A O Smith Corp (AOS) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the A. O. Smith Corporation second-quarter 2011 earnings conference call. At this time, all participant lines are in a listen-only mode, and later, there will be an opportunity for your questions, with instructions being given at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I'd now like to turn the conference over to Ms. Pat Ackerman, Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you, Leah. Good morning, ladies and gentlemen, and thank you for joining us on our conference call.

In addition to our second-quarter results, we will also more completely describe the acquisition of Lochinvar, which we announced this morning. With me participating in the call are Paul Jones, Chairman and Chief Executive Officer, and John Kita, Chief Financial Officer.

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 releases.

Paul, I will now turn the call over to you.

Thank you, Pat, and good morning, ladies and gentlemen. And I'm going to add, greetings from Lebanon, Tennessee.

We're doing this call a little bit different than previous ones because John and Pat are in Milwaukee, and I am in Lebanon, Tennessee in Lochinvar's offices, where we just had a meeting with all the employees to communicate with them about the transaction announced today. So anyway, if we're a little disjointed on our communications, that's because we're in two different places.

I'll start out with the earnings, as Pat said. The second quarter played out pretty close to what we expected, as we achieved increases in sales and earnings. Our earnings from continuing operations, excluding one-time items, were 19% higher than last year at $0.51 per share. Sales grew 8% in the quarter to $405 million. Sales for the water products operation in China grew 20% as a result of continued expansion into Tier 2 cities, and an increase in number of retail and specialty stores selling the premium branded A. O. Smith products.

Our electrical products company achieved a second-quarter operating earnings record with a 24% increase in earnings and a 12% increase in sales. And finally, we continue to work with the Department of Justice to conclude its review of the sale of our electrical products company to Regal Beloit. And we expect to close the transaction in the third quarter.

I'll now turn the call over to John to go through our second-quarter results in more detail.

Thank you, Paul. As a result of the pending sale of our Motors division, we are required to designate electrical products as discontinued operation in our financial statements. I will begin with the results of our continued operations and then finish with electrical products results.

Total sales in the second quarter of $405 million were 8% higher than the previous year. Higher China sales, coupled with higher sales of commercial and tankless water heaters in the United States, and a global commodity-related price increase, more than offset a fall-off in US residential water heater volumes.

Industry residential water heater volumes were down in the second quarter, as customers purchased water heaters in the first quarter ahead of the April 1 price increase. Earnings of $28.6 million, or $0.62 per share, include several one-time items, which collectively added $0.11 per share in the quarter. I will elaborate on these items more specifically on the next slide. Adjusting for the one-time items, our earnings in the quarter of $0.51 per share improved 19% over last year.

At water products, second-quarter operating profit, excluding one-time items, increased 10% to $46.3 million from $42 million in the second quarter of 2010, primarily due to higher volumes of higher margin commercial products and lower product liability costs. Our second-quarter 2011 results were impacted favorably by an $11.2 million pretax gain associated with a settlement with the component supplier, which was offset in part by an $8.2 million increase in our warranty reserve associated with a similar component concern in Canada. Both of these issues related to water heaters sold primarily in 2007 and 2008.

In 2010 we incurred $34.2 million in one-time costs related to the flooding of our Ashland City, Tennessee plant in May of last year. Operating margins, excluding one-time items were up slightly from last year. Excluding the gain in value on our equity collar, our corporate expenses were $11.5 million, which were down 10% from last year. You will recall that the value of the equity collar will be mark-to-market every quarter, as required by accounting rules, until the collar settles in March 2012. Total operating profit, excluding one-time items, improved 19% to $34.8 million.

Cash used by operations during the quarter was $105 million in 2011 compared with $42 million provided last year. A $175 million contribution to the pension plan during the first half of the year, and a larger investment in working capital to support higher volumes, were the major uses of cash, and more than offset higher earnings in 2011 compared with 2010. We project our cash flow for the full year to be between $40 million to $50 million.

Our liquidity position and balance sheet remains strong. Our debt to capital ratio was 28% compared with 23% at the end of 2010. The increase was primarily related to borrowing for the pension contribution. Our funding sources are solid and stable, as we have limited amortization of our long-term debt portfolio in the coming years. Our $425 million credit facility, which was renewed in November 2010, does not expire until November 2013.

Capital spending in the quarter was $24.3 million. We expect capital spending for the full year to be approximately $65 million, about one-third of which will support capacity expansion in China.

Our electrical products company achieved record operating earnings in the second quarter and sales were $222 million, 12% higher than last year. Electrical Products earned $21.7 million in the second quarter, a significant improvement from the prior year as a result of higher volumes.

That concludes my comments on the financial details. Paul will provide our outlook and elaborate on the acquisition, which we announced today, before taking your questions.

Thanks, John. First, let me share with you our thoughts underlying our 2011 guidance, which is narrower than it was initially announced six months ago.

Our China water heater business continues to grow at a significant pace as our customers continue to open new stores, primarily in Tier 2 cities. The upper middle class continues to grow and -- as our new energy-efficient product introductions gain traction. We have said before that we expect our China water heater business to grow at a rate of two to three times China's GDP, and that is what we currently expect for 2011.

The caution in our guidance stems from continued volatility in steel costs, which is always on our minds. We continue to vigilantly watch our input costs and respond accordingly, as we historically have. The acceptance of our A. O. Smith branded water treatment products in our retail channel is progressing right on track, but the products sold through the wholesale channel in China are lagging our expectations.

As a result of all these factors, today, we have narrowed the range for our full-year guidance for continuing operations of $1.95 to $2.05 per share for 2011. This does not include the acquisition announced today or any impact from future acquisitions, the second-quarter one-time settlement costs or increase to the warrant reserve, nor the quarterly mark-to-market from equity hedge. The midpoint of the range would represent a 17% increase over 2010 earnings from continuing operations.

In addition to our earnings, this morning, we announced our agreement to acquire Lochinvar Corporation, one of the leading manufacturers of high efficiency boilers in the United States. This acquisition is highly complementary, and fits squarely within our stated acquisition strategy to expand our core product offering with new technologies which emphasize high efficiency products, which can be applied to heating water globally. The acquisition is a significant first step in growing our diversified global water heating platform on the eave of selling our Electrical Products company.

Here are a few details of the acquisition. The fixed purchase price of $418 million plus a $35 million earnout will be paid to the sellers in November 2012 if certain revenue objectives are achieved. Lochinvar's trailing 12-month revenues and adjusted EBITDA were $200 million and $45 million, respectively. The purchase price represents an adjusted multiple of 7.5 times adjusted EBITDA when taking into account the estimated $80 million of tax benefits that A. O. Smith will receive, as a result of treating the transaction as a purchase of assets for tax purposes.

The transaction achieves our stated financial goals and creates value for our shareholders, with a creation of $0.40 to $0.50 per share, and generation of return on invested capital in excess of our cost of capital next year. We have identified annual synergies of the next few years in the amount of $10 million to $15 million, as a result of purchasing and logistical economies as well as global expansion opportunities.

As approximately $275 million of the proceeds from our Electrical Products company relates to entities outside of the United States, and will be used for acquisitions in emerging economies, we will fund the Lochinvar acquisition with a combination of cash and debt. As a result of borrowing for Lochinvar and selling 50% of our Regal Beloit shares, we expect our debt level to be approximately $350 million at the end of 2011. The normal regulatory review will begin shortly, and we expect to close the transaction before the end of the third quarter, subject to that review.

The North American boiler opportunity is a logical expansion of our core water heater business, and Lochinvar's product offering is highly complementary to our current product lines. The acquisition will bring a number of new products to A. O. Smith, including stainless steel heat exchange commercial boilers, residential boilers, pool and spot heaters, and commercial solar systems. In addition, many of Lochinvar's products and internal resources are geared toward residential and commercial hydronic heating air, areas in which A. O. Smith has very little experience and limited distribution capabilities. We will become a meaningful player in hydronic heating as a result of this acquisition.

The boiler industry in North America is in transition from low-efficiency, non-condensing products to higher-efficiency, condensing products. Lochinvar is the leader in the higher-efficiency condensing products. In fact, Lochinvar's sales compounded annual growth rate in the last five years is 8%. And we believe the transition to higher-efficiency boilers, coupled with Lochinvar's strong technical know-how and new product pipeline, will support a similar growth rate in the foreseeable future.

Our acquisition strategy has always emphasized high growth opportunities in our base US GDP business. Lochinvar provides us with higher growth right in our own backyard.

The China commercial market is still developing, as cast-iron boilers are still the predominant product used for hydronic heating applications in that country. The combination of A. O. Smith, with our strong brand, distribution, and manufacturing platform, and Lochinvar, is uniquely suited to introduce boiler products in China. Given our small boiler presence and Lochinvar's technical prowess, Lochinvar will serve as our global new boiler platform.

The transition to higher-efficiency boilers has been occurring for the better part of the last decade. Condensing boilers have grown from 5% of the total unit volumes in 2002 to over 25% in 2010. This transition in technology is occurring in both commercial and residential applications, and it is understandable, given the payback is three to four years. Some industry observers expect condensing boilers to be 50% of the market by 2015.

Lochinvar is one of the leading commercial and residential boiler manufacturers in the fragmented North American market, and it has a strong position in faster growing condensing boiler products. In addition, Lochinvar is considered one of the industry thought leaders, being first-to-market with technological innovation and efficiency in controls. Its family of boiler brands, including the newly introduced CREST condensing boiler, as well as the KNIGHT and SYNC boilers, are well-regarded for quality and reliability. It has one of the broadest product offerings in the industry, especially higher BTU products.

Finally, Lochinvar's highly regarded distribution and sales organization of independent reps adds a third distribution channel to our strong retail and wholesale channels. The combination of A. O. Smith and Lochinvar creates compelling shareholder value. As one of the leading boiler manufacturers, especially its higher growth, high-efficiency condensing products, Lochinvar is well-known for strong technical capabilities, and product quality and reliability. These attributes stand up well with our brands and focus on technical innovation.

We expect $10 million to $15 million in synergies in the next few years from purchasing and logistical economies, as well as potential global expansion opportunities. The transaction achieves our stated financial targets for both accretion and return on capital. We expect $0.40 to $0.50 per share accretion and returns in excess of our cost to capital in the first year.

And finally, we will explore revenue opportunities in North America, where we will be very careful about channel conflicts. The logical expansion opportunities for us to explore outside of North America are in China, given our strong brand recognition, commercial distribution, and manufacturing platform there.

This is an exciting and transformative time for our Company, and the acquisition of Lochinvar represents a significant first step in building our global water platform. We have cash and borrowing capacity for additional acquisitions, and we continue to look for opportunities to expand our global footprint.

We are now finished with our prepared remarks and I will now open up the lines for your questions. Leah, can you take over and handle the questions, please?

(Operator Instructions). Tom Hayes.

Congratulations on the quarter. I guess, just kind of looking at China, one of the things that caught my eye in your outlook, you said that the -- on the retail side, you're seeing good traction on the water treatment products but it's lagging on the wholesale channel. Just wondering what are your thoughts on why that is? And is it the equipment side that's lagging or the replacement filtration products?

It's a combination of both. We've been through a pretty significant transition there where we had to -- we decided to vacate the original facility faster than our original plan. So we very quickly moved the whole product line about 150 miles away and opened up in a new, more modern, more efficient plant. And we've just been transitioning bringing that plant online.

We are very happy -- one of our principal strategy, if you're going into water treatment, was to expand the A. O. Smith portfolio of products in China. And that part is actually going to look better than we expected. But it's going to take a while for the wholesale piece to catch back up.

Okay. And then just kind of a follow-up question -- on the commercial side, it continues to show strong results. I was just wondering if you have any clarity on the end markets that are really driving that continued strength?

You're talking about the commercial in the US?

Yes, commercial in the US.

Okay. Yes, commercial in the US, it's actually doing -- as we said the last couple of quarters -- soon better than we thought it would. And the only thing we think could be driving it is replacement of more efficient products, which give a pretty quick payback. Our Cyclone product is an incredibly efficient product in a restaurant that exercises their water heaters pretty heavily. Can get a payback just on the efficiency improvement in a year or two. So that's what we think is one of the things that's driving, frankly, stronger commercial volume than we thought we'd have.

Thank you. I'll go back in queue.

Mike Halloran.

Could you just talk a little bit about the resi trends in the US here? I know the quarter would have been impacted by the pull-forward demand. When you take the first half of the year on a whole, I think there was probably some modestly positive growth there. Is that how you're looking at it for the rest of the year? And then maybe could you talk a little bit about how the trends look through the quarter for that piece?

Yes, Mike. I mean, the housing market has been pretty sick for some time. Frankly, the first quarter, the overall demand in the market was a little stronger than we expected. And you turn that right around. And when you take out the buy-head and everything else, second quarter was a little weaker than we expected on the residential side.

It's just a very sick marketplace right now. We're surviving fairly well by squeezing more profit out of the replacement business, which is still there, as well as the continued growth outside the US. Canada is doing well and, of course, China and India are booming. And that's where our growth is coming from.

We are very happy with what we've done to position our US residential business for the turnaround when it comes. And from an incremental volume standpoint, in a couple of years, when residential does start to pick up, I'm excited about how well we're going to be doing, because we've done a lot of structural things to improve the cost picture there, as well as continuing all of our efforts on new products. But right now, that market is not helping us very much, but we're still having records earnings in spite of that.

Yes. No, absolutely. Absolutely. So, on the price/cost relationship, I know you highlighted some level of conservativism in the guidance, given you're just not certain about the commodity side and the steel side. But when I think about the price/cost relationship heading into the third quarter, would you say that, given the price increases you've put into place and some of the indexing arrangements that you have, would you say that that price/cost relationship is about at equilibrium right now, though?

We've always said that we think we're in good shape there and we continue to manage that. I think our history will show that we do a pretty good job there. And, yes, we're comfortable with where we are right now.

Okay, good. And then a quick one on the acquisition. Obviously, an extremely positive acquisition. When you think about the boiler space on a whole, particularly the US market, it's still relatively fragmented based on what you can see from the slides there. Is this a market you would consider doing further acquisitions in at this point? Or do you think that the platform that you have now is the right platform, and you can drive with the technology, and then some share gains and cross-selling opportunities, and things like that?

Well, I can't comment on future acquisitions, but I can tell you that Lochinvar was at the top of our list. Of that list of companies there, we think we got the cream of the crop in this business -- not only for the facility and people and the products they have, but also for the product -- the new product pipeline they've got coming along. So we're ecstatic with being able to get to a deal for Lochinvar.

You know, they have grown at 8% compounded annual growth rate over the last five years in, frankly, a not very positive marketplace. They've been doing it with high-efficiency products that give the end-user a payback in three or four years or less. And we see them as the leader in developing this technology and providing products there. So we're pretty excited about it.

As far as future acquisitions, as we've said, we're looking for product line expansions, which this gives us; looking at geographic expansion -- that could be in anything water heated, water treatment, including boilers. So we're not going to comment there, other than this isn't the only one we've been working on, and it certainly isn't the only one we're working on right now.

Great. And then last one, when you think about Lochinvar's profitability profile, EBITDA margins north of 20% -- maybe a little context for where the EBITDA margins are. But then also, could you talk about why -- what's different about the product portfolio or the operational structure that would allow them to have such a nice margin profile?

Well, they're into the high-efficiency condensing boiler niche, which is not one that we're in. And that they give their customers a tremendous payback, and we think they're the leader in that industry. So they're -- they've got the right products for the marketplace right now. And they're able to give value to the end-user and still retain pretty high profit margins for themselves. And they do that very well.

The entire management team here is staying. We're delighted with them. We've been dealing with them, obviously, for the last -- the owners of the Company for the last couple of months, but we've had the leadership team involved for the last several weeks. And to a person, we're absolutely delighted with them.

As for your comment about how much of that is EBIT, there's not a lot of DA. So, it's a pretty high EBIT percent. They've got a modern new factory, I think it's 11 years old -- 11 or 12 years old; greenfield facility; no environmental issues. And it's a very, very well-invested factory, terrific equipment, very modern facility. They've got a reputation in the industry for being best-in-class in condensing boilers. And, obviously, we're going to do everything we can to enhance that.

Great. I appreciate the time.

Sure. Thank you.

Matt Summerville.

I have several questions. First, on the core China water heater business, Paul, it sounded like a lot of the growth you saw in Q2 was coming from Tier 2 -- expansion into Tier 2 cities. Can you maybe give us an idea what the same store sales are looking like with your well-established retailers in some of the Tier 1 cities right now?

We don't really have good accurate information on that, so it's very hard for me to say that. We were up 51% in the first quarter. We were up 20% in the second. There was an April 1 price increase in China as well as the US, so there was some pull forward there. But we're delighted with everything going on in China and everything the government is trying to do to slow things down. Our business is still doing very well.

We are serving the right niche, but we are opening more stores. Obviously, the majority of our growth is coming from the new store openings, but it's very difficult for us to give same store sales data on the stores that have been opened for some period of time. They don't keep the records there like they do in the US. And we don't ship directly to the stores. Our stuff goes to distribution centers, so we don't get that information.

And then you mentioned, I think, in your prepared remarks, in order to fund this acquisition, you're looking to take about half of the RBC stock to market. What is your plan for taking that to market? How will you go about selling that?

First, I'll answer part of it and I'll turn it over to John and Pat to answer the second part.

We have a collar, the cashless collar that we've already put in place for half the stocks. What we're talking -- and that will be settled next spring. What we are talking about -- or next March, I believe -- but what we are talking about is the other half. And we will take that to market as soon as the shares get registered. And there's some limits on how we can do that.

John, do you want to cover that a little further?

No, I think that's true, Paul. We have -- it will probably take us about up to 75 days to get it registered. And then, at that time, we have options such as selling into the marketplace, block trades, et cetera. So we'll look at all those options when we get there.

Okay. And then maybe, John, can you walk through some of the assumptions you're using to get to the $0.40 to $0.50 accretion for 2012? Some of the things I'm looking for -- intangibles, amortization -- help me understand how this tax yield kind of works in. Does that mean that Lochinvar really won't pay any taxes for a couple of years? Help me understand that.

Well, let's talk through the tax shield. That will not have an effect on our P&L, per se. What you're allowed to do with that asset write-up is you basically take the sales price less the fair market value of the assets. And that differential you're allowed to deduct for 15 years. So you amortize that over 15 years. So, for example, if I had $25 million of earnings and I had -- it would be, what, $350 million or $375 million of asset write-up, then you would be able to amortize that over 15 years and pay no tax on that $25 million of earnings. But it does not affect the P&L.

Got it.

But it is cash flow. And then (multiple speakers) how we did it is we took that and discounted it at a cost of capital to get the $80 million.

Right. So that $80 million is an actual MPV number?

Yes, that's an MPV number using our cost of capital.

Over 15 years?

Right.

Okay. And then what kind of intangibles amortization are you looking at on a [$418 million] purchase price?

Well, we're in the process of going through that valuation right now. Preliminary invested -- preliminary would be kind of in the $8 million to $9 million we would think of amortization. But we'll finalize that when we get in and can do a formal valuation.

Okay, great. And then just one final question. Paul, you commented in the press release that, within North America, sales of some more higher-efficiency side in residential maybe not so robust as either what you would have thought or the prior year. And I guess -- I mean, why are we kind of just hearing about that now? I guess I didn't think that that was all that big of a benefit to you guys last year.

We're just trying to be objective about what we're seeing in the market. We saw a little weaker second quarter than we had in the first quarter on US residential. That's all we're doing.

Okay.

Any other questions?

No, I'm good. Thanks, Paul.

David Rose.

I was wondering if you can break down your sales for Lochinvar between boilers and heaters, and then between the residential and commercial market, so we can get a better idea of how much overlap there might be as well? And if you can reconcile that with your comments about the energy efficiency side in the residential market being weaker. So I'd like to get a little bit of clarity of how much of that is impacted by Lochinvar and why the difference between them and you.

And then lastly, if you can break down the number of stores you have at quarter-end for both China and your Jaguar in India.

Okay, I'll answer the first piece generally. I'm not going to go into great specifics on the breakdown of Lochinvar's business. But it's about 50/50 for the high-efficiency condensing boilers and that's the fastest growing piece. And then the other part is the other pieces of their business. But the high-efficiency condensing is the fastest growing.

And your second question was how many stores in China do we have? We've got about 800-plus stores in China. And then (multiple speakers) --

(multiple speakers) -- stores, yes.

India is how many?

The India stores is we're approximately 1,000 of Jaguar and outlets. And then we started the year in about 300 of, I'll say, white goods appliance stores. And we expect to be close to 600 by the end of the year.

And by the way, I'm talking about A. O. Smith stores in China being 800-plus. That's not counting what we do with the big box retailers, which (multiple speakers) -- over 1,000.

(multiple speakers) Do you have any numbers for -- I'm sorry, do you have any numbers for the Suning stores?

(multiple speakers) Well, we have in our investor pack, we've said, I believe, we're in about 1,200 Suning stores; about 1,000 GOME stores. And then we are also in other department stores, like Five Star, et cetera. And then on top of that is the specialty stores. So we think we have a very well-rounded distribution channel in China.

I guess my question is really how many stores you added in a quarter?

Oh, that information I don't have.

Okay. Thank you.

Ted Wheeler.

On the domestic water heater business, if we look just at the first half in total, I guess that would x out the pre-buy, what kind of -- are we up or down or modestly up, modestly down? Could you give us a (multiple speakers) [a quote]?

I have that, Paul. It's down a little over 2% year-to-date on the industry. We're pretty similar. And I think what could be driving that is we've talked in the past that completions are a big focus for us. And completions are down 75,000 to 80,000 year-over-year. So we're thinking that probably has an affect on why the market is down. That's housing completions year-over-year.

Yes. Yes, I guess that kind of compares -- well, I'm not sure where the stimulus of last year timing on it. I know it aided the industry and then it went away. On the completions, I guess, that would lag a little bit. So maybe there's still some headwind on completions, would you say, for the back half of the year?

Potentially.

Yes. And on the China pre-buy, was there any trend intra-quarter? In other words, the pre-buy, I assume, happened early in the quarter. Do you -- you had 20% for the quarter. I mean, would June presumably be better than that? Do you have any color on that?

Yes, the pre-buy occurred in March, Ted. So it was ahead of the (multiple speakers) [quarter].

(multiple speakers) Oh, no, I meant the opposite -- you know, the backside of the pre-buy.

So, yes, we're back to a normal run rate in China now. It just took a few weeks for that thing to flow through, the pre-buy. I was just explaining why we were up 51% in the first quarter and 20% in the second quarter. But we're still standing by our two to three times GDP, (multiple speakers) which we've always said.

Would the normal run rate be somewhere between 50 and 20, if I was to think about the normal run rate now?

Well, I think part of the reason for the first quarter being so good is we had the pre-buy, but also we had a very good comp compared to the prior year. So I think Paul's estimate of two to three times GDP of -- you know, that's probably 18 to 25 or 26 is kind of where we're at for the year.

Okay. Okay, great. Yes, on -- this acquisition looks so good, I guess, is there any issue of overlapping water heaters, considering your size in the market? Is there any concern there?

It's minimal, Ted. They actually buy some tanks. We think we know another supplier for those tanks in the future that ought to be able to take care of that for them (laughter) -- glass-lined tanks. But it's a very small piece that they do. And that's part of the synergies that we've talked about.

But it's fairly small what they do. Their bread and butter right now, their whole focus -- you go through their product display area here, it's high-efficiency condensing boilers that, frankly, we think they're the world leader on right now.

And on the third distribution channel, I guess that -- does that mean that you could use their direct sales approach in the commercial water heater markets more fully with the A. O. Smith line? Is that what you're heading for?

You're getting way ahead of us, Ted. They have a terrific set of reps in the field. And it's independent rep agencies. And it is our intent to -- obviously, we want to keep everything going they've been doing. And how we go forward from here will be worked out, but it will be looked at as how can we grow share and how can it be additive in each of the sales channels. We don't see any scenario where we'd be taking away from one channel to add to another. We want to add to each of the three channels at every opportunity we have.

Okay, well, great. Sounds good. Thank you.

Thank you.

Good strategic acquisition here.

We agree. Thank you, Ted.

Scott Graham.

Paul, John, Pat, good morning. (multiple speakers) Congratulations on what looks like a great acquisition. It's funny, I actually initially read the press release wrong. I thought that the guidance narrowing included the extra income, and it doesn't, which sounds to me like the second half is going to roll out pretty much as you expected. Is that a fair statement?

Yes, that's a fair statement.

Very good. The other thing -- this synergy number in earnings per share. Obviously, it -- from what you answered in an earlier question, it looks like it's mostly just off of the transaction value. I was just wondering, is there any of the $10 million to $15 million of synergies included in that $0.40 to $0.50? And if so, what -- is it costs or sales?

Some is included in it and it would be on the cost side. And it would be primarily -- the thing I just mentioned, the example being them sourcing tanks. But there's some other things. We're a bigger steel buyer. We think there's some synergies and we're doing our normal conservative look at it, too.

You know, if you asked me what I really think the number is, I'd probably give you something different. But for right now and for external purposes, until we really get in to understand everything that's going on, and see all the cost synergies we can get -- we've got nothing in there, for example, on export sales of Lochinvar product. Yet, we're going to be working very hard to try to grow that piece. It's right now a very, very small piece of what they have. And we think there's some significant opportunities there, especially in China. But until we can prove those opportunities, we're not going to put them in our guidance.

Understood. Two other questions. On this acquisition, does this change the way you approach acquisitions globally now?

No, this is right down the middle of the strategy we stated last fall.

Right. But what I mean, Paul, is now that you have a beachhead here and do we now maybe also open this way up to include emerging-market acquisitions of boiler companies?

Yes. But that was on our list before. Our first acquisition happens to be US-based, but we're looking at emerging markets as we said in our strategy communication last fall -- it's product line extensions and geographic expansion. This one happens to be in the -- predominantly in the product line extensions, but geographic expansion is a parallel effort that we're underway. And we have looked at boiler companies. We have looked at water heating companies, tankless type, tank type, every scenario. We see some opportunities for commercial in some emerging markets. There's a lot out there that's being worked on right now.

Fair enough. The last question is regarding the North American resi business. And off of the industry data, the April numbers dovetailed directly into what you said about the pre-buy. It looks like May was actually a strong number, although that's obviously a -- there's a timing issue there, understanding that manufacturers' shipments versus sell-through. But does this imply that maybe -- was June the weakest month of the quarter on a year-over-year basis?

It definitely was, Scott. It was definitely the weakest. But again, you had some noise last year. You had the flood. You had some potential pre-buy last year, so there was just a lot of noise in that second quarter last year. We're more stepping back and looking, and saying, okay, through the first six months, the industry is down about 2%. And as we look at it, that kind of matches completions being down that much. So that's kind of where we're at, at this point in time.

Fair. And John, to that end, you're right on the path that I wanted to go. It looks to me like, while the comps get easier year-over-year, in the next two months, there's still hard comps, and then things get a lot easier in the fourth quarter. I know that you've contemplated all of this in the guidance, but I guess the overriding question would be, how is July looking on that basis?

Yes, I mean, we're doing okay in July -- no surprises. Doing about like we expected.

Okay. And is there any help that you're getting from the energy efficiency products? Are you seeing an improvement, a pickup in those volumes which you're advertising behind?

It's -- we have seen some -- we're getting some improvement in those products, but it's a very small piece of our total revenue right now. And frankly, without the -- for the typical homeowner to convert to solar or to convert to a heat pump, it's a very expensive process to convert. And they don't really get a strong payback in a reasonable number of years.

It's going to take, in my opinion, to really kickstart it -- these are good products. They go into new home construction. So when that picks up, it will definitely help. But without the tax credits or energy tax credits, or something from a governmental standpoint that could incentivize the consumer to go do a retrofit, I think our high efficiency products are going to continue to grow, but they're going to be a smaller piece.

And as I've said, we're just positioning ourselves very well, we believe, for when the housing market picks up. There's still a long-term demand for 1.5 million housing starts every year. Household formation is driving that. When we get back and when we get this mess cleaned up in the housing market, I don't know, and when we start getting back up over 1 million housing starts. But when it does, we're going to be ready and it's going to be very good for our shareholders.

Very good. Well, congratulations on the acquisition. Thanks for your time.

Thank you.

And there are no further questions. You may continue.

Okay. Well, thanks a lot, everybody, for your interest. It's quite a coincidence that we had both of these announcements today. That was not on purpose. We just, frankly, got the Lochinvar deal all signed up at 1.47 a.m. this morning. So, we're announcing it right away. And the earnings, of course, we've had that on schedule for some time. So thanks for your interest in the Company and we look forward to talking to you again.

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