A O Smith Corp (AOS) 2009 Q3 法說會逐字稿

Welcome to the A.O. Smith Corporation's third-quarter 2009 earnings call. At this time all participants are in a listen-only mode and later we will conduct a question-and-answer session with instructions being 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 your host, Ms. Patricia Ackerman, Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you, Kieley. 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, Senior Vice President of Finance.

Before we begin with Paul's remarks I would like to remind you that some of the comments that will be made during this conference 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, I will turn the call over to you.

Thank you, Pat, and good morning, ladies and gentlemen. Before we get into the highlights let me say that we couldn't be happier with our third-quarter results. We set an all-time quarterly earnings record. The challenges of the global recession are still present, but our focus on cash generation and cost reduction have really paid off for our shareholders.

Let me cover a few highlights to consider. First, while sales were down nearly 17% from last year, our third-quarter earnings were up 62%. A vast array of cost control activities and temporary softness in raw material prices benefited both businesses.

Second, our water heater operation in China grew 35% over last year. Higher consumer confidence in China as well as expansion into new geographies and new residential and commercial products all contributed to the strong growth year over year.

Third, our operations generated almost $198 million in cash during the first nine months of this year. Our inventory reduction programs delivered some great results as well as declined by over 20% or $63 million from the end of last year. Additionally, improved terms with our vendors have now resulted in negative working capital levels in China.

As a result of the strong cash flow we have paid down over $100 million in debt since the beginning of this year.

And fourth, due in large part to the success of our cost management efforts, we increased our 2009 earnings guidance. Our non-GAAP earnings guidance for the full year is now a range of $2.60 to $2.75 per share, an increase from the $2.05 to $2.25 range that we gave during our second-quarter call in July. Our forecast on a GAAP basis is $2.95 to $3.10 per share.

Terry Murphy will now elaborate on our third-quarter financial results. Terry?

Thank you, Paul. Before I go to the third-quarter financial results I would like to remind you that the required GAAP accounting for the Smith Investment Company transaction is different than the accounting we show here on a historical basis. For that reason, we will provide a reconciliation from GAAP to non-GAAP in the press release that we issued this morning.

Total sales in the third quarter declined to $501.5 million from $602.7 million last year. Despite that declines in volumes that we experienced in all of our North American end markets, we have reported higher earnings of $34.6 million or $1.14 a share compared with $21.4 million or $0.70 a share last year.

Our 2009 results benefited from two favorable items -- the sale of our Shenzhen, China, facility, which generated a net gain of about $3 million, and a $1.5 million tax benefit from the closure of our 2005 and 2006 federal income tax returns. Collectively, these items added $0.15 a share to our third-quarter earnings.

The 2008 earnings per share included restructuring charges at Electrical Products Company amounting to $0.05 a share.

Sales of $336.7 million in our Water Products business were off 10% from last year and mask sales increases in China of about 35%. Commercial volumes were down more than residential volumes, but both were off by more than 15%. We estimate that the industry's residential replacement volumes in North America are now about 93%, reflecting housing starts of historically low levels of below 600,000 new homes.

Electrical Products sales declined by 28% to $165.9 million driven by declining end market demand. Despite continuing to add business at some of our large distribution accounts, volume in all of our strategic business units except distribution experienced double-digit declines. Distribution volumes were off high single digits.

The largest volume declines were in our heating and air conditioning, pump, and general industries strategic business units.

Total operating profit increased by 46% to $48.5 million from $33.2 million last year. Operating profit at Water Products was $38.7 million, up 18% from last year. Operating margins improved to 11.5% from 8.8% last year as a result of increases in higher-margin China sales, aggressive cost reduction programs, and lower raw material costs.

Electrical Products posted a third-quarter operating profit of $22.8 million compared with operating profit of $10.6 million last year. The profit improvement was a result of savings from its 2007/2008 repositioning activities, lower raw material costs, a $3 million net benefit from the sale of the Shenzhen plant, and a year-over-year $2.2 million favorable LIFO adjustment.

Operating margins improved to 13.7% from 4.6% last year. When further comment on this sale -- plant sale in China, as we relocate production out of Shenzhen over the next six months we expect to incur moving and severance costs which will partially offset the net gain recorded in the third quarter of this year.

Operating cash flow was almost $198 million in the first nine months, which was considerably better than the operating cash flow of $75 million last year. In fact, after CapEx and dividends free cash flow was over $100 million. A 22% reduction in inventory levels from the end of last year contributed over $60 million to this year's operating cash flow.

Cash cycle days of 49 were almost 15 days better than a year ago, primarily from improved vendor terms in China. It should also be noted that this cash flow result is after a $50 million contribution to our pension plan which was made in the second and third quarters of this year.

Through the third quarter capital spending was approximately $38 million compared with depreciation and amortization of $51 million. Capital spending for the full year is expected to range between $55 million and $60 million. Depreciation and amortization is expected to total $70 million.

We are projecting operating cash flow of $190 million to $200 million in 2009, about where we ended the third quarter, as we expect that our China operations will use working capital between now and the end of the year and our electric motor division may build some inventory ahead of the spring selling season.

Our liquidity position and balance sheet remains strong. Our debt to total cap ratio declined to 24% from 34% at the end of the year. We have limited amortization of our long-term debt portfolio in the coming years. Our $425 million credit facility does not expire until February of 2011, and we had over $325 million of available capacity under the facility at the end of the quarter.

Paul will provide some details on the acquisition which we announced last month and talk about our outlook. And then we will open up the call for your questions. Paul?

Thanks, Terry. Last month we announced our intentions to purchase 80% of the assets of Tianlong Holding Company for $77 million. We are excited about the growth opportunity that water treatment represents.

Several factors make China a particularly rich environment for growth in water treatment. First, the economy has been growing at about 8% per year and it is expected to continue to grow at least that rate. Second, our research indicates that the market for water purification equipment is expected to grow annually more than 30% over the next three to five years.

Several factors will drive this greater than GDP growth. The Chinese government has done a great job of bringing water to the cities. However, after years of industrial waste, the majority of the water is polluted. Second, as living standards have improved and the economy opens up the population has become more educated about the poor quality of its water. The Internet has been a large part of this education.

The most popular solution in China at this time is to buy a dispenser for your home and haul large jugs of water back to your apartment or home, or to purchase single-serving bottles of water. The quality of this purchase water, however, is starting to become suspect. Consumers are looking for alternatives and the in-home point-of-use appliances that Tianlong makes are attractive solutions.

Tianlong is the market leader and what comes with that is a quality product line, manufacturing and product development expertise, and well-developed customer and supply chain relationships. The current owner, who will remain in the business, is well regarded in the industry and a passionate advocate for the health benefits of Tianlong's water purification technology.

One of the strengths we bring to the acquisition is our retail distribution, now over 2,000 stores, and our strong brand in China. We expect to have an A.O. Smith branded system in the retail channel next year. We expect to maintain the existing distribution channel and continue its growth.

Finally, our existing customer service and marketing investment and our manufacturing expertise will provide synergies over time.

The majority of Tianlong's current business is domestic sales in China primarily through distributors. However, about 30% is exported to other developing countries where water purification is a real need. We expect the acquisition will be accretive to earnings from the start as the profit margins are similar to those which we currently are experiencing in our China water heater operation.

We expect that the acquisition of Tianlong will earn more than its cost of capital by the end of next year, and we anticipate closing the transaction in the fourth quarter.

In discussing the outlook for the fourth quarter I want to touch on four items -- the stabilization of our residential end markets, our China volumes, raw material costs, and our cash conservation coupled with cost-reduction activities. Let's start with the residential markets.

We are starting to see signs that declines in new residential construction have leveled off. We don't know how they could have gotten any lower. In the last couple of months annualized new housing starts have bottomed out in the 500,000 to 550,000 annual range, although we don't expect to see that number increase much any time soon as the supply of foreclosed homes seems to be -- needs to be worked down.

In addition, our commercial end markets are still seeing new construction spending declines and we expect that our commercial volumes will continue to decline into 2010 as well.

Finally, the fourth quarter is typically one of the lowest volume quarters in our more seasonal segments such as air conditioning and pool pump, so we expect softness in our Q4 sales compared with the third quarter.

Second, we are expecting our China water heater business to grow about 10% in 2009. Our China water heater sales were up 35% in the third quarter after being down 10% in the first quarter and up 16% in the second quarter. We have said it before, the China stimulus package is bolstering consumer confidence and ending up in consumers' wallets, and they are opening those wallets and buying goods.

Third, raw material costs, especially steel, have marched upward 30% to 40% after reaching their lows in the second quarter. Because our costs are indexed they lag the market by about 90 days, therefore, we have good visibility into what our costs will be in the fourth quarter. This will pressure margins when compared to the third quarter.

Finally, we continue to focus on conserving cash. These programs have already generated great results as evidenced by our strong cash flow and the programs will remain in place for the foreseeable future. We expect to be well-positioned with a lean cost structure that will allow us to leverage our position as the economy improves.

So while we set an earnings record in the third quarter we remain cautious about the fourth. Earnings guidance for the full year is now a range of $2.60 to $2.75 per share on a non-GAAP basis, an increase in the $2.05 to $2.25 range we gave during our second-quarter call in July. And on a GAAP basis, which we don't think is a relevant way to look at the Company, it's $2.95 to $3.10.

We now welcome your questions and we ask Kieley to open up the phone lines at this time.

(Operator Instructions) Michael Schneider, Robert Baird.

Good morning, all. First, I guess on motors; the margins and actually revenue were both impressive. Can you first just address on revenue? It's unusual that motor sales would be up sequentially just given the seasonality of HVAC. Could you just give us some color on what actually improved sequentially and why?

Sure, Mike. A little bit -- to remind you on this year, we have not had -- we did not get the normal inventory build that we normally get in the March, April, May time period. Consequently, in June when people started turning on their air conditioners and their swimming pool pumps they were having failures and they had to wait for the product. But we did see a bump up in business in pool pumps, hermetic especially.

The encouraging thing to us is three years ago we laid out our roadmap to profitability for the motors business of a couple points each in three different categories -- managing assets better and getting our cost structure in line and managing the products we offered and the customers we served. Those things are working.

Unfortunately, the great recession has hit us and it wasn't visible, but we got some visibility to that in the third quarter with really not a large jump up in volume but a very, very encouraging that when the volume jumped up the margins fell through. So when the economy comes back and we get back to normal levels, we are quite excited about -- we believe the motor business will be achieving the 10% operating profit that we laid out three years ago.

Without the Shenzhen sale and the LIFO benefit we were above 10% last quarter.

All right. And just the distribution business, did you see a similar pickup in that business? Because that seems to me to be probably a better barometer of just GDP.

Yes, the distribution business was very strong in the third quarter relative to where we are in the marketplace. We have picked up a little bit more business in distribution that kicked in, a little bit of volume, too, during the quarter.

Okay. And then just on margins. So if we do kind of the elevator ride and we scrub motor margins of the one-time benefits and the LIFO adjustment, operating income was up about $10 million sequentially and $3.5 million more in sales sequentially. So obviously a huge flow through there.

Of that $9 million that I would estimate is probably outside of volume increases, how would you bucket the $9 million between materials and what I would call more structural savings as a result of the cost reduction activities?

That is hard to say, Mike. I mean material costs was a large part of it because we did hit a bottom on steel in the second quarter. The one thing you didn't mention, we do have lower cost products, lower cost designs in the marketplace than we had a year ago. We are continuing to roll those out every month.

We did have some mix benefit. We are having some success with our energy-efficient products which come with higher margins. We have a variable speed pump program that is working very well. So there is a lot of moving parts in this thing.

I think it would be -- it would not be telling the whole story if you say, boy, I have got a really, really big benefit from material costs, even though that did give us some tailwind in the quarter. A lot of other things are really clicking in the motor business.

We also had some one-time in the second quarter, Mike, where we had those excess copper contracts of a couple million dollars that hurt us in the second quarter that we talked about. We also had some negative absorption in the second quarter because EPC took their inventory down quite a bit in the second quarter that did not repeat itself. So, as Paul said, it was clearly not only raw materials.

Okay, all right. Thank you, guys, and great quarter obviously.

Thanks, Mike.

Ned Borland, Next Generation.

Great quarter, guys. Let's see, let's go with China here. A significant acceleration sequentially it looks like. Last quarter you were talking about it was going to be up single digits for the year, now you come in with a 35% increase. Is this just all China stimulus or what is going on here?

The China stimulus was a lot of it and the stimulus is oriented towards a lot of second and third tier cities. Our partners there, the retail customer, especially [Suning], have really been accelerating their growth into that area. I will give you one little statistic. This is a company that five years ago had 30 stores; they added 50 stores on October 1 and these are primarily -- on the one day. They were doing it ahead of the Chinese holiday. So we had to have product available in those stores, but the sales will come in the fourth quarter.

Remember we put the product into those stores on a consignment basis and so we expect to get some continued volume growth in China. That 10% for the year might be conservative now because we had a -- I guess it's okay to say -- we had a $24 million water heater month in September. Our folks over there tell us that is incremental to the year, that that was not stealing from the fourth quarter.

So it's really -- the Chinese economy is really coming back quickly. They are offering incentives, especially in the rural areas, for people to buy appliances. Some of these stores may be selling only two or three a day, but still it's all incremental to us and we are delighted with what is going on there.

Okay. And then sticking with China for a second, the filtration business. It's the market leader, Tianlong is, but how fragmented of a market are we talking about and is there potential for further consolidation of that market?

It's a very fragmented market in China at this point. We have been looking at it for about a year and a half. We had about 40 companies that we started out and we pared it down to three, and then went ahead with negotiations with those three. Tianlong is the market leader; they have the number one share and are experiencing the fastest growth rate.

So we were -- that is obvious it was our primary target and we are delighted to have gotten to a deal with them. The market is still way under penetrated. We believe the penetration rate in China is below 10% so we think there is a long runway ahead of us. We think the best way to win is to pick up the market leader and ride with them.

And as to further consolidations, absolutely. Those are certainly a potential.

Okay. And then circling back to the motors margins. I noticed that last year you had a decent second quarter of '08 coming in at about 9% or so, 9.3%, but it was unable to be sustained. I am just wondering what are you seeing now that gives you confidence that these are more sustainable going forward.

Well, we have been continuing the cost reduction activity. You know what happened last year was the third quarter the world came to an end. We saw our order rates plunge in the third quarter. While we work with a small backlog, it's not a large one. So essentially what has happened -- the second quarter of last year probably compares better with the third quarter of this year than those four quarters in between that we have had to get through. So that is probably one way to look at it.

We have not let up on the massive redesign efforts and standardization efforts as well as the manufacturing footprint consolidations to continue to get our costs down. The plan, the real short plan is still the same thing -- get to a profitable base and then grow from there. We are to the profitable base and now we are focusing on the growth.

Okay. And then finally on steel overall, you have noted that the steel index has moved up. How does your inventory cost of steel look like right now? Are you still working through some of that low-cost steel from the second quarter?

It's gone. We tried to buy more but the mills were just not shipping. Why should they ship it to us at one price when they can get $150 or $200 a ton more for it a week later or two weeks later? So we are working off of essentially the third quarter.

I think we saw the CRU Index go up $197 over the last three months and that is indicative of what we are paying this quarter. We just got the October numbers and they were about $40 a ton more than we thought they would. They moved up even more than they thought we would and that is giving us an indication of first quarter next year.

Okay, thank you.

Thank you.

Thank you. Scott Graham, Ladenburg.

Good morning, nice quarter. I do want to kind of split Mike's question maybe a little bit of a different way. I am trying to, as I think many of us are, triangulate between -- triangulate to what was raw materials, what was restructuring, and what was, let's say, beyond restructuring. So were the restructuring savings in the quarter in line or above your expectations?

It was in line. We said $20 million this year and it was $5 million in the quarter.

Yes. Okay, great. So then (multiple speakers)

-- because one of those three steps on our roadmap was optimizing our assets. But that is permanent; we are going to keep that savings forever.

Right. So there were actually some blocking and tackling improvements here over and above restructuring, and I am wondering if you could tell us where that is coming from? I am specifically talking about in Electrical Products first.

Okay. Well, both of our operations are doing a terrific job on productivity. The plant operations and the way we measure them continue to improve month after month after month. We, of course, do all the forecasting and the plant operations, even with the lower volumes have been coming in with better-than-forecasted results.

It's a combination of everything -- labor productivity, efficiencies in the factories. We do a, we call them Kaizen events, every week in every plant. We have freed up a lot of floor space in every plant that is allowing us to do some consolidations in Mexico that we are not even talking about.

You are not going to hear us say eating a restructuring charge. But if we can empty a building in Mexico and consolidate into another we get some fixed factory overhead goes away as well as some SG&A and some indirect factory costs. It's a lot of things like that that I want to make sure that the Company is getting credit for doing, because that is going to be with us month after month as we go forward.

We are going to continue to ride this elevator ride of material costs -- copper, aluminum, steel, etc. All we can do there is just try to buffer it with maintaining margins by making sure that we have the right price/cost relationship. But on top of that standardizing product, redesigning product such that it takes less steel, and factor productivity programs are a major focus of our company.

Okay. So would it be fair to say that some of the things that you are doing in the restructuring, for example, the standardizing of the product that you just mentioned, is maybe having more benefit than you expected because it has kind of gotten long arms, it affects other areas of the factory and other operations? Would that be fair? You following me?

Well, yes, these things are all inter-related. By the way, mix, don't rule out mix. One of the three elements we focused on three or four years ago was product optimization and customer optimization. And that is paying off for us. We don't have any below water deals with customers anymore and that is allowing us to make -- in both businesses now we are up to a margin level that we can continue to work on some new products.

I am looking forward to having that conversation with you in the near future as we start to roll out some of the products we have been working on the last two or three years that we think are going to make a pretty significant impact on the marketplace.

Okay. Kind of the same question on Water Products, and I know that some of your comments are going to be repeat comments in terms of the factory improvements. But I guess where I am going with this is, if we look at mix, so China was strong so that aides, but then commercial was weaker than construction so that detracts. Would you say that those were kind of offsetting and then if we unbundled the rest of the incremental we kind of arrive at raw materials plus operating improvements? Do you know what I am saying?

Yes, I think that is probably a fair way to do it. You know commercial is declining. We think it's going to continue to decline based on our forecast, but it's not going to have the decline residential had. We don't have a sub prime problem with commercial, new commercial construction and we still enjoy a very healthy replacement business in commercial. So we are not going to see that market dropping by the 75% level or so over the last three years that new housing construction did.

But it's still declining. But, yes, it's as everybody knows a good margin business for us, but the strength in China has certainly offset that and the residential is essentially a flat line. Our replacement business on residential now is over 92% of our sales; that is down only 8% new construction, it was 20% a couple years ago.

Okay. Here is my last question and it's also on the water heater business. In res we -- obviously this spike to north of 90% is kind of difficult to explain if you don't assume that maybe some people are somehow repairing units, which is kind of odd for the market. But I am wondering on the commercial side that trend, I think, is potentially more real on the repair.

So I am wondering are you doing anything with your business to position yourself for commercial parts pickup going forward.

Yes, that is a real good question, a real good observation. We are seeing two things. One is that when there is a repair that can be done more and more people are doing it. The other thing is we have come to understand there is a discretionary replacement. People that have three teenagers at home and a 40-gallon water heater, they are delaying putting that 80 gallon in or putting another 40 gallon in. So both of those things are happening.

But to your specific point, we supply the parts. We supply parts for our own product and we supply the parts to many of our competitors and our parts business is up this year.

Okay, great. Thanks.

Paul Mammola, Sidoti & Company.

Good morning, guys. On the cost savings, Paul, would you say it's fair that this is all permanent and you could realize this all through 2010 or do you expect some variable costs to come back in terms of shifts? I guess, what are your thoughts on that?

Well, I think it is going to stick. I think we still have -- some of our factories we are running a four day week. That is not real efficient, but we can get a 25% bump in output just by adding the fifth day. We save a little bit on the labor but we still have the full benefits cost of those employees. So I think there are some pluses and minuses that will come in as we ramp up.

But everything other than material we feel pretty good about our handle on that going forward. Our plants are productive, continuing to be more productive. We have a -- Terry talked about capital spending. We do have pretty healthy fourth-quarter capital spend ahead of us compared to what we have done the last three quarters. One of those projects is a significant productivity improvement that has a very nice internal rate of return on it that we are doing in one of the water heater factories, for example. We are also finishing the factory in India. We will have that up and running early next year.

So, I would assume that you will stay on a four-day week at most of those plants in the fourth quarter, correct?

Probably, yes, and we may take an extended Christmas shutdown and things like that.

Okay. And then on new products you talked about China and what was driving that, but I think we had talked about a solar heated or solar water heater on the balcony mounted. I was wondering if that was a part of the growth and maybe some of the other new products that were launched there and what the penetration rate is for that stuff right now.

Yes, the solar product has gotten off to a terrific start and that is part of what we had in the quarter. I actually got to see some of those units last month. People are delighted with them. The cut the electricity cost use by 75% in the Shanghai area and Nanjing area -- Nanjing was where I actually saw them -- so as they go further south they actually cut even more.

That is a great product. We are expanding our commercial offering in China and that has got a nice upward growth to it. And we have some more things coming out very soon.

Paul, what you think the penetration rate is on that solar water heater so far?

Very, very small. We think there is -- if you have been to China and seen all the high-rise buildings, some of these can only get sun three or four hours a day on the balcony. And that is still enough in the Nanjing area to get enough water in the storage tank, which is very well insulated and holds the hot water and keeps it hot, that these things are selling. People are excited about them and they are buying the product.

Okay, great. Thanks for your time.

Thank you.

Matt Summerville, KeyBanc.

Morning; couple questions. Paul, you kind of walked through where you were from an inventory standpoint with regards to steel on the raw materials side. Can you sort of walk through where you are with the copper as well, if you still have any lower-cost copper that is flowing through the P&L?

Yes, we have got some but we are essentially at our normal hedge rate where we don't have any underwater contracts anymore like we had earlier in the year when copper got down to $1.75. But it has been moving up pretty regularly since then, since the spring just like a lot of other things.

But we were hedging a little, obviously a little heavier when copper was at the $1.75 to $2 range along with our customers. This was -- again we do most of our copper hedging along side customers. We will get together with them and decide to hedge a certain percent of their volume at some determined level into the future.

If we look at the fourth quarter, obviously you give annual guidance, but if you kind of go through the math it looks like your earnings guidance is somewhere in the range -- would fall in a range of $0.35 to $0.50. If we assume you did about $1 in the third quarter excluding the $0.15 worth of good guys, one-time good guys that you pointed out -- I guess help me bridge that sequential decline.

I guess what kind of sequential volume decline are you looking for work in your overall business relative to the third quarter that would underpin that kind of sequential decline in EPS?

Well, if you look at our company historically fourth quarter is a low-volume quarter so volume is the first thing I am going to mention. We have the holidays and everything else. Yes, Shenzhen, yes, the --

The benefit this quarter in Shenzhen will have expense the next quarter in Shenzhen.

Yes, the Shenzhen $3 million or so benefit we are actually going to use a lot of that up over the next several quarters. The accounting rules don't let us take all those expenses until we actually incur them so that will be a part of the fourth quarter. And material costs is going to be part of the fourth quarter, primarily steel.

But the first thing I would mention is volume. Probably the second element would be material and the third would be there is Shenzhen expenses that come in to play that eat into the one-time gain we had this quarter.

Terry, how much of that three or thereabouts would you anticipate in Q4 and then what is left over for 2010? And then I think in your prepared remarks, Terry, you mentioned what your year-to-date pension contribution has been. I missed that, unfortunately. Could you give that again?

Relative to the Shenzhen expenses they will probably be about $500,000 in the fourth quarter and then maybe another $1 million in 2010. Relative to pension contribution, we made a pension contribution of about -- well, not of about -- we made a pension contribution of $50 million this year, cash contribution.

And that is included in the $190 million to $200 million operating cash flow guidance, correct?

Yes, that is.

And then what are your thoughts on cash contributions next year based on kind of where you are at today?

They will probably -- we actually made a higher contribution this year for tax purposes than we had really thought about at the beginning of the year. I expect that contributions will be high, but less than $50 million next year. Probably in the $35 million to $40 million range next year and maybe at that level for a couple years, then it would shoot up. All other things being equal, after we have amortized the past gains the pension contribution would shoot up quite dramatically unless the markets improve.

And then just one final question on pricing. Can you kind of update us where you -- what you are seeing in terms of pricing right now in both of your businesses? Given your comments on raw material inflation kind of ticking up, do you think that gives you any incremental pricing power in 2010?

Well, once again, we cannot be very open about that because our competitors are on this call. Obviously, if material costs keep going up there is going to be some upward pressure but we are not going to talk about anything relative to price in either business.

Thanks.

(Operator Instructions) Ted Wheeler, Buckingham Research.

Hi. Good morning, everyone. Great performance.

Thanks.

I just wanted to hone in on maybe one comment you made, that was that the steel indices this month looked like they are $40 a ton a little ahead of your plan and it might impact the first quarter as it flows through. Now can you change, and will you change, pricing to basically offset that?

Well, the steel index we thought it would go up about $30 and it went up about $70, the October CRU index. So that is really what we are talking about, and that will impact our costs in the first quarter.

Well, can you price (multiple speakers)

Obviously, we have a very strong priority to maintain margins.

Well, just as a practical matter, excepting for competition, which I guess is a big concern too. But from a timing point of view, there is no barrier to you adjusting prices and capturing that?

No. One exception is our motor business we have a lot of -- our OEMs are on a contract so there will be -- it's got an escalation or de-escalation clause and those kick in every quarter. As we incur the higher costs, we are able to pass that along to our OEM customers.

But on the water heater side we have limited contracts and, yes, we can do anything at any time there given competitive situations.

So I guess the question would be, the timing is such that everyone has got this issue and presumably pricing will adjust to keep that cost from being a hit for anybody?

We will see. We are not going to make a price announcement in our earnings call. We will do that separately.

But you have the wherewithal and the timing is such you could do it if it -- if you wanted to --?

The industry has had a long history of end-of-the-year price increases. We will see.

Okay, great. Thank you.

Thank you. Speakers, there are no further questions in queue at this time.

Okay. Well, thanks, Kieley; thanks, everybody, for being on the call. We are going to go back to work on the fourth quarter. Any other questions give us a call.

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