AOS - Earnings call transcript Q1 2018 | A. O. Smith Corporation

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Operator

Good day, ladies and gentlemen, and welcome to the A. O. Smith Corporation First Quarter 2018 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. this being reminder, a as conference recorded. is And introduce for today's would now Ms. host to like I conference, your Patricia Ackerman, Vice President, Investor Relations, and Treasurer.

Patricia K. Ackerman

Good us and Officer; Chief first and Chief Amanda. you Chief the call With Operating you, morning, Officer; Rajendra, gentlemen, in Officer. and Financial Thank Chairman Ajita and me for participating joining Kita, results Kevin on and quarter XXXX Executive John are our conference call. ladies thank Wheeler, President

adjusted Also provided others adjusted limit also the presentation at measures on closure one the we question remind Ajita's this statements remarks, constitute some courtesy in I answers Before you to we in restructuring yourself per our a end to In operating results will during that subject These and this are improved results non-GAAP the plant associated our business, to among be Reconciliations like our the the made to begin conference actual follow-up that have of we with and risks comments forward-looking earnings, with in forward-looking order transparency impairment statement. this are will of into would including excludes materially measures, that the your turn. provided appendix to question please be website. described press questions, as call, to morning's to could risks and costs net queue, one in and different. Renton, segment earnings that provide release. share, non-GAAP GAAP earnings, that to cause measures from adjusted Washington. Those of matters include, others, per

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

Ajita G. Rajendra

positive ladies was by and Thank and in products market first in good North demand the sales morning, for quarter America. growth in boilers continued for China driven consumer end our and gentlemen. our you, X.X% A Pat,

net adjusted per per were $XXX few sales share our a Record highlights. earnings Here XX% of higher of million, XXXX. are earnings in than $X.XX share

growth our sheet. Aquasana cash allocation The dedicate approximately and review Lowe's increase XXX,XXX will of to to announced product is We our primary January. Hague, $XXX quarter shares our The using five-year and over delivered We continue during coupled that of the with proceeds this combination shareholders. down and the portion selected announced of August. and Lowe's rate XX%. the We a dividend Smith million our repatriated value and floating-rate our compound displays, the O. million. return improving tools proposition XX% We compelling dividend and a annual innovative the $XX flexibility capital over water to developed pay products, debt technologies, and to A. to our We in repurchased beginning for be over to in brand globally recent of merchandising balance at brand team. treatment accepted treatment internally a of our acquisitions month earlier water first

with our water and expertise relationship retail heater to very earned longstanding about are the of we We treatment expand opportunity and because water partner. vision, also our our excited

$X describe now sales slide John year. detail beginning our this results million We more million start-up million with loss transition costs to and in a expect due will $XX to in and $X X.

John J. Kita

earnings the over million quarter in same million XXXX. from for $XXX the XXXX. quarter in increased first than $XXX of Sales quarter the of first higher X.X% XX% quarter or were first the net Adjusted

and of improved by earnings XXXX. The of $XXX segment than from pricing decline added with sales heaters associated earnings. the acquired air quarter a to treatment of volumes demand Sales gains steel benefit of selling favorable sales, impact sales improved partially last Hague a same related million higher installation the other treatment contributed quarter million lower and of incrementally higher of sales. heater in to believe, North the of First new of from charges compared In currency offset factors X% in $XX partially as including and a engineering earnings to the were products, XX%, recently water China, with These in associated by quarter pre-tax to terms steel by XXXX. XX.X% volumes with sales. XX% year. boilers in same compared XXXX. and our products costs World by segment Adjusted year $X America of with were air last negative earnings of of were of quality due cost plant sales segment higher actions higher per segment purification boilers offset and XX.X% sales quarter exclude $XX air XXXX. pre-buy were the sales, in Rest quarter in with to million lower with significant increased adjusted On offset Higher and compared higher for Canada. in quarter Pricing tankless product steel $XXX input XXXX. World approximately adjusted price sales $X compared fourth the XXXX. pricing in partially increased Rest share $XXX same margin the America North and closing. well $X.X due XXXX were increased impact local the primarily increase, higher XXXX earnings higher and quarter earnings in compared $X.XX Higher Translation primarily first from partially China segment company's muted of in slide costs, North X% product the higher drove first as our steel approximately XX% offset the and added of million impact million actions with in of actions currency of XX% costs adjusted water X, approximately to increased in China million mid-XXXX, Aquasana million were America costs. U.S. sales in segment increases America first including of gas segment to we compared translation the North with quarter China. water expected water purification million. earnings by comprised

First quarter XX.X% was year lower of ago. modestly margin than one segment

in quarter Our slightly higher the compared our Corporate the same with Corporate XXXX, higher were at first to spending expenses period due Technology in Center. primarily

benefits. our first was offset and first and was rate share. by due year, of than The Washington, was Our heater in taxes, tax effective to last lower during lower tax during second primarily from which tax tax income impairment lower earnings after-tax per $X.XX lower move XXXX effective income the compensation stock-based quarter from adjusted quarter XX.X%. related benefited federal by with first XXXX and partially XX.X% Efficiencies rate plant. earnings was manufacturing of water the plant closure quarter the the will the reform, costs experienced income of restructuring rate Excluded The associated to specialty inefficiencies be third relocations by $X Renton, costs quarter. offset income million

working last Higher with provided year. from the approximately first in primary earnings were XXXX cash We of benefits the in same drivers in smaller expect XXXX. of flow operations million Cash the period $XX during be was quarter higher relocation million capital and a by used investment $XX compared XXXX compared $X with the during to million.

and strong. position sheet balance liquidity Our remains

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

million net and located position We million March. totaling have offshore balances cash the our at was $XXX end $XXX cash of approximately

compared authority existing quarter, the our a with remained repurchase shares $X.XX range XX% and X.X adjusted EPS Approximately approximately XXXX During per results. of of upgraded EPS on our This of of in guidance shares our represents XXX,XXX a first our we total a adjusted between The XXXX stock adjusted for midpoint repurchased March. share. morning, EPS $X.XX end at guidance million common of increase million. we with $XX the

guidance EPS plant per excludes costs. of Our closing share $X.XX

over operational our tax performance U.S. the XX%. by Excluding reform to improve expected is benefits,

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

for capital higher We this lower working and earnings outlays year. expect

spending approximately million. capital XXXX were Our plans $XXX

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

expected be spending due higher other approximately million the Our slightly XXXX, our expenses are to Corporate higher Center. XXXX, and corporate partially $XX than at to $XX in million Technology in projected

rate tax year due XXXX, U.S. than to tax previous reform. in approximately XX% the to income lower expected effective Our be is

repurchase shares to similar in plan, to the We in supplement XXbX-X XXXX. XXXX. approximately a under expect XXXX amount XXbX-X We our in plan of our $XXX share may repurchase million opportunistic with

be guidance, the We expect beginning XXX XX. growth for on our Kevin the XXXX, will and business average in outstanding our our million. summarize assumptions remainder XXXX shares Wheeler of strategy Kevin? diluted will slide approximately

Kevin J. Wheeler

John, and you, good morning, everyone. Thank

tailwinds and headwinds. for XXXX several outlook Our includes

expansion Boiler demand and condensing to and XXX,XXX heater XXXX XX% first product. our new units. grew includes in volumes in tailwinds. construction project continued driven residential assumption for replacement increase First, water introduced due tankless industry We solid by recently XXX,XXX units quarter demand. This to U.S. will boilers the revenues of

We business grow expect XXXX. in our approximately boiler XX% to

in result XX% a water to inflation on increase products steel U.S. a costs, and of higher As June. freight and price up in prices early significantly we announced heater other effective

to on heater products. expect We the of average price XX% increase majority water our

project China we XXXX, the While we rates compared to million depreciation benefit currency of of a in during a the sales modest $XX XXXX. now approximately expected previously with translation

purifier XXXX. our quarter, China And exchange in was quarter, China of year. including the our air The XX% remainder Our the during The year. loss million over the million projection in million appreciation prior at China in currently XXXX. to industry down loss $X.X currency modest rate is in $XX to we headwinds first India The expect in loss we in the XX% gains. decline demand an declined XXXX currency from experienced the which the first assuming include, of grew $X sales business is currency from

We have to be and similar business from year. million, expect reassessed to down and purifier to our lose our for now sales air last $X original XXXX expectations

purification expect sales to due to We decline the sales. the be second quarter China and pre-buy air similar first growth in to quarter

X% We expect XX% the growth now the currency local air dollars. the XX% over lower impact and sales, and up forecast to U.S. in of and purification in pre-buy

and at XX.XX% optimistic in million growth purification revenue the water revenues I'm currency treatment increase. the we about XXXX. new in treatment price to our translation for into business will incremental to the of prior over project approximately of includes to million, are projected We for growth manufacturing going be Our in $XX will movement impacts U.S. headwinds, which in majority between slide tailwinds our move water of second Combined recently of This plant XXXX China the costs of China will and result the million announced and performance approximately quarter the year. year $X in XX. Lowe's, XXXX. of the and and bottom-line of $XX approximately XX% gains occur air

XX.XX% and the of start-up Lowe's negatively the between water be behind expect second new China in as We to XX.XX%, impacted plant costs business. and U.S. costs the of performance year margins We segment treatment in and us. half the China transition pre-buy by improved project are the move the

fast-growing XX% high and China of basis our sales. business is its well our growth segment points in growth to result and to acquired I'm and represents to Rest continue to organically America products. to model due to products of China of its We be we consistent for as World to a expected moving last water businesses. heaters disclosure with higher treatment XX and performance, be XX Last As new rate the updated This growth recently now water it treatment is of consumer North than our strength disaggregation the we category mid-teens year. combined margins least quarter, slide China. points as India and revenue of at company XX. in with India rules expect basis water incorporate components

over water We business, and of and Lowe's treatment, branded revenue of million A. new expect of Hague this reach O. North sales $XXX America the composed Smith year. products, Aquasana will

in year last being the XXXX. Global make With our both sales to for margins year. pan-India water the water project we to forecasted now million $XX per Lowe's this we XX% sales and the grow XXXX grew America improve contributing enthusiastic India $XX by portfolio business XX%. distribution treatment treatment. Based to we water to heaters, project exceed and to future, made investments in have in North million, XX% million water and are over XX% and we are $XXX high-growth on approach about treatment to million $XXX expect

are As composed sales many boilers of know, products you heaters. and water Lochinvar-branded XX% our of approximately of XX%

products of remain with CAGR our sales Going forward, Lochinvar-branded America heater rate North water heaters. matches our our will XX%, Sales growth company's boiler separate piece water the our our model the of its assumed company XX%. growth of of five-year largest which revenue portion including at

we add as to remarks, water O. Smith prepared concludes X% that project market, take construction differentiates to America positively which poised Especially replacement Couple of of economic have new uncertain and with needed we model from be our us demand, growth our strong to allow A. return the The XX% for value expanded shareholder industrial timeframe. medium-term volumes, questions. replacement water now X%. and formation organic our household as your growth and stable Given at sheet strategic average for that our shareholders. North a well these acquisitions boiler that we growth rate and times, defensive we heater represents growth in heater and of support a to cash weighted expected potential model to That believe balance other we stability, are the advantage our our believe available of companies. continues

Operator

you. Thank

comes Our Markets. of Graham first line Capital Scott question the BMO from of

Your line is open.

R. Scott Graham

morning. Good Hi.

John J. Kita

morning. Good

R. Scott Graham

So, of to but I I'll have stay the format in and a get of your queue. back questions, then number two

that doesn't look American what's water residential of I for heater frankly, business, to has market, comes there there, has Could your business, you bit talk lot question the market it is little in me first growth your is like that been going flagship? of sporadically. mind primary been think which and some about a time, kind a North for which a is that in on that The growing

John J. Kita

XXX,XXX said, March. to strong, we very in interesting. then units this are January-February, up it go was we down as Scott, quarter And forecasting, was year. XXX,XXX to first the It Well, and

that's Our including guess Sears and strongest XX,XXX our us last by is units quarter. about pretty quarter primarily tankless. the first industry was up was for driven total, flat year's was We were with

the industry calling to as getting we and But to as they're The people, talk XXX,XXX. they talk was expected. When optimistic. issue on our residential We're for kind salespeople, The commercial So, biggest is very XX,XXX. performed up I of both optimistic. they're labor.

do it about, you talked if So the XXXX was pretty we that industry that's that X.X growth the now, But back. to hit goes industry units. And X.X if growth. look XXXX, in a we obviously, at million significant million

to going this decent million four five-year have seen now So growth. we over or stretch, X.X

R. Scott Graham

you I all because relative or two this understand just Yeah. I I here market, like statement? that's that year like are the guess, tankless? know and that to kind is point of your losing of more sell-through that you that. is to the I stuff. bottom that, X.X versus retaining line be sort talking was sell-in one me salespeople seemed saying share, Would and comfortable to in It off the as everyone a are at of a about but time, you months fair a to if same –

Kevin J. Wheeler

And was address XX% QX, in growth. embedded This strongest is year. that price over in that. XXXX, the Canada compare had of last which a when increase Kevin, we QX I'll and you quarter in had back that, add One that,

low-teens that put we're what to comfortable to together, share at you question, comfortable So new to your year. very and in our growing – in all forecast (sic) based that if share to some grow customers XX% is And it projects, feedback as to the or when tankless, and we're share. receiving California, XX% units] year, it compete in parts market. very low-teen of the sales about capture products being on And grew far continue where last comfortable in XXX,XXX the It It's construction-oriented. continues where and additional we're we we we look we're and capturing and very forward, with [XXX,XXX organization. primarily see as additional bring answer $XXX,XXX from market. this it's to have we're $XXX,XXX able share it's And you

are So comfortable forecast residential XXXX. rate overall, and fairly with its growth we business, its for our

R. Scott Graham

Kevin, thank answer. appreciate you. comprehensive it. I was That very

of was China's you that sure filtration, I'm around a though improvement. that release in even the quality air air around is question, sort text mean about of kind the were which the make thing? what And more you second and The secular was you statement quarter? didn't triple-parter, press than by more because days. mean why Is you on in that, the down that in XX% potentially that suddenly XX Could through market first the talk improved air sales quality a

John J. Kita

Well, a much coal closed you doubt. as alluded heard, what people, control the we've well was over to, down to without there and air on plants industry focus the quarter, XX%. was our locally automotive. a Talking during as improved as they more quality closed them They on

to anecdotally did talking companies it closing talking or Scott, that better air was also are that Now, they and no for et can't plants we've coal these anything. that we is disruptions not get quarter people to But heard not. that our the sure is manufacturing, sustainable, doing in talked way this we air is that there only units is will can this past explanation cetera. tell we've we've What quality better was heard, do the – driver. some everything other Because just consultants, create consumer is otherwise you, say the about in the to the the XXX% the and

told measuring come much a the there, better we're of sensors Now, doing we can PMX.X. put with job only again, better up we on is But explanation air you we quality.

R. Scott Graham

Thank you. Got it.

Operator

you. Thank

Jeff question of comes of Markets. from KeyBanc next the Our Capital line Hammond

Your open. line is

Jeffrey D. Hammond

morning. good Hey,

Ajita G. Rajendra

Good morning.

Patricia K. Ackerman

Hi, Jeff.

Jeffrey D. Hammond

Hey.

and pieces or Is can some So that of that? just moving just FX, there you walk mostly guidance other on price that? Lowe's, this increase, within are the kind through revenue incremental

John J. Kita

you the of majority think them. hit I

appreciate basis year, now, to expecting on it we're Last than RMB rates X.XX, little X.XX. estimated average. – X.XX X.XX. we a we expecting little XX from know was standpoint, are a about expecting over little X now when the points. RMB above And a a year closer to be were the were RMB to So RMB RMB currency RMB we We less

that's do million that we didn't you $XX in our have currency that, when about estimate. gain original So of incremental

know, you China down. as we Now, took

talked when XX% a And $XX million, point about at were we're that's air XX.X% due we're about to to look XX% now it X% you we down basically again, in we all X saying XX% difference, taking If That's XX%. that. to that's we're – saying to purification. January,

We expected was million, last year, $XX – air million. purification $XX

$XX to it million expect to this year. go We

and first million given Given quarter saying the second best. of $XX at we're kind the quarter,

you price And now. you we're Lowe's and XX.XX% that's why the And we the yeah, from that forecasting January then, we're going add negative. X.X% X.X% in add comfortable that XX% So had to to the business. that's to the

a and there's of lot So, takes. puts

Jeffrey D. Hammond

relative helpful. too like That's increases magnitude the in point? that, given much And I know talk don't of but price, Okay. normal, then just And at other of very size market seen water have the I to just on kind similar in are price what players to terms any of you heater you guys the guess expecting Thanks. from kind you this pushback? about

Ajita G. Rajendra

Ajita. is this Jeff,

we've we don't of in else pricing of terms anyone doing is are. and very there comfortable we what terms we on comment price. As We before, are where in said really out put our

Operator

Thank you.

of comes of Our the Giannakouros from next question Oppenheimer. Jim line

open. is line Your

Jim Giannakouros

Hi. Good morning, everyone.

John J. Kita

Good morning.

Patricia K. Ackerman

Hi.

Ajita G. Rajendra

Good morning.

Jim Giannakouros

World keeping your call on least out impacts touch the Can you're you margin mix takes to kind year? for puts lots and there of of margin rank-order leverage, guidance influences, or and marketing the year-over-year at expectations. clearly spend, But helping. FX Rest obviously, of there. Obviously, Just how

John J. Kita

the margin actually and, on correspondingly, are currency going up Well, the sales really have an the doesn't effect EBIT. because

we about we at India, we contributor. a be any we're talked effect look seeing When Rest certainly, to So World, India. of expect there. not

lose $X.X billion. lost $X last on this $X.X million million whatever, you If that's million year, you $X.X year,

points So, up there. we XX pick basis

million China from margin the purification that of as two to standpoint, things; forecast We be good of the expect new at loss $X a had even in plant. overcoming inefficiencies the least we air in and

maybe We little up bit. a be to expect China to flattish

flush comfortable we're points and last say, you I'd points XX year. why everything, is XX I thing from to through So, basis the when mean, raising biggest India, basis

Jim Giannakouros

XX give to we sense the the taking on tack life to of mean, us maybe Scott's I U.S. And math Thanks. XXXX replacement question, runway to two? your your an taper still the water if have it. expected on you XX of original we think update the heaters I for should if there. years just But on years of to in that's state here that cycle, XXXX housing can on and Got simple more going probably you think or swell recall, to next that starts, year

like thoughts your I'd So, updated hear there. Thanks. to

John J. Kita

Yeah, the water third heater studies seen, years, life is and I of independent average by we've say the think that done over parties, and XX they're increased. has all

take So of you figures you XXXX-XXXX, that the if to the early would out XXXXs. last look at

are continue up units. right we of also would and we the Now, this to tell that's we going we're but you start housing X.X XXX,XXX think don't year, grow that think starts to estimating completions number, housing the million

point, that. at future we'll evaluate So some in to but is the I have that, think have we'll when it's

Jim Giannakouros

Thank you.

Operator

Thank you.

next Robinson Our the Brady question Humphrey. of from is of Charley line SunTrust

open. is line Your

Charles Brady

Good morning, guys. Thanks. Good morning, Pat.

Patricia K. Ackerman

Hi.

Ajita G. Rajendra

morning. Good

John J. Kita

Good morning.

Charles Brady

Just start QX we – deal, there August. or going to ahead so slip all on expect have to you QX the into costs be into run and to that's that those they Are QX? should of Lowe's that costs mostly that in talk

Kevin J. Wheeler

Kevin. is that. I'll take This

it of most that the in in implementation around our timeframe be to starts. expect We August

comes business, organization. inventory a As is that to to significant about transition $XX from And on take will a working $XX a million have treatment you going certification are know as decision certainly And be process difficult very helping just we're that of Lowe's there's But happen and on August. amount significant and time be million transition them. X,XXX with the you of for in water through. friendly that for purchase There'll being over and doing resetting the we'll be business when consumer of our be the the consumer in stores same displays focused win point really through then to that purchase packaging. the a of and displays we'll purchasing again,

going to look execute prior you XX of within August. to But as that in we it's maybe days. start again at get come hopefully, be to around it, and will fully if timeframe so it August most that implemented, of Some or

John J. Kita

is The third And we have be in start quarter. quarter, then moving will I'll in right, the Kevin's second only add quarter, costs the we in fourth will profitability. the but thing some to majority

Charles Brady

on And timing. just broadly you're Thanks. capturing increase. speaking, North the from price there America, that increases, pertains the just helpful the very on price on as margin obviously it That's Okay. XXXX to

You've one we're guess, going in get the June. to coming got another we and in, In increase the or now neutral where summer? up are June, we between at have I up we raw until cost material catch in price to

John J. Kita

the Well, I'll more really in year, answer costs than increase the it this get we second of Steel progressively the quarter. second affected materially way. the half throughout but year

So, with transition, line for the essentially will in will most well kind the part, up which increase of will it that be late be effective price in the the June. –

Charles Brady

Understood. you. Yeah. Thank

Operator

you. Thank

is Davidson. next D.A. Summerville of the Our Matt from of line question

open. is line Your

Matt J. Summerville

questions. of Couple Thanks.

heater prepared saying recall don't around your I you market. commercial in anything water guys the First, American remarks North

could to in gas and what you side if specifically, the your is QX what year? of the business industry both did for maybe you the electric outlook So full speak and, for felt the

Kevin J. Wheeler

Kevin. is This

have surprised, that And in to that appear not X,XXX The first we And commercial we QX. QX. market. The pulled because were a we flat did was a pre-buy have did year-over-year. really and quarter impact affect to really in pre-buy in bit the anticipated being

flat. essentially were volumes electric So,

be and go and revised that's the forecasts. start we business we last our flat change the we're electric. on And industry, the forward, commercial over to of our given full-year gas both going and year, neutral as forecast so, And to

Matt J. Summerville

Got And it. just a follow-up China. then on

for product you're not seeing you. electric versus your assumption also what assumption in in And volume to the what maybe new of is for in your is water legacy You And think, I mentioned price, China? air sort purification seeing curious about treatment? you you're or to year. XX%, continue the as the then, Can what whether Thank water sort is volume grow. talk I'm down heater China specifically, of

John J. Kita

currency over that had good we were treatment up the We're water to So, is quarter. the treatment about and XX% dollar volume see The I and XX% transition volume from terms was standpoint, going continues, up in XX% in from XX% local U.S. up. to tell year electric XX%. From to industry, a somewhat be gas we U.S. that up think, would flat for terms. well in our terms. in electric standpoint, gas as up was RMB this units dollar and expecting the XX% over We terms that were a probably about you water a

kind on that's of broad So, the water heater the side.

Matt J. Summerville

John. Thanks,

Operator

you. Thank

Our is Mike line of Halloran of Baird. from question next the

open. is line Your

Mike P. Halloran

morning, Hey. everyone. Good

John J. Kita

Good morning.

Ajita G. Rajendra

Good morning.

Mike P. Halloran

side that be this great. a has So words, process on other in opportunity the investment In air around your China, you Do purification structural? would changed approach? it this blip, do or still think color terms see long-term of thought in is you is same the Any set?

Ajita G. Rajendra

the going whether terms terms – as what Mike, in to what the of Ajita. don't John is said, is is be it know sustainable. of impact We in did this the government

years Olympics you before similar few something If did ago. the recall, they

Mike P. Halloran

Yeah.

Ajita G. Rajendra

and to Cleaned then normal. up the things air quality for while went a back

happy So disruption. were the because compensate to was coal-fired there it there and not capacity of we hear enough here, because not that did life, the of their People plants. was types significant for heating impacted loss what of other

Okay? So, don't know. future? going that's happened what How the in the to in happen it's past. We

that seen last However, pace couple and products of grow, probably we've the have in really market the at coming continuing out from years. are but our new be like some to exciting not going continuing that to the are we is perspective, we

So, we that's our best the That's now. know approach.

Mike P. Halloran

then... and sense, Makes

Ajita G. Rajendra

products that we're out. But we're continuing to and and putting invest capabilities in products new the new the

Mike P. Halloran

the just sound you're but XX% price/cost guidance for through and is, America, the you China that. It Thanks expect And some big then China. putting thoughts where directionally that some obviously, in considering Great. for the it's like you increase. thoughts margin a trend. another North on how question, concern Maybe price just doesn't to

John J. Kita

we the seen increase Well, in extent did would not China, there last tell year. to put it's is you I U.S. in the but we've price increases steel

the with relationship. comfortable So, I point, we're think cost/price at this

Mike P. Halloran

Thank Great. the you for time.

Operator

you. Thank

Eisner Our question the Goldman line Sachs. Sam is of from next of

line is open. Your

Samuel H. Eisner

morning, Hey. everyone. Good

John J. Kita

morning. Good

Kevin J. Wheeler

Good morning.

Samuel H. Eisner

Just margin going North American your guidance. to

of the is guide So, midpoint XX%.

Obviously, points, the I quarter last how John, from guys the doing only weighted, profitability a you compression pricing inflation before XX.X%. guess, margin Recognized indicating in just year-on-year? did heading. first You that year standpoint. overall comments the XH but do than expect XX that's better we guess think here guys to the I about is be your expected much more basis you when were

the I'm in or something where So I to it. thinking I'm about missing how guess from compression going you guys maybe understand failing is are to come

John J. Kita

Well, the lose $XX bat, takes on when $X.X of Lowe's, off right points basis sales. XX about the million million you

So, that's But XX.X% impact Otherwise, biggest noise. you, down factor. business Lowe's probably from to going XX%. the is I biggest the primarily tell clearly, the would it's the

Samuel H. Eisner

Understood. maybe question for helpful. a And That's for term Ajita. the long then

up. has debt. some floating-rate down Just gotten sheet the million. balance cleaned Obviously, cash your paid looks approaching $XXX It net balance like, is you

business getting much treatment water larger. is Your

You called now out a the fact that it's business. global

just in overall Smith? two, term. so, this think talk And for water you the the business right for maybe the A. three about O. the outlook years? What's long to way next can about What's treatment

Ajita G. Rajendra

have global making India see I'm very, in the have certainly succeeded when country, that I than terms targets business displacing can in treatment as to trying in strategic. And India – strategy get what most four competitive the longer that brand – environment globally, you our past, we moves U.S., this with, three, back there our in treatment, Hague say, the taking for then player of at we outside did So about acquisitions I rounded you that that line could allocation we out line And us then of and we is of We as said be compete this argue, which targeted perspective, business. see Lowe's, in acquisition broad that been a think we've you to that very would laid terms the made, very doing, going business, is have think, to U.S. and from years serious specific Aquasana go in look strategic we business. done and that we out around to capital water been water which be you big-box gave much the our some we in the and this going our a for brands a were China, a

growth we've getting behind both cities Flints in the India XX nation. old. we of is counting hearing see average we growth. a the quality as start growing what see we China, and said, in are U.S. we number the being in number there years water what over in for about as – the you driver on of in water future, And municipal in have is infrastructure us a investing of around And treatment – that with of business us terms always So, and start their major realizing and Lowe's are water it (XX:XX) are major people a of The this is, the into that

Samuel H. Eisner

helpful. much. Thanks right. That's All so

Operator

you. Thank

Our next is the Longbow MacGregor Research. from line David question of of

is open. Your line

David S. MacGregor

talked quarter you just XQ, think go think on incremental over update Can just us as Yes. I the quarters costs. you everyone. next Can detail Good Nanjing? first XQ, we $X some for QX about million around impact we the about the should how provide forward? morning, you few

John J. Kita

I we about first will tried year be to impact it about quarter. in we're this the million we is expecting think $X of – about $X say for experienced and million what the $XXX,XXX

be place. in over general plant. et We're and both, going – plants. move second We're And costs operating that's quarter. will. you really cetera, when that's little a new driven $X million lease to a inefficiencies, be depreciation cost, expect the if going by We'll is to on be transition the have opening just two going We to taking

half so efficiencies we'll some And costs. experiencing utility the start offset that the and second as higher depreciation year, Lowe's get the will to of we then,

and So I'd to and get of depreciation. I guess, then plant probably, $XXX,XXX running year, some next or say, to what it's and million. running $XXX,XXX, $X and those $XXX,XXX, we're And in order and the offsetting numbers higher utilities efficiently, we're is the up are $XXX,XXX,

David S. MacGregor

market sort more so Thanks And costs and secondly, for going Lowe's, if basis, that questions. does we North for loading it a then, think how you how you've to accretive of and think year, American XXXX I the or about two Number guess, Lowe's I follow but with everything in regard American all grow? is previous of secondly, on beyond, dilutive the on normalized just the that. should notwithstanding, a growth is question And one, revenue North potential margins? Got to up it. business, this on guess got to that

John J. Kita

North it Well, or objective America up over three transition, North of up et I'll we next answer sales, couple margins the in dilutive margins. years, last grow is during this it's the Kevin, America so. the... know answer get it if want dilutive. to we to next our years to and will don't one. to certainly, be move as Ultimately, But cetera, the I you But the

Kevin J. Wheeler

how there. sales displays we to We been products. we get the the through are – that performance, about leading perspective, that confused product see From help and the the long-term $XX and get well product mentioned category, a how our benefit, choose growth process. things have a of bringing has as as not million. transition well. line as to to there We consumer believe high RO, in been their full into as that mean, I million to full We're we'll they've high-end the going XXXX, $XX have pick, I Yeah. And as the products there

as we we (XX:XX) effectiveness things we're a that market far to it So whole, be as as our about U.S. Ajita Flint the additional business of years another is as education very of it depended go strategy, when into – well at on in other to up, growth business And we generates component as look like that. you how back displays like the said and our it to remaining as our how go look a at may and enthusiastic the going the the what goes will I'm and about things to long-term as up sales happen, treatment going water

David S. MacGregor

rate way? ask that if it could think category we growth about the you do then, How longer-term

John J. Kita

I think mid-single...

Ajita G. Rajendra

Yeah.

John J. Kita

...mid- to high-single digits is what we've been talking about.

Ajita G. Rajendra

Yeah.

John J. Kita

education, And even that. improve it we hope we than higher can, through

Ajita G. Rajendra

And that there, research our value feel there done continue our good and develop isn't us proposition lot on – significant consumer this is what side. for which to we've There category, also there we of especially side. and of Because filtration filtration side. believe data is on this a a to any shows, Right. helped research softening Lowe's. products on the good going the We amount the data is grow, category portfolio isn't what of especially on out

David S. MacGregor

Thanks very much.

Operator

you. Thank

Connors & Boenning from question Ryan line next comes Scattergood. of Our the of

is line Your open.

Ryan Michael Connors

or Did incremental the stick for on understand very seems a just the water existing I of channel congratulations with some topic treatment business there and want have, you you. Thank incremental whether entirely want be actually of the interplay But Great. here of degree and business to near-term to there? whether this some your Lowe's is overlap and between that business existing the deal, and cannibalization minute, exciting. could the better there's

Kevin J. Wheeler

is This Kevin.

no have at channel, we we and, As is presence far primarily very very, course, This had very as for Hague. as a see we Yes, this little e-commerce and with But none. through to a little we business and no we had business until overlap, category business a some or cannibalization. incremental look new of us new Lowe's.

Ryan Michael Connors

standpoint. is your my this And bigger Obviously, regarding strategic to follow-on Okay. with then Lowe's deepens picture a from them. that relationship

move year into You last flagship moving the heater of water brand the Lowe's. had

aggressive the company. reviews known the of times and for got sort Obviously, things. at they're for you've significant So, brand and presence pretty a now in that being line there for

as see two-fold. to, the protect I you how build times? the and continue then at yourself being and tough big And of Number opportunities at on this some that against that relationship the dealing strategically relatedly, boxes, alluded is Lowe's you in So, happen, you question future you Ajita, guess, things then how with look the one, to company? do do to for customer can do further kind of my

Ajita G. Rajendra

good Certainly, the leverage be feel We very we going want about forward. able to relationship. to it

of – boxes Water back we Heater (XX:XX) years? we've Lowe's dealing go big think been for I it's been to before that, the a know acquisition, terms with you XX American with partner and In all of when

Kevin J. Wheeler

least. At

Ajita G. Rajendra

opportunity our years flagship at partnership, call I have to any grow So good a Lowe's there. business we into – of plus, we're XX looking move it we can performance. happy both are Lowe's. the with say very and numbers, happy been Lowe's partnership, has I performance brand we has the not we a the are I with be truly brand very numbers. the But about about that can public of specific can't because very the at both The

Ryan Michael Connors

Great. the exciting. congrats again. Well, It's thanks for color and

Ajita G. Rajendra

Thanks.

Operator

from next Scott of our is And Markets. question the you. Graham BMO Capital Thank with line

Your line is open.

R. Scott Graham

don't have that just such is out a for you other wondering, And increase allowing any been XX% front trade here. we next are, like close whether this? you of in I Thank kind by had kind increase Hi. increase? NAECA price other than I'm for or follow-ups an when trade driven, Yes. – price feedback broad product what's extension increases the question then have put the line the to even of looking quarter. that remember we're of

Ajita G. Rajendra

have and I'm increases, they XXXXs, it's had steel early back the and have, terms I'll from that. They in we than were market, put driven increases through. where high recollection, And Kevin perspective, historic price a this. type price we going From teens, my of to we had been to higher to prices. go say to the teens by steel I were high significant respond

Kevin J. Wheeler

any increase, increase, customers, and way so all clear in contractors, a and if would clear forth. and that It's there. to really component that on water primary retailers, to say has builders there to the a distributors, heaters, Over there particularly our is is been it's down that out our steel the need the years, I component, price out there drives

increases And increase. that market, executed implemented So, without have historically, this been in those relatively the need-based incident. put been a is have and

Ajita G. Rajendra

how driven, as not And sort warranties, in that, water residential et has heater cetera, in said, that price the take cost, increase of cost all a look Yeah. industry a it increase an with some the a you impetus reasonable price cetera, the It's sort significant about back, is of usually at step is it. impetus price marketplace. the a cost. Kevin still annual-type the market And long drives This that with the commodity total, for if lasts, you back take of increase. very et some or is in the of if step increases are an a price and

those drivers. are the think key I So,

Kevin J. Wheeler

just the reaction similar relatively to based announcement, has past. I tell Yeah. on would the you, our from been customer, our

R. Scott Graham

with clauses say distributors, newer with let's pricing that be will escalator your retailers versus And maintained? your – and your, gap

Ajita G. Rajendra

see we what is don't this of implementation that of That's getting the with. this uncomfortable change we getting Scott, is see detail type – But major overall history. into is Ajita. we're from the

R. Scott Graham

Okay.

which So, margin? you're second mix in pre-buy and retail, to let's the not potential quarter lower a say, shifts is fearful of,

Ajita G. Rajendra

channels. answer, first a – talked impact between let of never me all, about we've think mix I

will Okay? within terms But be think it I the of pre-buy, in quarter.

– minus So, it's not is the pre-buy, you're the and going there to within plus if to be get quarter. a going

So, impact you're in going not to an the quarter. see

R. Scott Graham

it. Got

you. Okay. Hey, thank

Operator

I'm And to Ms. showing Ackerman no time. I'd Patricia the closing turn like you. to Thank at this over questions conference remarks. further for back

Patricia K. Ackerman

that XX. on conferences note joining we York in second our Please May conference KeyBanc Oppenheimer on X, call on several Boston for May during in participate us all the Thank City and you today. New in will take in quarter. day. date on be June please XX, XXXX Day our Chicago on Blair save the to Chicago William held for a November Analyst Also, Have XX, Boston in X. in Stifel on June great

Operator

today's in program. conference. participation your for does you thank the gentlemen, and conclude This Ladies

You a may great day. disconnect. Everyone, have now

A. O. Smith (AOS) 25 Apr 182018 Q1 Earnings call transcript