AOS - Earnings call transcript Q3 2017 | A. O. Smith Corporation

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Operator

Good day, ladies and gentlemen, and welcome to the A. O. Smith Corporation Third Quarter 2017 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. reminder, is a recorded. As Instructions] this being conference [Operator for introduce Patricia and I to host Treasurer. today's Relations would like Investor your conference, President, Ackerman, Vice Please proceed.

Patricia Ackerman

gentlemen joining Thank Kita, thank With Chief and Chairman me call third ladies and Good the you, call. and Financial in Ajita James. results conference Officer. you on us John are for participating our Chief XXXX morning, Officer; and Rajendra, Executive

comments different. others to with Ajita's one to cause queue, release. morning’s that turn. remarks, I will among to this risks yourself like press include, that during you the constitute your forward-looking in answers begin would please as limit one in some statements. and actual statements remind materially others, courtesy a conference of the that risks These we to this results Also, could to that will including question made be to forward-looking Those Before call, per subject are follow-up we be question matters have described questions,

have you turn the who queue. Ajita, to remarks please multiple begin rejoin now his over call Slide will X. the on I will questions, If

Ajita Rajendra

in driven for America. growth and Thank good double continued sales and quarter North markets morning, for in end positive our residential demand by was heaters the and gentlemen. you, digit strong water consumer products third China A ladies and Pat, in boilers our

and negligible product had Smith sales grew Here doubled. to to air year-to-date highlights. were fluctuations O. XX%. million. a in impact nearly revenue treatment branded A. few the are Sales purification sales XX% quarter. up grew sales XX% Currency water third China $XXX

quarter our in XXXX. per share So were record per share at setting XX% earnings higher than earnings third $X.XX

softener family, to the treatment Hague our in platform. to strategy work in acquisition company U.S. through water early grow delighted based O. Smith water our are the team Hague September. squarely acquisition of the fits our We to on A. global

bring products high experience as opportunities, us about network. Hague’s Hague's the quality are innovative water global excited quality as We and dealer well

of We our We nine to continue approximately announced review XX%. return to to year capital July. months portion dividend The million. the O. in a Through Smith year. X.X we million first annual earlier $XXX and five shareholders. our compound of dividend of XXXX, S&P repurchased dedicate our cash to is a for shares allocation XXX this growth rate increase A. XX% our over joined Index the

honored to this prestigious U.S. are We group join of Company.

X. significant year beginning a is inclusion milestone details will rich our John now with Our Slide company’s history. number describe more our XXX results in in

John Kita

than from million third Sales of $XXX earnings $XX million the of for the XX% XXXX. Net increased were in quarter XX% third higher previous the year. quarter

third X treatment Slide higher was sales steel third and sales demand action action X, in earnings one with drove approximately North earnings quarter $XXX in increased The tier Third primarily sales factors actions pricing to by driven installation by due cost, boilers, in and related pricing increased including of increased was volumes consumer higher in increase boilers and China. North and tier with comprised sales. compared These offset pricing to of partially and XX% Hague sales as two partially than residential heaters to segment the our primary the led were China world products, On higher same in North America with operating million share of product and the Rest Cost higher with installers to added the from higher cost. of increases. for pricing earnings were North water water America higher steel million sales SG&A region, in in had million $XX X% incrementally sales XXXX. the treatment of company’s due prior and primarily $XXX water higher America XX.X% the water year. Aquasana higher of and of X% of Rest paid and to segment steel products water retail quarter of were purification actions fees the by quarter cost to U.S. water engineering increase compared purification sales selling, XX%, three sell treatment cities air world segment expenses. our improved dives of American increased administrative to $X.XX XX% well heaters parts of compared treatment and XX.X% The higher margins of Higher as year XX% steel higher weaker air last residential compared million higher XXXX by outlets products XXXX. compared per year. to cost. quarter expansion full offset China the of ago. XXXX. and Sales earnings increased development associated our million with general segment $XXX segment

compared these was due segment Third X.X% factors. X.X% margin to year quarter to last

corporate expenses were than Our one ago. year lower

was year. working last $XXX the benefited the tax to XX.X% provided the XXXX million for income by primarily ago during nine effected more was with year, quarter Cash third by the Our outlays earnings experienced during more by $XXX XXXX due rate effective capital. the rate a of first million lower income compared was rate operations state during $X.XX provided with higher than effective the rate Higher The offset than the prior XXXX lower compared results taxes. in were XX.X%, year tax months share. third quarter per

Our liquidity position and balance sheet remain strong.

third the at ratio end debt-to-capital the Our was of quarter. XX%

totaling million balances after-tax $XX potential our million. end and plan out flow water the earn the a based of the a quarter. million cash the We acquisition PBGC to of Hague, position our continued during in at $XX a company is plus $XX.X quarter million $X U.S. of million to quarter. cash to as third $XXX We and approximately a have was net approximately Primarily, of escalating The completed our made softener up for located premiums, of contribution cash strong flow result offshore, million. third we voluntary pension cash $XXX impact

we our share increase several XXXX The XX% range nine repurchased of During common our the This EPS approximately total EPS $X.XX guidance EPS Approximately first of increased September. authority per guidance Please XXXX XXXX, of by represents compared between with for $XXX months results. share. million our shares to end existing million. X per on our and of remained stock XXXX repurchase we morning, the turn shares Slide the the $X.XX of at X million X.X at of options. $X.XX of for mid-point in with mid-point

cash XXXX generated be the to million, in $XXX in which from is lower expect flow approximately operations than XXXX. our We $XXX million

to earnings We fourth the outlays than in flows also in working the capital higher for larger expect of higher due anticipated quarter XXXX. cash XXXX but

with cash construction Over generate $XXX programmed of manufacturing compares the in two-year period of million, air and expect we facility XXXX water of the which operating flow growth treatment million support XXXX Nanjing from in China. approximately on We to these to to products a XXXX. during new purification $XXX XXXX, a strong XXXX in to

quarter $XX $XX XXXX expected approximately capital Total plans XXXX for cost second of about which of to this will in to is the plant. Our $XXX facility, million million be include related million. production the begin spending

million amortization XXXX. in depreciation and Our approximately is be expense $XX expected to

million $XX decline discussed, XXXX, in As expenses were implementation related approximately to projected in XXXX. ERP our previously $XX are and to million to

and a Our our expected corporate Take be to million studies. market slightly commissioned Corporate and Hague. note XXXX share expenses higher due and as treatment water interest Center in the repurchase million that $X approximately will rates, XXXX, expense than be primarily of our activities of other and result expenses approximately higher higher Technology acquisition in XXXX, that our in Aquasana $XX million are higher $XX to

federal proposed income Reform Act plan, we per profits reform final mind. the to from of plan We total or the reform. federal smaller share elimination due effective and XX% in to to O. net hear XX.X% the $X.XX tax taxes. couldn’t measurement result in over deduction less could the in on We XX% approximately the expected top tax in our impact tax state the XX% recently significantly million than rate XXXX, of Depending income income be would and lower based our derived income an lower expense credit estimate of from and Tax Approximately tax tax the XX Our are believe on rate The to tax form President’s cash primarily associated proposed combination benefit taxes. of Smith is tax benefit rate XXXX, lower A. by XXXX repaid approximately one-time manufactures tax of of federal the XX%, earnings. creation differed U.S. the the state with

in million repurchase XXXX, a our in shares expect of to amount XXbX-X the XXX approximately plan. under We

will be I our the back for expect XX. our business our XXXX growth will now shares XXXX, We Slide Ajita assumptions outstanding million. Ajita? in diluted on will who guidance, and $XXX.X summarize turn the beginning average strategy call approximately to

Ajita Rajendra

you, We for Thank year. growth the project XX% to be John. to revenue between XX%

headwind year, this year. Lochinvar and up of by first units softener price water slightly sales electric X. from year anticipated the and water last the of gain. global, be nearly XXXX, products on million to demand. depreciation We be as Chinese in January new XXX,XXX residential market of includes U.S. to will quarter over commercial full This in sales, to were Including earnings. will this of change pre-buy X% $XX sales Hague the heater product first new industry Aquasana accretive $XXX and volumes heater this to in advance project share million treatment related expect grew XX% in assumption project sales XXXX We demand expected compared an months months of approximately America to in solid increase could and driven North due due expansion to third demand XXXX, million industry sales. tankless We for will well product filter our segment, America higher as branded and construction $XX water be Specific project approximately the XXXX. be water increase nine in North year will volume nine units strong year nearly Aquasana units. in and a resulting regulatory effective we boilers replacement driven primarily XX% X% U.S. currency for XX% we

Lochinvar XXXX. of in portfolio total to grow X% the over products branded expect We

As a for basis the August. us products lead approximately our effective margin to XX% steel grew late sales U.S. currency the XXXX over treatment. increased our we These expect in from our similar the margin of of rest of heater prices despite North result China XX.X%, segment be X% majority quarter operating margin costs, operating of on to water our segment, to in expect rising full by to factors we North to point growth a third Specific America and water XX year. in headwind XX% world American local

heater profitability improved India in to our expect in water business. due We scale

margins the of We and last margin expect in in year. full year fourth China quarter flat resulting improvement approximately to in XX%

now As similar we operating a margins will expect of to result, world be year. rest last segment

growth company companies. we cash well potential X% poised continues future. concludes Our advantage boiler America That acquisition Especially value, questions. model and are positively remarks North uncertain O. assume organic us we our stability, organic and return your and XX% amongst heater volumes strong for A. water with strategic to economic markets total now which we Smith prepared approximately balance growth sheet differentiates available shareholder as other our to these stable our of a times, and as the growth allow for to believe in we represent of believe have adds growth industrial shareholder. that take to Coupled replacement foreseeable defensive

Operator

question Instructions] from from first Thank And comes Matt Alembic Advisors. you. [Operator Global our Summerville

Your line is open.

Matt Summerville

on want I morning. good couple questions you Thanks, China. a to ask

water to You in more treatment for outlook numbers you performance I Thank little third those products how commenting is could you. the the full year mentioned if was give specific performed business and heater quarter China legacy in QX? then purification, and the the some wondering a also your on year-to-date what in during detail while

John Kita

in XX% about expect And the up up the local we be So, that in local and currency of XX would it’s water was range after XX%. more Air to expect touch, XX% the was purification year-to-date going is about quarter so what in treatment is or – up to the year would was your be Didn’t more for last was something else. double year-to-date it we double quarter in currency. it year. and than than for

Matt Summerville

water Yeah, performance heater the legacy QX. the system business China in in in

John Kita

QX, I it electric when gas, about at X%. up was look X% and probably or

Matt Summerville

distributions purification to China year quarters in in snap going next many you how may the least the outlets final at off where added of where back you’re bit less treatment, spend Got the over that it many in of bringing some product, see you question, air and margins water then talk you been then the you just in would and with couple X, can associated Tier mentioned in with of And to currently, how a World? Tier one about anticipate be that X, how back they is spend QX have pretty should Rest last relative that’s evolve or at meaningfully so. why in to we are

John Kita

sure. Yeah,

X and margins water quarter in all quarter for outlets. the investment also and in yeah, truly almost example, that were the third For treatment that points new in the down the about margins was retail engineering and decline acquainted

important in I on some will we slow all comment, as aggressively we’re the it approximately – the We think then that last next have Ajita XXXX guess we to zones we of stores are couple about years we growth two have because cetera. pretty will look years. building special been and et at XXXX over

Ajita Rajendra

Yeah, just opportunity going went build our of out two years would faster I because the we the we’re would have I slower said been to if ago, and we rate think back we have see longer term. think

John Kita

we X,XXX two last had outlets almost if the you stores, will Yeah, years. XXXX over about

Operator

question Robinson comes SunTrust next our Charley And Brady Humphrey. from from

Your line is open.

Charley Brady

get step little Hi, down with jump margin I pretty because the QX just on margins to it’s up the thanks. clearly and overall what in I World of them guidance implies Rest a of largely the want big China, or going declining guidance a of big a certainly into out just kind of engineering you cost or essentially and this water but coming function is that lot a a that is done that’s or treatment took hit bit

Ajita Rajendra

volume volume look we highest to also. quarter. highest would quarter, the at this expect always fourth when year be our that So We that’s the

and going combination as a lower. cost couple the down So percent SG&A not to with of a the We that expect would being we are high engineering as of the being high, contributions. advertising as being points get be will SG&A is not and high

that and over comfortable clearly the second third quarter. and are will talked have were the be and lumpy in lower spends be those they fourth they We years quarter in the could we

you I are think So right.

new higher and we introduction – get but little we have a We are comfortable fairly the the from electric will aggressive favorable unit think then SG&A, estimate. volumes, with quarter mix fourth with a new we lower of a

Charley Brady

that you pulling little in of Oaky you bit expect a top stuff stronger – stronger Did forward is is maybe QX on and then pretty implied I just on guidance. underlying Lochinvar you margin or North pre-buy America, guess that the the obviously you mentioned line growth growth – why kind are it’s of that is sort in doing some because good? is just that

Ajita Rajendra

Yeah, and be Lochinvar we up. expect to

nicely up to in residential the be expect quarter. We fourth

happening on the regulatory on buy that’s changes So two do electric then the commercial. the expect those pre some and we from units

sales fourth be a three in up combination all quarter. zones think of nicely the we will it’s why that’s So

Operator

our Eisner And Samuel from question comes from Goldman Sachs. next

open. is line Your

Samuel Eisner

Hi, how it’s guys you? Sam here, are Eisner

Ajita Rajendra

Sam. Hi,

Samuel Eisner

going on on Just there last guys Lochinvar by about? benefit any on there the this the saw also pre-buy you to them then quarter anything want particular that – back the that you the you in in can is the was comment given pre-buy, just and define quarter, guys performance going that question there

Ajita Rajendra

put X. September mean don’t already August I X, but I guess in we pre-buy, so was that Well, I think – any price you I mean increase mean by September tell I the by will was there residential strong, in been

But their up pre-buy if you had have a September August any was Lochinvar so residential was will, I no. and business happened in quarter, greater think boiler strong mean would we So XX%.

business, about the that their and a the almost their break during we They was up X million was of they but of X to reflection XX, $X X.X.million that’s a that’s clearly smaller then out, is order And from is non-condensing You big residential that a X high into quarter new product that their over was to distributor. digit historically single commercial three talked points the or China that have million up helped pieces, in and did well a add about condensing large brought that double boiler so have which and their BTU. growth. which

We are through also in selling China that Smith product our operation. A.O.

that XX expect product $XX year XX We will this China. million sell of it with in and or

sales about that and growth grew they the had up year and about certainly are talked just they quarter, we comfortable a grew we Lochinvar the very So are earlier margins, portfolio. X% X% with very pleased good they we year-to-date significantly in are

John Kita

also building, we for existing the presence global product results, especially have this as the that opportunity leveraging global and in that Lochinvar demand reinforced in that capability product being Sam think it’s the I quarter, our and And country. the various but and us with distribution

Samuel Eisner

term, maybe long over maybe a seeing of of transitory that below XX% Got nervous it, that the that of out term that’s kind guys we continue Rest guys that in long bit spending. Should Tier on helpful second X that on be you view. your World kind called you certainly XXXX? segment, Thanks. think Is of you growth little XX% the then and is should that’s quarter of are part and and have into rate the X kind Tier the fourth about, a that something and looking

John Kita

going U.S. of matter fact about with grow model, they an and as basis on what year-to-date, annual growth never Ajita up I said you we as have can and guess about think up our we mean I right are I mean that add, the XX%, XX% dollars Well, are have talked quarterly to XX%. say we of can I will we and have they

that to comfortable percent XX% for be mean in plus are I they be achieve XX it’s the going it’s So we going to going year every quarter. and not local to currency lumpy are

at are basis. We annual looking

With quarter. very and and the we SG&A. Ajita We I hard mean out right think have some higher some be air are to third think specifically at in fourth that our spend, role said the ’XX purification we will and quarter slow are the less I in comfortable. we I we plan will respect at treatment even ’XX as as did the so that looking will water of now, look So mean spend, into stores the yeah, looking be in in we

Ajita Rajendra

think is I add, the am that a comfortable Yeah, growth China local currency is China said. year-to-year reinforcing with much is quarter we’ve to to are always sales very the one in that, vary not just annual what and holidays fact the make by And the we can in XX% driven going selling other. the different especially lot it from spending things like lumpy and that from which

So guidance may are perspective, but we an that each comfortable with basis on lumpy, from the that quarter annual have seem we given. very for year the

Operator

comes Markets. And Capital Hammond KeyBanc Jeff our question from from next

Your open line is

Jeff Hammond

Hi, good morning guys.

Ajita Rajendra

morning. Good

Jeff Hammond

on incremental of the growth has presentation be growth, or you acquired me the help in XX clear million to and is Just the think all there. XXs acquisitions, I Ajita, said that the just XX,

Ajita Rajendra

XX year of Hague ’XX. we from August of about we Hague the and is of course full because our Aquasana prior XX what and about only With that’s have and year didn’t over Aquasana had the incremental

water and the this total will America year So was North treatment XX incremental in the XX.

Jeff Hammond

there cash cited have ups supply from you know then down million, there? XQ, timing capital you anything took would that? we I driving on chain but working flow, think XX of in known looks you like anything that’s cash flow going kind And on Okay.

Ajita Rajendra

occur that more out $XX did first is that million planned the inventory to we nothing we treatment the the and move estimate. issue building XX water have Probably biggest that. are is, quarter other so our item pension but certainly of for so what the in then contribution, and our late ordinary. in quarter going that’s about not that’s the significant of most benefactor We probably second Well, had plus,

sales et very and cetera. with comfortable still We’re our days’ outstanding

Ajita Rajendra

demand to we’re that. so sure build anticipating we that grow revenue. mean of very in and I and other we want any is transition continues Yeah, out some lose well the because driven make don’t that In is to business that

Operator

from And comes our next Capital Markets. from Scott question Graham BMO

line open. Your is

Scott Graham

XX% only business, Yeah, I hi. point, the size be promise. reach number morning. away maybe Last that two to with world you to question but given going world Do essentially than of kind think internally? of nothing is you. I’m – At the teens or rather on gauge want will of XX% difficult low Good on obviously or trying a thinking one question have rest large some number business which be just we’re growth for there wrong a year maybe your thinking that’s the

Ajita Rajendra

with it to million And dollar comfortable the you year, what am and a of were order of business we okay. periodical from we have. say that $XXX going I magnitude which are perspective, now be every are outlook says billion revenue we new

So for comfortable. we future, the foreseeable are

that little, as turn see we’re know. is a down something say that that we soon let you have As will going to we we what to

we will that our to sure make that We investors. communicate

Scott Graham

Okay. Thanks.

John Kita

continue we treatment consumables, when air I Scott, purification, you am toss it’s million. markets now about the to franchise China, predict $XXX growth still and I and a over water are See in have our businesses significant grow you XX% treatment, Clear in pretty significantly. mean add water those on growth expected add

Scott Graham

is of kind saying. Yes. what So that I’m

Okay. but term go intermediate for That’s the right? if fine, you

Ajita Rajendra

into it categories. to and get into distribution our talked new Yeah we’ve and new is strategy is categories, also about part brand to of the leverage as getting

same okay. not the incremental bring portfolio So year, we’re counting to businesses every on growth us that just

China. in of we in that the get terms balance that leverage to right and we the infrastructure time into So to have it

Scott Graham

it it is also results five very numbers certainly been – months business, my is not both we last have And might little looks the last about U.S. like bit were come second but actually driver the driver, the a fourth a of primary numbers we in residential of six over – strong a the XX% Those which the as really down and good. months, pretty Understood. are across is five construction I field sort quarter you at wondering sort are going go I And looking least sales sort of margin of probably if the not American you to at North quarters you North know backdrop how and that guys agree any and operating looks America far on operating here, past, just next like trajectory. that, quarters, for just the the sales would that margin pretty can but that? the comment with really fourth or just looks of question the look good quarter, market. you you couple

John Kita

Well seen I I strong didn’t we it’s residential, guess XXX,XXX said relatively about in strong, growth see we’ve probably units.

on million X.X that’s again units. Now, of base

that’s gone next so it’s year So so. any? leveled we’re quarters off continuous it quarter seen Ajita say a as plus and we that yeah would we quarter. appears fourth X% fourth a And with does benefit up looks it’ll so again up like be think it about which we in year-to-date dramatically standpoint. what as that go off the margin, which have or would in tell continuing. but some look of has X% or in have I we by haven’t the last from that optimistic stabilize.You leveled you steel it know America kind North it the much if decline, a because I strong, think is Commercial of that the up – you that probably be was seen been X% three I

Ajita Rajendra

summarizes I that think No, well.

Operator

question from from next William Lawrence Blair. our DeMaria comes And

is line open. Your

Lawrence DeMaria

million, to but clarify, just of we have sequentially morning. $XX good margins it thanks, the two you’re record looks questions, increase Hi, needed first, world projecting. million I rest in EBIT get like to $XX

SG&A, X bridge volume engineering clarify, rest and the around that is slower is we just Sounds to right right? growth and are getting in reduction a that like then the million is

John Kita

engineering SG&A down of down be won’t I going will think is say at $X We right. couple million points. that

volume so the have some contribute. of get to also costs we stabilized, material think again going will then we’re going get compared will last to net raw that’s material. China even we price in price benefit to some We And have benefit

from there. electric So the those a up of units. favorable are throw are little bit kind that pieces then major mix get new pieces the the you of Those in the

Lawrence DeMaria

the XX% Okay. Thank do margins about incremental about the you. Should the fourth of think without over forward? to And rest then how going world, any we in start staying exception you of can annual moving secondly, quarter do scale the be get incremental are and look base at referenced, infrastructure you rest good we which have now world, XX% there? in scale would as you not over leverage of businesses smaller think

John Kita

not am incremental. a different XX% you you said I said you numbers, sure, two said and XX% then

Lawrence DeMaria

Over going forward those in are since scale and XX% an incremental getting annual on infrastructure leveraging basis you businesses?

John Kita

a as be we I forward. India We intention getting in SG&A shot and becoming world volume the Well, India I’ll it. loss going think our with it’s of take our yeah to leverage a at China’s for to want it’s reducing ultimately clearly breakeven and should the same statement more rest Turkey. And then Turkey of combination a we margins, profitable, say, capital

the put margins. objective certainly go any rest We it’s our have but not to world try out to of specific objective

Ajita Rajendra

than so the the And average incremental put out not margins we better have be certainly number. will but

Operator

from next Research. question Longbow And from Aurand Robert comes our

is line Your open.

Robert Aurand

thank impacting your Dave in extent what downfor today. Stock Robert heater competition increased McGregor, from water Aurand your domestic the China by you. and Hi, results? manufacturers business is

John Kita

Look, you would the as market growing seen top, the there know fast as it’s it’s been gas of more competitive. not We’ve always in city. competitive been electric we which say because the happened always is I’ll distribution continually in assumed

was and three good but gas don’t have to it’s the a in a probably happens. said years would electric stronger we have we to and that a have position us much So sure market probably if electric. We go we’re Not close if position asked would ago, – in XX%, leading it’s was we’re further going XX% you flip in but gas now.

as don’t dynamics much be So by being said, the this year and think I in us gas. going that is but water it’s all the led heater growth competition the that there’s marketplace, to nice for

Ajita Rajendra

that to in John happened the competitive. to happening. are type that, have about yeah just not – always back on said a little changes China talked more color the overnight environment, market the is competitive I’ve know to very, very question changes going your add You From evolutionary China

they’re players business. in You consumer all world and of there and in bringing being got all branded very the the major in competitive new a products appliance

of it’s been So none changed, always has very competitive. that

Robert Aurand

And question over get aren’t real in results flow Okay. I impact throughout trying down, on year China, that the moving you that major a you. of cities bubble, stay market new guys your does really just there, you that I more think property there, cool there the mean kind the one impacting are about extent to forward? Thank mean do just what

John Kita

in estate investment real two the we sales, that that tracking limp is really the a have for about as don’t or of recent because build for think and not news of We the the market. that’s here primary with a It’s show replacement what property you month, good of heater – about is a replacement. slowed. the going what just us failed market good not. or sales have sense leads. don’t outside one forward The water component know replacement replacement ultimately is does that news that’s ultimately makes as is X States, we million you in know the X-X is The data we’re a kind closely Well you we’re Chinese. this tracking which still bigger build, really becoming And

it’s So China we in developing. nowhere that near are but

products we some differentiates forward, as heater in going water not. have we or of think be growth your gas think which best are answers able from both electric and we the Is still look we and us. segment to I to So question that the

Ajita Rajendra

is it’s reinforce coming of and think headline a know a out take of policies you the congress those and longer or based term it I drives party urbanization, the which this you completed growth perspective that continuation perspective, also drives consumption and a you our And just form us completing you China at macro know macro week latest strategy. things help more really look communist if from

Operator

our comes And Andrew from Research. question Northcoast Cohen from next

is open. line Your

Andrew Cohen

in online this water is my When couple have answered but cost or great it quarter, of going comes small basis? roughly margins Hi, as be second questions to always. is quarter the going just ones on been affect of to Most materially same that treatment. a plans

John Kita

going initially through operation, we are Well, going process mean, certainly mean going a quarter. we not new moving we’re moving be it pass news the ultimately we higher the offering the of half far right efficient will, much now. inefficiencies the certainly the first plan. the The think it’s It’s some is more a the good moving and quarter. first first year, plans we’ll news we I have – in we’re year. good I ultimately will are significant planning to for probably is second have to but But our have but and we second depreciation

about in planning hiccups through possible talk we effect we’ll XXXX we’ll for year could talk I and So and process our there could more year there that on marginal some early not that But think into get significant. when have the end. but full

Ajita Rajendra

team entails this in in the are are factories now. you said the And months have factory. factories. designed doing at which will benefits same into operational from new building new fairly to this they to productivity. the see we’ll we’ve it terms know depreciation very obviously that factory they time, in higher just Yeah, operations significant as But able moving – John of this in and we more constantly China potentially new expanding is But because used to be three define

So we see both.

John Kita

And we real that’s we’ll know to in that get XXXX later XXXX into you expect and when see certainly benefit.

Andrew Cohen

Great.

portfolio but is Hague just set small rest much the of probably sold based or fairly it this pretty also is U.S. question world products. in over be a Second acquisition, to of it’s going

John Kita

And in it’s which bucks you in have is sales a and months selling as necessarily sales, six manufactures, been Yeah, quite that we the for And Hague they and there looked nice sales water we’ve know manufacturers been a to guess can million make March, been in April. that. those it’s OEM China important have Hague U.S. probably in all at heaters one they a the softer we over softener. and in and we things that the the look feel way. water of successful unit looked for China frankly over water of us agents market the started And we attracted was and think of compact for I about and I

So new really we are they in optimistic China. the can benefit that provide us

Ajita Rajendra

softener O. Hague, is in made by are Hague, these know branded China. A. you selling And Smith water

John Kita

Yeah.

So doing, it’s we anticipate saying, are not now. something we happening it’s

Operator

Scott BMO question next from from our Graham And comes Capital Markets.

Your line is open.

Scott Graham

hi. been and Yeah, point heater strong sort residential water you residential asking? I that shipments John, to making very cut just that of was that is I I guys been I right of fairly pretty wide okay. – off next suggesting that just but the gap have couple was your could am before that construction be overwriting the has are was quarters strong, hearing Is what from now seems be

John Kita

again understand what I units, Scott it but And million you better goes that think. to X over, of back I is haven’t just X.X been replacement.

X.X bit, that units. XX,XXX little might So on and you maybe margin know up add XXX,XXX completions are but to a the

have know I have You rest you know that XXX,XXX of and driving completions XXX,XXX some don’t and that you because know year units up you growing not, that’s million are this if probably million that to is what and base I get mean? partly I the is So think but but that’s replacement. I units, you of what’s X have X.X

why that’s say. trying I So was to

Ajita Rajendra

comment may quantifiable a Scott, saying. And is I not you guess it I make you touch but obviously and what which comment are another know try

felt and is know were ago the meeting meeting which weeks you just we good that annual you optimistic. know where. but there we you You things about where know of distributors of people quantify people all know a can’t was our ASA have where faced pretty I couple

Scott Graham

that. on thanks well Okay,

word my but I to out two other of and three of the your So rest time would the up and double you sorry tier I need I question for spending know spending. mean margin the tier am increase know weakness be, you guess don’t last called you here off in the the remember I

guess Number some two, investment, which you has is water the been purification bit? but incremental and markets can additional purification an there number treatment the are one, requiring completive, I that’s air of is or know the little water you this required distribution that points I talk about heater treatment my So understand spending? kind is twofold, question competitive of uptick either dynamic a different in versus

John Kita

share have we our treatment I’ll the to won’t that the take position. to support build the want invest lead water competitive water the environment to in for say one I market to distribution. is best treatment. guess has And products we Well, first changed, where out that R&D continue And I and going we’re

about it’s and we cities only talk somebody tier position from and three we that to helps know not two tier fulfill there online locations distribution because about. see want that we You do us to talk got

treatment. are our So purification, going products growing primarily the will market we’re the water we it’s to Air some stores we next we when that beneficial. out think leader, share think we’re specialty say we I’ll retail, that and new be be not year bringing have

so we’re and going out And in also investing portfolio. R&D that

the to when the talked one think XX% we organically XX% beginning I of EBIT is return. about not China of world, and are growth with about is the think but mention meet year, done I we want year, rest expect to did them that there margins we yes,

they give material year the spend where good a us. I a have maybe want we what So and are thought being impression, not they hurt we and not having year, to cost good than more the having expected are don’t what raw then

don’t that’s or having look anything a good we think the changing So strategic there you at standpoint need competitive our things. I really from and as year, is year a I

Ajita Rajendra

a think new when we especially had clients well. the And we do to consumer that’s and summarized a as advertising and know you business we branded in that just – things categories are And those that better it brand John into huge, the well we you some I – know getting like need things a which long comes feel known that said when categories. we is share we’re term water leader. very And and our in better China, to it and known new research come huge market potential these as in treatment has back get

And feel question to in From be I that. situation, see competitive So competitive a very like presentation, to the good a either that. about down said from earlier continuous it’s market material I perspective. a any or a we earlier up competitive change don’t it pretty and it’s

Operator

And Markets. question comes our from next KeyBanc Jeffrey Capital Hammond from

Your line open. is

Jeffrey Hammond

area Hey, just be in you that a some mentioned in struggle. taken was an Actually quick that a international inflection seems China, to and when call. along

internationally? can Thanks. are there, starting inflection change really where what’s you see to So an you to penetrate start

Ajita Rajendra

acquisition. did going type reason Lots we see What’s continued demand the market grow time lots reasons activation growing. then there the a good felt for think would to for what that of got condensing back condensing difference there in demand but time of mean are But is a that. Jeff boiler is China that non-condensing was we taken for cost, low that’s the that didn’t boilers we I be the market China. China energy that lower the you we did that but the key that, products we in is Yeah, I a efficiency memory, in for

in ways and very So products are two the which selling in market those for market literally we Chinese and fit are needs China conducive we some designed the products different actually China.

through them name. a set selling China and we the distribution. blocking in selling manufactured under China in also And then one wall wall blocking A. are those products, them manufacturing products brand We branded O. of Smith

those successful. So and both are very being –

So for change some it that them months is recognized was been it’s the non-condensing market saying for a design that there the we’ve out brought products, market and and last Chinese we they have successful. the XX-XX very products

very happy about So that. are we

Jeffrey Hammond

Okay, thanks Ajita.

Operator

questions. time, further this am no at showing I And

Patricia Ackerman

in the quarter. in several wonderful Chicago, Conference Boston. Sachs Have us Conference North you fourth Conference Please on City, on in for November November the that today. in Industrial in York Goldman we conferences a Coast joining take and November Xth participate The the day. XXth Thank New Baird note will Xth on

Operator

Ladies conference. program. This and concludes your gentlemen, thank in participation today’s you for

day. now great Everyone may a You have disconnect.

A. O. Smith (AOS) 25 Oct 172017 Q3 Earnings call transcript