A O Smith Corp (AOS) 2007 Q2 法說會逐字稿

Second quarter 2007 earnings conference call. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, today's conference is being recorded. I would now like to turn the conference over to the Vice President of Investor Relations, Mr. Craig Watson. Please go ahead.

Thank you. 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, Chairman and Chief Executive Officer; Terry Murphy, Chief Financial Officer and John Kita, Controller and Senior Vice President, Finance. Before Paul begins, 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. Paul.

Thank you, Craig. And good morning, ladies and gentlemen. This morning we are pleased to release our results for the second quarter of 2007. Sales in the quarter increased to $612 million. This compares with $595 million in the second quarter of 2006. Net earnings increased to a record $27 million or $0.87 per share compared with $25.1 million or $0.81 per share last year.

Net earnings in the second quarter of 2006 included a $3.2 million after-tax gain or $0.10 per share from currency contracts related to the acquisition of GSW. And the quarter just ended benefited from a lower tax rate compared to the second quarter of last year, resulting in an additional $0.06 per share. Earnings per share adjusted for those two items were $0.81 versus $0.71 last year, reflecting growth of 14% year-over-year.

And, based on the strength of earnings during the first half of the year and our expectations for the balance, we increased our 2007 earnings forecast this morning to a range of between $2.85 per share to $3.00 per share. I will come back to talk about the forecast later, but first Terry will talk about financial results in a little more depth. Terry.

Thank you, Paul. Second quarter sales of water products were $11.3 million or 3% higher than the same period in 2006, and reflect increased sales of commercial water heating equipment and continued strong growth in China. Sales in the residential market were similar to the second quarter of 2006.

In the electrical products business second quarter sales -- excuse me -- in the electrical products businesses second quarter sales of $258.5 million were 2% higher than the second quarter of 2006. Improved sales in the Company's distribution and commercial hermetic motor market and increased pricing resulting from higher raw material costs more than offset lower sales for the residential hermetic, pump and home appliance motor markets. Sales in China grew more than 20%.

Operating profit in the second quarter increased $3.9 million or 10%. In the water products business operating profit of $37 million increased $3.8 million or 11% over the second quarter of 2006. The increase resulted from higher sales of higher margin products. Operating profit margin was 10.5% compared to 9.7% last year. At electrical products operating profit of $18.2 million was approximately 10% higher than last year's second quarter primarily as a result of lower restructuring expenses, repositioning savings and cost reduction initiatives, which more than offset lower profit contribution from a decline in units sold.

Second quarter operating profit margin increased to 7% compared to 6.5% last year. Excluding a $1.8 million restructuring charge, operating margins would have been 7.2% in the second quarter of 2006. The $1.5 million increase in corporate expense reflects an increase of reserves related to previously sold businesses.

Our tax rate was 25.7% in the second quarter compared to approximately 31.2% last year. As Paul indicated at the beginning of the call, the lower tax rate contributed approximately $0.06 a share compared with last year's tax rate. The tax rate is expected to continue at this rate for the balance of the year and compares to a full-year rate in 2006 of 27.3%. The lower rate in 2007 results from proportionately higher income in China where tax rates are significantly lower than in the Company's US operations.

Operating cash flow was positive $38 million for the first six months, reflecting a $55 million positive cash flow in the second quarter. Cash cycle days increased to 64 days from 61 as a result of a modest decline in accounts payable days, receivable and inventory days were similar to last year. Capital spending totaled $28 million through the first six months of the year, and we continue to project approximately $75 million for the full-year. Depreciation and amortization were $34 million through June and should total approximately $70 million for the full-year.

Our debt to total capital ratio decreased to 38.5% from 39.1% at the end of 2006, and for 2007 we continue to project full-year operating cash flow of approximately $150 million as a result of the higher projected earnings and an emphasis on improved working capital management.

Now Paul is going to talk about the outlook for the balance of 2007, and we will open up the call for questions.

Thanks, Terry. As I mentioned at the outset, we narrowed and raised our earnings forecast to a range of between $2.85 and $3.00 per share in 2007. For the full year we are projecting flattish sales in our North American residential water heater business. The current outlook for the residential business will continue to be challenged by the slowdown in new housing. Commercial sales strengthened during the quarter, and we expect them to be higher for the full year.

Full-year sales will also benefit from the additional quarter of GSW and a projected 25% improvement in China to approximately $150 million in revenue. Since 2002 the Company's water heater operation in Nanjing, China has seen its sales multiply fivefold from approximately $30 million to an expected $150 million this year. The Company has now completed a significant expansion of capacity from approximately 500,000 units annually in 2005 to 1.1 million units annually now. The operation has begun another expansion project, which when complete will double its productive capacity again by the end of 2009. This project, like the one just completed, will ramp up capacity incrementally over the next two years.

Last month we announced an agreement with Fagor to jointly invest in a new company to manufacture residential wall-hung gas combination boilers in China. We believe Combi Boilers represent a rapidly growing product category that complements and extends our residential water heating footprint in China. The new company will be located in Nanjing and is expected to begin production in 2008.

Sales in electrical products were flat through the first six months of the year as improved pricing offset lower unit volumes related to a cooler housing market. Modest sales growth is expected for the balance of the year. Raw material costs are still a concern with copper hovering around $3.60 a pound.

As many of you know, we have been working hard to expand the margins in our motor business and have a roadmap that we believe will get us there by the end of 2009. The big pieces of that roadmap are captured on this slide. Our lean products initiative is intended to reduce product SKUs and components and simplify product offerings. This is intended to address opportunities related to the integration of some of the acquisitions we have made. Our product and customer optimization initiative is intended to address the weaknesses in some of the lower margin products we offer and market segments that we serve.

And as we make progress in these two initiatives, asset utilization and operating efficiencies, we believe we will improve. So to wrap things up, we still have some things to be cautious about in the housing market, and perhaps in the broader economy, as well. But we are comfortable with our second half plan and our ability to deliver record earnings of between $2.85 a share and $3.00 a share for all of 2007.

That completes our opening comments; we are ready for your questions. John, if you will put the first caller through, please.

(OPERATOR INSTRUCTIONS) Mike Schneider, Robert Baird.

Maybe first we can address just the quarterly performance, certainly better than we expected and the stock reflects it this morning. I am curious, though, given that you don't give us quarterly guidance, just the annual guidance, was the quarter better than you expected and where?

Well, we are pleased pretty much across the board with how the quarter came in, Mike. We are getting good productivity, good cost activities in both the businesses. We certainly have a weaker housing market that everybody recognizes. I am particularly pleased with motors. We are starting to see some traction. We've been talking about it, and we are starting to see some traction in what's going on there relative to getting some costs down. We are absorbing a weaker housing market.

We have a major customer that is way down from where anybody thought they would be this year, and our pump business last year had an abnormally high volume, and it is lower. And with all those things going on with the material prices and everything, that team is really down in a tough scrimmage blocking and tackling but delivering. And I am really pleased with what they are doing.

And on the water heater side, it is just more of the same. We are not going to talk about GSW anymore, but we still have a lot of projects related to that integration, that is getting so fuzzy to try to break those out. So we are pleased with the margin improvements there, and even though we've got a weaker housing market our commercial markets are pretty strong; both motors and water heaters. So you add all that up, we are mostly pleased with how the quarter came out, and we are obviously -- we think we are still conservative folks. But we did narrow and raise our guidance, so we are obviously feeling pretty good that the traction that we are seeing on the cost activities, particularly in motors, is sustainable.

Okay, and Paul just on -- it sounds like it is more margin driven during the quarter than necessarily volumes.

That's correct.

And I guess on that issue of just the forward guidance and should we read anything into the fact that the guidance was raised roughly $0.07, $0.08 at the midpoint despite what was a $0.14 beat, at least versus analyst estimates, or is it just conservatism as you alluded to?

Conservatism.

Okay, fair enough. And then just specifically on water heaters, as you double the capacity looking into '09 in China for water heaters, can you walk us through what happens to margins given that presumably there is some under absorption upfront?

Well, we just went through a doubling, and I don't think you saw it in the margins. It is an incremental improvement. Obviously early on there will be a substantial capital investment because we are putting up a very large building right next to where we are right now. And then we will be bringing in equipment on a staged basis just like we did with the last expansion, and we will bring people on as the marketplace requires us to have the volume.

We did the last one, I think the team there did a pretty good job. We actually ended up getting a little squeezed early last year in that we had more volume coming in than we had the capacity for; we just ran a few Saturdays and did a few things there to help that. But I think we will be fine there. The market is growing. The customer base that we have is expanding rapidly. I think customers, large retail customers, one in particular that had 30 stores four years ago is over 600 now. And that is pretty remarkable I think on what is going on in that market.

And then in US residential you expect volumes to be roughly flat for the year. Can you explain the discrepancy, though, the [gamma] data at least year-to-date through May shows that US residential is down 8%, which implies you are gaining share. Can you just give us some more color on that?

I think a lot of what we saw early in the year was inventory reduction by our customer base. And when I say flat, that is how we see it coming in to us. We think the reduction is in place. It has already happened, and even though we are at a lower run rate than we had a year ago, we think it has flattened out. And that is really all we are saying is we think it will be flattish for the rest of the year.

Okay. Thank you.

Ned Borland, Next Generation Equity.

A couple follow-ups here on with copper back to the security levels it was back in May of '06, what is your attitude toward hedging these days?

Same as it has always been, Ned. We continue to buy about half of our copper alongside our customer, along with them. And the other half we tend to hedge and I think we do about the same thing all of our competitors do, and I think we do it just about as well as they do. That's about all we can say.

Okay, and then on China I am curious as to you maintained your guidance there of about 25% growth over there this year. I think it grew 36% in the first quarter, about 19% in the second quarter. You have the doubling of capacity that you've just gone through. I am curious as to why that guidance for that region has not increased a little bit.

Well, the last three years we forecasted 25%, and we've achieved 40%. I do not think we will achieve 40% this year, but I think we will achieve the 25%. It is going to be a little bit lumpy. Frankly this quarter, and I'm not going to use the words only up 18% or 19%. It was still up 18% or 19%. But that is one of the lowest increases we've had in a long time, but it is just going to be lumpy every so often. We've obviously reviewed with the operating folks there, and we are fairly confident that 25% growth will be achieved. We don't talk a lot about new products. We have a lot of new products coming out there. A lot of initiatives that we have to continue to make sure that we are on the leading edge of what the market is requiring. And we feel pretty comfortable that the 25% will be achieved.

And how much in your CapEx is associated with the start of the new facility that is going to come online by the end of '09?

It's about an $18 million, $19 million project. But a lot of that -- we're going to get some of it in the latter part of this year with the building construction that I alluded to earlier. But I would say the majority of it will be coming in next year as we start bringing in equipment, blasting equipment and the presses and the like. But you will see some of it. Our run rate on first-half capital spending I think is $28 million. It will be higher than that in the second half primarily because of what we are doing. Not only with the expansion in Nanjing -- didn't talk about it in our prepared remarks -- but the Yueyang, we are building a new facility there also. And we've already broken ground and that facility is coming up. That is for the commercial hermetic motor piece. So some of what we have in the second half is related to the early stages of those two big capital projects.

Okay. Fair enough. And on a tax rate, Terry, I just want to clarify your comments. You are saying that this quarter's tax rate is what we could assume for the full-year '07?

Yes, yes.

All right. That's all I had. Great quarter.

Andrea Sharkey, Sidoti & Co.

Good morning, everyone. Quick question. I don't know if you can break this out, but how much did price add to your sales in both the motor segment and the water heater segment? And then do you have any more price increases that you anticipate taking or that are coming through now?

Well, there is obviously some pricing in the growth. That is why the unit volumes are down (inaudible) the housing. But the dollar, the revenue parts are up, and that is largely attributed to pricing which is driven by raw material costs. We are implementing some additional selected price increases related to raw material prices, primarily in motors. Or raw material costs, and we are not going to talk about any other plans other than that. But obviously copper moving up $0.80 or $0.90 from where it was a few months ago is certainly driving a lot of pricing right through to the invoices. So, it's in there. Some of it. We prefer not to break out specific pieces because you get into all the different market segments, and frankly, we are just giving too much information to the competition if we do that.

I guess then the other question I had was on commercial water heater sales. I guess the last quarter you indicated that you thought it would be relatively flat for the rest of the year with the prior year because last year was such a high volume. It sounds like it actually was up this quarter. I was wondering what changed or what made that be higher than you anticipated and do you expect that to then continue throughout the year?

The short answer is we were wrong in what we said before. The commercial market has been stronger than we expected it to be then. And based on some recent analysis we think it is going to continue strong the rest of the year, and that is obviously good. It is a higher margin market segment for us, and it is performing very well. This is light commercial. There is just a lot of light commercial construction going on. One of the indicators that I look at is the building trades employment. Even though the residential housing is down and new housing starts are way off, the plumbers and electricians and carpenters are still busy. So they are off working on light commercial, which certainly is a good thing for us, both in HVAC on the motor side as well as water heaters.

And can you give us any sense of how much that commercial was up this quarter?

(inaudible) was up a couple percent.

A couple points over last year.

They were up a little more than that.

And then just one last question on the commercial water heater side. Or, I am sorry, on the water heater side in general. The 70 basis point margin improvement, some of that was really it's just better mix; I am assuming commercial having better margins, China having better margins. Can you give us a sense of how much is related to mix versus how much is related to improvements that you guys have made via the GSW acquisition and other efficiency improvements?

It is hard to break out but I'll tell you, we've got improvements across the board. The mix is positive, and the GSW -- we still have some fairly larger projects from the GSW integration, are yet to be completed, the ones that have substantial savings coming to us. Those are being worked. We're very pleased with what the team has done there. As I mentioned earlier, it is getting to be more and more difficult was this related to GSW or just us looking at four water heater North American water heater manufacturing operations and continuing to make improvements in those, both in the designs and standardizations. But we are getting it across the board. We are very pleased with what the team is doing on the cost improvement projects, whether it is a GSW integration or a general cost improvement. And we are obviously the mix of the market, the commercial market segment being a little stronger than we expected is also helping.

So I guess it would be fair to assume you guys haven't peaked out yet on the water heater margin and that there is still some room to go given the activities you have going on.

That is true, and I should have probably clarified. That is going to always be true because we're always going to have projects. But we certainly have a plethora of projects there right now that have come from the GSW. I will give you one example is, we have three combustion chamber designs today. This time next year we will have one. That is a pretty significant savings for us.

Great. Thanks so much, guys.

Matt Summerville, KeyBanc.

First question on the water heater business. This new joint venture you are forming for these Combi Boilers, how do you size up the market opportunity right now in China? And what sort of growth rates are you seeing there? And what are the margin opportunities in that business relative to your core water heater business?

Well, we see -- our initial look at the market is probably at least 250,000 units on a market size. We think it is growing at 15%, 20% a year. We think we are coming in at -- with a good design product with one -- one of the things that our water heater business in Nanjing, probably doesn't get enough press about is the job they've done on having products that are appealing to the customer. When a customer walks into a store and walks into the A. O. Smith area, our salespeople intend to sell them a water heater. And in almost every case they do. And they do it because it is a product that has got some features that are appealing to them. So we think we're going to come out with a product in '08. This is not in '07. We think we're going to come out with a product in '08 that it is more than a me, too. It is not going to be just going at what's out there. It will be something that might have some appeal to it. So we think we're going to get off to a good start. It is a very low investment. We are looking at $1 million or so on our part. It is going to be down the street from where we already have a very large management team and where we already have established an outstanding sales and distribution network. So we are excited about it. We think our sales, and I will stick my neck out, but I think they could be in the $10 million or so range within three years, and it will be very good margins.

So probably comparable to what you see in your existing operation?

That's correct.

Okay, so it is $10 million in sales over three years, so you --.

That is in the (multiple speakers)

In '08 is that the beginning of the year or the end of the year?

That is $10 million in the third year. We're going to start production in '08.

Just in the second quarter, can you give a little more detail just on the residential side performance of the Lowe's related business versus your legacy water heater business?

Lowe's is doing very well. It is doing as we expected. They are continuing to do a good job in the marketplace. I'm going to give you something surprising. Sears did a good job the last first half of this year, too. Sears has had a very good first half. So the retail side of the business from our standpoint with the Kenmore and Whirlpool brands, they are both showing very good strength. I'd say the Whirlpool brand has done about as we expected it would. It is up upper single digits, and again, the Kenmore brand being up, that has been down for many, many years. And we're very pleased that they had a nice -- that they are showing some nice strength this year.

Okay, so wholesale volumes were still down then?

That's where most of the housing is affected, yes. The majority of new construction, almost all of it goes through a wholesaler. Somebody building, putting in a subdivision they'll go get -- they are putting in 500 homes and they will go get a quote from a plumbing contractor for 500 homes worth of plumbing and water heating and disposals and sinks and faucets and pipes and everything. And that is where we are seeing the weakness.

Can you talk about or remind us what your comparisons look like in your commercial related business in both motors and water heaters moving into the second half of the year?

Well, we are expecting both of them to be up over last year. Housing, our motor business was fairly weak the second half of last year. We kind of stuck a comment in our prepared remarks that we are expecting to see some growth there in the second half. And I'd rather not give some percentages, but we are expecting both of them to be -- we expect the commercial water heating business to be up over last year slightly, and essentially continue the strength we are seeing so far this year. And on the motor side we are just expecting some strength in the areas of distribution; our China business is up. I think we are through the inventory bubble in pump and we're going to see some things continuing to go well there.

Okay, and then just in terms of when you look during the quarter at raw material costs and average selling prices in the motor business, do you feel that in the quarter you are in parity?

Yes, in general I would say we are in parity. We see a few areas where we are needing to do something on pricing, and we're doing that right now.

And is that comment relegated to the motor business because that is really the division I am looking at just given where copper prices are.

That is correct. That is what we're doing. It is in the motor business that we're doing some selective areas where we've had a spike in our costs, and we have to do something to get our margins up to where we want them.

If I look at the margin leverage during the quarter raw material costs versus selling prices, mix of product, and it is a fact that it is your seasonally strong quarter, how would you characterize those three things as impacting margins? Or are you really starting to see, and I guess this dovetails into another question, traction from this next wave of restructuring that you're highlighting with that slide, I think in the presentation that you put out today. And then are we going to get more detail on that program, more specific timeframes, specific cost targets spread across those three buckets?

Okay, I'll try to catch that question. We are seeing some traction across the board. We have hundreds of projects underway. Probably it would be fair to say thousands. Some of these take very little time; some of them take quite a few days or weeks or months. And I am primarily talking the motor business now, but we are starting to see some traction on the margins related to cost take out. And that is something that we've been stressing. We have allocated a lot of engineering resources to standardizing the product to eliminating some -- this way multitude of SKUs we have, as well as taking out costs on the existing designs.

In some cases we don't eliminate an SKU, but we take the cost down. That is the primary effort that we are under, and we're seeing traction on that. As far as the roadmap, I think you've seen as much as we're going to share with you. If we tried to go into great detail and had to say here is our 48 frame motor, which is used for ventilation or refrigeration, as well as other marketplaces and we're going to do this to the stator lamination, and we're going to do this to rotors, we're going to this to end caps -- I think it would just be way too much information, and I think we would be giving our competitors more information. So when we are talking about the one to two points of margin improvement from the lean and the one to two points from the efficiencies that we are going after in that market, I think that probably gives you a pretty good indication.

What I will be doing later, I'm not ready to do it now, is to give a few specifics in each of those categories. I think we owe you that where we can say, within the lean we did this, this and this and it resulted in an $800,000 a year savings that will be there forever. And that is more or less just to convince you that we are really doing those things.

That is really the level of detail I was looking for on that. I just -- one more question on motors. Let's assume that the business does $925 million this year in revenue this year just for the sake of argument. Once you get through this restructuring, if you are pruning down customers, pruning down SKUs, how big is this business post restructuring?

Well, our strategy is we have been talking about now for well over a year, is to get the margins up and then grow, grow, grow. And right now we are getting the margins up, and anything we do on the growth area is very opportunistic right now. And it is also very profitable or we don't go after it. For example, we just got another contract with one of our distribution customers. It is existing products, very little design effort required and very high margins.

We are enjoying some new business on the commercial hermetic, primarily the product out of Yueyang. That is an area that we see as an opportunity. But day in and day out the majority of the effort there is on getting the margins up in all the other market segments. And once we get the margins up, then we will be doing a little more bold in those areas where we can profitably grow the business. I'm not going to give you an end number as to what we think it will be. Maybe in a year from now we will be ready to talk about that.

Okay, thanks.

Scott Graham, Bear Stearns.

Good morning, everybody. A couple of questions on -- looks like the motors business broke above 7% operating margin for the second time in two years or something like that. Is this a sustainable level of margin, or is that sort of more is it more that the increase, the year-over-year increase given the seasonality first-half seasonality of the business? I am trying to get to what the second half should be and I think the motors business is somewhat off-season in the second half of the year. So is it more of the increase in the motors margin that is, that might be sustainable from here?

Part of it is, of course, is that second quarter is historically our strongest margin quarter for motors. But part of it, and we did that 7% with a weak housing market. We have a major hermetic customer that is off significantly. Pump of course is down; part of it related to housing, part of it related to an inventory blip. But we have lower costs too. We are really getting traction on the cost side, both in the taking cost out of the product designs. If you look the SG&A is down. That is on purpose. We had a rather significant reorganization there. There is a lot of things happening. I could go on and on because we are living this every day. But I think you are seeing some traction, and we believe that this will be continuing and that we will see year-over-year margin improvement on the next two quarters over what the motors business did in the last year. That is what we believe will happen, and we're working every day to make it happen.

Thank you. I do have another question about the water heater business here. It is a little complex, so bear with me. I think as we've all agreed, the price gap between retail and wholesale needs to be something like 10 to 20%, probably closer to 20% to keep the installers from heading into the retail outlets on convenience, depending upon where they are installing. That price gap currently does not exist right now. Our checks show it is much closer to the 10.

Furthermore, the price increases that I think you've gotten at Lowe's, which is great, does not appear to being followed by Reem at Home Depot. Could you kind of weigh on all this, Paul?

No, I'd rather not. This is a complex issue. We are continuing to manage it day in and day out. We -- I am not going to argue with any of the points and you made, and I do not think I should comment any further.

You'll agree that this is something of a risk for you guys going forward? Because if the pricing doesn't hold up at Lowe's because Home Depot is suddenly deciding to use this to take market share from Lowe's, you obviously as the core supplier have to do something about that with -- I'm sorry at Home Depot -- you guys obviously have to do something about that at Lowe's. And similarly, since you guys are the market share leaders in the wholesale channel this could kind of have a double impact on you guys. And so I was just hoping for some type of -- are people strategically looking at this in your organization and trying to determine how to handle this?

The answer to that is yes, people are looking -- this has been an issue all the time; it's frankly less of an issue right now than it has been over the last two or three years and like I said, I'm just not going to comment any more. But obviously that is something we pay attention to.

Okay.

Just look at the results and let that be your guide.

Okay. The other thing is on Sears, it doesn't look like there was a price increase from you guys at Sears, and Sears continues to seemingly be pricing themselves out of volumes. Is that a business that longer-term is just going to continue to just sort of decline? I don't mean in any one quarter, but over time is that a business where we've really maybe seen the best of times?

Well, the volume at Sears is off considerably from where it used to be, but we are very pleased and honored to be the sole supplier to Sears for water heaters. And I am trying to think of a nice way to point out that I'm not going to talk about price on the motor side. It is, Sears grew their business first-half of this year. They are doing a real good job in their stores managing the Kenmore appliance sales. And we are pleased and honored to be the supplier of their water heaters.

Well, thanks. I appreciate it.

(OPERATOR INSTRUCTIONS) Alan Mitrani, Sylvan Lake Asset Management.

Can you just remind us how much of the motor sales are go to commercial or industrial, what percent roughly?

I think your question is on the HVAC part. Is that right?

Yes, it is.

On HVAC we are about half of that HVAC; this is the hermetic and the air moving motors, about half of that goes to commercial, and about half of it is residential.

Half commercial.

Real rough estimate.

And roughly, I know you don't want to give exact numbers, but how much in terms of margin is it a couple hundred basis points above the residential margin or the commercial margins in that area?

I would rather not quantify how much it is.

But it is definitely above the residential, correct?

Commercial margins are higher than residential margins.

And at what percent of that commercial roughly goes into distributors?

The majority on the motor side, the majority of our HVAC goes into the OEMs that are building it, but an increasing percentage goes into distribution. Our distribution business, and that is primarily where it goes -- it is replacement motors for the HVAC -- but our distribution business has been growing double digits for the last three years, and I think we are on track to be close to that, if not achieve it again this year.

That's really good. And just how many times have you raised prices this year on the commercial side?

Oh gosh, as far as general price increases we've had one -- we've had a whole lot of selective actions that we've been taking.

But overall roughly this year you expect pricing in commercial to be up how much?

Some of it is being driven by the formulas relating to steel and copper, and we have contracts with our customers.

Pass-through contracts that raise prices automatically?

Yes.

Geared to the underlying.

All of our contracts have escalation clauses in them tied to various published indices.

And then lastly, have you seen -- there has been some consolidation in the business between Regal Beloit making some acquisitions recently and Baldor's big acquisition. Have you seen any effects on your business either share gains or share losses? Can you just talk a bit about what the end market environment is in light of the acquisitions that have gone on?

On a general scale I am pleased that there is a consolidation going on in the industry because it needs it. Other than that, it is business as usual. Those are two fine companies that do a good job.

Lastly, in terms of a buyback, are you currently active, and have you bought back any stock in the quarter?

We have bought back stock so far this year 135,000 shares.

About 150,000.

150,000 shares. We typically stop doing that about a month before the earnings release, and then in three or four days we will be back looking at the market.

What is the average price you bought back this year?

I don't know.

38.5, something like that.

Nice job. I hope I'm as lucky. Thanks.

Ted Wheeler, Buckingham Research.

Good morning, Ted Wheeler.

Yes, Ted, we got that.

I just wanted to ask a question. Maybe you talked on this earlier. I was in and out on the call, but the restructuring and repositioning of the electric motor business you've talked about some 300 to 600 basis points of potential margin. I know there is ongoing actions that you will always be taking, but I think there is sort of a group of initiatives that you are kind of well into now. What is the timetable of sort of the larger number of restructuring actions for that to be completed? Is this going to be a two-year process or a one-year process and then you will be more steady state, or if you could just help me out on that.

Long-term, obviously, we want to see that be a double-digit business. We have established an objective of a 10% business by the end of '09. That is an internal objective that we have just when we are talking publicly about. That is not to say that is the end game because frankly we are not going to be happy with a 10% business. But it has been 5% for a long time, and getting to 10% we think will be a significant improvement. And that is essentially what we are on track to do. Some of that is facility rationalizations. We've done a lot of those. But some of it is related to SKU reduction, essentially integrating some of the acquisitions we've made, streamlining the productline, as well as streamlining the -- not only the manufacturing, but what we sell and who we sell it to and at what margin. So there is a lot going on there, and our objective is 10%.

I was trying to get a sense of if it is a linear process or is there a group of initiatives that kind of get completed between now and '09 and we sort of see an impact of a step up as opposed to a gradual.

That's a good question. There is a lot of moving parts. I will stick my neck and say it is probably going to be mostly a linear projection with some lumpy moves in there. And a lumpy move would be an elimination of a particular contract that is maybe not a good one for us. And when it expires we may have a lumpy move in the, either because of a significant price increase or elimination of the productline or something like that. We have a couple of things like that but I would say it is generally going to be linear with maybe three or four lumps, lumpiness.

Well, I look forward to it. You are doing a great job.

Gentlemen, there are no further questions in queue at this time, please continue.

We appreciate everybody's interest in the Company, and it is time for us to go back to work. Thank you very much.

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