A O Smith Corp (AOS) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the A.O. Smith Corporation fourth quarter 2009 earnings conference call. At this time, all lines are in listen-only mode. Later there will be a question-and-answer session and instructions will be given at that time. (Operator Instructions). As reminder today's call is being recorded.

At this time, I'd like to turn the conference over to Vice President, Investor Relations and Treasurer, Patricia Ackerman. Please go ahead.

Thank you, Ken; 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 now turn the call over to to you.

Thank you, Pat; and good morning, ladies and gentlemen. Before we get into the highlights, let me say we couldn't be happier with our 2009 results. We set all-time earnings per share and operating cash flow records. The challenges of a global recession are still present but our focus on cash generation and cost reduction have really paid off for our shareholders. A few highlights to consider.

While sales were down nearly 14% from 2008, our earnings of $90 million were up 10%. Growth in higher-margin China sales, a vast array of cost control programs and lower raw material and restructuring costs contributed to the improvement. Our operations generated almost $270 million in cash.

Our inventory reduction programs delivered some great results as levels declined by almost 25% or $70 million from the end of 2008. As a result of the strong cash flow, we have paid down almost $100 million in debt since the beginning of 2009 and we paid for the water treatment acquisition with cash.

Our water heater operations in China grew 19% over 2008. Higher consumer confidence in China as well as achieving the number one market share position, expansion into new geographies and new residential and commercial product launches all contributed to the strong growth.

Before I turn this call over to Terry to go through the 2009 details, let me share with you our thoughts underlying 2010. First, the good news.

We expect our China growth rate to be higher than China's GDP as our customers continue to open new stores in new geographies and as our 2009 new product introductions like the solar water heater gain traction. In 2010, we will also benefit from the full year results of the China water treatment business which is expected to add between $0.10 and $0.15 per share.

Additionally the overall improvements made to our cost structure in 2009 will in general carry over into 2010. What we have learned going through the recession is that we now have a different definition of discretionary spending and it is much broader and deeper than in the past. As a Company, we also demonstrated to ourselves that we can remain focused on our customers and increase our own productivity. This is a great combination for our shareholders.

Finally, we have seen some stabilization in the US residential housing market and we expect a small increase in new home construction in 2010. We are forecasting housing starts to be around $850,000 in 2010 which is above the current run rate, so there must be a pickup during the year to achieve that number.

The caution in our guidance stems from the declines from our commercial volumes due to the global recession. In spite of the fact that about 75% of our commercial business is replacement, it's still the highest margin piece of both businesses and we expect a 10% decline in 2010, a smaller decline than we experienced in 2009.

In addition, while we enjoyed softness in commodity costs in the second half of 2009, the trajectory on steal and copper is marching north, putting pressures on margins and the increases ultimately raised the pricing question. Finally in spite of closing our pension plan to new participants at the beginning of year, we expect our pension costs to increase in 2010 by about $5 million.

As a result of all these factors, we've established full-year guidance of $2.95 per share to $3.25 per share for 2010. Terry will now talk about our financial results in more detail. Terry?

Thank you, Paul. Before I go through the financial results, I'd like to remind you that the required GAAP accounting for the Smith Investment Company transaction which closed in the second quarter of 2009 distorts our results on a historical basis. For that reason, we will provide non-GAAP information in this presentation. A reconciliation from GAAP to non-GAAP is provided in the press release that we issued this morning.

Total sales for the year declined to $2 billion from $2.3 billion last year. Despite the declines in volume that we experienced in all of our North American end markets, we reported a 10% increase in earnings to $89.7 million or $2.96 per share compared with $81.9 million or $2.70 per share last year.

Total sales in the fourth quarter of $509.6 million were essentially unchanged from last year, however, earnings markedly improved to $20.7 million (technical difficulty) per share from $6.7 million or $0.22 per share last year. Taking a closer look at the individual segments, Water Products recorded sales of $1.38 billion, a 5% decline from 2008 sales of $1.45 billion.

This segment benefited from a 19% increase in China sales that finished the year at $219 million. However, lower residential and commercial water heater volumes in North America overshadowed strong progress in China.

Electrical Product sales declined by 28% to $620.4 million driven by declining end market demand. Volumes in all of our strategic business units except distribution experienced declines ranging from 25 to 40%. Distribution volumes were off high single digits as overall market declines were tempered by new business wins at our largest distribution customers.

Fourth-quarter sales of $362.2 million of Water Products were up 5% compared with fourth-quarter 2008 as a 32% increase in China sales more than offset residential and commercial water heater volumes in the US. At Electrical Products, fourth-quarter sales of $148.4 million declined 9% compared with the same period in 2008. Fourth quarter is typically the lightest production quarter for our OEM customers and we were encouraged to see some evidence of improved demand in some of our global [motor] markets.

Total operating profit increased 5% to $131 million from $125 million last year. At Water Products, 2009 operating profit of $148.9 million represented an 11% increase over 2008. Earnings were favorably impacted by higher margin China sales, aggressive cost reduction programs and lower material costs. Operating margins grew to 10.8% in 2009 from 9.3% in 2008.

Electrical Products posted 2009 operating profit of $32.5 million compared with operating profit of $39.1 million last year. Significant volume declines were partially offset by repositioning savings, aggressive cost reduction activities and lower raw material and restructuring costs.

In addition, Electrical Products operating profit included an incremental $6.6 million favorable LIFO adjustment net of lower absorption or fixed cost as a result of significant reductions to the inventory levels when compared with 2008. Add $1.6 million of restructuring income primarily associated with the sale of the plant in China, also improved the 2009 operating profit.

2008 earnings included $8.7 million in restructuring expense. And operating margins improved to 5.2% from 4.6% last year.

At Water Products, fourth-quarter operating profit increased significantly to $44.5 million from $29.6 million in the fourth quarter of 2008. 32% growth in China water heaters sales, aggressive cost reduction and lower raw material costs contributed to the higher profits. As a result, operating margins expanded nearly 400 basis points.

Electrical Products earned $5.1 million in the fourth quarter, a significant improvement from the prior year. Cost reduction programs implemented earlier this year, lower raw material costs and a $6.4 million net favorable LIFO adjustment contributed to the improved performance. Fourth quarter 2008 earnings included restructuring charges of $2.9 million.

Electrical Products operating margins improved to 3.4%. Operating cash flow was almost $268 million in 2009, more than twice the operating cash flow of $98 million last year.

The 25% reduction in inventory levels from the end of the year contributed over $70 million to this year's operating cash flow. Cash cycle days of 42 were almost 25 days better than a year ago, primarily from the inventory reductions and improved vendor terms in China.

It should 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 in 2009. We are projecting cash flow in 2010 to be considerably lower than 2009 due to the expectation that working capital will not shrink any further. We expect to generate 115 to $125 million in 2010.

Capital spending was approximately $57 million compared with depreciation and amortization of $68 million. Capital spending is expected to be between $75 million and $85 million in 2010 and the increase is due to the completion of the India water heater production facility and the construction of a new water treatment facility in China. Depreciation and amortization is expected to total about $75 million.

Our liquidity position and balance sheet remain strong. We paid down almost $100 million in debt during 2009 and this was after purchasing the water treatment company for $77 million.

Our debt to total capital ratio declined to 24% from 34% at the end of 2008. We have limited amortization of our long-term debt portfolio in the coming years.

Our $425 million credit facility does not expire until February 2011 and we had over $300 million of available capacity under the facility at the end of 2009. We expect to begin working on the renewal of that credit facility in the upcoming months.

Paul will now present a few more details about our outlook and then we'll open up call for your questions. Paul?

Thanks, Terry. Going into 2010, our largest concern would have to be the continued decline of new commercial construction. Despite the fact that about 75% of our commercial products are for replacement and as a result our volume declines are somewhat insulated from the overall drop in commercial construction activity, these products represent our highest margins in both businesses. We expect commercial construction activity will experience a typical 18 to 24 month lag from new home construction and therefore we do not expect to see an end to the declines until 2011.

However, we do have some bright spots in this category which should help mitigate the declines. We continue to gain market share in the commercial water heater segment as a result of our energy-efficient cycle and product line. And we have seen evidence of some increases in orders in our commercial hermetic motor segment in China from the depressed 2009 levels.

Revenue growth in 2010 will come from one, increases in new home construction; two, increases in consumer confidence, which prompts home owners to replace failing systems instead of fixing them; number three, increases in our customers' confidence which prompts restocking inventories along the channel ahead of end market demand; and four, increases from our businesses operating in Asia.

And number five, I don't want to underestimate this, is new products. We have an exciting stream of new, primarily energy-efficient products being introduced as this year goes along.

Most forecasters expect housing starts to rebound in 2010. We are carefully watching for signs of increases in demand for our products. We will not add to our production resources until the demand is real and sustainable.

We are determined to maintain our low-cost structure and the benefits derived from our aggressive cost reduction and cash generation activities implemented in 2009. This will provide some margin leverage when demand does pick up.

We will finish our 2010 outlook commentary with Asia. Our 2009 sales in China inched over the $300 million mark in 2009.

In 2010, we expect the total would be close to $400 million. Coupled with the fact that our margins in Asia are better than in North American, this region plays a vital role in our growth strategy.

Many of you are familiar with our China water heater story. Last year, our largest retail customers opened 100 new stores in Tier 2 cities. This represents new retail footprint for us in addition to the 2000 stores already selling our products.

In 2010, these customers are expected to add another 200 stores. In 2009, our water heater group initiated a new distribution channel for us in China by establishing about 300 independently owned stores. These stores sell water related products exclusively and some carry only A.O. Smith branded product. We expect to add another 200 or so such stores in 2010.

We launched several new products in China last year and 2010 will represent the first full year of sales for these products. Many have started to gain traction, including the balcony mounted solar water heater and our tankless water heaters.

We ended 2009 in the number one market share position in China residential water heaters. We go back and forth between first and second place with our largest competitor, Haier, a local China [white] goods manufacturer. All of these factors combined to back up our GD plus growth rate assumptions for our China water heater business.

Our foray into water related products started late last year when we purchased 80% of the leading residential reverse osmosis water treatment system manufacturer in China for $77 million. We closed in late November and therefore water treatment sales and earnings were not significant for us in 2009. We expect 2010 accretion to be between $0.10 and $0.15 per share from this acquisition.

We will also introduce A.O. Smith branded water treatment systems into our existing China retail distribution channel later this year and expect meaningful contribution from the branded product introduction in years to come. We will leave the 2010 outlook discussion with a quick update on India.

The production facility is progressing on our expected timetable with a production launch in a few months. We are now selling A.O. Smith water heaters in 40 cities in India. Sales in 2009 were over $6 million and we expect 2010 to almost double 2009 results. Profitability was negatively impacted by import tariffs in 2009 and again, by fixed manufacturing costs in 2010 but India should be profitable for us in early 2011.

So while we set an earnings record in 2009, and have some great momentum in Asia, we are cautious about 2010. Earnings guidance for the full year is projected to be between $2.95 to $3.25 per share. We welcome your questions and ask the operator to open the phone lines at this time. Ken?

(Operator Instructions). Ned Borland, Next Generation.

Great quarter. If we could talk margins and raw materials for a second here, in the water segment, you saw unbelievable margins of north of 12%. As you have expectations of raw materials getting higher here, what do you expect the increase in raw materials to -- how much do you think that's going to impact your margins in that segment?

It's tough to say. There's a lot going on. We just got a new steel index this morning. Steel is now up almost 50% from where it was six months ago and it's been moving up over the last few months.

With our water heater business, that's half our cost is steel, over half. So it is certainly putting some pressure on us right now. As far as the margins, it's our objective to be above 12% in the water heater business. We think that's a good healthy business model to have.

We have been continuing to reinvest back into the business even as margins are well below that because we do take a long-term outlook with the business. But it certainly is our long-term intent to have margins above 12% there continuously and that would easily allow us to continue to be the leader in new product introductions in the water heater market.

And conversely on the electrical side of the business, 4% operating margins. With all the cost take-out that you've had there, was this mostly a story of copper or volumes pulled through in earlier quarters from tax incentives on HVAC? Can you help us out with that?

Yes, it's primarily volume. Our volume was off significantly in the motor side and the fact that we still have operating margins at the considerably lower levels I think is a tribute to what that management team has done over the last several years and all the restructuring we have been doing which every one of their restructuring projects has generated the savings that they projected it would.

So while we are certainly not happy, our objective there is 10%. The fact that we actually grew the margins last year with such a large falloff in volume I think is encouraging for what the future of that business could hold but we need to have the top line start to grow.

We've got some new products coming out. We've got some new wins on our variable speed motors and we've got some other products in the pipeline that's got some encouraging feelings here about how that business will do long term. On the other hand, back your other comment, copper is twice what it was a year ago right now and it certainly is throwing a damper on things.

Right, and circling back on your comments on motor demand improving, is that really underlying housing start data? Is that what you expect or is that more about the new products?

It's a combination of things. Housing starts will certainly help. It's the primary reason for the big decline of that and some inventory reductions in the channel that we have already talked about many times. But we're excited about the new products coming on and what benefit those will give us going forward.

Okay and then finally on cash, pretty impressive year for cash generation. Anything on the horizon in the acquisition land, maybe something else in China?

We are looking all the time. As we reported before, we have on a long-term basis, we have increased our corporate development staff and we have a lot more going on throughout Asia as well as other parts of the world looking for the right acquisition.

I hope we have developed a reputation for being good stewards of cash and how we are very diligent about acquisitions we make to make sure that we generate returns for the shareholders. But it is our intent to continue to grow the business and to grow it with acquisitions that not only are accretive, but cover the cost of capital very quickly after us making the acquisition.

Mike Schneider, Robert W. Baird.

First, congratulations on a great year obviously in a very tough market. The Electrical Products division, just sticking with that for a minute, the operating income this quarter was largely if not even more so entirely due to the LIFO benefit.

So as you look forward now into 2010, can you just kind of give us the ups and downs of presumably higher production, higher raw material cost, just what your outlook is for pricing in electrical? And I guess as that all rolls up, is it realistic to assume that margins rise much if at all in 2010 within electrical again, given the LIFO headwind that you start with?

Mike, we think they will grow because as we have mentioned, a lot of our pricing -- most of the pricing in this business segment is tied to contracts. So contractually as steel and copper move up, we are able to pass those costs through because of the agreements we have with our customers.

The whole strategy with our motor business, I know it has been a drag on our stock price. It has been to finish the rationalization of the acquisitions that were made and optimize the business that we have and then start growing it.

We got it optimized, not perfectly. We still have lots of things on our cost reduction list. But it's now time to start growing the business and time will tell. We'll have to see how that plays out as the year and the subsequent years roll out.

But it's our belief that we've got the right products coming out. The marketplace is embracing us bringing these products out and we will see how successful we're going to be. The world is optimistic. We will see how it goes.

And distribution has been the channel you have grown most. I guess as you look forward this year, what channel would you expect to see electrical make the greatest strides?

I think distribution will grow, will continue to grow. We have got a very, very good position in hermetic and I think that one looks pretty good too. But we are focusing on all of them.

Pump, we've got a huge market share. There, we're relying on the market to come back, primarily swimming pools. Whether that happens or not, we will see.

And I presume that within electrical, production rates will at least be equal to the sellthrough this year. So that will be a tailwind for absorption. Currency with the moves in the peso, can you just give us a view on where you are in the hedging and what that looks like as a tailwind in 2010?

The peso is helping right now given that we have got such a large amount of production there. Yes, we will be -- I should point out that with the inventory reductions, we increased service levels across the Company.

I mentioned this before and people -- usually eyes glaze over. But we made a pretty significant investment in our information systems in the Company and we now have much better information and visibility to what's going forward.

So we've been able to reduce our inventories and increase our service offers. So production ought to be at the sales rates which it wasn't last year and we think that ought to help us also as we go forward. We won't have the underabsorption costs that we had last year which obviously cut into the LIFO but the LIFO ended up being the bigger number last year.

Okay and then just one question on water. Within residential water in the US, typically the December quarter is a quarter in which your customers pre-buy to beat price increases for the following year.

At least my contacts suggest there's been no such price increases issued. So does that mean that at least as best you can tell there really wasn't any pre-buy activity in the December quarter within US residential and presumably you benefit from that as we start 2010?

Yes, there was no pre-buy, Mike. You are right.

And remind me what went on in Q4 of 2008. I presume there was little or no pre-buying then?

Q4 2008 we thought the world was coming to an end.

Right.

We were seeing -- when we were on this call last January, we had very little to say about how the future was going because we were watching the order rates fall precipitously. But there was no pre-buy a year ago to our belief.

People were -- our customer base was not sure that their lines of credit were going to be maintained. Customers tell us that they were afraid to get canceled even though they had excellent credit.

So there were many moving parts from September 15 of '08 through the first quarter of '09 that it's hard to do any correlation between those two. I'm glad that period is over.

And then am I correct, you have not issued any price increases thus far for 2010 in water?

We don't talk about pricing on this. We're always looking -- we need to make sure that we are covering our cost of material and as I mentioned, our material costs are going up. So I can't make any comments there, Mike.

But there is precedent for doing mid-year price increases within US water?

Yes, there've been years we did three in one year.

Scott Graham, Ladenburg Thalmann.

Very nice quarter. In the past, Paul, you have helped us in unbundling some of the segment sales. In electrical for example, you've talked about the sales numbers or at least trends, better, worse, what have you; even HVAC versus pumps versus general industrial and where in the past you have done sort of your retail wholesale commercial thing. Would you be able to at least tell us which were the worst markets, which were the better markets in each segment this quarter?

I would love to do that but our competitors are listening to this call and we found out they were getting a lot more information out of that than we we wanted them to give. So we have purposefully stopped giving out segment information and when our competitors give it out, we will go back to doing it.

Fair enough, two other questions. Back on the electrical products, because obviously I don't think anyone has -- I don't have any questions about the water heater business right now. But the Electrical Products margin obviously without the benefit of the LIFO as previously pointed out, operated at a loss in the quarter and I'm just wondering if the -- if we look at the month of December, did you see customers closing a week or two early? Did that impact the business?

We saw that all year last year. We have a lot of customers -- we were running four day weeks a good part of the year trying to maintain the flexibility to go back up [in the market continues]. But our OEM customers did significant reductions in their production rates throughout the whole year.

I guess the follow-up question then, Paul, would be that it then looks like the Electrical Products business from a maybe more normalized standpoint then based on what you just answered there is really running almost at breakeven level in the fourth quarter. And I guess I know the level of cost reductions that you've put through there and I know that the realizations have all come through for you.

But is there a next step here given what has happened? I know you're looking at to grow the business, I heard that. But operating that business at kind of a breakeven level in the fourth quarter, I assume you're not satisfied with that?

No but the fourth quarter is always our worst quarter. It was a whole lot better than the fourth quarter a year ago. We were not upset with how the fourth quarter came out. It actually came out a little bit better than we thought it would as we went into the quarter. I was down at our operations last week reminding them that last year is over and we start over at zero again. They're all focused on 2010 and we expect to be off to a decent start this year.

Okay, last question is about your balance sheet which obviously is in great shape and even post the acquisition which as you point, you paid it off in cash. Are you looking -- are acquisitions the number one priority for uses of cash or could we see some more -- a share repurchase authorization? Not that you would forecast that, but is that on the priority list, share repurchases?

We have a share repurchasing authorization already that we have in place right now and we're always looking at what we need to do. Our job is to increase shareholder returns. We increased our dividend last July.

A lot of industrial companies did that last year. We evaluate that all the time both as a management team and with our board of directors. So it's our objective to increase returns to shareholders. If we can get a bigger return within an acquisition, we will do that but we currently recognize that we are underlevered as a corporation and we are well aware of that.

I actually did have one other question and it was about SG&A which -- I'm throwing out the percentage of sales because of the decline in sales. But on a [grossed up] basis, on a whole dollar basis, SG&A for the year was up. And what I'm wondering is that in light of the fact that sales were down and part of SG&A of course is variable and some of the cost reductions did impact SG&A, what would you say would be some of the increments of why SG&A actually went up?

Because if we look at the [366, 367] number there; cost reductions impacted that and as I said, the variable cost nature of them. So it looks to me like you had somewhere between 15 and $20 million increase in SG&A ex those items. Could you talk about that a little bit?

Let me make a quick comment and then Terry is going to finish it. We have said that we are continuing to put resources into electronics in product development and we have done that throughout. Even when, as I joked earlier, we thought the world was ending, we still went ahead with increases. We also did SG&A reductions last year. We had layoffs, two of them, across the Company that were painful to do but necessary to do. So we are continuing to -- it's not going to be flat across the board declines or flat across the board increases.

We are managing the business the way we feel it should be managed, both for the short-term and the long-term. And with that being said, I will let Terry add a few more -- a little bit more color to what I just said.

Scott, there isn't -- when you look at that number, the $17 million increase, I'm not going to go through each and every item. But I would say that there's a couple of million there relative to some legal issues, to some legal cases. There's a little bit of pension increase in there. There's about $4 million in there increase as a result of China, increased SG&A in China.

There's increased product liability costs in there of a couple million. There's costs associated with the purchase of [TM long]. So there's a combination of a number of things that make up that, some of which would not occur next year.

But all in as Paul indicated, we actually have made a lot of SG&A reductions. These kinds of things that I pointed out with the exception of China are all kind of -- well China and pension are kind of onetime increased accruals resulting from events that would not reoccur.

That's very helpful. Thanks a lot, Terry. Thank you, Paul.

Matt Summerville, KeyBanc.

This is actually [Joe Rattigan] on for Matt. You touched briefly on the variable speed and I was wondering if you could just give us an update on the development cycle there. Are there still field tests in place and how are those progressing and has there been in any change in when you think that could be a meaningful contributor?

There's a lot of field tests going on. We have had field tests going on for years with some of the customer base. I was just at the Ashbury show yesterday in Orlando and saw four products of our customers that had our variable speed motors in them.

So we haven't had the huge wins there but we are getting wins as we go forward, both variable speed and the pump market as well as HVAC. So it's still starting. We have gotten some very positive feedback on the test results that we have so far and it's one of those stay tuned until we can talk about that piece of the business growing.

I know our customer base wants it. We have developed the products. We feel good about the products we have. But when you are an OEM supplier, there's a pretty lengthy approval process as there should be and right now we feel real good about where we stand with those.

Okay and then sticking with Electrical Products, I think you said you have seen improved demand from the OEM customers. Was that commentary based on what you are seeing in January so far? Or did you see that towards the end of the fourth quarter and are you seeing a more normalized seasonal build heading into kind of the spring season?

Compared to last year, it stopped -- first thing that happens, it stopped getting worse and that was a positive sign and then it leveled off and we are now seeing a little bit of an increase. This time last year, our customer base was telling us they were not going to do the seasonal build. We're not hearing that this year. So we think will be in a more normal year and frankly comparisons to last year aren't going to mean much as we go into this year.

Okay and then on the water side, kind of similar inventory question, there obviously is no pre-buy ahead of a price increase. But are you starting to get the sense that customer inventory -- that customers are going to start building inventories in the channel? I know you mentioned that as kind of upside to the number, customer confidence, restocking ahead of demand. Are you starting to see that yet or is that -- are we still kind of in a just-in-time delivery mode because the turnaround times are so short?

I'm going to say we are seeing a little bit of that but I'm going to also say that it couldn't get any worse. We couldn't get any lower channel inventories than we had last year. So it's expected that we would start seeing some and we are. We are seeing some, not a lot. Just once again, first thing that happens is stop getting worse and then it leveled off and now we're seeing a little bit of an uptick in demand.

(Operator Instructions) Ted Wheeler, Buckingham Research.

Let me add my congratulations on good results, great results. You mentioned a bit of an uptick. I guess you said it was faint I guess on --

That's a good word, Ted.

Commercial hermetic in China. I wondered if you could just refresh me as to where you are say now on orders from where they were before the downturn came, just kind of get an idea of how far down that business is.

You talking about China?

Commercial hermetic in China.

Commercial hermetic in China. It was down -- I'm not going to talk about a specific but our customer base is OEMs. So we sell the product to -- and that's very much of a global product. We ship all over the world with that product.

It was off good double digits last year. We are starting to see a little bit of an indication that we're going to have a better year this year than last year. Whether it will be back to 2008 levels or 2007, I don't know.

As you know, I'm always an optimist and I think we'll go past those numbers but for right now, we haven't seen the orders to do that. We have one fairly large customer that actually bought nothing for nine months last year. This is a customer that makes the hermetic for the shipping containers, refrigerated shipping containers, and they're back ordering. So that's a good positive sign.

I guess by what you are calling the peak might have been '07?

First half of '08 was pretty good. But September 15 I think when Lehman collapsed and everything else happened, our world changed at that point (multiple speakers) everybody else's.

And another one. On the acquisition, the water treatment business, what is your revenue expectation for that business? I guess if I recall, the revenues are about comparable to the acquisition price on a run rate?

Revenue was below that. The joke internally right now is we are taking revenue down on purpose. There were some export customers that they shipped to that we eliminated as potential -- actually before we closed the business, they stopped exporting. The export to -- they did export to 30 countries. It's now 28 because we are adamant about complying with all of the laws and they were shipping to countries that we don't ship to. But time will tell. We're not giving out any revenue number on that at this point.

Do you expect growth in revenues from the base after this discontinuance?

Yes, yes we expect that to continue to grow.

(inaudible)

Market penetration is very slight there. We estimate 10% market penetration. We think there's a lot of demand for the product. We have a lot of plans in place relative to increasing the sales and distribution network, especially taking it through the existing A.O. Smith one.

We haven't implemented anything yet. So while we have seen the plans and looked at the numbers and challenged and exercised the people putting the numbers together, we're not ready to go public with what we think that will be yet.

Will it go into the A.O. Smith distribution channels with the A.O. Smith branded products? I think you said will happen this year, is that correct?

Yes, that will happen this year.

Will it get to a small fraction of those outlets starting out or will you go throughout the entire --

We are going to go across the board and the good news is, so do our customers. The OEM -- just a little history. Our OEM customers, the Sunings and Gomays] have been pushing us to expand the A.O. Smith brand product line.

We sell water softeners now that we private label. We do a couple of things. But we have spent a lot of money over the years establishing a very strong brand image in China and their whole point is to take advantage of it and expand your product offerings and that's what this is doing for us.

Okay, we'll look forward to it. Thank you. Great results.

Thank you.

(Operator Instructions) At this time, I'm showing no further questions in queue.

Okay, we thank everybody. Once again we are very pleased with 2009 but it's over and it's time to get to work on 2010. Thanks for your interest in the Company.

Thank you. Ladies and gentleman, this conference will be available for replay starting today Tuesday, January 26 at 11 AM Central time and it will be available through Wednesday, January 27 at Midnight Central time.

You may access the AT&T Executive playback service by dialing 1-800-475-6701 and then enter the access code of 142898. That is a domestic number, domestic within the US or Canada. From outside the US or Canada, please dial 320-365-3844 and again with the access code of 142898.

So those numbers once again, 1-800-475-6701 within the US or Canada or 320-365-3844 from outside the US or Canada. And again, enter the access code of 142898.

And that does conclude our conference for today. Thanks for your participation and for using AT&T's Executive Teleconference. You may now disconnect.