A O Smith Corp (AOS) 2004 Q4 法說會逐字稿

Ladies and gentlemen, good day. Thank you for standing by. Welcome to the A.O. Smith fourth-quarter earnings conference call. At this time all lines are in a listen-only mode. Later there will be a question-and-answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded.

I will now turn the conference call over to your Director of Investor Relations, Mr. Craig Watson.

Good morning, ladies and gentlemen. Thank you for joining us on this conference call. With me this morning 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 conference call including the 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. I'd also like to point out that we have a slide presentation on our website, so feel free to follow along while we conduct the call.

Thank you, Craig. This morning we reported full-year earnings of $1.18 per share for a net income of $35.4 million compared with $1.76 per share and $52.2 million respectively in 2003. Fourth-quarter net earnings were $4.4 million or 15 cents per share compared with $12.7 million or 42 cents per share in the fourth quarter of 2003.

During the year we had significant improvements in operating income resulting from our repositioning programs at Motors and new product introductions at Water Systems. These improvements were more than offset by the adverse impact of higher costs for steel and freight throughout the year. Additionally, manufacturing inefficiencies at the Company's Ashland City Water Heater plant impaired operating performance for the first 9 months of the year.

Sales of $1.65 billion were 8 percent higher than 2003, while fourth-quarter sales of $409 million increased 11 percent over comparable period last year. The higher sales for the year resulted primarily from new water heater products and higher prices related to steel and freight costs. In addition, China Water Heater sales rose another 40 percent in 2004.

Fourth-quarter sales increased 11 percent as a result of a 6 percent increase at Electrical Products and a 16 percent increase at Water Systems. A modest improvement in unit volume as well as higher prices drove the increased sales at Electrical Products. Stronger unit volumes in both commercial and residential water heaters, continued strength in our Chinese operation, and higher prices drove the Water Systems sales performance.

As we have discussed in previous calls, we initiated several price increases during the year to address higher material and freight costs. The most recent and significant price increase was effective on January 1. While we are generally pleased with the impact and acceptance of the new price levels, it is far too early to project their ultimate impact. Accordingly we have determined that we will not provide a forecast of earnings at this time.

Now Ken will go over the results and the outlook for pricing and costs in more detail. Ken?

Thank you, Bob. Sales in 2004 improved 8 percent to a $1,650,000,000 compared with 1.53 billion in 2003. The sales increase was due to price increases for higher steel and freight costs, the introduction of new water heater products, and significantly higher sales at our Chinese water heater operation. Net earnings declined to 35 million from $52 million in 2003 primarily as a result of significant increases in costs for steel and freight, manufacturing inefficiencies at our Ashland City plant early in the year, and higher SG&A expenses.

Earnings per share were $1.18 in 2004 compared with $1.76 in 2003. Gross margin was 18 percent compared with 19.5 percent last year. The decline in margin was attributable to the higher cost for raw materials and freight as well as manufacturing efficiencies during the first 3 quarters.

SG&A increased $30 million in 2004 to 14.3 percent of sales compared with 13.5 percent in 2003. The higher SG&A was due to increased selling and advertising expenses at Water Systems, expansion in China, and higher administrative expense related to pension and personnel costs. Interest expense increased 1.3 million as a result of modestly higher debt levels and interest rates compared with last year.

We generated 41 million of operating cash flow during the quarter, bringing year-to-date cash flow from operations to 67 million. Working capital improved by almost 30 million in the fourth quarter. Inventories declined approximately 29 million during the quarter with receivables and payables increases offsetting each other.

Receivable days outstanding were 62 compared with 58 last year. Inventory days were 62 versus 76; while payable days fell from 44 to 42. Cash cycle days improved to 82 from 89 days last year. While we are pleased the reduction in inventory and the improvement in our cash cycle days, this remains an area of opportunity.

Capital spending was $18 million during the quarter and 48 million for the year. Depreciation was approximately 54 million for the year. Our debt to capital ratio of 32 percent was unchanged compared with the ratio at the end of last year.

During the fourth quarter, sales increased 11 percent from last year to 409 million. Sales were 16 percent higher at Water Systems and 6 percent higher at Electrical Products. Net earnings of 4.4 million were lower than the 12.7 million earned in the fourth quarter of 2003. Higher costs for steel and freight continue to exceed improved pricing and were the primary cause for the decline in earnings.

Income tax expense was only $100,000 due to a year-to-date adjustment of the tax rate to 25.5 percent. The tax rate for the full year fell to this level due to the geographic composition of earnings. The earnings shortfall was primarily in the U.S. and Europe where we have tax rates in the 40 percent range. While earnings were at or above expectations in countries with low tax rates, China and Mexico.

Now I'd like to move on to a discussion of the operating performance in our Electrical Products and Water Systems businesses. Sales of 194 million at Electrical Products were 6 percent higher compared to the fourth quarter of 2003. Increased sales to the distribution channel and price increases were the primary drivers.

Operating earnings decreased to 4.4 million from 8.3 million last year, as contribution from the increase in sales combined with savings from the repositioning program were more than offset by cost increases for raw materials and freight. Operating margin was 2.3 percent, compared with 4.6 percent last year.

For the year, motor sales increased $36 million to 861 billion. HVAC sales declined 4 percent as a result of the loss of a contract by one of our major OEM customers. Sales to all of our other market segments were more than 10 percent higher than in 2003, reflecting higher unit volumes as well as price increases.

For the full year, operating income decreased approximately $2 million. Significant benefits from the Company's repositioning program were more than offset by higher costs for steel and freight as well as higher SG&A expense. Full year operating margin declined to 6 percent of sales from 6.6 percent in 2003.

Water Systems fourth-quarter sales of 216 million were 16 percent higher than the fourth quarter of last year. The sales increase was driven by strong commercial volume, China, a modest increase in residential unit volume, and higher prices. Higher prices were in place due to the launch of NECA compliant residential products as well as price increases implemented earlier in the year in response to higher steel costs. Sales in China increased 27 percent to $18 million.

Fourth quarter operating income declined to 11.4 million from 19.5 million in 2003 as the higher margin from sales was more than offset by higher costs for raw materials and freight.

For the full year, Water Systems sales were a record $792 million, 12 percent higher than in 2003. The sales growth was due to the introduction of higher efficiency residential water heaters, higher prices related to steel and freight costs, strong commercial volume, and a 37 percent increase in sales in China.

Operating profit of 36.8 million was $20 million lower than in 2003, the significant benefits related to new product introductions as well as the stronger commercial business were more than offset by raw material cost increases higher freight costs, manufacturing inefficiencies during the first 9 months, and higher selling expense.

Full year EBIT margin was 4.6 percent, compared with 8.1 percent last year. Throughout 2004 our business faced cost pressures due to increases in the price of steel and other materials as well as higher freight costs. Several price increases have been implemented in an effort to offset the cost increases. While these price increases mitigated the impact, they did not cover it all. As a result, we implemented additional price increases in both businesses, which took effect January 1.

As Bob said earlier, it is very difficult to gauge the impact of these new price levels in the short time they have been in place. Accordingly we are deferring earnings projections until we have a better perspective of the pricing impact.

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?

(OPERATOR INSTRUCTIONS) Scott Graham from Bear Stearns.

Good morning. Ken, would you be able to tell us what price versus units were in the sales numbers by segment?

Generally yes. I think if you took the increase on the motor side it probably split about 50-50 between price and unit volume improvement. On the water heater side, I have got to think a little harder on that but I'm going to call the units just up a smidgen, maybe in the 1 to 2 percent range with the rest of that being price. And again that is price not just related to the price increase, but year-over-year there is also the NECA product in there which was launched on January 1 of 2004.

Yes, of course. Would you be able to tell us also what the companywide impact of raw materials and freight was on the expense line this quarter?

In the quarter -- and again we can kind of give best estimate because while the cost increases are in steel, that floats through to a lot of the component parts. As you mentioned, there' also some freight cost increases. But I think -- numbers in the range of 12 to $14 million from a cost impact probably aren't that far off.

That's incremental year-over-year, you're saying?

I'm sorry, the cost increases are more than that. They're closer to 20 to 22 million for the quarter.

20 to 22 versus what you saw last quarter at this time?

Right.

Okay, last question. Could you talk about the outlook for pension expense in 2005? What we should be assuming for that?

Yes, Scott, this year we're going to be recording a credit of about $6 million. In 2005, we expect that number to move to an expense kind of in the 3 to $4 million range.

Very good, thank you.

Matt Summerville of McDonald Investments.

A couple questions. First as a follow up to one of Scott's questions, Ken, can you talk about the strength you saw in your commercial water heater business in terms of what kind of volume increase you saw there? And then excluding China what you saw in the residential business and whether or not you think you encountered any sort of pre-buy ahead of the January 1 increase.

Okay, yes, as we have talked about really during the course of the year the commercial market has been strong and that was particularly true in the fourth quarter. We still see a lot of construction and a lot of new activity there and the unit volume in the fourth quarter is probably in the plus 9 percent kind of range.

Then would that imply your residential volumes were down if you back out China?

No, the residential volumes were up. I think I used the word smidgen before because I didn't remember the exact number, but it is about 5 percent increase in volume in units in residential.

Okay, and then the inventory reduction that you were able to do in the fourth quarter, can you provide a split between the businesses and where is the majority of the opportunity in '05 and the magnitude of incremental reductions that you're looking at for this year?

Yes. The breakdown was about 10 million of that reduction was in the motor's business and about 19 million in the water heater side. So the largest area of opportunity there remains on the motor side. A lot of work to shorten up our cycle times. We now have -- our repositioning is behind us. So we are largely configured the way we are going to be and a lot of the stock that we put into place to cover that transition still needs to be whittled down. So a combination of reductions in those safety stock levels, reductions in cycle times are going to be the primary tools we use to reduce the inventory. There is always some opportunity on the water side but I would say the stronger opportunity is on the motor side.

And just the follow-up on the pre-buy, Ken, in the residential business, do you think you saw any in the quarter? And then what should we be looking at for a tax rate in '05?

I don't think we saw any significant pre-buy in the fourth quarter ahead of the price increase. As we said, the units were up 5 percent so that would indicate that if there was any, it was relatively modest. We did have procedures in place to monitor -- the inventory that was shipped in the fourth quarters so that we did not get way out ahead of as a result of the price increase.

Tax rate for next year is projected to be about 33 percent. As I said earlier, it was 25.5 percent this year but that was because the mix in earnings went towards Mexico and China. Most of this shortfall was in the U.S. and Europe. As we balance that back out next year, our target for this year was 33.5 and our ongoing target is to move it down 0.5 point a year so next year's target will be 33 percent.

Great, thanks.

Kieron Hurson from Midwest Research.

First question on the price increases, could you give us an idea of the magnitude for both the motors and water heaters? What the magnitude of those price increases were?

Yes, again, the price increases that are going into effect, the large ones to balance the equation here between our cost structure and our pricing were effective January 1 so they did not have an impact on our fourth quarter obviously. What did have an impact is the two previously implemented price increases in April and July and as -- I'm not sure I said earlier, but the price increases had an impact probably in the 12 to $15 million range during the quarter.

Just looking forward for '05 the new price increases, what was the magnitude of those?

We have had price increases as we said before in the double-digit range in both businesses. They range from 12 to 18 percent on the water heater side and probably 12 -- bell curve around 12 percent in the motor side. Having said that, there is a wide dispersion there. There's obviously -- especially on the motor side, the composition of those motors, some are more weighted towards steel and copper and materials that went up a lot. Some applications require more materials. So there is a lot bigger beta on the motor side than there is on the water heater side.

Okay and I wondered if you could -- if you have a feel for the year, for '04, what was in net raw material impact that you felt in dollars and if you have a feel for what your gross raw material headwind is for '05 that you need to overcome with these price increases?

Well you can kind of walk through the elements and materials. Everyone knows steel was in that range of kind of doubling in price for the year and copper and the marketplace went from about 80 cents as we came into the year and I think the spot market was closer to $1.40 as we left the year. Freight costs were impacted not only by the fuel costs but by the changes in the driver's rules and the freight costs have increased anywhere in the 30 percent and north kind of range.

Now the other significant impact is like all other contract steel players, we worked with a base price and a surcharge kind of arrangement all through '04. As we enter '05, we have new contracts. Having learned that we need to have our costs vary with the rather than having -- a scenario where they have fixed pricing and variable costs, we tied our steel prices in new contracts to indices so they will tend to move with the market. But there was also a significant increase in our steel costs effective with the first of the year.

Okay, and do you have -- as far as '05, do you have an outlook for the volume growth in both motors and water heaters?

I do not. That is part of what is behind where we are right now. We are literally just weeks away from the largest price increase that we have had. Unfortunately had to implement it in a long period of time, so there's potentially some volume impact there. I think the markets overall, again most of our business on the water heater side, 80 percent of it is tied to replacement probably something in the half to two-thirds range in the motor side tied to replacements so they tend to be stable markets.

The next biggest driver is residential housing starts, which look like they are going to be okay but a little softer than they have been in the past couple of years. And the commercial construction side seems to be going pretty well right now. It seems to be pretty robust.

Okay. Thank you.

Andrea Wirth from Robert B. Baird.

Wondering if you could talk a little bit about the pricing on the water heater side? I know you obviously don't know as to what extent the pricing is going to stick but could you give us an idea of maybe what percent of your volume with certain customers is secured as far as pricing? Have you actually inked some pricing level with some of these customers and what percent of your volume is actually secure right now?

Okay, this is Paul. I will take that one. On the water heater side, the majority of our sales are to wholesalers and those are typically not contract oriented so we have raised those prices effective January 1, as Ken said. On the retail side, there is a little bit of variability of the timing of those and that is where we have more of a contractual arrangement. And there is a little bit of a timings slip with retail compared to what we did on the wholesale side. On the cost side, our costs went up the same for a retail product or a wholesale product, so you can probably guess what we are in the process of discussing with our retail customers now.

So is the price increase looking more like a February as opposed to a January one on the retail side? Is that kind of the sense?

Retell has traditionally been about a 30 day lag, yes.

30 day lag. Okay. And you have none of those negotiated at this point?

We are in discussions as we speak.

All right. And then my other question is on the electric motor side. The profitability was actually well below what we were looking for. It came in at 2.3 percent. Obviously sequentially that is down but volumes are down. I guess could you just give me a little bit more color as to what is going on there, because I know obviously you've put in more price increases January 1, but you did it have some rollings throughout the year. Was there a just a significant spike in material costs in the fourth quarter or what is driving that?

The other drivers we talked a little what about SG&A and there were some costs there and the other one is there was some absorption issues as a result of the inventory reduction, Andrea.

Do you know about how much that was?

I would say all of that wrapped up was probably in the $4 million range.

$4 million, okay. Thank you.

Godfrey Birckhead from SBK Brooks.

Good morning. The receivables went way up. Can you comment on that please?

Sure, Godfrey. Really 2 elements to the receivables increase. Obviously we've got the big prices going into effect January 1, but the ones related to the higher costs from April and July as well as the price increases related to the NECA product are in the our receivables. So the good news is we have higher prices. The bad news is as they sit in receivables, they increase.

(multiple speakers) mainly?

Mainly, and as I said before, the days did go up about 4 days year-over-year.

I heard that. Now, Ken, in terms of the SG&A costs we heard that the pension costs are going to go from a $6 million plus to a 3 to $4 million negative, so I guess that is what -- at a 9 or $10 million swing there. What to do you expect the SG&A costs as a percentage of total to be this year? They were at 14.3 percent last year.

Right. Historically we have been in the last year, we were kind of in the 13.5 percent range. There is a little bit of a mix issue at play here because on the water heater business, because of the nature of the channels and the sport (ph) costs there, we tend to run at a higher SG&A level in the water heater business than we do the motor business. Because their growth has been higher than the motor business for the last several years, that puts some upward pressure on the overall ratio and I would say we are probably more in the 14 percent SG&A as a percent of sales going forward, primarily as a result of that mix.

Okay so if you were doing a model, you'd use 14 percent then?

That would be my expectation.

Okay, all right. What is the mix on your water heater business between the sales to retailers and the wholesalers?

Our residential volume is in the 85 to 90 percent of wholesale with the rest of it being retail.

Okay, thank you very much.

A follow-up from Matt Summerville from McDonald Investments.

Couple questions. Paul kind of went through a look at how pricing is going to roll through in the water heater business. Paul, I was wondering if you could do that with the Electrical Products segment and then kind of delineate between the distribution channel and then the OEM channel? And then a follow-up to that would be just in the motor business, how you are feeling about the HVAC market and what is your interpretation of market share trends in that business as it pertains to yourself and your competitors?

Okay, Matt. Generally we are pleased with some successes on the pricing side. I'll answer the first part of your question first. We are still in the process of finishing up some of the discussions and we will probably have more of an assessment of that at a later date on how the pricing is going there. I'm talking to the OEM's. On distribution that one is pretty much -- we changed the price list in the market and the price is out there and that one has already been implemented.

Your question about what is going on in the markets, the HVAC market is an interesting one in that we are tied in to a few OEMs and their successes is what drives our successes. And those are a couple of the discussions that were still underway. So I really can't comment on what we expect to see on HVAC this year on an ultimate basis. The market itself is projected to be up slightly for the year and it is our intent to do whatever we can to participate in that.

And then can you talk about in 2005 how much of your steel you're buying on contract versus spot? And then whether or not you think there will be a problem securing supply for your businesses?

We buy 100 percent of it on contract and we don't anticipate any problems on supply.

So we're off to the new year here, how much do you believe on a year-over-year basis -- your steel cost is up as we sit here in the first quarter versus last year?

Versus where we started January of last year or starting January of this year, it's almost doubled.

Okay, that's it. Thank you.

A follow-up from Kieron Hurson from Midwest Research.

A little bit of housekeeping. On the pension delta, that shows up in the corporate expenses line. Will there be any other positive or negative offsets to that within that corporate expense line? In other words, do we just expect that corporate expense to be 9 or 10 million more for '05?

It doesn't show up all in the corporate expense line. It shows up about 60 percent or so in the SG&A line and then 40 percent in the cost of goods sold line. And we would expect a somewhat similar distribution in 2005. So that is where that is getting allocated, some of which then ends up in corporate because corporate is a piece of the SG&A.

Okay and just final question, do you have an idea of when you will be in a position to give an outlook for '05?

I am optimistic that we will be able to do it during the first quarter.

Okay, thanks.

A follow-up from Godfrey Birckhead from SBK Brooks.

Does that mean following onto that last question, does that mean that you'll wait until the end of the quarter or you could be notifying us during the quarter, in February and March and call a special conference call to discuss your plans at that time? Or are you going to wait until the end of the quarter?

I don't really know Godfrey at this point in time. Obviously I am including in the first quarter up to and including the first quarter release. Whether it will be earlier than that will be very dependent upon just how much our view crystallizes on the impact that these price increases have had.

Okay, CapEx for this year, please?

Last couple years we've been running 5 to 6 million behind depreciation. I expect this year we will run at depreciation maybe a little more. We have a need to expand our capacity in China as a result of the growth there and potential for a few other investments such that I think if CapEx ran in depreciation, maybe depreciation plus a little, that is about the expectation for this year.

Around $50 million each?

Well, depreciation was $54 million this year. Depreciation will be in that same kind of range, so I guess CapEx would be plus or minus in the 55 million kind of range.

Okay, about the same. Okay, there was an article in the New York Times a couple of days ago. I don't know whether you saw it about the bulls and the bears on steel and I listened to a prior conference call -- the company I listened to is also a heavy user of steel and they said that they thought the price of steel this year and they were basing their business plan on that would be up 5 to 10 percent. I wonder whether you would comment on that. On what you feel the price of steel will be this year?

Godfrey, this is Paul. The different grades of steel have seen different things happen to them on the marketplace, on a global basis. So depending on the types and kinds of steel that people are buying has got a lot to do with what is happening on the percentage. And as far as outlooks and articles, I am not going to say we have read them all but I bet we've read most of them, and they are all over the map. You can find an article that concurs with your opinion without too much difficulty and you can find one that is directly opposite of your opinion. So what we have tried to do this year, as Ken mentioned earlier, is try to make sure that we have some variability on the selling price to go with some variability on the cost side so our contracts have escalators and de-escalators with our customer base for the most part that will allow us to keep the selling price and the material costs more in line.

Okay, given that and your business plans for the year, do you feel the price of steel will hold and go up a tad? Would you agree with that 5 to 10 percent increase or what?

I don't know.

That's a good answer. Thank you very much.

A follow-up from Scott Graham from Bear Stearns.

I just wanted to try to understand a summary of previous questions including mine and one or two others. At this juncture, there really is no price increase that has been negotiated with retailers and there does not appear to be much traction on the negotiations with OEMs on the motor side.

That is not true. Let me clarify that. We have concluded some retail contracts. We have not concluded them all on the water heater side and we have concluded most of the discussions with the OEM side on motors and we have done all of the distribution increase there. We just have some discussions still underway and we're still wrapping that up. And obviously a couple of those discussions are with very large OEMs. So that is one of the reasons why it is just difficult for us to give an outlook at this point. But the majority of the discussions, the vast majority of the discussions in both businesses are concluded.

And at this point you are fairly pleased, and does that mean that you are 8 rungs on the ladder for what you're asking for, 6 rungs, or 10 rungs? Could you give us an idea?

How tall is the ladder? (multiple speakers) I think generally pleased, Scott. If you looked at the whole process as we need to determine the amount of the price increase and announce it, then we need to enter into negotiations and agreement and then we need to understand what impacts if any it's going to have our volumes. As Paul said, we're through those first two phases and through all of them in many cases and we are I think generally pleased is about as well as you can put it. But there's still enough uncertainty out there with the remaining steps that we just need to finish that off. With what we have accomplished, I think generally pleased, I am not going to say it's a 6 out of 10 or an 8 out of 10. We did what we needed to do in order to offset these cost increases. We just have some of the activity yet to conclude.

But it's fair say that the price increases that you guys announced and were going for were a little bit pie in the sky to the extent you knew you wouldn't get the full amounts?

Really they were calibrated at recovering the cost increases. Nobody likes to do this. You hate to go out with a price increase but they were calibrated to recover our costs and maintain our sales and cost relationship. And so on businesses that everybody on this call knows historically, we are margin rich. So we needed to get our pricing and our cost model back in place and that really was the determiner of the magnitude of the price increases.

Last question. Are you contemplating the next set of production moves to Mexico or China for either business at this time for 2005?

We're constantly evaluating our manufacturing footprint, looking for ways to make improvements in our cost structure. Nothing that we can announce at this point. But I can tell you that we are always looking at things like that and always doing some tweaking and occasionally we'll do some pretty major moves.

I think the most pervasive kind of ongoing incremental activity you're going to see is we do have 4 motor plants in China we talked about before, Shenzhen, which is dedicated to the C-frame and the 3.3 is operating in that 50,000 unit a day kind of range and you'll see incremental mental improvements there. Our Shenzhen operation is dedicated is dedicated to the pump and the fan motor is kind of the mid-range and will continue to bring and qualify customer's products there. And Suzhou, which is our hermetic plant, is we've expanded that since we bought it. It's full and we continue to increase our business levels there.

So I think you'll see as a general rule, you won't see the abrupt disruption that we had in '02 and '03 with the very considerable transition of going from the U.S. to Mexico. What you'll see more is a gradual transition of high-volume items from Mexico to China, a little bit of backfilling in Mexico, and just ongoing activity.

Ken, how much of that is coming back to the U.S.?

Most of production, the vast majority of what we do in China from the motor standpoint is coming back here.

Very good, thank you.

David Durel (ph) from T. Rowe Price.

Just a couple of clarifications. Ken, earlier you said that the water heaters was on a volume basis, just up a smidge. Then you said the commercial water heater was up 9 percent and residential is up 5 and I guess China is up 40. Could we maybe go back to the price versus unit calculations on the water heater side?

Okay, hang on one second. You know, we said before the increase in the motors business was evenly split between volume and price. I guess I would make about the same comment on the water heater side.

Okay. That's great. I did want to ask the question maybe a different way with regard to the retailers. How important is it given that the distribution has already taken place in the past, the retailer hasn't taken price, the delta between retailers and wholesalers has become larger. How important is it for all this pricing to work its way through the system to have the large retailers -- who I think are you are concluding negotiations with now actually take price and get that delta between wholesale and retail shrunk. How important is that to have all of this pricing sort of stick? How important is that?

It is very important that that happened because I mentioned earlier the water heater does not know which market its going to until it gets a brand-name put on it. The costs have gone up the same for the water heaters, whether it's going to the retail channel or the wholesale channel and I think all manufacturers need to recover the cost increases that we have all seen.

But if you don't get the retail price increase at the same magnitude as what we have seen over the water heater, and that delta becomes pretty large and the water heaters that are sold through wholesale are now at a significant disadvantage to retailers, even beyond normal pricing, that becomes an issue. That you hope to close that gap with these negotiations.

Yes, if that were to happen, you're absolutely right but it is our intent for that not to happen.

But since the water heater guys on the wholesale side have already taken price increases earlier, for the most part, the retailers -- the large retailers haven't taken it. The magnitude of the price increase you're looking at from the retail side this time in January of 2005 is greater than what you're doing on the wholesale side. By definition, it would almost have to be or else that ratio is going to get -- the delta between wholesale and retail, pricing is going to get worse.

That is correct.

This is probably a good thing that we didn't mention this. OR we didn't talk a lot about it, but I'm hopeful that Ashland City there was no negative inefficiency costs in the quarter from Ashland City? Is that a correct statement?

That plant is humming very nicely right now, thank you.

Do you just want to -- how much did Ashland cost you -- (indiscernible) did Ashland cost you in the first 3 quarters of the year?

We had talked earlier, David, that it was running in the $4 million a quarter kind of range.

So all else equal, you get $12 million out of your hip pocket from Ashland getting better on a year-over-year basis?

Right.

Okay, just one last question -- going back to the pension question. Can you just divide that $9 million headwind between -- you said it was SG&A and cost of goods sold between corporate and the 2 business segments -- or at least just a general breakdown for everybody?

A general breakdown is about 50 percent of it will be affecting Electrical Products; 25 percent of it or so, corporate; and 25 percent, water products roughly.

Okay, that is great. Okay, that's actually everything I had. Thanks very much.

Brendan Hartman from Cramer Rosenthal.

Ken, I'm sorry; I'm confused a little bit relative to the last question. You said that if the volume growth in motors was pretty much split 50-50, price and unit volume; and in water heaters, you said units were up 1 to 2 percent and the rest is price, that's what you originally said, and now you said water heaters is 50-50, price and volume.

Let me go back. On the volume side, I said a smidgen or 1 or 2 percent. Actually by looking at the numbers, the volume on the residential side was about 5 percent the quarter. The commercial volume in units was up about 9 percent. And as we said, China was up 37 percent. So that is the metrics around the unit growth side.

The rest was price?

The rest was price.

So with that commercial being up 9 percent in the quarter and how it relates to the pre-buy ahead of the January 1 price increase, what have volumes been doing in January?

Again, it is very, very early but we did not really see any significant pre-buy impact on the water heaters in December and really have not seen any reflection of that in January at this early date.

When you talk to your big customers on the wholesale distribution side, what do their inventories look like?

I don't have a good answer to that question. I don't expect that their inventories are going to be outside the norm, but I don't know that.

Early indications we have, some of them is that early inventories are about at the normal level.

Okay, thanks.

We have a follow-up from David Durel from T. Rowe Price.

I was just going to ask -- you talked about on the call about what you've done on your pricing. Could you just comment without specific numbers or who your competitors are or what they're doing? Just generally on the wholesale side, have your competitors raised prices at a similar magnitude to you both on the motors distribution side as well as the water heater division side? And at the same time, can you just comment -- has there been any -- I guess the big boxes, any of your competitors that serve some of the big boxes that you don't serve -- can you just talk about what they -- is there any price increases that have been announced or put through by your competitors?

David, I obviously can't talk about any competitors or pricing scenarios. All we can observe, again, that is part of the uncertainty is you calibrate what you need to do from your business' perspectives and the prices that you need and you put those into place and the expectation is that the marketplace is going to accept those and that's really what we're testing right now.

But have your competitors done similar things so far?

David, I can't comment on that.

Okay, I'm not asking about any specific customer or the magnitude, I'm just saying have your competitors raised prices based on your -- I'm not sure why that's an inappropriate question.

It is only inappropriate from the standpoint of again -- I obviously cannot and do not discuss any kind of pricing activity with competitors. All you can observe is what's going on in the marketplace and I think the comment we made is with where we're at right now, we're generally pleased. Are their potential share issues or volume issues here and there? Of course. Any time you go through price increase of this magnitude, there's going to be discussions of potential for customers looking elsewhere. But in general, right now we're pleased and we've just got a little bit of work to do.

Okay, that's fair. Thank you.

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