A O Smith Corp (AOS) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter 2010 earnings conference call. (Operator Instructions). I would now like to turn the conference over to Miss Pat Ackerman, Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you, Julie. Good morning ladies and gentlemen, and thank you for joining us on our fourth quarter 2010 results 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 you.

Thank you, Pat and good morning, ladies and gentlemen. Before I begin with my prepared remarks I need to clarify something. The first release that came out this morning from Reuters was in error. Let me clarify that. And I also need to say -- I know it's confusing with everything we have going on with the last quarter of those of you familiar with the Company with the Smith Investment Company transaction that happened a year and a half ago as well as us now having a discontinued operation but still part of the Company, still generating earnings. But let me explain.

We made -- the Reuters report talked about $0.44 versus the $0.54 analyst expectations that they had. We had $0.25 from electrical products with the addition of electrical products so we made $0.69 versus their $0.54, or $0.69 versus the unsuppressed analysts' estimate average of $0.51. So we had a good quarter. I just wanted to get the numbers correct. The $0.44 is the continuing operations that we're going to be talking about.

But on an apples to apples way the analysts work, analyzing our Company and the way they were modeling our Company for the fourth quarter included EPC. And on that basis we made $0.69. So we had a very good quarter. With that we'll be getting into highlights a little later, but we couldn't be happier with our 2010 results.

We set another earnings record in 2010, which is the fourth time in the last five years we've done so. The challenges of the global recession are still present, but our focus on growth, cash generation and cost reductions have really paid off for our shareholders. Here are a few highlights from a great year. Our combined businesses achieved record earnings of $112 million, or $2.42 per share, which included the flood charges and resulted in an increase of 25% over last year's record earnings. Combined sales were up 10% over last year to $2.2 billion. Our global water heater operations reported operating margins of 11.3%, excluding the flood charges. Our water heater operations in China grew 30% over 2009.

Our leading market position, expansion into tier two cities and new residential and commercial product launches all contributed to the strong growth in China. Our electrical products Company posted its strongest operating margin in over 10 years at almost 11%. Our operations generated $125 million in cash, lower than the year before but still very strong in the year with higher working capital needs to support higher sales and new products. Our recovery from the May flooding in our largest water heater plant is essentially complete and we look forward to normal efficiency levels at the plant in 2011.

And finally, in December we announced the sale of our electrical products operating segment to Regal Beloit Corporation for $875 million. In all areas truly an outstanding year for A. O. Smith. I'll now turn the call over to Terry to go through our 2010 results in more detail. Terry?

Thank you, Paul. Before I go through the financial results I would 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 full year 2009 results. For that reason we will provide non-GAAP information for full year 2009 in this presentation. A reconciliation from GAAP to non-GAAP is provided in the press release that we issued this morning.

Additionally, as a result of the pending sale of our motors division we are required to designate Electrical Products as a discontinued operation in our financial statement. For ease of comparison I will be presenting the results of the two business segments on a combined basis. I will start with details on our fourth quarter performance and then follow with full year results.

Total sales in the fourth quarter of $536 million were 5% higher than the previous year. However, earnings markedly improved to $32.2 million or $0.69 per share from $22.7 million or $0.50 per share last year.

Fourth quarter sales of $370.2 million at Water Products were up 2% compared with fourth quarter 2009 as a 15% increase in China water heater sales, the impact from pricing actions related to raw material costs and higher US commercial volumes more than offset softer residential water heater volumes in the US. At Electrical Products, fourth quarter sales of $166.4 million increased 12% compared with the same period in 2009. The fourth quarter's typically the lightest production quarter for our OEM customers, and we are encouraged to see some evidence of improved demand across all of our motor segments, particularly in our hermetic, HVAC and pump motor SBUs.

At Water Products fourth quarter 2010 operating profit, excluding the flood costs of $1.2 million, increased to $44.8 million from $44.5 million in the fourth quarter of 2009. Cost reductions programs were partially offset by lower residential water heater sales in the US and higher raw material costs. Operating margins were down slightly.

Electrical Products earned $12.2 million in the fourth quarter, a significant improvement from the prior year, as a result of higher volumes, lower operating costs, and improvements in plant efficiencies. 2009 operating profit included a $6.8 million net LIFO benefit. Electrical Products operating margins improved to 7.3%.

We mentioned this morning in our press release some developments in our Shanghai Water Treatment Company. First, we now own 100% of the Company, having bought out our minority partner late last year. We also settled disputes with the seller related to the condition of the Company on the date of the purchase. The settlement resulted in a gain of $5.1 million. In addition, we incurred an impairment charge of $3.3 million related to the value of trademarks we received as a part of the acquisition.

And finally, we are moving our water treatment operations to Nanjing where we can take advantage of our strong management team and the engineering center in place at our water heater operations in that city. As a result we incurred $1.8 million in moving costs during the fourth quarter.

We continue to be very excited about the future growth of our Shanghai Water Treatment Company, particularly the market success we are seeing with the new A. O. Smith branded systems which are now available alongside our water heaters in 200 retail stores in China. We expect the A. O. Smith branded water treatment systems to be available at most if not all of the stores in the retail channel by the end of this year.

Switching gears to the full year, 2010 total sales increased 10% to $2.2 billion from $2 billion last year. Our net earnings were $112 million, or 25% greater than 2009 and included $21.7 million or $0.47 a share in after-tax flood costs. Earnings per share of $2.42 were up 23% from 2009.

Taking a closer look at the individual segments, Water Products recorded sales of $1.49 billion, an 8% increase over 2009 sales of $1.38 billion. Water Products benefited from a 30% increase in China water heater sales and a full year of sales from Shanghai Water Treatment, a company acquired in late 2009. Electrical Products sales increased by 14% to $705.9 million driven by higher demand for motors in all of its strategic business units. Sales increases were highest in our hermetic and distribution SBUs. Total operating profit increased 46% to $191 million from $131 million last year.

At Water Products, 2010 operating profit of $168.3 million excluding the $35.4 million in flood-related costs represented a 13% increase over 2009. Earnings were favorably impacted by higher margin China sales, higher sales in Canada, and higher commercial volumes. Operating margins, excluding the costs associated with the flood, grew to 11.3% in 2010 from 10.8% in 2009.

Electrical Products achieved operating profit of $74.1 million compared with operating profit of $32.5 million last year. Volume increases in all strategic business units, lower operating costs, and improvements in plant efficiency contributed to higher profits. In addition, electrical products 2009 operating profit included a net LIFO benefit of $10.1 million. Operating margins improved to 10.5% from 5.2% last year.

Operating cash flow was $125 million in 2010, and it was lower than our record-setting operating cash flow of $263 million achieved in 2009. Higher working capital to support higher sales as well as higher inventory levels related to new product launches and new business at Water Products impacted cash flow in 2010.

In addition, Electrical Products increased inventory levels in the fourth quarter ahead of expected first quarter seasonal demand. Cash cycle days of 55 days were 13 days higher than last year primarily related to higher inventory levels at both businesses compared with lower than normal inventory levels at the end of 2009. Capital spending was $68 million compared with depreciation and amortization of $67 million, approximately $19 million in capital spending related to the flood.

Our liquidity position and balance sheet remains strong. Our debt to capital ratio declined to 23% from 24% at the end of 2009. We have limited amortization of our long term debt portfolio in the coming years. Our $425 million credit facility was renewed in November of 2010 and does not expire until November 2013. At end of 2010, our borrowing on the facility was approximately $140 million and will be paid down with some of the proceeds from the motor sale.

Paul will introduce our thoughts on 2011 guidance in a few minutes, but I know our requirement to show the motor segment as a discontinued operation in our financials creates some gaps in your modeling of AOS. And as we will be providing our 2011 guidance for continuing operations only it begs a few questions about 2011. Here are a few relevant data points to help you understand how we ended up in 2010 and how we think about 2011.

Cash flow from continuing operations was $63 million in 2010. And we expect it to be slightly negative in 2011. The negative cash flow from operations assumes that we will make a $200 million tax-deductible contribution to our pension plan in 2011.

Our capital spending at the Water Segment was $53 million in 2010, and that included about $19 million in spending to replace damaged equipment from the flood. In 2011 we are projecting our capital spending from continuing operations will be between $70 million and $80 million. 2011 capital spending includes approximately $20 million to begin construction of a second water heater manufacturing plant in Nanjing, China. When complete the new plant is expected to add 50% more capacity to our China water heater operations. Water Products depreciation and amortization expense was $41 million in 2010, and will be slightly higher in 2011.

Our effective tax rate was 23% in 2010, and we expect the rate to be about 30% in 2011. The tax benefit from the flood expenses were calculated at the full US statutory rate of 39.5%, and resulted in a lower rate in 2010. Finally, we plan to use a portion of the proceeds from the sale of motors to make a $200 million tax deductible contribution to our pension plan in 2011. This contribution will result in a pension expense of approximately $2 million in 2011 compared with $11 million in 2010 and replaces contributions that we would have had to make in future years. I'll now turn the call back to Paul.

Thank you, Terry. 2011 is going to be an exciting year. Most of you are aware of the pending sale of our motor business to Regal Beloit. We jointly made our Hart-Scott-Rodino filing in early January so the regulatory review process has started. The net proceeds of the sale after paying taxes, paying down debt and making the sizeable contribution to our pension plan, plus our ability to borrow on our new credit facility, provides us with about $900 million to invest in our Company for higher growth and global opportunity.

At the time of closing we expect to have about $9 to $10 per share in cash. In my final remarks, I will share our outlook for 2011 and elaborate on our acquisition activities.

First let me share with you our thoughts underlying our 2011 guidance. First the good news. We expect our China growth rate to be higher than China's GDP as it is every year. Our customers continue to open new stores, primarily in tier two cities and as our new energy efficient product introductions like the heat pump and solar water heater gain traction. In 2011 we will also benefit from the continued introduction of A. O. Smith-branded water treatment products in the retail channel.

We expect growth in our higher margin, energy efficient products to begin to expand our margins in North America and China. While our growth assumptions are not dependent upon them, federal and state legislation and DOE regulations would add to this momentum in the United States. We have seen some stabilization in the US residential housing market, and we expect a small increase in new home construction in 2011.

As Terry mentioned, we'll use some of the proceeds from the motor sale to make a contribution to our pension plan. Just to reiterate Terry's point, the contribution essentially eliminates about $9 million in pension expense. The caution in our guidance stems from continued volatility in steel costs. As many of you are aware, this primarily impacts our wholesale water heater business. After having stabilized early in the fourth quarter, at $700 per ton, prices recently have rocketed to $900 per ton.

As a result of all these factors, we've established full-year guidance for continuing operations of $1.90 to $2.10 per share for 2011. And this does not include the impact from future acquisitions. On an apples to apples basis, the mid-point of the range would represent a 17% increase over 2010 earnings from continuing operations.

I will now elaborate on our acquisition plans. Today we are the leading water heating company in North America and China. And our strategic direction for the future is to become the leading water heating company in the world. In addition, we also aspire to become a leading player in water treatment technologies, in developing and emerging geographies.

These aspirations are not new. In fact, our business development efforts have been ongoing. We significantly added resources to our corporate development team in 2009. With the sale of motors in the works, we will now increase our resources on these efforts. We now have four areas on which we are focusing, and we have teams exploring each of these areas.

The first area of focus is to continue to expand the geographic base of our core residential and commercial water heating and water treatment businesses. This will take us beyond North America, China, and India, into other high-growth emerging and developing countries. As an example, a team returned from Brazil last month after exploring opportunities for commercial water heating as hotels and restaurants are actively being built to accommodate the World Cup in 2014 and the Summer Olympics in 2016.

Second, it is incumbent upon us as water heating leaders to protect and expand our core product line by looking at acquisitions, joint ventures, or other business relationships that will allow us to offer products like boilers, heat pumps, and other high-efficiency products. This also marries nicely with our geographic expansion focus as we place particular emphasis on products that are highly efficient as well as attractive for Chinese, Indian, and other high-growth markets.

Third, we continue to look for unique technologies or competencies for residential commercial water heating and treatment applications with a similar emphasis on energy efficiency which continues to be a key driver in all markets globally. Finally, we continue to explore opportunities to expand our offerings of water related products, services and technologies to other plumbing components to expand and strengthen our relationships with our customers. These areas are by no means mutually exclusive and each team is working on a parallel basis identifying opportunities.

To look at what I just said graphically, it might look like this. As we examine the water heating and water treatment solutions in high growth and developing countries, we expect that process will concurrently lead us to opportunities to acquire or develop energy efficient water heating and new water filtration technologies specific to those countries as well as new geographies. That's what is happening in China today as we are supplementing our basic electric wall-hung water heater with heat pump, balcony-mounted solar and gas instantaneous water heating solutions.

We are also pursuing new water filtration products for India. These steps move a little further from the core but are still relatively close to what we know best. Finally, we have always been open to the possibility of acquiring adjacent businesses such as specialty plumbing businesses to create value and benefit customer relationships.

As has always been the case, all of our teams regardless of focus area are preparing recommendations for investment which meet the following criteria. First, we expect each investment to bring value creating opportunities. Second, the investment's return must be in excess of our cost to capital. Hopefully in the first year but for sure in the second year. Third, we are especially interested in opportunities which expand our existing operating margins and bring higher growth. And fourth, the investments must be accretive to earnings in the first year.

Finally, it's important to note that we have not set maximum or minimum transaction sizes or time frames. Nor have we prioritized the four focus areas. We will consider acquisitions, joint ventures or other business relationships to maximize a given opportunity and maximize the returns available to our shareholders. This is an exciting and transformative time for our Company. And the efforts to accomplish our goals in 2011 are well underway.

We are now finished with our prepared remarks, and I now open the line up for your questions. Julie?

Thank you. (Operator Instructions). We'll go to the line of Mike Halloran with Robert W. Baird. Please go ahead.

Good morning, everyone.

Good morning, Mike.

First on the pricing side, I know you talked about how steel pricing or steel in general has moved from that $700 to $900 range. Maybe you could talk a little bit about your strategy in the wholesale network to pass that pricing through from timing of price increases and things like that.

Mike, I can't discuss pricing strategies in this call, but look at our track record. We've had steel going crazy for the last seven years that I know of, and we've been able to expand our margins over that time. So the same thing that happens to us happens across not only just the markets we participate in but all markets. And when that happens, companies do what they must to make sure that we keep having earnings come in to reinvest in the business.

And I understand then you guys have a great track record in passing through price increases. I'm just curious when you think about this, is this the type of thing where typically you have about a one quarter lag relative to the price increases. Impact in the first quarter. When you guys think about this over horizon over the course of the year, I mean, if steel normalizes on some level is it the type of thing that you expect to be more or less back to some sort of equilibrium by the time you get to second quarter or does it take more time than that?

Well, we get a heads up. Because right now our pricing of steel, what our cost-to-steel is was determined in the fourth quarter. Just as our second quarter cost-to-steel is being determined by January, February and March data points on the steel index. So we have plenty of notice of what's going to happen. So we're able to do something such that we can keep our -- as our costs go up we can make sure our prices are properly aligned.

And then switching gears to Tianlong, you guys talked about a couple hundred stores now where you've got that strategy of positioning the Tianlong products with the cold water heater products. Could you maybe talk about the penetration you're seeing in those couple hundred stores and how much customer acceptance there has been?

Well, it's exceeding our original expectations. We've gotten more space in the stores than we originally thought we'd get, and it's getting some pretty good turnover. The A. O. Smith brand name, which has been established over the last 16 years, is really, really paying off. The product display is spectacular. We probably ought to put that up on our website so everybody can see what that product display looks like. But it's doing very, very well for us.

I'm not going to give you any numbers at this point, but maybe in the future if it gets big enough we may be able to come out with some things that will help back up what we're saying. But we're happy with how that's going.

Mike, it's later than we thought we'd do it. But we wanted to make sure we did it right. I think that says something about our Company there.

And we have done it right. We've got a product that we are proud to put our brand name on. And it's working well for us.

Well, that makes sense. And then just kind of parsing on the outlook a little bit, thinking about the residential comments in particular versus this quarter. Maybe you could talk a little bit about what drove some of the weakness in the residential US water heater market in this quarter. And correct me if I'm wrong here, but it sound like you're expecting things to at least start getting a little bit better on a go-forward basis through next year relative to the fourth quarter?

Well, the reason the fourth quarter or really the decline in water heater sales is a weak housing market. And people aren't building homes. And I think everybody knows that.

Towards the end of the year we typically get some inventory reductions. Our wholesalers will take their inventory levels down. The only time they won't is if we have a January 1 price increase which we did not have this year. So they don't load up ahead of a price increase. So there was just nothing that was out of line from our standpoint.

We actually did a little better in our water heater business than our forecast for the fourth quarter. Our internal forecast. So we're still in a weak housing market.

We are seeing a little bit -- we call it a very slight potential improvement in the market conditions. There might be a little pent-up demand for the homeowner that wants to upgrade their water heater that's not tied to new housing. Maybe there's a few more people just going ahead. Maybe they're tired of cold showers because they have three teenagers. We don't know the reason.

We're seeing a very slight improvement. It's nothing -- we're not going to get back to where we were in 2007 I don't think for a couple of years if then. But at least we think we've hit bottom. We're on a slow upward trend.

Great. That was the color I was looking for. I appreciate it.

Thank you.

Thank you. The next question comes from Ned Borland with Hudson Securities. Please go ahead.

Good morning guys.

Good morning, Ned.

I would like to dive into the pro forma balance sheet that you guys envision. First of all, it sounds like with the $9 to $10 of cash that you're expecting upon closing per share, it seems like that's a little bit higher than when we last heard from you. It seems like it's more like $410 million or $460 million versus the $390 million that you said in mid December. Is that just a function of the cash generation in the fourth quarter? Or is there something else there?

Well, we get the cash generated from Electrical Products. It may be a discontinued operation for reporting purposes but they are still making money and the cash is going to be coming into the business.

Okay. And that figure does not make any assumption for the shares of Regal Beloit.

No. And we've got some rough assumptions obviously as to when we think the transaction will close. But I think we and Regal are both saying we expect it to close sometime in the first half of this year. But we're still as we were very early in the regulatory approval process.

Okay. And that would basically leave you after paying off the revolver with about $100 million in debt?

No. When we use the -- the intent is to use the proceeds to pay down the debt, to pay taxes. We'll pay about $140 million in taxes. We'll pay off about $140 million in debt. And so your net cash -- well now some of this cash is going to ultimately be in the foreign jurisdictions as well.

But we figure that the net remaining cash for acquisitions is about $440 million after the $200 million pension contribution plus the $425 million that you would have for your revolver. So when we're thinking in terms of cash available for acquisitions, we were looking at that kind of $875 million divided by 45.6 million shares or something which comes out to about $9.63 a share or something like that. So that's where that number, around $10 a share, comes out.

Okay. Thanks. And I guess on the commercial market, I guess if we could just look at that. What are your assumptions for that? That's stayed pretty steady for you this year, or in 2010.

It was a lot steadier than we thought it was going to be. Look at all the indicators on light commercial construction. There was a lot of new construction but there was a lot of refurbishment. A lot of the commercial water heaters get exercised pretty heavily in restaurants, for example, and they do have a more frequent replacement cycle than residential water heaters.

Additionally, we have the most efficient products on the market. You probably get sick of me talking about the Cyclone. That thing is now getting 20% of the commercial market. That's our product that is the highest efficiency gas-fired water heater in the market place. And when restaurants upgrade or change out, we've got a pretty good shot at getting that business.

So for this year we're still not projecting robust growth back to the levels we saw in 2007 or early 2008. But we certainly are expecting that we're going to be able to compete and compete well in that market place.

Okay. And then final question, on the Nanjing plant, $20 million of CapEx in that. When would that be operational for you?

It will be next year. It will be 2012 before we'll get the first product out of it.

But we're acquiring land about four miles I believe from our existing plant. And we're going to put -- we have the capability there to have even a larger plant in our existing Nanjing facility.

But as we've always done, we do it in phases. Don't want to get too far ahead of ourselves. But make sure we have the capacity on line before the demand gets to that level. That's what we're doing.

We'll put up a building. It will have some empty spaces in it at first. But we'll be able to produce to 600,000 or 700,000 or 800,000 units will probably be our first phase. And then we'll add to that as necessary as the demand continues to grow.

Okay. Thank you.

Thank you. Our next question is from Matt Summerville with KeyBanc. Please go ahead.

Hi. Good morning. This is actually Joe Radigan on for Matt. If I could just start with the pension contribution, were you guys required to fund that due to the EPG sale, or is this more of a pre funding to get the tax benefits and what not?

The expectation and it will be determined at closing not at the point in time that we signed the deal that if a certain percentage of employees are separated from the plan that the plan may be a partial plan termination. If it's determined that there's a partial plan termination, then there would be a requirement of a fairly large contribution to that plan, probably in the $70 million to $80 million kind of contribution that we would be looking at. Absent that even under normal circumstances, we would have been looking at pension contributions of probably $40 million to $50 million a year over the next four years.

So you've got two things. One is that if everything stayed the same we'd be looking to make a $200 million of contributions over the next four or five years, and we may be required to make a contribution of up to $70 million or $80 million. So as we looked at cash flow, as we looked at available cash, we've decided that we would make this $200 million contribution this year. And the shorter answer to your question, it's more of a pre funding of what we would have had to do anyway.

Okay. And then the $2 million of pension expense, what would that have been prior to the contribution? Would it have been --

About $11 million.

Okay, it would have been flat with that.

Excuse me, a little higher than that?

Probably about $14 million.

Okay, $14 million.

Okay, great. And then in retail, can you remind us how the mechanics of the customer arrangement works there in terms of raw material escalators and deflators and the corresponding lag? Is it safe to assume that all the retail contracts still have those in place so that your raw material exposure, other than from a timing of pass through perspective, is all your exposures on the wholesale side?

Yes. On the retail, with the larger retail. We do have some smaller retail that are still on a buy-sell like our wholesalers. But it's the same thing that we've had since we put it in place. Our first quarter indices determined our second quarter costs. It also determines our second quarter sales price so we match up as we go through the year.

Okay. And then with Ashland City back at a full run rate, what's the magnitude of the tail wind that you're going to get in 2011 from increased efficiency, reduced freight costs, all that extra cost that went into recovering from that flood? What kind of tail wind do you get there? And are there still plans in place to improve efficiencies even further? I mean, I think you had some factory automation plans that kind of got derailed from the flood. So what kind of benefit do you think going forward you're going to get from all that?

Well, the flood set us back about a year. That's the way we look at it internally. We have ongoing productivity programs there.

As a reminder if you go back six or seven years ago we had 500 more people there then we have today with the same output. So we have been putting in automation and productivity improvements and will continue to do so. We have some pretty aggressive plans.

Our capital investment is oriented towards productivity. And I think that's been showing up in our steadily-increasing margins. We expect to keep doing that. We expect to get our man hours per unit from x to y. Those are numbers we don't want to get out in the market place. But rest assured we have, as we always have, pretty aggressive productivity and cost reduction plans.

Okay. Great. And then last question for me is with respect to China, are you seeing any macro concerns showing up in demand for your products there?

We haven't seen it show up in our demand, but we're obviously watching everything that is happening there. The government is being pretty vocal about their intent to cool down the market and cool down the housing in particular. But we had a strong fourth quarter. We had a stronger December than we thought we'd have. So we haven't seen it yet but we're watching it closely.

But I'll remind you, we've got a very strong track record of growing three times GDP, at least. We say two to three times. We did three times last year. If the GDP in China is going to be -- instead of going up 9% or 10% it goes up 7% or 8%, then we'll go up 16% to 25%. That's still not bad.

Right. Thanks a lot, Paul.

Thank you. Next question is from William Bremer with Maxim Group. Please go ahead.

Good morning, gentlemen and Pat.

Good morning.

Good morning.

Hi.

I just want to touch base on pricing in this market right now. Can you give us some color there? Pretty much from say the end of the quarter to the present time? What are you seeing in terms of the market right now in terms of overall pricing?

We haven't seen anything. And if it is it would be somebody would -- other than the indices changes base that I've already talked about based on quarter-to-quarter. But we've just in the last nine weeks steel has gone up over $200 a ton. So that's certainly putting some pressure. But once again, I'm sorry but we can't get into a conversation about pricing and pricing plans for the obvious reasons.

Okay. Not an issue. How many underlying products are you offering now in the Asia Pacific Rim? Including tanks plus the treatment activity, per store?

Per store? First of all, I don't know. But in the last year we have added solar. We've added heat pump. And we've had very good results in both of those.

We rolled out the water filtration products, quite a few across the board into the retail. We're now the largest tankless manufacturer in China. And we just started building those products three years ago. But yes, we've always had the both wall-hung as well as floor-standing water heater tanks somewhat similar to what we have in the US.

We're rolling out a commercial line in China. We've been doing that for some time. So I don't know how to tell you how many different products we have.

I will tell you the stores are all very different in size. They're very much focused on the neighborhood they're sitting in. So the product offerings at each retail store, and we're in well over 2,000 of them now, it would be hard to find two that were exactly alike. They tend to have the products more oriented to what the neighborhood they're serving.

So I'll circle back to what I originally said, I don't know. But it's a pretty good product offering and it's certainly serving us well.

And Paul, I might have misheard you. When the Nanjing facility's up and running, the first phase, did you say 600,000 to 700,000?

Yes. It will be in that rough numbers. It's all sized off -- it's glass lined water heaters. And it's in how many ovens do we have. So the first oven will give us 600,00 to 700,000 units capacity that we'll put in the metal working and bending and welding and leak testing and of course all the assembly, the jacket and the related controls around that. So it tends to be the one item that helps us determine what our capacity is.

Okay. Thank you. I appreciate it.

Sure.

Thank you. Next question comes from Thomas Hayes with Piper Jaffray. Please go ahead.

Good morning. This is Dan Garofalo on for Tom.

Good morning, Dan.

Good morning, Dan.

Good morning, guys. I'm just wondering for my own benefit, here domestically the US residential energy efficient credits, sounds like those have been reduced somewhat. I'm just wondering if you can give some color on what if any effect those have had in 2009, 2010 on the Water Products business and what effect if any you envision them having going forward.

Well, it's certainly had an effect because it has driven some consumer purchasing decisions to purchase high-efficiency products.

But we have more of a presence in Washington than we used to have. And we happened -- we're meeting with the people at the Department of Energy as well as other regulatory agencies as well as the elected officials. But we're anticipating that there will be some pretty significant energy-efficiency regulation.

We encourage it. We think it would be good for the country. We think it would be good for the economy to stimulate more energy-efficient demand someway somehow. We think we're going to be a very strong participant in that when it happens.

So just to kind of elaborate on that, are you anticipating some regulation as it relates to new construction in terms of the technology that goes into new construction as opposed to any sort of incentives for existing? Is that what you're getting at with that?

We think it will be a little bit of everything. We don't know. I tell you, the regulators have been very unpredictable the last two years. Don't get me started on that part.

We don't know. But common sense would tell you that it makes sense to have something that would give an incentive not only on new construction to be more efficient.

We did a white paper a few years ago. If every electric water heater was replaced with a heat pump water heater in this country, we're talking about $100 million or so of water heaters. We could eliminate over 20 coal-fired power plants. When you come out with that sort of a statistic, it gets people's attention to go from something that's got an efficiency factor of .95 to 2.5. That's a huge improvement.

There's things like that that are being discussed. We're getting out there with trying to make sure there's data in front of everybody. So that when they get around to doing an energy bill which we hear going to be working on sometime this year, we'll make sure that they're going to use data and put in the right efficiencies and then let the manufacturers figure out how to meet those. And we are looking forward to that.

So is it safe to say that in the new construction business there's probably still a lot of lower energy-efficiency models that are going into say starter homes at this point?

Yes, that is true. There are. One thing I'll add, it's not just federal government. State governments are doing things on energy efficiency and even utilities. Utilities are realizing if they can avoid the huge capital costs and all the regulatory things they go through trying to build a power plant these days, sometimes they're a lot better off to offer incentives for energy efficiency. So it's across the board. I think I've said this before, the US is behind Europe in this department but it's a place that I think we're going to see some catch up over the next few years.

Great. That's good color. Just one quick follow up. Obviously China is a huge international market. But in terms of if you had to say -- you mentioned Brazil. If you had to say the geography that's really on deck in terms of commercial opportunities, would it be India which you've talked about in the past or Brazil or just any color in terms of what you see as the next strong opportunity.

Well, we have 10 or 11 countries that we're looking at right now that would be called emerging or developing economies. They're areas that need water heating and they need water filtration. I'm not going to start prioritizing them because I don't want our team to start prioritizing. We're going to pick the one that's got the best returns and the best opportunity. It has to be actionable and all those things.

I'll mention we opened a water heater plant in India last summer. So we're already there with a water heater plant and we're expanding the product offerings in that as we continue to improve our revenues in that country. And I mentioned Brazil in my prepared remarks only as an example because everybody else is talking about Brazil and I didn't want to be left out of the loop.

But we've had people in a lot of other countries over the last year or so, and we've got quite a bit of data that we're analyzing and looking at what the market needs are, predicting where the market's going to go and seeing what the best way is for us to get returns for our shareholders by participating in that market; be it an acquisition of an existing company where we could bring some new products through it very quickly, or as we did in India just a green field site where we go in and build it. Our first priority is to find a complementary acquisition because that's faster. But if we can't do that, we went to green field site in China and it turned out very successful for us, and we've done the same thing in India.

Fair enough. Thanks for taking the questions thank you.

Sure.

Our next question is from Samuel Eisner with Sterne, Agee. Please go ahead.

Good morning, everyone.

Good morning, Sam.

Good morning, Sam.

Good morning, Sam.

Just had a couple quick questions here on China. You guys mentioned you're sticking to this two to three times China GDP which would imply mid point about 25% growth. This quarter you did about 14.9%, 15%. Are those just lapping tough comps? Is there some seasonality there? Any color there would be great.

Yes. That was a tough comp. We had an incredibly strong fourth quarter of 2009. We had a little dip in the fourth quarter early in December. Volumes were less than we expected. Then it came on like gangbusters at the end of the month. That's just what happens with the ups and downs in China. The good news is when we have a down it's still significantly up from where it was before.

Okay. Very good. As it relates to cash, post I guess the divestiture of the closing, I think Terry you said about $440 million in cash?

Go ahead.

How much of that will be in China?

We're looking that up as you speak.

$200 million will be in China. $150 million to $200 million.

Okay, great. Just two more questions here quickly. Tianlong, did that earn a return this year? I think you mentioned in the first quarter that was going to be about break even or so. Did you get any major return there or was it about break even for 2010?

It was a slight loss last year because of the move expenses and everything else we had going on. We're just getting the Company positioned for even better returns over time. But if we look at that particular segment for last year, it was less than we originally anticipated. But we're no less committed to the strategy there. We just had a lot more heavy lifting to do after we acquired it than we originally thought. But we've got the products moved into Nanjing now into a separate facility from our current water heating facility, but it's still close by to the technologists that are going to be vital to as we roll out water treatment we expect to roll that out around the world.

Very good. And then lastly, the tankless market in the US, I believe the Takagi acquisition or at least that agreement should help you guys expand in that market. Have you seen any major uptick in penetration of tankless in the US and where your positioning with Takagi would be going forward? I think it was about 5% to 10% of the total market. So any kind of color there would be great.

The market's not been growing as fast as it was early on. As I said before, the next generation tankless is going to be a better product.

The current -- a lot of people buy the tankless because of space concerns or a belief that they're much more efficient. If they look at the efficiency ratings, the tank-type gas water heaters, high-efficiency ones are still more efficient than tankless. But a lot of people are buying them because they think it's the in thing to do. But that being said, the next generation is going to add several points to the energy efficiency. And that's the part that frankly I'm looking forward to.

But the market is up slightly. It's been growing not by leaps and bounds like it did up through 2007, 2008, but it's still -- if I were guessing the total tankless, 3% or 4% of the total water heating market in the US. And it's not growing very fast right now. But we'll see.

I think with technology and fixing some of the problems with the cold sandwich and the wasted water that you get from a tankless, if we can solve those problems -- by the way we have a hybrid product we brought out last May which marries some of the technology of a tankless with the energy efficiency of a tank. And we got with that product several points of energy improvement and eliminated the cold sandwich and eliminated the wasted water. And we've had very, very good success with that.

It's still a small volume line for us, but it's an awfully good product for people looking for the tankless technology as well as eliminating some of the problems from tankless. Our little hybrid is a pretty darn good product.

And just lastly, the timing of the next generation product?

It's going to be rolling out over the next year or so.

Okay. Great. Thank you very much.

Thank you. We have no further questions in queue.

Okay. Thanks everybody. We're pretty excited. We're very pleased with last year. We had a lot of curve balls thrown at us. The flood being one of them and the economy not being as strong as we thought and commodity prices going through the roof. But I think we managed to wade through it very well. And now it's a new year and we're excited about it. Thanks for your interest in the Company. Operator, do you want to give the call back information?

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