Franklin Electric Co Inc (FELE) 2007 Q2 法說會逐字稿

Greetings and welcome to the Franklin Electric Company, Incorporated, second quarter 2007 earnings release. At this time, all participants are in listen-only mode mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Mr. Mike Butchko, the Treasurer of Franklin Electric Company, Incorporated. You may begin.

Thank you, Andrea. I would like to welcome everyone to Franklin Electric's second quarter 2007 earnings conference call. With me today, are Scott Trumbull, our chairman and CEO, and Tom Strupp, our CFO. On today's call we will review our second quarter 2007 results and we will have time after prepared remarks for questions and answers. Before we begin, let me remind you that any forward-looking statements contained herein involve risks and uncertainties, including but not limited to, general economic and currency conditions, various conditions specific to the Company's business and industry, market demand, competitive factors, changes in distribution channels, supply constraints, technology factors, litigation, government and regulatory actions, the Company's accounting policies, future trends, and other risks which are detailed in the Company's Securities and Exchange Commission filings. These risks and uncertainties may cause actual results to differ materially from those indicated by the forward-looking statements.

I will now turn the call over to Scott, who will review the first half of 2007 and provide some highlights about the markets we serve and then Tom Strupp will conclude our formal remarks by reviewing the financial results of the second quarter.

Thanks, Mike, good afternoon and welcome to our company's first quarter conference call with investors and analysts. Our company's going through a strategic transition year, and we decided to initiate these calls in order to offer an additional channel of communication with investors during this period of change.

As those of you who follow Franklin Electric know, in 2004 we made the decision to sell our water systems submersible motors, drives and controls in the U.S. and Canada primarily through distributors as opposed to pump OEMs, and to enter the water systems pump business ourselves. Two strategic premises underlie this decision. First, we believe that our sales and earnings from a complete line of Water Systems pumping products sold to distributors worldwide will grow to exceed the sales and earnings that would be otherwise achieved from continuing to sell only submersible motors to OEMs. Second, that selling a complete line of branded pumping systems products to a more diversified distributor customer base, which is also closer to the end user, will give us a better platform for future growth and product innovation than just selling submersible motors to a concentrated group of pump OEMs. In the course of implementing this decision, we entered into a settlement agreement with two large pump OEMs, which ensured that we would continue supplying them with our line of two-horsepower and less submersible motors until January 1st of this year.

On January 1st, we discontinued supplying these customers, and shortly prior to that date, they introduced submersible pumps equipped with their own branded submersible motors. When we entered into the settlement agreement, we were aware that one tactic that these OEMs might employ would involve trying to build a large stockpile of our submersible motors, so that they could continue supplying distributors and contractors with their pumps equipped with Franklin motors after the expiration date of the agreement. Although we safeguarded against attempts by these large pump OEMs to build even larger inventories, we were not able to foreclose the stockpiling. As early as the first quarter 2006, and in every quarterly press release since, we have warned investors that 2007 would be a transition year for the company as this large stockpile of motors was released into the market and as our competitors employed pricing tactics in an attempt to maintain their market position.

While our EPS had improved for 25 consecutive quarters on a year-on-year basis, as we entered 2007, our earnings declined in the first quarter, and now again in the second quarter, as our sales and earnings on Water Systems products in the U.S. and Canada have been impacted by the liquidation of these stock piles and by meeting competitive promotional pricing programs, instigated by our competitors as they respond to our pump sales gains. These problems have been exacerbated by weak overall water systems industry conditions in the U.S. and Canada. Trade association data indicates that industry shipments are off 15% during the first half and second quarter of the year, due primarily to the decline in housing.

As we entered 2007, aware of the stockpile situation and the prospect of promotional pricing pressure, and the impact that these factors may have on our earnings, we made four key decisions that we knew would hurt earnings further in the short term but were critical to achieving growth in 2008 and beyond. After that, these transition issues were behind us. First, we decided to enter the peak summer season this year carrying a larger than normal inventory of pumping system products. When our competitors stockpile of Franklin motors is depleted we believe a large number of contractors will choose to switch to Franklin pumps in order to continue enjoying the benefits of the proven reliability of Franklin submersible motors. We do not want product availability to impede any contractors' decision to convert to Franklin pumps.

Second, we built a sales and engineering infrastructure in our U.S. and Canada Water Systems business that is sized for the industry-leading position that we anticipate achieving. Again, we do not want our ability to reach customers with the Franklin message and to supply them with world class products to impede any contractors' decision to convert to Franklin pumps. Third, we decided to go ahead in 2007 with the development and launch of new products that were -- will replace incumbent pump designs represented over 75% of our Water Systems pump sales. Our new tri-seal 4-inch submersible pumps offer substantial improvements in efficiency and durability while enabling us to streamline our pump manufacturing process. Our new VersaJet jet pump line also offers improved efficiency and durability as well as patent-pending features that provide installation advantages for contractors. Of course, we're incurring added development, marketing and start up costs as we launch these important new products.

Finally, we decided to proceed with the construction and start up of a new Water Systems pump plant adjacent to our new submersible motor plant in Linares, Mexico. The new plant is under construction, employees are being hired and trained and equipment is being debugged in a temporary quarters in the Linares motor plant. We expect the new facility to be operational in early 2008 and among other things, it will produce our new Tri-seal and VersaJet product offerings. Sales from Water Systems products outside the United States and Canada represented 30% of total consolidated sales during the second quarter, and we achieved organic sales growth in these markets of 16%.

Earnings improved at a significantly faster rate than sales. We experienced growth in all key regions of the world, and we anticipate that this will continue as we expand our product lines and distributor base globally. We are also focussed on growing our Water Systems business by acquisition in key high-population regions of the world, where there is a growing need for our products. In this regard, we completed the acquisition of Pump Brands Limited, with sales of approximately $30 million, Pump Brands manufactures Water Systems pumps from factories in South Africa and Botswana and distributes products throughout Africa. Sales from Franklin Fueling Systems represented 22% of consolidated sales during the quarter, and experienced total growth of 41% and organic growth of 8%. Earnings also improved at a significantly faster rate than sales in this business.

We were pleased to achieve rapid growth from fueling products that incorporate proprietary technology, such as the new TS5 fuel management platform, and the Healy vapor recovery system. So, while we remain attentive to the short-term effect on sales and earnings of the submersible motor stockpile liquidation, the weaker than normal domestic Water Systems industry demand, and the possibility of ongoing promotional pricing in response to our pump sales gains, we believe that we're well-positioned to reestablish sales and earnings growth in our Water Systems business in the U.S. and Canada as these factors dissipate and as our marketing, new product and cost-reduction programs contribute to better results. At the same time, we anticipate continued growth in sales and earnings from the sale of Water Systems products in international markets, and from Franklin Fueling Systems.

Now I'll turn the call over to Tom Strupp, our CFO, who will review our second quarter financials.

Thank you, Scott. As Scott indicated in his' comments, while the company reported essentially flat sales of $152 million for the second quarter of 2007, there was a shift in the mix of sales with the addition of $19 million of sales from the Little Giant and Healy Systems acquisitions, solid growth in international Water Systems outside of the U.S. and Canada, and a good organic growth from the fueling business. This was offset by the decline in Water Systems sales in the United States and Canada, which represent about one half of consolidated sales in the second quarter.

The sales volume of 4-inch submersible water well motors in North America was off significantly due to the continued inventory liquidation by several large integrated pump OEMs that began in the first quarter of 2007, and indications that the water well industry is off 15% for both the second quarter and the first half, compared to 2006. We are encouraged by the rapid growth of our Water Systems pump product lines in North America, and strong Water Systems product sales outside of the U.S. and Canada. The headwinds from the submersible motor inventory liquidation led to the overall global Water Systems sales decline of 17% for the second quarter, that excludes the Little Giant acquisition benefit.

Our fueling product line continues to perform well with second quarter organic growth of 8% in the base business, and the Healy systems acquisition reporting solid growth over its prior-year performance for the quarter. Operating margins for the consolidated business declined to 7.3% in the second quarter compared to 17.2% last year. A reduction in the gross profit margin from 34.6 to 28.4% in the second quarter of 2007, was a major contributor to the operating margin decline and was principally attributed to the following factors. Significantly reduced sales of four-inch submersible motors to large pump OEMs and the lower production rates for submersible motors reduced fixed cost coverage.

Promotional pricing, promotional price discounting in North America in response to competitors' reacting to Franklin's Water Systems pump line growth and weak water well industry conditions. Product line mix changes that include a broadening in Water Systems pump and accessory products being offered in North America, including the Little Giant pump product lines added in late April 2006 have modestly lowered gross profit margins than the average. Increased freight costs resulting from fuel surcharges and increased level of shipments to a more diverse customer base would be the final point impacting gross profit margins.

Selling and administrative expense spending increased 350 basis points to 20.9% for the quarter, compared to last year due in part to the sales decline in the global Water Systems business, and the approximately $2 million of increased selling and administrative spending to support the increasingly diversified global customer base and introduction of new Water Systems pump products in North America. Franklin made the decision to strategically invest in sales, marketing and engineering infrastructure to support a long-term market leadership position that we anticipate achieving. This higher support expense spending penalized earnings in the second quarter with lower Water Systems sales in the United States and Canada for the reasons already mentioned.

The Little Giant and Healy acquisitions added an additional $2.5 million of selling and administrative expense in the second quarter of 2007, compared to prior-year. Interest expense increased by $1.1 million in the second quarter compared to last year, higher working capital needs for the Water Systems and fueling businesses in the first half of 2007 were the principal factors causing the increase in interest expense. Phase two of the global manufacturing realignment program continues to be on track in 2007. Restructuring expense was $0.4 million pre-tax in the second quarter, and $1.6 million pre-tax for the first half of 2007.

Siloam Springs, Arkansas manufacturing personnel are expected to be reduced from 411 at July 1, 2007 to under 300 at year-end as manufacturing capacity at Linares, Mexico continues to expand. As Scott mentioned, construction is underway on the new Lenaris pump manufacturing plant that is adjacent to our existing motor plant. With the expanding Lenaris operations, the new Tri-Seal 4-inch submersible and VersaJet jet pump production lines will be in full operation in the first quarter 2008. We anticipate substantial savings going into 2008 and beyond from these initiatives.

The company's effective income tax rate in the second quarter of 2007 was 35.3% compared to 35.8% in the prior year. Cash flow usage by operating activities in the first half of 2007 were $37.5 million, compared to cash flows generated in the first half of 2006 of $5.9 million. The operating cash flows used were primarily related to increases in receivables and inventory. Additional inventory was carried for the 2007 Water Systems selling season in North America, to ensure Water Systems pumping systems product availability to fully serve our distributor customers. We have also experienced a modest increase in our overall days sales outstanding due to selling to a more diverse customer base, including the growth in our international business for both water and Fueling Systems. Net cash flows used in investing activities were $44.5 million for the first half of 2007, while $95.4 million in 2006. Cash flows invested in 2007 were primarily for the purchase of property plant equipment, the second quarter Pump Brands acquisition, and net investments in tax exempt municipal securities.

In the second quarter of 2007, the company issued $110 million of long-term fixed rate debt, with a coupon rate of 5.79%. Proceeds were used to refinance floating rate debt outstanding at the time. The company repurchased 187,600 shares of its common stock for $8.1 million in the second quarter of 2007. This now concludes our prepared remarks on the second quarter. Now we would like to open it up for questions.

Thank you. Ladies and gentlemen, we will be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS). Our first question comes from Mike Schneider with Robert W. Baird. Please proceed with your question.

Good afternoon, guys.

Good afternoon.

Scott, maybe you can just talk through the North American Water Systems business, just by my rough numbers, if the industry was down 15 and we assume you were down comparably, it looks like pricing was down almost an equal personal or about 14 points. I guess are you able to determine what indeed is the average discounting occurring in the market versus what is just weaker volumes and incentives needed to drive volume in a weaker market? I hope that question makes sense.

I guess the good news, from my perspective, about the pricing behavior in the industry is that the nature of the price reductions that are occurring have been in the form of price promotions as opposed to list-price reductions. And have generally occurred at the end of a quarter, and have been very substantial in the range of 15 to 18%. And it appears that because of this behavior over the last several quarters, our customers have become trained to buy at the end of the quarter with these very substantial price promotions available to them. And I think that the -- and again, it's the pricing and price promotions are something we can't control, we respond to them but we aren't -- we can't control them, but we're, as we look forward, I mean, in some ways it's understandable that it is occurring right now because the market is -- there's so much of the market that we view as being in some ways up for grabs.

A high percentage of, from our perspective, a high percentage of what our competitors have been selling through to contractors in the industry has been their pumps with our motors. Still, due to the stockpile liquidation. And as that inventory starts to be depleted, and contractors are confronted with the choice of converting to somebody else's motor or converting to a Franklin pump and staying with the Franklin motor, we believe that a lot of contractors would choose to make that decision. And with that large chunk of the market up for grabs, this kind of pricing behavior during this transition period, in my view, isn't terribly surprising, and the fact that the industry shipments are down by an amount that's really unprecedented in our memory, just makes the situation worse. How this behavior may change after this transition period is over remains to be seen. But certainly this type of behavior during the transition period is regrettable, from our perspective, but not completely surprising.

And Scott, in the remarks, both in your prepared remarks and in the press release tonight, the statement either is direct or even implies that the pricing actions have been led by your competitors. But during the second quarter, the dates and the price discounts that we've gotten a hold of from the channel indicate that you all were the first ones out with the price-cutting in early June. I guess, can you --

I don't know the materials that you've gotten and the pieces of paper that you're looking at, but I can assure you that we responded to competitive situations and did not lead them.

Okay. Well, even with that said, take that as the base case, why would you follow? If you know that there is inventory to be burned off and this is a finite issue, and you're willing, even by your own remarks, you're willing to sacrifice some short-term earnings hit for the long-term gain in this strategy, why compound the problem by matching your competitors' discounts? Why not just wait for the inventory to burn?

The -- I believe that Franklin motors deserve a premium, we're a known entity in this market. And under normal circumstances I think we would test the slope of the demand curve. But these aren't normal circumstances. This is a kind of -- a transition period that isn't going to happen again. And we feel that as part of our strategy, it's critical that we succeed in influencing, as many contractors through this transition period, while they're making these important decisions for their businesses and ours, not to be distracted by a price differential. Again, I believe that under normal circumstances we would test the slope of the demand curve for our product, but in this -- I'd say unusual time, we have elected to meet our competitors in the marketplace as far as this pricing behavior is concerned.

Okay. And then just on the profitability, because you said you'd made a comment return to more normal times once the inventory depletion is complete, what give us you confidence in gross margins in North American Water Systems returning if you look at the numbers, it looks like gross margins at least on a worldwide basis went from 35 to 27 this quarter, and presumably North America is down quite hard in they're probably doing even half that rate. Can you -- based on your modeling and your understanding of inventory levels, et cetera, are you confident that gross margins return to this mid-30s rate or are we structurally at a lower point because there's simply twice the industry capacity there once was?

Well, I think that there will be -- I believe our margins will go up materially. It's difficult for us at the moment to predict how far they'll go up because it's difficult for us to predict our competitors' pricing behavior. But we're in some ways at the worst of times right now. Our-- we have given up the sales to the large OEMs and in the course of doing that, we are largely competing with ourselves in the marketplace. And that when that condition changes, we don't see our fixed cost base growing from where it is right now, and we do see substantial upside growth potential for our sales going forward. So we're going to get some good operating leverage, both in the gross profit arena and in the SG&A arena as we look beyond this transition year 2007. So I feel confident that our margins will improve, but I wouldn't want to speculate on our -- how the pricing scenario will play out at this point.

Well, maybe just to slice that question a different way, Tom, you laid out four buckets to explain, again, what I calculated as an 8-point gross margin decline in North America. And you attribute 25% of it or two points to the reduced manufacturing, presumably just your attempts to reduce inventory, but the other 75% or six points doesn't necessarily appear to be nonrecurring, meaning, again, to go at that question of where should we predict or where should we expect margins to go from here, it looks like 6 points of the 8-point decline in gross margin may be structural. Tom, maybe I don't know, if you can refer back to your four buckets and walk us through, should we expect just a two point recovery as you guys return to more normal production levels or indeed are the remaining six points recoverable?

You want to explain, Mike, where the eight points, 800 basis points your number comes from?

Yes, I've taken out of the press release, I've just backed in, given what you said about gross margin dollar declines, I backed into the year-ago margin in water systems was 35%, and the global waters gross margin this quarter appears to have been 26.8 or about --

Our disclosure is consolidated gross profit margin 34 versus 28, using round numbers.

Right. Although, you --

That's six points.

Okay. And fueling was up a bit and water was down by the dollar amounts you gave in the release, even if you want to start with the six-point number, I guess my question really is, if you go to the four bucks you laid out, Tom, what do you believe and Scott what do you believe is structural versus transitional?

Well, I think part of what Scott indicated on the fixed costs, interest grow our distributors' sales in future quarters that will give us additional fixed cost coverage. That's about a quarter of the difference. The promotional pricing, that we talked about, in addition, is about 25%, and that's something that we're not going to provide future guidance on, but that scenario we're obviously concerned about and we'll be working on. And the product line mix, as it relates to expanded pumping systems lines, including Little Giant, to use your word, perhaps that piece is structural subject to our ability to improve that over time and in terms of sourcing and operating efficiencies.

Yes, I think subject to speculation on where pricing may sort out, I would have said that about 20% of the decline would be -- may be viewed as structural in the sense that product mix has been a factor.

Our next question comes from Matt Summerville with KeyBanc.

A couple questions. First, I guess when you look at the international business, how much of that volume is going through the two large OEMs versus distributors or other OEMs at this point?

Very, very little. Not quite zero, but almost zero through the two large OEMs.

Okay. And then just in terms of, can you give us any color on motor volumes versus pump volumes in North America Water Systems during the quarter? Any more specificity?

Well, really for a variety of reasons, including competitive reasons, we don't disclose those numbers specifically. But obviously our motor volume is down substantially and our pump volume, in spite of the declining industry condition, is up very significantly, but not enough at this point to offset the decline in the motor volume.

Okay. If you look at, I think the press release mentioned that you believe you have gained pretty significant amount of market share on the pump side of the business. I guess from where you entered the year, how many points of market share do you believe you've picked up?

Again, Matt, I'd rather not disclose market share data in any fashion, but I think in the month of June we were either Number 1 or Number 2 in the industry in terms of pump volume.

Okay. Great. You guys didn't spend enough time probably on the Fueling Systems, Scott, lets talk about that business, how you think that revenue's going to ramp up in the pack half of 2007 and 2008, associated with California that being point 1 and is Texas pretty much wound down at this point? And then kind of what you're seeing internationally from fueling right now?

Okay. Well, the fueling business, our -- call it incumbent product lines prior to the Healy acquisition had about an 8% organic growth and we're very happy with the performance that -- and market reception to the new fuel management system platform, TS5 platform, both in the United States and outside the United States. So we're seeing very good growth and we think that in our incumbent product line we'll continue to see good growth for these products going forward, particularly the more high/tech. or proprietary products, such as the TS5 platform.

The Healy acquisition is particularly exciting because of the conversion that is about to occur in the California market. We've discussed this with most of our investors and analysts in the past, but to summarize the story, California has passed regulations which require that the roughly 11,000 filling stations in the state install vapor recovery and monitoring systems prior to the end of the third quarter 2009. And these systems sell for $25,000 to $30,000 apiece. That would be the vapor-recovery component and the monitoring system component. The vapor-recovery component sells for $17,000 to $20,000 and the monitoring sells for $5,000 to $10,000. And so that in total relates something like a 250 to $300 million market opportunity, that will occur between now and the end of that third quarter in 2009.

California has a very rigorous qualification protocol that can take up to two years for either vapor-recovery systems or monitoring systems to be approved for use in this mandated installation. And thus far, our Healy vapor recovery system is the only approved system for use in the state. I believe that it's possible that another system may be approved in time to enjoy some of this market, but at this point we're the only approved system. And our -- there is currently one monitoring system approved, and our monitoring system is in the approval protocol doing very well, and we would expect to have that approved by the end of the year. So as we look into -- we've seen, for instance, when the tank regulations went into effect, that the typical pattern is that people put off these installations until pretty much as late as they can.

We believe that we're going to see a great upsurge in business in 2008 and 2009 as this California transition or transformation of their vapor-recovery systems and their gas stations takes place. We have, at the moment, been selling a significant percentage, and I'm not going to give you the precise percentage, but a significant percentage of our Healy sales are coming from overseas. In many instances, in high-temperature regions such as India, where vapor-recovery is more of an economic issue than a environmental issue for the large station owners. They see that a system like Healy can save them money. And because it can reduce the loss due to evaporation in the stations.

We're seeing the -- some significant interest in sort of the tropical belt across the world, and there are a number of countries that are considering legislation that could benefit our Healy systems as well in either the national or municipal level. So it's a -- an ongoing opportunity. We have our marketing people out dealing with the environmental legislatures in regions around the we would, and we think that there's a good chance that beyond California we'll see significant growth for the Healy product line for those reasons.

The Texas conversion is still underway. We think that there's still around 2,000 stations in Texas that have yet to be converted. So it's not as large as the opportunity in California, and the qualification protocol is not the same as the California qualification protocol. Therefore, there are more stations -- more competitive systems that can be used in that market. But we don't think that the installation opportunity is has been exhausted yet in Texas.

Okay. Just a couple follow ups if you please and then I'll get back in queue. I guess can you comment on whether you believe the rate of inventory liquidation in the second quarter, was it a pace above what you saw in Q1? And then I guess, what's your level of comfort that in the third quarter we're pretty much out of that inventory?

Well, we have no precise way of measuring the size of the stockpile that occurred. All we can do is look at trade association data historically over the two or three-year period, the relevant two or three-year period leading up to January 1 of this year, pair it with our own shipment data and see if there's a disconnect and, therefore, the potential for an inventory build. And then over and above that, we'd have to estimate the size of just ongoing inventories that were in our -- the large OEMs possession just to operate/business because that will be liquidated, too. So that's not a very precise way of estimating what the inventory levels would be, but doing the best we can, we came up with an estimate of around 250,000 motors. And again, there's no hard data available for us to determine how many of their pumps with our motors were sold on a quarter-by-quarter basis, other than we can estimate based on industry data about what their shipments were in total, and then based on our own field sales people, and we have a lot of people covering essentially every distributor in the United States, so we have a very good window on what's going off of distributors' shelves, but based on that, we can estimate what percentage of the products that are sold off distributor shelves have a Franklin motor versus have somebody else's motor.

And based on that, we estimated that there may have been an inventory liquidation of about 100 -- about 85 to 90,000 units in the first quarter, and we think it might have been 90 to 100,000 units in the second quarter. And then that gets us to the 70 to 80% liquidation range that we identified in the press release. And again, I have to emphasizes that it's hard -- I don't want anybody to think that's a hard number, that's just the best we can do for our own planning purposes, and to give you a parameter or give you an insight into our thinking, we included it in our release. But having said that then, that would indicate that as we go through the third quarter, we will see an increasing number of and certainly as we go into the fourth quarter, an increasing number of situations where our competitors may be allocating our product and the -- some contractors will be made aware that they will be strongly encouraged to take a competitive motor because the other isn't -- may not be directly available to them. And so with that, we think there's an opportunity there for us. And--

All right, last quick one, then I'll get back into queue or let somebody else ask. What is your -- based on inputs from your sales force, your conversations with contractors and your conversations with distributors, what's your assessment of some of the penetration or conversion rates that your competitors are throwing out there? And I guess what is assessment of the level of success Farradyne is generating in terms of real penetration into the market here?

I think that our competitors are -- I've heard this comment that our competitors have achieved an 85% penetration rate. And I believe that it is possible that there are Farradyne motors sitting on the shelf of 85% of that competitor's distributors in the U.S. However, I, of course again, we have to rely on soft data, our own people who I must say have a very clear picture of what's going on out there, because we -- as I said, call on essentially every distributor in the country. But based on our own salespeoples' estimate, the vast majority of what our competitors are actually selling to the -- through the trade to contractors continues to be equipped with Franklin motors. And so I don't want to take a crack at putting numbers on that, but other than to say that the vast majority continues to be with the Franklin motor.

Great, thanks a lot.

Okay.

Our next question comes from Jim Foung with Gabelli & Company.

Okay. This will be our last question. Yes, Jim.

I was just wondering if you could just comment on the quality of the Farradyne motor compared to the Franklin motor or just what kind of deficiencies you might see or just compare the two motors and what your contractors are saying?

Okay. I think generally speaking it's a little too early to tell regarding the quality and the robustness of the Farradyne motor. Because of the performance of the Franklin motor, people have an expectation that when they install a water well, it's going to last for at least 10 years. And we have seen in the past competitive motors enter the market and in most instances they will start up out of the box. I mean, the electric motor technology is known well enough that almost for certain you can design a product that starts up out of the box. The issue is will it still be operating flawlessly three to five years down the road? And what historically we've seen is people will come out with a a motor and it starts up out of the box and then there are problems with it down the road. So I, at this point, I think that -- and I believe that a number of our customers believe that it's a little bit too early to tell whether -- how the product is going to perform long term, which is the key issue for any contractor. We have seen some issues in the field pertaining to starting torque but again, I think overall I'd say that it's a little bit early to tell.

Okay. And then in your North American Water Systems, your sales there are now just going to distributors, so strictly to distributors, right, and to OEMs that are -- besides the two big OEMs; is that correct?

That is correct. Our sales to the two big OEMs have obviously fallen to essentially zero.

Okay.

But we continue to supply a number of the other OEMs who continue to be very interested in promoting our products to their customer base, and their sales are actually doing pretty well. And then of course we also supply distributors with motors directly and with motors attached to pumps.

Could you give us sort of a percentage or some sort of rough idea how much of the North American Water Systems revenues went to distributors and to other OEMs and then to pumps, to the pump group?

Well, we generally do not disclose detailed product mix information, Jim.

Okay. And then how about the gross margins, I mean, could you just maybe just a general idea in terms of the margins on the pumping systems, are they -- obviously, because they're going to be less than the motors, but is it a half less than the motor margins on a gross margin basis?

No, nowhere near that. It's less but it's marginally less.

Can you give us some idea of what that might be?

Again, we have not been disclosing margins by product line.

Okay. All right, well, thank you very much.

Thank you, Jim. And thank you all for attending our conference call. And that will end our session today.

Ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.