Patricia K. Ackerman – Vice President Investor Relations & Treasurer Paul W.

Jones – Chairman of the Board, President & Chief Executive Officer Terry M. Murphy – Chief Financial Officer & Executive Vice President John J.

Kita – Senior Vice President Corporate Finance & Controller Craig Watson – Vice President Business Development

Michael Schneider – Robert W. Baird & Co., Inc.

Ned Borland – Next Generation Equity Research Scott Graham – Ladenburg Thalmann Paul Mammola – Sidoti & Company, LLC Ted Wheeler – Buckingham Research Matt Summerville – KeyBanc Capital Markets

Welcome to the A.O. Smith fourth quarter 2008 earnings conference call.

At this time all participants are in a listen only mode. Later there will be an opportunity for questions and instructions will be given at that time.

(Operator Instructions) As a reminder, today’s conference is being recorded. I would now like to turn the call over to Vice President of Investor Relations and Treasurer, Ms.

Pat Ackerman.

With me this morning participating in the call are Paul Jones, Chairman and Chief Executive Officer; Terry Murphy, Chief Financial Officer; John Kita, Senior Vice President of Finance; and Craig Watson, Vice President Business Development. 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.

Our operating units performed well in 2008 given the difficult conditions in the housing market, the commercial market that began softening in the third quarter and commodity cost volatility that was best described as a roller coaster. In spite of those difficulties we generated sales even with last year of $2.3 billion and earnings of $2.70 per share.

Adjusting for restructuring and other charges we earned $2.89 per share. We generated operating cash flow of $107 million and continue our efforts to preserve cash.

Our balance sheet remains strong and our debt to capital ratio is 34%. Sales at our water products operations in China grew 26% to $185 million.

We were rewarded by our repositioning activities in our motor business with $5 million in savings in 2008. The merger agreement with Smith Investment Company is progressing.

This morning we established 2009 earnings forecast of between $2.40 per share to $2.60 per share. We will expand on each of these points in our review today.

I would first like to begin by addressing the market environment currently facing A.O. Smith.

Regarding the outlook for 2009, we believe the soft housing market will continue throughout the year and the recession will continue. We believe the softening in the commercial construction market that we began to experience in the fourth quarter of last year will not abate in 2009 leading to a contract commercial market.

We expect that our growth in China will slow in 2009 but will be positive and we expect our pension cost will increase by $6 million over 2008 costs. Thos major influences will be slightly offset by certain positive developments as we believe our water heater prices will have a positive impact on our profitability this year.

Additionally, the anticipated savings from repositioning activities in our motor business and from salaried work force reduction programs will increase in 2009. Combining all these factors with the overall temperature of the economic environment will make 2009 a challenge year for A.O.

Smith and thus our forecast for earnings is lower than what we achieved in 2008. Terry will now talk about our financial results in more detail.

Full year sales of $2.3 billion were flat compared to 2007. Reported net earnings of $81.9 million or $2.70 a share were 7% and 5% lower than last year’s numbers.

Adjusted for $0.19 in restructuring charges, earnings were $2.89 per share 4% lower than the adjusted $3.02 in 2007. For the fourth quarter of 2008 sales were down 11% to $509 million while net earnings declined by $10 million to $6.6 million or $0.22 per share.

Fourth quarter earnings included $3 million or $0.07 of restructuring compared with a net $0.20 per share for restructuring and a tax benefit in the fourth quarter of last year. Taking a closer look at the individual segments, water products achieved sales of $1.45 billion, a modest increase over 2007 sales of $1.42 billion.

This segment benefited from a 26% increase in China sales to $185 million. However, lower residential and commercial water heater volumes overshadowed the strong progress in China.

Despite selling price improvements to offset higher costs for raw materials, sales in the electrical product segment declined 4% in 2008 to $858.1 million. Unit sales were negatively impacted by the weak housing market as well as customer inventory reductions at the end of the year.

Fourth quarter sales of $346.2 million at water products declined 9% compared with the fourth quarter of 2007 due to double digit declines in commercial and residential water heater unit volumes, partially offset by sales growth of 11% in China. Residential water heater volumes in the fourth quarter fell below what we believed to be replacement levels which should favorably impact our order rate in the near term as depleted inventories in the distribution channel are replenished.

In electrical products fourth quarter sales of $163.2 million were significantly lower than the same period in 2007 due to weakness in its residential market segments. Although our OEM customers paired back their production schedules in December, we expect them to begin to replenish depleted inventories in the first and second quarters which will positively impact order volumes.

As we look at operating profit water products 2008 operating profit of $134.7 million represented a 10% decline from 2007. Earnings were negatively impacted by lower residential water heater volumes and higher costs for raw materials and components which were not completely covered by price increases.

Operating profit margin declined to 9.3% in 2008 from 10.5% last year. At electrical products, operating profit for 2008 increased to $39.1 million and included a restructuring charge before taxes of $8.7 million.

Operating profit was $23.1 million in 2007 and includes pre-tax restructuring expense of $22.8 million primarily associated with the 2008 closings of three manufacturing facilities. Excluding restructuring expenses, the electrical products company’s operating margin for 2008 was 5.6% compared with 5.1% last year.

The increases in operating profit and margin were primarily the result of cost savings associated with product repositioning and pricing action at targeted accounts. During the fourth quarter water product sales declined to $29.5 million compared with $45.1 million in the fourth quarter of 2007.

Lower residential and commercial water heater sales in the US more than offset an 11% increase in China water heater sales. Fourth quarter operating margin fell to 8.5% compared with 11.9% in the fourth quarter 2008 as a result of significantly lower US volumes of higher margin commercial water heaters combined with additional margin pressure due to higher steel costs.

Electrical products recorded a $5.2 million loss in the fourth quarter which included a $2.9 million pre-tax charge for restructuring. Fourth quarter operating loss for 2007 was $18 million and included $21.2 million for restructuring.

Excluding restructuring charges, the operating loss at electrical products was $2.3 million in the fourth quarter of 2008 compared with adjusted profit of $3.2 million last year. Operating margins in electrical products was a -1.4% in the fourth quarter of 2008 compared with 1.6% in 2007.

Despite savings of $2 million from repositioning activities the steep volume declines drove margins down. Operating cash flow of $107 million in 2008 was below our expectations and below our record cash flow last year.

In addition to higher inventory days, cash deposits associated with derivative contracts negatively impacted cash flow when compared with 2007. Looking ahead we expect inventory levels to normalized by the end of the first quarter.

The total cash cycle days increased to 65 from 57 last year. A small contraction in accounts payable days and the expansion in inventory days more than offset a reduction in receivable days.

Depreciation and amortization totaled $66 million in 2008 and our capital spending was $66 million. Capital spending is expected to increase to a range between $75 and $85 million in 2009 primarily due to the construction of the water heater plant and India and carry over projects in China that were approved in 2008.

Our debt to capital ratio remained unchanged for the year at 34%. We repaid $40 million in debt during the year but our leverage ratio was impacted negatively by charges to stockholders’ equity associated with higher pension liabilities and losses on derivative contracts.

We continue to preserve cash and reduce our cost structure to maintain our solid financial position. For 2009 we’re projecting full year operating cash flow of about $150 million.

This projection includes a voluntarily pension contribution of between $35 and $40 million which is more than double the $15 million voluntary contribution we made in 2008. Now, Paul will talk about the outlook for 2009 and we’ll open the call for questions.

As you know our biggest end markets are residential and commercial construction. The protracted slowdown in the residential market is old news at this point and the slowdown in the commercial market segments we serve is upon us.

As you may also be aware, we sell products in to fairly mature segments which have a high component of less volatile replacement demand. This is an important point to consider when you think about our volumes going forward.

As you can see, for water products we estimate the replacement demand to be over 70% and for motors it’s approximately 60%. To elaborate on these points these charts on Slide 15 give you some historical perspective in to the stabilizing effect of the replacement market on the water heater industry.

Over the last 10 years the replacement market in the residential water heater industry has been consistently between 7.5 and 8 million units. Since we have a 50% market share, that translates in to a nice solid base of sustainable demand for our product.

Our commercial business enjoys an industry with the stability. The replacement volume in the commercial market has fluctuated between about 90,000 and 110,000 units over the last 10 years.

While we expect our replacement demand will continue to provide volume stability that many companies would envy, we are not completely immune to a recession. Therefore, we expect our residential volumes and our higher margin commercial volumes to decline in both businesses in 2009.

Also, we’re projecting our pension expense will be $10 million which is higher than 2008. That said, we also expect to benefit from several earnings enhancers in 2009.

First, the results from pricing negotiations in our water heater business will fall right through. Second, we expect growth of rates about GDP in both our high margin water heater and even higher margin commercial hermetic motor business in China in 2009.

We continue to penetrate new markets for water heaters in tier 2 cities by following our retail customers and establishing new distribution in these geographies. In addition, at 18%, we now have the largest market share for electric brand tank type water heaters in China.

Third, our restructuring activities in motors are on track to deliver $15 million in savings in 2009 and we expect additional savings from the salaried work force reductions program announced this month. However, not withstanding these bright spots we remain cautious for 2009.

The persistence of the soft housing market, the slowdown in commercial construction and global recession will continue to pressure our businesses in 2009. All of these factors will make this year a challenging year for A.O.

Smith but I am confident that our experienced team is ready for the challenge. Accordingly, we expect earnings to range between $2.40 and $2.60 per share.

With that, we’re ready to take your questions. Operator, I’ll turn it back over to you.

Maybe we could just start on what occurred in Q4 and what you’re expecting in Q1. Q4 sales in water heaters down, I’m wondering if you could give us a sense of what you think the sell through in the market was versus what you actually experienced so that we can understand at least a rough mix of what was inventory depletion by distribution and retailers and what was the actual sell through decline.

Fourth quarter was actually below the sell through decline. Mike, you talk about a roller coaster, October was okay, November was horrible.

Our order rate dropped across the board, almost every product line in the US, very, very low order rate and then it popped back up in December. For the quarter I think our number was about $61 million less volume than we thought we were going to have on November 1st is where we ended for the quarter.

But, it was just everything from customers worried about whether they would be able to get the bank financing to cover their lines of credit to everything under the sun. But, it picked back up in November and before you ask we’re off to an expected level of volume on the order rate so far in January.

So the volume decline of 9% in water products during the quarter, you’re actually running better than that right now in January because of some of this I guess more stable inventory actions?

Yes. The other factor we have is this is the first time I think in five years, we haven’t had a price increase in wholesale on January 1st.

There was no pre-buy at all, matter of fact, just the opposite. So, we’re off to a fairly decent order rate so far.

Then on pricing and wholesale in the coming year, with no price increase what have you seen within the channel though in terms of any price discounting that’s occurring by you or your competitors now as we go in to 2009 given what the CRU Index has done?

Well obviously there’s some downward pricing pressure but steel in the fourth quarter was by far the highest steel cost we’ve ever had in this company. It was up something like 80% over where we started the year and so we still have steel costs today in the first quarter well ahead of where we were a year ago.

And, we had more than one price increase last year. Yes, there’s been some deterioration but the first price increases had held fairly well and we expect that will continue.

We had to have that last year to cover the steel costs and once again, obviously steel has come down slightly from where it was in the fourth quarter but, it is still significantly above where we were first half of last year.

And in your outlook comments you said you’ve assumed for water, you show volume declines in 2009, what have you assumed for pricing in 2009 as a whole? And maybe, just give us some thoughts on distribution versus retail?

I can’t split those out but we’ve obviously assumed that overall there will be a price increase over 2008.

I guess then just final question, on the contracts with your distribution and retail customers, can you give us a sense of what percent is actually tied and is automatically adjusted by the CRU Index?

That’s only on the motor side and that’s with our OEM customers. As of right now we don’t have any wholesale contracts with any of our customers.

That’s why we can have – I think we had three price increases last year on the wholesale side on water heaters.

Have you concluded or finalized your negotiations with your largest retail customer?

We don’t comment on that.

Just on the China mid teen growth, I’m wondering if that includes any shipments in to India from China?

Yes, it does. Not a lot although it’s more than our original plan had been.

As you know, we are shipping products in to India from China, it’s a specifically designed product for the China market. It’s actually taking off better than we expected, it’s doing quite well there which is a little bit of a good news bad news and frankly I’m pleased.

The good news is the volume is up but the bad news is we’re not making any money on those because there’s a 10% tariff from China in to India and the dollar versus the RMB is strengthening and the dollar versus the Rupee is weakening so we’re getting a double currency hit on that too. But, the good news is we now have land allocation and we’re in the process of putting together the plant design and I suspect we’ll be breaking ground there before this quarter is over and within a year we expect to have a facility up, early 2010 in India producing product for that market.

I think by then we will have established the brand name fairly well. Our distribution partner there, that relationship is great.

We could not be happier with how this product launch has gone.

Then on electrical products I know the volume decline was pretty staggering. I just want to kind of put in the context of the road map initiatives and you shut down three plants in 2008 but, I’m just wondering how to think of margins in that segment on a lower level of volume going forward here in 2009.

Our gross margins have been moving up. The road maps have been working on that side, the problem has been volume decline.

The OEMs, we primarily service the HVAC OEMs. You can just go check out what they’re saying and that will tell you what we’re facing.

They’re shutting their factories down for several weeks in the fourth quarter and we were off to what we would consider a shallow start to this year. Some of the factories have stayed down for the first start of the year and they’re not running anywhere near the rates that they have in the past.

We’re assuming housing starts this year now to be 600,000. That’s an unbelievable number based on those of us who have been around for a few decades but that is what our forecast is this year and that’s obviously driving the HVAC people to be very cautious.

Then finally, on the salaried headcount reduction, any ballpark range of savings expected from that?

The last one that we did was about $2.6 million in savings so that’s only part of it. We’ve done quite a bit of reorganizing and eliminating open positions and restructuring that way.

But, we actually had a salaried lack of work last week that would generate about $2.6 million in savings this year.

Then just one last one on the guidance, how much of a price increase is embedded in your guidance range and what is the low end versus the high end? What are the variables on price embedded there?

It’s all over the map but, just to give you one indication, we’re going in to this year with steel at about 25% above where it was this time last year and steel is about half our costs so you can do the arithmetic on that. That’s the sort of thing that we’re trying to have on year-over-year.

A couple of question here for you, could you first Terry maybe walk us through this derivative impact on cash flow if you don’t mind?

We’ve got a foreign exchange contracts, we’ve got interest rate swaps, we’ve got copper, we’ve got aluminum. If you look at the balance sheet you can see the number on the balance sheet I think is about $73 million.

Most of that is probably associated with copper but there are a number of contracts in there. Also, the large numbers associated with those underwater derivative contracts.

A good portion of those as you will recall relative to the copper contracts are specific customer contracts so they bear the risk on those contracts, we don’t bear the risk on them. The remainder would be those to which we’re exposed to on hedging contracts which at a point in time that is the value date at the end of the year for underwater.

That’s not to say that that may not change during the year because that’s a measurement on which we make the entry on the balance sheet at the end of the year.

But it’s a balance sheet entry?

It’s a balance sheet entry relative to valuing contracts at the end of the year.

So I guess my question is why was the change in current assets and liabilities a negative this quarter whereas historically we’ve kind of sourced cash out of that line?

Well, what happened was there was a dramatic drop in the Peso and the price of copper in the fourth quarter which resulted from those mark-to-markets. They moved from an asset to a liability.

Again, it didn’t really affect cash flow because that’s a non-cash flow item, it’s a balance sheet adjustment.

And the adjustment is made every quarter.

Maybe I didn’t ask the question right or maybe you guys misunderstood it, we had a change in operating other working capital items in the fourth quarter, it was a minus and in the past it’s always been a plus. I was just wondering if the derivative contract, settlements, mark-to-markets and all that is largely balance sheet which was the answer I expected, then why are we negative in the fourth quarter on that line?

Well, two things really happened in the quarter, the biggest one accounts payable was down pretty significantly quarter-over-quarter and also the margin, we had to make some margin payments during the quarter. Those were the two biggest factors.

Again, those margin payments related to the derivative contracts. So, accounts payable and margins were the biggest factors on negative cash flow from what you were probably expecting.

I think accounts payable is a lot of that answer so I guess my follow up question to that would be why did you have to do that?

The biggest issue is we saw volumes dropping dramatically as Paul said in November, December which resulted in purchases dropping in November, December and we had to make payments by the end of the year.

So would it be fair to say that if you didn’t really match that up with the production per say, should we see a nice positive cash source out of working capital in the first quarter?

I can’t say the first quarter but we definitely would hope that in 2009 we’ll have favorable working capital.

And we usually are a cash user in the first two quarters and a cash generator in the last two.

It’s safe to say Scott that we went in to the year with more inventory in some of the operations than we planned to both raw, in process and some finished goods. We will get those inventories in line in the first quarter so that will help offset the cash usage somewhat but I don’t think we’re ready to predict what our cash flow will be for the first quarter.

The next question has to do with the restructuring plan, I guess the loss in electrical was a little wider than I expected and my question on that would be is there a way to tell right now of the $20 million in total – where are we at right now run rate on that number?

On the $20 million in savings?

Yes.

We will achieve $15 million more this year. We got $5 million last year so that’s a solid number.

I don’t question that I’m just saying are we there now, will we be there by the end of the first half on a run rate basis?

I think you can level load it for the quarter. The plants are closed, the costs are gone.

So you’re essentially there right now for the most part?

Yes, the plants are closed, those costs are gone off our income statement.

Additional headcount actions would be incremental to that number?

Yes.

I guess my last question would be along the lines of capital expenditures in 2009, I know you’re finishing up construction in the first quarter on the China facility. Is that a number we can expect?

I guess I was looking for something in $55 to $60 million range for ’09, is that reasonable?

If you take the ’08 and ’09 numbers together what we were predicting, we’re still where we were, the thing is we had quite a bit more carryover. We did not spend as much money on capital in ’08 as we had planned and that’s what’s driving the ’09 numbers up to something in the $80s.

As always, cash is king, we’re going to be monitoring those capital projects on a monthly basis as we go forward. There’s a very heavy emphasis on short payback productivity and a very low emphasis on any maintenance capital right now.

So, the guidance that Terry gave you are numbers you can use but you should know that it is our intent to keep our capital expenditures below that if we can. We have the India facility which will be all in this year, most of it will be in this year with not only the facility but the equipment and we are finishing up the Nanjing expansion this quarter as you mentioned.

Actually, I did have one other question just noticing from my notes here and that is on the electrical products business I know we’re starting to run off some of the 820 rule stuff, things you’re getting out of and what have you. Is there an impact that we can look for revenue wise on an annualized basis in that business that will come out?

It’s been coming out over the last couple of years Scott. I don’t think we want to quantify what that number is because some of those discussions are still taking place.

But, we will see a decline in unit volume and a decline in revenue and an increase in margin which is what we’ve been saying we’ll have.

First on the Bangalore facility, do we have a sense of how many units on an annual basis could come out of there and what percentage of the market that might be?

No, not yet. That’s going to be a slow start up.

You go back to our Nanjing facility, we did over 1.2 million units last year out of Nanjing but if you go back eight or 10 years ago it was 50,000 or less so we’ll see. We’re doing the India project differently in that we’re getting out front with the brand and with a solid sales and distribution network.

We have quite a few employees there right now in marketing and sales and we are putting a healthy investment in to establishing the sales and distribution network and the brands identity. When I say healthy investment it’s not only the facility but as I mentioned earlier we’re going to be recording some small operating losses as we do that but that’s per plan and that’s going to generate what we think a very, very good return for our shareholders over the next several decades.

We think it’s the right decision right now. The beauty is we’ve got a balance sheet that allows us to make some long term decisions like that and we’re continuing that one per our original plan.

Then on Nanjing I guess I didn’t realize it was going to be finished this quarter. Does that factor in positively to the guidance in ’09?

I guess more clearly, do you expect that to have a positive impact or a big positive impact?

Well, we need the capacity. The old facility had capacity for about 1.1 million and we did 1.2 million last year.

We’re still forecasting growth in China. We’re not forecasting another 26% plus growth in China this year, we had a fairly weak, relatively weak fourth quarter and it’s going to be a relatively weak first quarter.

There’s a lot of things going on in China. The government’s forecast is 8.5% GDP growth, we are forecasting 6% within our business and that’s what we’re expecting.

But, we need that capacity. A 6% GDP growth will result in a higher – we grow well above GDP with the market niche that we serve with our products.

The facility will be done, we will not have it completely full of equipment. We’re only putting equipment in as necessary but we’re going to stay ahead of the demand curve.

So Paul when does that expect to be doubled in capacity which was I think the original plan? 2 million units?

It could be anytime we need it to be. We can be at 2 million units I think given the slowdown in the housing market in China, which I think is probably going to be a six month event, not a multiyear event, I think we will be closing in on the 2 million within a couple of years which is why we’re already planning what the next piece of capacity will be and where that will be located.

Then Terry, given those projects, is there a meaningful tick up in D&A next year? Is there an expectation for a number there?

Depreciation and amortization will be in the $70 million range next year so that’s not a significant impact.

Then given the China holidays rolling off are we expecting a 30% tax rate in ’09?

I don’t think it’s that high, about 27.5%.

I wonder if I could just get your outlook parsed a little bit by market? If I looked at water products, commercial, residential, could you give us a little estimate of what you think those two buckets would be?

Then, in electrical I know you do a little break down on air conditioning, and distribution, and pumps, maybe a little color on that would be helpful.

I can give you a little but not a lot. One of the charts we have in the presentation showed the commercial market for water heaters.

We’re expecting that total market to be off somewhere in the 10% to 15% range. I think our market assumptions are 140,000 units down from I think close to 160,000 in ’08.

That’s a rough estimate of what we think it will be. I’ll admit, it’s a rather fuzzy outlook right now so what we see is replacement business will be there, that’s another good news bad news.

It hardly ever grows but the good news is it is always there. Of course, right now we’re very happy to have that level of replacement business.

The commercial market on the motor side, I think will not have as a big a decline. We’re more global there, we ship product all over the world and there are some places that are still doing quite well so we have a little bit more positive outlook on the commercial market on the motor side.

Maybe not a growth element but not as big a decline.

What about the residential water heater market? Do you think that is double digit down?

I don’t know whether it will be double digit down but we believe it will be down. The housing starts, housing starts two years ago was 2 million units out of a $9.5 million market and it’s now going to be 600,000 units out of an $8 million market.

That’s pretty significant over the last two years. We had some of that decline last year.

I’m not optimistic on US residential marketplace other than the replacement business. People still will not take a cold shower more than once no matter what their credit card balances are.

The pricing comments you made, I guess three price increases in the whole sale water heater market and I think you said that steel is up 25% today versus beginning of last year?

That’s a rough number. We have prices all over the place depending on the kind of steel but that’s a rough number.

Is that 25% rough number a spot number or is that your cost?

That’s our costs which are tied as mentioned earlier by Mike Schneider. Our costs are tied to a trailing there months CRU Index with adjustments from that based on our negotiations with our steel suppliers.

The trailing three months is October, November, December. October was still a big number, it was over $1,000 a ton.

November and December obviously declined and I think our January number was down $5 a ton on the CRU, I just got that a couple of days ago.

So your costs, if all stays the same, will be down by the end of the year from where we are now?

Yes, the fourth quarter of 2009 will be hopefully a lot less than 2008.

And your pricing, I think you indicated prices will be up, you wouldn’t say how much but prices will be up?

That’s what we expect, yes.

So if that holds certainly your water heater margins should be higher ’09 versus ’08 I would think.

Well, it depends on the market and it depends on competitive pressures but that’s certainly our expectation right now.

I guess the retail pricing negotiations, aren’t they always sort of end of February when they’re concluded and finalized?

It’s typically in this quarter, yes.

So you wouldn’t say whether those are in your expectation or not but you must have a pretty good idea what’s going to transpire there?

I can’t comment. We’re still in discussions.

So we’ll get that feeling firmed up by the end of the quarter then?

Yes.

A couple of questions, I think you had originally guided to $0.25 in the restructuring charges in ’08, it turned out to be $0.19. Does that mean we have some spillover in to 2009?

Then, alongside that, are there any meaningful restructuring expenses contemplated in the $2.40 to $2.60 guidance?

Relative to the restructuring expenses being less in ’08 there is no spillover. We had overestimated what they were going to be.

Relative to 2009, there is nothing in the guidance for restructuring.

Then Terry, can you comment on what your cash contribution to the pension will look like in 2009 and how you think about 2010 in context of the funded status of the plan versus what that number would have been in ’08?

I can tell you it will be very large. I think in 2008 our voluntary contribution was about $15 million, we’re looking at a voluntary contribution someplace between $35 and $40 million in 2009 and a number that’s much larger than that in 2010.

Now, having said that of course, it depends on how the markets perform and it depends on what will happen to the discount rates but at least given the knowledge that we know today, we booked and you can see that on the balance sheet about a $200 million plus increased liability on the balance sheet which we have to make up over this seven year period of time. So, the required contribution to the plan next year is probably in the $7 million range but if that is all we would make we would be looking at significantly higher contributions going forward.

So, our expectation is we had $15 million this year, we’ll have something in the neighborhood of $35 to $40 million next year and something that is significantly higher than that in 2010.

So in your operating cash flow guidance is that increase in cash out the door pension of $20 to $25 million ’09 versus ’08? Is that in your operating cash flow guidance?

Yes, it is. That’s in the $150 million guidance, yes.

I just want to make sure I understand all the dynamics in play here, when I think about pricing Paul in the motor business ’09 versus ’08 you talk about steel a little bit, can you put how you think pricing is going to evolve for the full year in context of not only steel and the lag you have but also what’s happened with copper? I guess I’m having a hard time being convinced that you’ll see higher price realizations in motors ’09 versus ’08 all things considered?

Well most of that business is contractual so we move the selling price to our customers based on the same indices that we buy steel at. So, we essentially protect ourselves on the upside and the downside there.

So, as that moves, we ought to be able to maintain essentially the same margins. Now copper, yes we’ve got a lot of customers that have contracts with us, as Terry mentioned earlier, that are significantly above the spot price and we have some exposure on our own that are above the spot price.

We don’t talk that much about what we do no hedging. I think it’s safe to say that we have hedged over the recent - starting last spring when copper got up to $4 a pound, we were not doing hedging at that point, I don’t think our competitors were either.

But, as it started coming down we have consistently implemented our hedging strategy. We are not fully hedged for the year, thank goodness, so we will be in the sport market from time-to-time.

The majority of the out of the money contracts that we have are customer specific and the customer is bearing the risk of that and will be paying whatever the copper contract price is.

You mentioned I think, in your prepared remarks the growth in the water heater business in China was kind of 11% in Q4 and it sounds like embedded in your guidance is an acceleration in that growth rate. Can you talk about the logic behind that?

Then, how much you anticipate your China electrical products business growing ’09 versus ’08?

Well, I think we’re going to have a weak first quarter in both businesses because there’s still a carryover from the weakness in the China market in the fourth quarter. But, our expectations and we’ve got I think about 12 forecasts out of China from various people that we’ve been massaging and looking through.

We’re going on the conservative side of that and expecting a GDP growth of about 6%. Our volume is typically on the water heater side about three times that.

On the electrical products side it’s typically at about the GDP growth. So, year-over-year those are just kind of some rough numbers that we should expect but, it’s going to be a weak first quarter.

There’s still an excess of available housing but the government’s got a stimulus package coming out and they’ve changed some of their policies relative to residential housing that are going to help us quite a bit we believe this year.

You commented I think as well that within the water heater business it appeared that your out the door sales were trailing below what the normal replacement demand would be. How would you characterize the motor business in that regard and how would you describe overall channel inventories in the motor business as well as we sit here right now?

I’d characterize it the same way, we had a horrible November in both businesses with an incoming order rate that was below the replacement market. I think channel inventories are in good shape the problem is the sales out of the channel to the end users are significantly down because of the housing situation.

So, we’re off as I said to a fairly slow start by the OEMs, a lot of them you can go on to – some of them have already come out with comments this year publically and you can see what they’re saying. When they keep a factory down for two or three weeks additionally, that’s two or three weeks we don’t ship motors in to them.

It’s not going to last for the rest of the year, there will be a pick up. That’s why we typically build inventories in the first and second quarter, is serving the growth in HVAC and pump markets that we typically get in the spring time.

It’s just getting off to a slow start.

Maybe we can just talk about Q1 now looking ahead based on what we’ve seen in Q4. For your inventory depletion efforts would you expect the overhead hit as you reduce production days to be as great in Q1 versus Q4 or will it be lesser so?

We’re going to have a little bit of absorption hit but that’s good. I mean, nobody gets in trouble for doing that because they’re generating cash flow.

Again, another advantage we have to be able to take a long term approach. Characterizing it Q4 to Q1, I think Q1 will be better but I don’t know how much better at this point.

Terry, do you happen to have at least a rough calculation of what absorption costs you have in Q4?

No. John, do you have any idea?

I don’t.

On [EPC] side, my recollection is it costs $2 to $3 million.

And water heaters not as significant?

Water heaters is not as significant.

Then if we go back just to the contribution of pricing versus volumes, was the price cost curve actually positive in motors during Q4?

Q4 was our highest cost steel by far as steel shot up in July, August, September. That was a one-time event Mike, it was not good.

We had these huge steel costs at the same time markets were declining and the spot market for steel was going down significantly. We think we’ve got that balanced now.

But, Q4 was we believe, a negative anomaly that we don’t expect to see come back again.

And it was clearly negative in water heaters, correct?

Yes.

Then as far as the declines in water products were both commercial and residential down double digits in units or was one down materially more than the other?

In the fourth quarter that’s true, they were. Commercial was down significantly in the fourth quarter and we’re expecting it will be weaker this year.

And what was the pricing contribution in water during Q4 so we can understand the price volume mix?

My lawyer won’t let me give any of that information out. I’m sorry, I can’t do that for competitive reasons.

Just this question for you, I know that in the water heaters business particularly when it comes to the wholesale distribution side that the number of price increases that the industry has kind of needed to jam in to that channel the last couple of years has you guys thinking that there’s a market share opportunity if you could maybe buck that trend. So my question simply is my sense from speaking with you in recent months is that you would like to be able to actually take some pricing off wholesale distribution and maybe other areas.

Could you talk about that? Conceptually what are you guys thinking on that right now?

I don’t agree with that you said at all to be blunt. We have been on a kick to get our margins up there.

We will not be utilizing price to do that. We have a major program on service and quality and features, new products, new high efficiency products and that’s our focus to grow market share.

But, we are not going to use the P word to do that. It’s going to be by being a value added supplier and somebody they can count on.

It’s our intent to continue to get margin expansion there.

Thanks everybody for your interest in the company and as always feel free to give us a call any time with your questions.