A.O. Smith Corporation

Good day, ladies and gentlemen, and welcome to the second quarter 2019 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 be given at that time. If anyone should require operator assistance during the conference, please press star then zero on your telephone keypad. As a reminder, today's conference is being recorded. I would now like to turn the call over to Patricia Ackerman, Senior Vice President, Investor Relations, Corporate Responsibility and Sustainability, and Treasurer. Ma'am, you may begin.

Good morning, ladies and gentlemen, and thank you for joining us on our second quarter 2019 results conference call. With me participating in the call are Kevin Wheeler, Chief Executive Officer, and Chuck Lauber, Chief Financial Officer. Before we begin with Kevin'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. As a courtesy to others in the question queue, please limit yourself to one question and one follow-up return. If you have multiple questions, please rejoin the queue. I will now turn the call over to Kevin, who will begin our prepared remarks on slide three.

Thank you, Pat, and good morning, ladies and gentlemen. Chuck will elaborate on our financial performance in a moment. And while China continues to be particularly challenging, I am pleased to highlight several items in action which help position us for future success. Number one, our solid operating margin performance in North America remains steady despite expected lower water heater volumes compared with last year. We announced a price increase of up to 4% on our North America wholesale water heater portfolio effective August 1st. Excuse me, just August, early August. We joined our Hay and Water Right water quality dealer sales organization together so as to represent one customer facing our customers in that channel. The transition has gone well. Continuing our strategy to leverage our distribution channel, we launched our A.O. Smith branded water treatment portfolio in the U.S. wholesale channel. We revised our China sales expectations as we moved into the back half of the year. with a path towards more normalized channel inventory levels, which, as previously discussed, has been elevated for over the past 15 months. Chuck will now describe our results in more detail, beginning on slide four. Thank you, Kevin.

Sales for the second quarter of $765 million were 8 percent lower than the same quarter in 2018. Earnings in the second quarter of $102 million declined 11 percent from the second quarter in 2018. and second quarter earnings per share declined 8% to $0.61. Sales in our North America segment of $524 million declined 2% compared with the second quarter of 2018. Lower residential water heater volumes due to a tough second quarter 2018 comparison driven by a pre-buy in advance of the price increase were partially offset by the mid-2018 pricing actions. In addition, Our recently acquired Water Right business added approximately $14 million to sales. Rest of the world sales of $249 million declined 19% compared with the same quarter of 2018. China sales were down 16% in local currency, primarily related to previously disclosed channel inventory build, which occurred in the first half of 2018 and did not repeat in 2019. The weaker Chinese currency unfavorably impacted translated sales by approximately $16 million. India sales grew over 30% in constant currency compared with the same period in 2018. On slide 6, North America's segment earnings of $123 million were 2% lower than segment earnings in the same quarter in 2018. The favorable impact from mid-2018 pricing actions were more than offset by the unfavorable impact from lower water heater volumes and higher steel costs and other costs. As a result, second quarter 2019 segment margin of 23.5% was essentially the same as last year. Rest of the world earnings of $22 million declined 35% compared with the second quarter of 2018. The impact of profits from lower China sales more than offset the benefit to profits from lower SG&A expenses. Weaker China currency translation negatively impacted earnings by approximately 2 million. As a result of these factors, the segment margin declined to 9% compared with 11.3% in the same quarter of 2018. Our corporate expenses of 9.6 million were lower in the quarter compared with the second quarter last year, primarily due to lower incentive-based compensation. Interest costs were higher in the second quarter than a year ago due to the acquisition of Water Right in early April. For the year, we expect interest expense to be approximately $11 million. Cash provided by operations of $144 million during the first half of 2019 was lower than $173 million in the same period of 2018. Lower earnings and higher working capital investment resulted in lower cash flow from operations. Our liquidity and balance sheet remained strong. Our debt-to-capital ratio was 17% at the end of the second quarter. We have cash balances totaling $578 million located offshore, and our net cash position was $219 million at the end of June. During the first half of 2019, we repurchased approximately 2.8 million shares of common stock for a total of $133 million. Through yesterday, we purchased approximately 4 million shares at a cost of approximately $185 million, accelerating the pace of our repurchase due to valuation. Approximately 6.3 million shares remained on our existing repurchase authority at the end of June. We continue to see prolonged headwinds in the appliance market in China. And recent indications from our customers in China inform us that they will reduce orders for the third quarter. As a result, we have revised our 2019 EPS guidance to a range of between $2.35 and $2.41 per share, a 9% decline at the midpoint compared to last year. We expect our cash flow from operations in 2019 to be approximately $400 million compared with $450 million. in 2018, primarily due to lower earnings. Our 2019 capital spending plans are approximately $85 million, and our depreciation and amortization expense is expected to be approximately $75 million in 2019. Our corporate and other expenses are expected to be approximately $49 million in 2019, slightly higher than last year due to inflation. Our expected effective tax rate is expected to be approximately 22%. We expect to repurchase our shares in the amount of $300 million in 2019. We expect our diluted outstanding shares in 2019 will be approximately $167 million. I'll now turn the call back to Kevin, who will summarize our guidance and business assumptions for 2019, beginning on slide 10.

Kevin? Okay, great. Thank you, Chuck. Our outlook for 2019 includes the following assumptions. We project U.S. residential water heater industry volumes will be down 50,000 to 100,000 units in 2019 as replacement remains stable, but new home construction appears to be lackluster due to labor shortages and weather delays. Commercial industry water heater volumes are expected to be up 1%. Based on boiler sales growth of 7% in the first half, we expect our North America boiler sales to grow approximately 7% for the full year. We project India water heater EBIT will be positive in 2019 and improvements to continue for water treatment in 2019. That overall in India, we will be profitable in 2020. Our forecast for the Chinese currency in 2019 is essentially level with where it is today and weaker than last year. Essentially, all the negative FX impact occurred in the first half of 2019. We see continued and prolonged headwinds in the appliance channel in China. Our third-party analysis of overall market performance in the second quarter showed the electric water heater market was down 8% to 9%. gas tankless water heaters down 2% to 3%, and water treatment systems down 1% to 2%. As previously discussed, we estimated 2018 China sales increased due to distributor inventory build, primarily in the first half of 2018. We are assuming continued weakness in the China consumer demand for the full year in 2019. We continue to improve our process to quantify inventories While we experience seasonality, a normal inventory level would be two to three months. Our current view is that the channel inventory is approximately four months. Based on our recent conversations with key customers, we expect channel inventory levels to decline over the back half of the year to approach normal channel inventory levels by the end of 2019. Due to the 2018 channel inventory build, With the impact of the expected 2019 channel inventory decline, we are projecting full-year sales to be down approximately 16% to 17% in local currency terms. Combined with our expected three points of unfavorable currency translation, our 2019 sales projection is a decline of approximately 19% to 20%. We expect third quarter 2019 channel China sales to be down 20% compared to the third quarter of 2018. Due to the decline in sales, we expect plant inefficiencies, reductions in headcount, and higher mix of mid-priced products. We'll have a slightly lower contribution margin. We'll weigh on margins. We forecast China third quarter 2019 operating margin will essentially break even. We expect fourth quarter performance to be similar to the second quarter, as the fourth quarter is typically the strongest quarter of the year, offset by expected continued channel inventory declines. Please advance to slide 11. We see continued momentum in North America with our water heater, boiler, and water treatment products, collectively expected to grow up to 6% in 2019 including approximately $40 million in water rights sales. Our profitability improvements and sales growth in India is also encouraging. Our business model in China is solid, and we are committed to the region for the long term. We have near-term challenges to navigate through in China as the economy remains weak. We continue to stay close to our distribution customers as they work down channel inventory, and we continue to review our cost structure to right-size the business. We project revenue will decline by 2 to 2.5 percent for the year in U.S. dollars and 1 to 1.5 percent in local currency. EPS is projected to be between $2.35 and $2.41. We expect North America's segment margins to be between 23.5 and 23.75 percent and rest of the world's segment margins to be approximately 6 percent. Our stable replacement markets which we believe represent approximately 85% of North America water heater and boiler volumes, and the long-term growth drivers in water treatment solutions and boilers across North America, and favorable demographics in China and India, coupled with our strong balance sheet, position us well to enhance shareholder value. That concludes our prepared remarks, and we are now available for your questions.

Ladies and gentlemen, if you have a question at this time, please press the star and the number 1 key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask you please place your line on mute once your question has been stated. As a reminder, please limit yourself to one question and one follow-up. Our first question comes from the line of with Jeffrey's. Your line is open.

Good morning. Good morning. Could you update us on how you're thinking about price costs in North America in the second half of the year and maybe into 2020, given your price increase announced today and then lower steel costs?

You know, so we've been typically we don't talk about price. I would say historically we've been able to offset increased costs with pricing actions. Our assumption, I'll tell you that our forecast and assumption on steel is that currently we forecast that it'll be this level for the rest of the year. And we have seen recently this last month some increases in steel prices or some indications steel prices may be going up.

Okay, and then I believe you were previously done with headcount reductions in China, but given the lower outlook, would you reduce this more, or do you believe you have already right-sized the business for current market conditions?

No, we're going to continue to review the business, as we always have, and we'll be aggressive. The first headcount reduction was about 10%. We completed that in the first quarter of this last year. We are planning an additional 5% reduction in Q3, And then the SG&A that we continue to look at and scrutinize to make sure that we're spending our money appropriately there and investing appropriately. And we're going to continue to close on productive stores. And so at the end, as we look at it, as the market continues to evolve, we'll aggressively adjust our business, and we will right-size the business to the current environment.

I appreciate it. That was helpful. Thank you.

Thank you. And our following question comes from Alvaro Lacayo with G Research. Your line is open.

Thank you for taking my questions. I wanted to start with the rest of the world and maybe if you could try to categorize for us the visibility that you see. I know you mentioned that you believe that the inventories may be normalized towards the end of the year. But given the big step change from last quarter to this quarter, maybe if you could just talk about visibility and what you could see going forward. And in terms of the numbers you highlighted about the volume declines, has that stabilized in your view, or has that not found a bottom in terms of your declines?

This is Chuck. Let me just talk a little bit about China. So what we've talked about in the past is a weak economy, and that continues. So we've continued to see weak economy. That really has not changed. We've talked about elevated inventory in the channel. That has not changed. The elevated inventory remains roughly where it has been really since we started talking about it June of 2018. We've also talked about assuming our outlook last call said assuming flat channel inventory, we'd be down 6% to 8%. What's changed in our visibility is that recently, as we come out of June and had conversations with customers, we've seen, you know, customers telling us that they are going to order less in the third quarter. Now, typically in the third quarter, and we talked about this on last year's call, because the fourth quarter is typically our strongest quarter in the market, we would see inventories go up. What we're looking at now and the visibility that we see and we've scrubbed it and we think we have a clear, we certainly have a clearer picture in the last couple of weeks is that we would expect that those inventories would start to come down in the third quarter. And by the end of the year, we'd be going out of the year, at least in our assumptions, at an inventory level roughly at what we went out of 2017 at. So really, really reversing out the inventory that went into the channel last year and would be flushed out and back to what Kevin said, more normalized two- to three-month inventory levels by the end of this year.

Got it. Thank you. And just to add on to that, you have to believe hit the bottom, and we certainly hope so. And we're still going to sit back and make sure that we're watching our business. And as I mentioned to the previous caller, If additional adjustments are needed, we'll aggressively go after those to continue to right-size the business. But we do believe that we've given the best outlook based on all of what Chuck had said and our visibility into the inventory, and we hope this is the bottom.

And in terms of the cost reduction initiative that you mentioned previously, Can you maybe quantify for us how much savings you expect from the initiatives you've already taken?

Yeah, so for the year, you know, it's approximately year-over-year $24 to $25 million of savings within the SG&A category. Think of that in terms of, you know, the split roughly first half, back half. Equally, the back half is a little bit less, and that's because we've got some investments in advertising we're going to do for the fourth quarter. But that's roughly the amount. There's a little headwind on the back half because we do have some severance costs that would be associated with the headcount reductions.

Thank you. And our following question comes from the line of Robert McCarthy with Stevens. Your line is open.

Good morning, everyone. How are you doing? Good morning. Good. So I guess the first question is thinking through, you know, kind of I think you've guided the flat margins in China in third quarter and then 6% for the full year. You talked about some deleverage there. Could you just walk us through kind of a bridge of where you think – you know, because I think your initial guide was kind of in the 11% range. Could you just bridge us, you know, what's deleveraged, what's restructuring, what are the buckets, you know, sales volume that get you from kind of the 11 to the 6 for the full year?

Yeah, I mean, so I'll just kind of take it in a big bucket. So we talked about the inventory coming down. That's a pretty big bucket. It's rather acute in the third quarter. So when we're thinking about third quarter sales, You have to kind of look to the first quarter to find something that's comparable. It's 20% down from last year. And at that level, we've got some pretty meaningful plant inefficiencies that we would not have expected before. That gets us through the third quarter. And then the fourth quarter looks quite a bit like the second quarter. So we still have some headwinds on channel inventory. but we get back to a little bit more of a normal, and not normalized, but a little bit higher volume level that runs through the plant. So, you know, when you kind of take all the buckets together, first quarter, or I'm sorry, second quarter just gets hit fairly hard by the lower volume.

Okay, and then, you know, maybe as a follow-up, you know, how are you thinking about perhaps your balance sheet right now in terms of, you know, M&A, Maybe considering, I mean, obviously it looks like today there's been anticipation of this cut given how your stock has traded intraday. But nevertheless, you're in a bit of a fight of a lifetime in terms of what's going on in China and the organic growth story. If you see a material market break with your stock, do you think given the fact that you've got a balance sheet that's maybe suboptimal from a cash redeployment standpoint that you would consider being very aggressive in terms of share buyback? Because if you think about it, you might be able to get your business at a substantial discount over the next 12 months as you kind of right-size and restructure this business. How do you think about that in this environment?

Well, just back to China, the China change that we have is we think we'll work through the inventories by the end of the year. Once we get through that, we would expect a bit more normalized operating performance. So we certainly have seen changes in China, and we're going to work through them by the end of the year. So thinking of our balance sheet, we're going to buy back $300 million of shares, or at least we're projected to buy back $300 million of shares this year. So we're going to continue to do that. So we're on track to repurchase more than we did last year.

I'd like to add on to that about China a little bit. Certainly, we're in a challenging environment. I wouldn't categorize it a fight of a lifetime. We have an excellent management team that's going to work our way through these challenging times, and we'll come out the other end as a strong organization. Positively, we have some great mid-price point products that are gaining share. Our share in Q2 was higher than Q1. So there's been no meaningful trading down. There's been really no noticeable effect to our brand. And as we look out, we still look at China as a long-term growth part of our business. Wouldn't want to be any other place than China when it comes to the growth. And when you look at it, the urbanization, we still believe it has a long runway. The movement to the middle class So, yeah, we have some short-term challenges here. We have the team in place. We're making the moves we believe are the right moves in the current environment, and we'll continue to do that. We know how to do that. And then as we come out the other side, the company will be stronger, will probably be a bit leaner, and we'll be in position to take advantage of one of the best growth markets in the world. So it's important for us to do the things we're doing, but again, I believe our management team has it under control, and we have a line of sight of what we're going to do to manage our way through this challenging environment.

Last question. Given what you see in the U.S. in terms of slightly negative organic growth, and obviously this could just be timing and Price increases, and you still feel good about the fundamental long-term outlook for the U.S., and obviously that could impact, obviously, margins, because you've got great margins there, and you have for some time. I've been skeptical of it, and you've delivered, which has been great. But do you see anything on the horizon that would give you pause that the market's changing or the cycle's changing where you think that the organic growth there is going to be more challenging going forward than it has been over the past several years where you've had very solid, stable organic growth in North America?

Yeah, to answer your question first, we still believe there's stable organic growth there. What's going on in our opinion, what we believe, is if you look at the market through May residential water heaters, the shipments in the industry were down about 150,000 units. And as we look at our June sales and our sales and we look out, we think it's going to be down another 100,000 units. And as we look at it... There's certainly been an impact of a wet spring that's limited new construction. There continues to be a labor shortage with most of the builders and so forth. So as we go forward, the reason we have it declining is we just don't think with the labor shortages out there that the industry can make up the full 250,000 units. We think it's going to be somewhere in the 150,000 range. But what's important, and we said in our opening comments, we still see a very stable replacement market. And again, as we go forward, we have no change to our North American growth pattern. Water heaters are at 4%. We believe Waccamaw will continue to grow at that 8% to 10% range. So no, that was a long answer, but no, the answer is we feel really good about North America. We think this is just some weather-related issues, and hopefully as the labor shortages in the market start to become less that the new construction will continue to move forward. So no change in our outlook on either of our North American businesses.

Well, gentlemen, good luck. The market seems to be believing you today. Thank you.

Thank you. And our next question comes from Matt Somerville with DA Davidson. Your line is open.

Thanks. A couple questions. Why do you think it's taken either the channel or A.O. Smith so long to react to the inventory situation in China?

You know, we've had a prolonged slowdown in China, right? So it's been a number of quarters that we've been talking about, the elevated level and the prolonged slowdown. You know, June typically is a favorable month for the appliance channel. It's a high promotion month. I think there was some disappointment perhaps in June, maybe wasn't as high as what expectations were in the customer base. And as we came out of June and the prolonged level of what the downturn is, I believe our customers just said, you know, it's time to deal out for a bit. So I would say those data points, and, you know, last year we went into Q4 with pretty high inventory levels and wanted and expected that the channel would, you know, flush those out, and it was a little disappointing. So, you know, when they start looking, when our customers start looking back and historically and look at the data points of last fourth quarter, June, and maybe what they see in front of them, they've decided to take action right in the third quarter.

So maybe if you can flush out in Q2 then and what your expectation is for the year between the water heater business, the water treatment business, and air purification in China. Can you give a little bit more granularity as to actual performance in Q2 and full year expectation for those three buckets?

Well, let me kind of carve out water heating and water treatment. So water treatment, so for the quarter, water treatment was down about 12%. Largely channel flushing or, you know, reduction of the channel inventory impacted. When we look at our water treatment business over the course of the year, you know, we would expect to be down about 12% on our sales. If you look at kind of the consumer demand, the customer demand and what we're seeing on sellout, it's probably up about 8% to 10%. So we're seeing a little bit positive there. The water heater, you've got to kind of look at the mix, right? So we've introduced some mid-range price products. We've introduced new products. We do have headwind on the water heater side. You know, our outlook for the back half of the year is to be similar to the first half of the year as far as consumer demand. We see, you know, we saw last year 2018 slightly downtick on consumer demand from 2017, but we've seen the first half of 2018 be fairly similar to last year, and that's what we're assuming for the rest of the year.

Thank you. And our next question comes from Mike Halloran with Baird. Your line is open.

Hey, morning, everyone. So just continuing on that, you know, there's a lot of inventory machinations as well as just the timing of when you guys are manufacturing this year versus last year. Performance relative to the market in the core China product categories, how do you think that's tracked lately? And what's the assumption moving forward from here?

Normally, the best tracking for us is market share. If you look at our product categories, we started the year out a couple points down overall, but as we go forward, our market share in Q2 exceeded Q1. We're getting really good acceptance of our new products, mid-price point products in the market. And as far as the premium channel, it's continuing to hold. It's down a couple points overall, the channel, but overall it's holding. So as we go forward, we believe we're getting our fair share and we're continuing to gain momentum on the online side of the business as well as with our offline. So overall, we think we're getting our fair share and we look for a back half On a sell-out perspective, not so much a sell-in because that's the inventory side of it, we feel we'll continue to get our fair share and possibly move our market share up in a couple of categories that we were down a point or so.

So, Kevin, was that commentary exclusive to the water heater business, or did that include treatment as well?

It includes both. It includes both. As we talk, we have so many different categories, but the three main categories that Chuck outlined include I feel comfortable that we'll be getting our fair share in all three of those categories.

Thank you. And our next question comes from Jeff Hammond with KeyBank Capital. Your line is open.

Hey, good morning. Good morning, Jeff. Good morning. Can you just talk about market share, how your market share is holding in North America on the res commercial water heater side, and then just how are things progressing relative to plan within North America water treatments?

Well, let me take the North America Water Heater residential share question. We had a very good Q2, and our market share on all of our key categories, particularly residential and commercial, were back in line with our 2018 levels. They were actually slightly up. So we had a soft first quarter, and we recovered in the second quarter, and we don't see any reason that's going to change. On the water treatment front, Chuck will outline, but we've had a very good Q2.

Yeah, we talked on the last call that we expect to be incrementally better in Q2 versus Q1, and that is happening. So the business is performing well. For the quarter, our sales were about $37 million. Fourteen of that, again, was water right, which is integrating well with Kevin. It's on track, as Kevin mentioned. So kind of the customer acquisition and core growth is low teens for us on the rest of the business. Operating margins were high single digits for the quarter. So we're pleased with the way water treatment in North America is progressing.

Okay, and then just on China, can you give us kind of an early read or feedback you're getting on this new price point product and when you think it will start to really gain traction? Thanks.

Well, you know, the mid-price point products have gone in in various phases. You know, it does take time to certify, and I think what we've mentioned in the past, we just don't take a product and discount it and make it a mid-price point. We will actually design the product for the right category with the right cost structure. So if you go across our residential water heating, it's continuing to do well, and we're gaining share on the online side of the business. Gas tankless, we still have a bit of work to do to introduce a few new products to fill those gaps. And those will happen by the second half of the year. And our water treatment continues to do well. So overall, the acceptance has been good. But more importantly, the products have been designed for the right price points with the right cost structure so that we could maintain margins. So overall, been accepted well. We look at introducing just a few more to balance out our product portfolio in each of those categories.

Thank you. And our next question comes from the line of David McGregor with Longbow Research. Your line is open.

Yeah, good morning, everyone. Just while we're on the topic of the median price point, can you give us some sense of what the mix is now in terms of premium versus mid-price point and where you think that might be a year from now?

Yeah, you know, right now we've probably got a little heavier mix of the mid-price point as we, you know, as we work through the back half of the year. A lot of those products are new. As Kevin said, they're pretty well accepted. The channel, as they work down the channel inventory, you know, there's products that is not as new, so those price points are different. But we would expect it to normalize next year, more normalize next year, and we're always You know, as we grow e-commerce and as we grow the mid-price point product, it will be a slightly less margin, but we would expect it to normalize. We've got just pressure on our margins in Q3, particularly because of the lower volume. So it's going to gross margins to be a little pressurized.

So when you say normalize, just from a proportional standpoint, are we talking 50-50 or just trying to get some sense of?

Off the top of our head, I don't have that information. I'll be more than happy to dig into it and get it for you, but what I would tell you is it's going to change by product category. It's a great question. We'll be sure to take a note of that and make sure that we get back to you.

Thank you. Our next question comes from Nick Leobold with William Blair. Your line is now open.

Good morning, guys. Good morning. I was hoping to ask about cash repatriation and maybe get a sense for how much of this currently disclosed cash number is in the U.S. and outside the U.S., and if you repatriated any cash from China in the first half or in the quarter.

Yes, we have. We've repatriated. We've dividended out of China about $150 million for the first half of the year. So all of the cash that we mentioned is offshore, just to be clear on that. Dividended out $150 out of China, and we've repatriated about $85 of that back to the U.S.,

So you said the 150 is from China and the 85 is back in the U.S.? Back to the U.S., yes. Great. Thank you for that.

Thank you. And our last question comes from the line of David McGregor with Longbow Research.

Yeah, thanks for taking the follow-up. That's two quarters in a row I've been cut off. I guess I'm not going to get a Christmas card. It's not intentional. Sorry. Just, you know, in the last couple of minutes we've got here, I guess, there was an earlier question about raw materials and price cost. And you noted that raw material prices were still high or maybe up year over year. And obviously spot markets have been coming down. You guys are contract buyers. I understand that part. But one would think that by now you're starting to see some leakage on the indirect component as well as maybe some supplemental spot purchases that So I guess the question is, notwithstanding, I know the mills have sent out letters asking for price increases a few weeks back, but when do we start seeing the benefit of lower steel prices coming through? Do we see some here in the third quarter, or just can you help us with the timing?

Yeah, we see a lag in 90 to 120 days to what you're kind of seeing in the marketplace. So we would expect to see a little bit of that benefit come through in the third and fourth quarter.

Okay. Is there any way to quantify that for us or think about it quantitatively?

No, you know, we'll just kind of go from the benchmark, you know, quarter over quarter improvement.

Okay. Okay, that's good. And then something we picked up in our checks was just talk of moving to kind of a national pricing model. And people are in distribution, I guess, now that distributors are acting more on a national scale. You know, they're pressing for more of a national price as opposed to the disparities where I guess the southern markets were usually at a discount to the northern markets. How does that play out for you in terms of price realization? Do your ASPs move up or down as you kind of normalize to a national level? And how does the timing also play out?

Well, hey, Matt, pricing, we're the only public company, okay? And so we just do not get into much detail on pricing with regards to strategy, or expected implementation, those type of things. And so I just would prefer to keep that as kind of our policy. And again, what we've demonstrated over the years is being able to, at the appropriate time, given time, to address cost and inflation issues going forward, and I'm just going to leave it at that.

Thank you, and we have another follow-up from Matt Somerville with DA Davidson. Your line is open.

Thanks. A couple follow-ups. First, can you talk about what you're doing in the wholesale channel with respect to water treatment? I know when you launched into Lowe's, you threw a revenue target out there. Do you have a revenue target for this wholesale initiative, if you will?

We haven't put out a revenue target for it. We just launched into that. It's right aligned with our channel strategy. So we're excited to have product into the wholesale market effective in May. What we will kind of talk about is because of our channel strategy, we're looking at growing water treatment year over year in that 10% to 15% range. So if you look at our whole portfolio of businesses, you know, not guiding just for wholesale, but we would look to grow year over year in that 10% to 15% range throughout kind of all of our channels.

If you aggregate your global water treatment business, what's your revenue objective for 2019? I believe that's a number you've shared in the past.

Yes, it's about 440, 440 to 450. Okay.

And then lastly, just with respect to lock and bar on the boiler side of the business, can you talk about what you saw in Q2 and maybe what gives you a little bit of pause with the 7% growth target versus, you know, the 8 to 10 sort of longer-term objective you have there?

Yeah, let me just start with that, you know, the backlog and the activity in the market remains pretty active. But what I just was talking about, the wet weather and the labor shortages on the residential side of our business, water heating side, it's also spilling over into the boiler side and commercial side of the lock-in bar business. So the business remains solid. It's just we just don't think because of the wet weather and the labor shortages that on either our water heater or our border side of the business, that we'll be able to make up the complete ground in the second half of the year. So that's why we brought it down a bit to 7%. But the market's active and our quoting's active, so the overall business continues to move forward in the U.S.

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Patricia Ackerman for closing remarks.

Thank you for joining us on our call today. We will participate in several conferences in the third quarter. We will attend the Oppenheimer Conference in Chicago on August 15th, the Longbow Conference in New York on August 21st, and the Davidson Conference in Chicago on September 18th. Enjoy your day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.