. And we had talked about commercial because you brought in a lot of application capability, and you were selling both the value of the application as well as the product, the margins being in the 25%-35% kind of range. Clearly as a result of the transition in products, with the introduction of the Flammable Vapor and the NAECA products, those margins are going to increase in the 5%-8% kind of range over time. The other price increases related to steel do nothing for our margin, in fact they tend to dampen it just a little bit, because we're adding a fixed amount of dollars to both the cost and the price, so overall it will take the contribution margin down a little bit.

So you're not expecting to recapture all the steel price hit with the pricing.

No, I expect to capture it all, but when I do capture it all, because you're adding a fixed amount to both sales and costs, you end up with the same margin but on a higher sales value, and therefore the percentage, the contribution margin goes down.

Okay. But you are expecting that at this point, where we are right now in residential and commercial, your contribution margin is up 5%-8% given the July standards of last year and the NAECA standards of this year.

They will be as the NAECA product comes fully on line. Again, that was mapped in the first quarter because of the steel costs and because of the conversion disruptions that we had in Water Systems, but that's part of the reason why I'm feeling pretty good about a double digit kind of operating returns in the back half of the year.

Okay, I got it. Thank you.

Thank you.

Thank you, and we also have a follow-up from Matt Summervale, please go ahead.

Hey, Ken, how much inventory is still left in Electrical Products, that still remains to be burned off?

Well, again, we made progress this quarter. We brought $9m of finished goods down. Now, unfortunately because we wanted to get in ahead of the yearly April price increases, we offset that by buying steel in both businesses. Having said that there is still significant work to do on the finished goods side on really both businesses, but with the really near-term opportunity being on motors. From a days standpoint, I think we could probably bring the days down by another 5-10 days over the course of the rest of the year.

Okay, and then you had mentioned I think in your prepared remarks, Ken, that the pending price increase in the water heater business in 6%-9%. Can you talk about how that compares on a relative basis to the conference call a couple of weeks ago when you basically used a rifle approach and said $14.

It's exactly the same, Matt, I'm just trying to get away from the rifle approach. I mean, 6%-9% basically brackets the $14 a unit we talked about in the last conference call on the residential side, and the 6% increase on the commercial side that we talked about.

And does that still take effect with June 1st shipments?

Yes.

Okay. That's all I have, thanks.

Thank you.

And we have a follow-up from Michael Schneider, please go ahead.

Ken, just in terms of inventory, I'm sorry, in terms of organic growth in the motors business, all sectors except HVAC up 10%. Now I know you gained some big distributors in the distribution market, but how much of that is actually organic unit growth versus just adding distributors or adding new channels. And rough numbers, or a rough breakdown is fine.

I'm going to answer the distribution side of that question. On distribution, we're actually seeing a fairly strong market. Again, distribution is a replacement type business, it tends to be serving customers on more of a quick delivery basis, and that business has been up nicely for us, as Ken mentioned earlier, and that's pretty much market growth. We have picked up some customers. We picked up a rather significant one yesterday, but it's not going to have much of an impact this year, but it is going to be something that rolls in over time. I think next year it'll add another $12m or $13m just through our distribution side of the business. So, overall again, the HVAC as I see it is just more of a seasonal and timing thing. Overall we're seeing some pretty good markets out there, and some pretty good market growth. We prefer not to get into specific customer type discussions.

That's fine, I'm just looking for a read on, just really the status of the industrial economy as you see it from the motors business.

Well, from the motors business, it looks better than it has in the last couple of years. It looks like it might have some upside as we go forward. Time will tell.

Okay. And talk about-it sounds like now you've added one additional large distributor, you won one earlier-later last year-how and why are you winning these businesses? Is it just recapturing market share you lost back in '01 and '02, or is there a new strategy at work?

Really, Mike, it's-as we talked about a year or so ago, we had to take-our fundamental underlying systems were fine-tuned and really tailored towards serving OEM customers. And we had some work to do to make sure that we had good visibility on inventory availability, the ability to expedite orders, the ability to give visibility into order status in our better served distributors, and that work is largely behind us. That's one of the reasons why you saw us not only regain some distributors that we had previously served, but also putting out some new ones, and it's really a little bit of both. It's some of the guys that we're going back to now because we've improved our systems and our capability to serve them, and it's also reaching out to some new customers.

Okay, then final question, Ken, on the motors business. You mention you're still on this $15m savings run rate. Are you able to quantify how much you actually saved in the first quarter from the moves of last year?

Yes. Again, it's in that $3m-$4m kind of range. Now again it was offset by steel costs and by the fact that we had-the downside of reducing the inventory was the absorption of fixed costs, but the savings from specifically the ramp up in Mexico and China was in that $3m-$4m kind of range.

Okay. Then lay out for us-what is left in terms of production moves during 2004. And if you can quantify just in terms of actual sales dollars, or cost of goods sold dollars that are actually going to be moved.

Well, again, the heavy lifting was completed last year. That's when the significant transition to Mexico was completed, when we got the Shenzhen plant and the C-frame 3.3" motors up to scale-actually there-the Shenzhen plant is now into the 36,000 motors a day kind of range, from the 25,000 where they were at the end of last year. The pump and the fan motor business in Chenzhou is probably lagging a little bit what we expected-the customer approvals of having those motors produced in China is coming a little slower than we expected. But all the production capability is there, the plants are in place, and if anything, our new facility in Chouzhou which is dedicated to the hermetic plants is coming along as well as planned, if not maybe a little better, and that's really in serving some of our North American customers who've got operations in China, and we're seeing some pretty good business there. I don't have the numbers at my fingertips, it's just what we expect from sales increase in China related to motors, so I'd rather not comment on it because I'd be guessing.

The last time we talked you had mentioned that in '04 really all that remains to be moved in motors are the pump and fan motor lines, and that was about $25m-$30m worth. Is there any other product lines that are being moved during '04?

Not of any significance, no.

And on the water heater side outside of the McBee move which has yet to be completed, are there any other moving parts?

No, and really, the McBee move is done. I mean, other than that one residential line that remains in McBee that ultimately needs to go to Ashland-probably Ashland City, really the physical movement is done, it's just getting everything up to speed now.

Okay, thanks again.

Thanks.

And at this time there are no further questions in queue. Please continue.

Thank you everybody, thank you for joining this morning, and we'll talk to you next quarter.

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