A.O. Smith Corporation

Good day, and thank you for standing by. Welcome to the second quarter 2021 A.O. Smith Earnings Hall. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I will now like to hand the conference over to your speaker today, Ms. Patricia Ackerman. Thank you. Please go ahead, ma'am.

Good morning, ladies and gentlemen, and welcome to the A.O. Smith Second Quarter Results Conference Call. I am Pat Ackerman, Senior Vice President of Investor Relations, Corporate Responsibility and Sustainability, and Treasurer. Joining me today are Kevin Wheeler, Chairman and 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. Also, as a courtesy to others in the question queue, please limit yourself to one question and one follow-up per turn. 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, everybody. Our global A.O. Smith team delivered second quarter EPS of 73 cents on a 30% increase in sales, demonstrating solid execution and operational agility despite supply chain and logistic challenges, along with rapidly rising material costs. I am thankful for my fellow A.O. Smith employees who tirelessly navigated through the pandemic, followed by weather-related production disruptions, and continue to navigate supply chain constraints. I appreciate the creativity and the collaboration of our team to find solutions to keep our customers supplied with water heating and water treatment products. Boiler sales grew 35%, driven by strong demand as a result of completed projects carried over from 2020, as well as an active education in-market. For reference, our boiler sales were down 15% in the second quarter of 2020, which was negatively impacted by the pandemic. North America water treatment grew 17%, driven by continued consumer demand for home improvement products, which provide safe drinking water in the home. Our water quality dealers performed particularly well in the quarter, and online promotional shopping days also boosted sales. Consistent with our strategy to build out distribution for North America water treatment, we acquired Master Water Conditioning Corporation. The acquisition supplements our presence in the Northeast, and we are excited to add expertise in local water condition and solutions in this region to our families. Our North America water treatment sales, including this acquisition, are expected to be over $200 million in 2021. Our volumes of U.S. tank residential water heaters increased in the second quarter. We believe the strong demand is a continued result of extended lead times caused by production constraints due to strain in the supply chain, finding advance of price increases, and incremental new home construction. After our weather-related disruptions in production, which we talked about on our first quarter call, we have seen month-over-month sequential improvement, and certain of our suppliers recently noted they see moderation of demand and supply imbalances. But we remain diligent as the imbalances are spotty, and we expect supply chain challenges to be with us through the remainder of the year. In response to continued material and logistic cost increases, we recently announced a fourth price increase of between 10% and 12% effective August 1st. In China, sales increased over 26% in local currency, driven by growth in each of our major product categories, including electric and gas tankless water heaters and water treatment products, including commercial and replacement filters. I will now turn the call over to Chuck, who will provide more details on the second quarter, beginning on slide four.

Thank you, Kevin. Record second quarter sales of $860 million increased 30% compared with 2020, which was negatively impacted by the pandemic. Second quarter net earnings increased 74% to $118 million, or 73 cents per share, compared with $68 million, or 42 cents per share, in 2020. Please turn to slide five. Sales in the North America segment of $604 million increased 26% compared with the second quarter of 2020, driven by higher volumes of water heaters, boilers, and water treatment products, and inflation-related price increases. Rest of the world segment sales of $263 million increased 39% from the second quarter of 2020. Growth in each of our major product categories in China contributed to local currency growth of 26% in the quarter. Currency translation of China sales favorably impacted sales by approximately $20 million. India sales more than doubled in the second quarter, despite the recent surge in cases of the virus in that region. North America segment earnings of $142 million increased 34% compared with the second quarter of 2020, The impact to earnings from higher volumes and inflation-related price increases was partially offset by higher material and freight costs. As a result of these factors, segment operating margin of 23.5% improved compared with the second quarter of 2020 segment margin of 21.9%. Rest of the world segment earnings of $22 million increased significantly compared with the loss of $5.8 million in the second quarter of 2020. which was negatively impacted by shutdowns and reduced consumer spending resulting from the pandemic. In China, higher volumes and lower selling and administrative costs were partially offset by the absence of social insurance waivers, which were received in 2020. As a result, segment operating margin of 8.5% improved from the negative 3% in the second quarter of 2020. Our corporate expenses of $12 million were higher than last year, largely due to management incentives. Our effective tax rate of 21.9% was essentially the same as last year. Please turn to slide seven. Cash provided by operations of $196 million during the first half was higher than during the first half of 2020. Higher earnings in 2021 compared with the prior year were partially offset by a larger investment in working capital during the first half of 2021 compared with the same period in 2020. Our cash balances totaled $582 million at the end of June. Our net cash position was $476 million. Our leverage ratio was 5.5% as measured by total debt to total capital at the end of June. Through June 30, we repurchased approximately 3 million shares of common stock for a total of $198 million. Please turn to slide 8. We upgraded our 2021 EPS guidance this morning with a range of between $2.70 and $2.76 per share. The midpoint of our range represents an increase of 5% compared with our prior quarter full-year guidance. We expect cash flow from operations in 2021 to be between $500 million and $525 million, compared with $560 million in 2020. We expect higher earnings in 2021 will be more than offset by higher investments in working capital than in the prior year. Our 2021 capital spending plans are between $85 and $90 million, and our depreciation and amortization expense is expected to be approximately $80 million. Our corporate and other expenses are expected to be approximately $50 million, similar to 2020. Our effective tax rate is assumed to be approximately 23% in 2021. Average outstanding diluted shares of $160 million, assume $400 million worth of shares, are repurchased in 2021. I will now turn the call over to Kevin, who will summarize our guidance assumptions, beginning on slide nine.

Kevin? Our businesses continue to navigate through supply chain and logistic challenges. That being said, we raised our 2021 top line growth expectation and now project an increase of between 17 and 18%, driven by strong demand and price increases implemented in response to rising material and transportation costs. Our revenue outlook for 2021 includes the following assumptions. With seven months of visibility, We've upgraded our U.S. residential water heater industry volume forecast to increase approximately 3% compared with last year. We expect continued resilient replacement demand and growth in new home construction. With our fourth price increase in the market and continued consumer demand, we no longer believe there will be channel inventory destocking in the back half of the year. We expect commercial industry water heater volumes will increase approximately 2%. as pandemic-impacted businesses reopen and new construction and replacement installations come back online. We believe the demand we saw in the last few months was partially driven by pre-buy activity in advance of the price increases. In China, it is encouraging to see sales of our products continue to remain strong. Our strategy to continue to expand distribution to Tier 4 through 6 cities is on track. We see improvement in consumer trends, towards trading up for higher-priced products across all of our product categories, driven by differentiated new products launched in the last 12 to 24 months. We expect year-over-year increases in local currency sales between 20 and 22% in China. We assume China currency rates will remain at current levels, adding approximately $51 million and $4 million to sales and profits over the prior year, respectively. boiler sales grew 24% in the first half of 2021. The comparison will be tougher in the back half of the year, and we expect boiler sales will grow by low double digits for the full year compared with last year. We project 13 to 14% full year sales growth in North America water treatment. We believe the mega trends of healthy and safe drinking water, as well as reduction of single use plastic bottles, will continue to drive consumer demand for our point of use and point of entry water treatment systems. We project margins in this business to grow by 100 basis points, above the nearly 10% achieved in 2020. We continue to experience inflation across our supply channel, particularly steel and logistic costs. Steel has increased 23% since our third water heater price increase became effective on June 1st. We announced a fourth price increase in late June on water heaters effective August 1st at the rate between 10% and 12%. We expect North America's segment margin to be between 23.75% and 23%, and rest of the world's segment margins to be approximately 8%. Our procurement and operation team face continued challenges in the second quarter. And while we expect continued headwinds in supply chain and logistics throughout the remainder of the year, these challenges are moderating, and I have confidence in our team to continue to navigate through this difficult environment. That concludes our prepared remarks, and we are now available for your questions.

As a reminder, to ask a question, you need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Brian Blair with Oppenheimer.

Thanks. Good morning, everyone. Good morning, Brian. The momentum in your boiler sales is very encouraging. You called out strong trends in the education vertical. I was wondering if there's any concern about the sustainability of project activity there. It would counter our read on the incremental funding that's coming through. Just looking at the 12% growth in Q1, mid-30s lift, Q2, the full year guide implies quite a bit of moderation in the back end.

Well, I think we – we had a very strong first half of the year. And again, as we mentioned, the back half is a bit tougher comp. And there's always challenges with COVID-19, the variants out there, and of course, labor and so forth. But, you know, overall, again, job activity has remained healthy. Recent non-residential ABI data was positive in June, up, I think, 57 from 50. And our July, we had a solid July. So, You know, we don't see really anything becoming an issue, but, again, in this environment, there's always things that could pop up and be a good spot for us.

Yeah, I mean, I guess the only other thing I would add is that it was an easy comp in Q2 last year, and we did do a residential early life program that we pushed back because of the pandemic last year into Q3 that got pulled into Q2, which is normal. That's the normal cadence of when we do that, and that helped a little bit on the volumes.

Yeah, appreciate the color there. And to clarify, does the outlook for 13%, 14% North American water treatment growth include master water contribution?

No, that's organic growth of 13% to 14%. So, you know, we frame kind of a North America water treatment at around $200 million, I think, you know, before we were talking about approaching $200 million. So with the acquisition at a half year, it's just over $200 million.

Excellent. Anything you can offer on margin contribution from that business? And even more importantly, additional color on what the asset adds to technology, you know, footprints, channel presence. You mentioned, you know, expanding into the Northeast, which is important, but any other color you can offer on strategic impact would be great.

Yeah, I'll take the strategic impact of it. This is part of our strategy to improve our footprint across North America and build up that distribution. The water quality dealer is a bit different than, say, our wholesale business that buys truckloads of 200 water heaters on a regular basis. A lot of water quality dealers will buy pallets, a couple of pallets for a product. It's really important that we have these distribution points, and this is a start with Master Water, so that we can improve our service levels, delivering 24 hours of smaller quantities, and do them in an effective and productive way. So this is an important first step in kind of building out that framework that we need to be successful in the water quality side of our business.

Very helpful. Thank you.

Your next question comes from the line of Scott Graham for Rosenblatt Securities.

Hey, good morning, all. Nice print. Good morning. So I've got a couple of questions. Hopefully you can answer them all. You know, I know of each of the price increases. Would you say that you're trending toward the middle, higher end of the rates that you've given in the past?

You know, I guess, Scott, we just kind of look at the four together. And when we accumulate the four and get to the fourth quarter, the fourth one will be effective. We'll start seeing that in the fourth quarter. We're at about a 40% increase, price increase on the water heating side.

Okay. Thank you. And then are we looking at similar type of price increases for boilers?

Not similar. Boilers are, for the most part, a lot of our projects are quoted, and we are taking steps to adjust our quotes to adjust for the cost. So we have taken steps, but it's not as formal as a residential standard commercial business. But we are taking steps, and quite frankly, we're taking steps across globally of all of our businesses to adjust for the inflationary cost that we've been impacted by and continue to be impacted by.

Yeah. I mean, let me just add a little color to the water heating side because that 40% is specific to water heating. And as you know, steel is a major part of water heating costs for us. There's other costs, including freight and foam and so forth, but steel is the largest part. You know, when we kind of look at the cadence of the cost for the year, when we get to the fourth quarter, we're going to be – and we have good visibility into the fourth quarter because, as you know, we've got 90 to 100 visibility forward on what we're going to be paying for steel. Our cost Q4 year over year is going to be two and a half to three times higher on just steel alone. So I just wanted to kind of frame that. The other businesses outside of water heating certainly have seen some cost increases, and we've got price increases at various levels. but certainly the water heater side bears the brunt of that steel increase.

Your next question comes from the line of Ethan Butchbinder with Citi.

Hi, good morning. Thank you for taking my question. Good morning. So Q1 had weather issues in Ashland and Juarez on top of supply chain constraints, which limited North America water heater production. And supply chain constraints lingering into Q2, how much have production levels improved, and can you quantify the percent utilization within North America water heater production capacity during the quarter?

No, not specifics. I always tell you that we had month-on-month improvement. And, again, we have terrific suppliers that are also working very hard to raise their capacity. And the important note is we believe that's going to carry on into Q3 and into Q4. So we certainly have plenty of demand. Our orders are marrying the industry. It's just a matter of us being able to work those overtime hours on Saturdays, and we've been a bit constrained with some of the supply chain issues that we talked about. And, of course, there's port issues. There's trucking issues that we're working through. But the takeaway is that it's a sequential improvement, and that should carry over into the back half of the year.

Thank you. That's helpful. In 2020, the cadence of social insurance was heavier than Q2 and Q3. Understanding that Q4 is normally the highest margin quarter for the rest of the world segment, and last year was 11.2% margin with minimal impacts on social insurance, what are the potential factors that could keep margin down year over year?

Yeah, this is Chuck. I mean, it's really mostly volume. We really had a strong Q4 last year. And that volume really matters on the incremental base of the business. It really drops nicely to the bottom line. So last year, you know, we had a very strong fourth quarter. We called it out on our call last year, and it could have been some pent-up demand from the pandemic. Not exactly sure all the drivers, but that's probably the major difference. There was some social insurance last year. And I want to say that, you know, that it's small. Like you said, it's probably $12 million through the year, and the bulk of that fell into Q2 and Q3. And we'll see a similar headwind in Q3 that we saw in Q2.

Here next question comes from the line of Damian Karras with UBS.

Hi. Good morning, everyone. Good morning. Hey, good morning. So pretty notable change in your view on the water heater market shipments from down 2%, now up 3% for the year. I was just wondering if you could elaborate on your earlier comments about the inventory data stocking. You're not expecting that anymore, and really just elaborate on what's changed since last quarter.

Well, I'll start with that, and Chuck can jump in. we don't move our forecast very often unless we see some clear line of sight. What's really changed is, one, we didn't plan on poor price increases this year. And that makes a big difference in pre-buys and buy-ahead. And quite frankly, the market's been, continues to be stronger than we anticipated, and new home construction continues to do very well. So as we were putting this all together and coming to the second half of the year, Those are – there's been multiple changes that have changed our opinion for this year to move it up that 3%.

Yeah, you know, we don't expect inventories to come down based on the order rate that we've seen. When we looked at the full-year outlook for the industry, I mean, last year was basically a record year on residential water heaters. And, you know, to be 3% up over a record year is pretty meaningful. But when we, you know, kind of look at the first half of the year and then look at the second half of the year, historically, those volume percentages kind of break down 52% in the first half of the year, 48% in the back half of the year. So, you know, last year it was exactly opposite. It was 48% because of all the headlines that, you know, the industry had in production in Q2, but it was 48% front half and 52% back half. And, you know, when we looked at the full year, we went back to kind of the normal cadence, too. So we looked at that and said, let's go back to that $52.48, thinking about what kind of demand we're seeing. And, again, with poor price increases, it's a little bit difficult to read out the total demand. But being – and decided to go up 3% with the assumption inventories would not decrease.

Okay, great. That makes sense. And then I was curious – If you've seen any market share jostling going on just as a result of the current environment with the supply chain issues and, you know, some of the capacity constraints you and other competitors of yours have had to deal with, maybe you can just talk about, you know, kind of through your channels and at the regional level if there's what's happening with market share. Sure.

Well, you're right. Market share is a bit messy right now because of different price increases in the supply chain. Yeah, I would tell you right now, A.O. Smith is lagging a bit. Not because we don't have the orders in-house and not because our customers, we have a solid customer base with no change there. It's really been just more of various constraints on what we can produce out of our factories and Of course, as we mentioned in the first call, the Gulf freeze did not help. But when it's all said and done, you know, with no major changes in customers and we'll get our fair share of orders, that over time this is probably all going to work itself out. But right now A.O. Smith is lagging a bit, and we anticipate that will be minimized by the time we get through the rest of the year.

Our next question comes from the line of Matt Somerville with VA Davidson.

Thanks. A couple questions. First on China, I was hoping you could comment on what sell-in versus sell-through looked like and how you're feeling about your inventory position there.

Sure, sure. We feel very, very good about our inventory position there. We felt good about it a year ago, and it's significantly improved. It's at its lowest point in five years, and I would say that it's probably as fresh as it's been. So we're in a great inventory position in the channel in China. Let me help frame kind of the sales growth for the quarter. So we're up 26% in organic local currency today. But if you kind of take a look at that, last year we did have some headwind on channel inventories coming down. When we look at sellout and demand for this quarter, you know, we're probably up about mid-single digits. We're right in that range, and it's across our whole portfolio of products. So, you know, we're pleased with the 26% growth. You've got to recall last year China came out of the pandemic earlier than North America, got into it and came out of it a little sooner than But that was a quarter that was building, you know, from April, May, and June. So, you know, mid-single digits up for the quarter, and we kind of, when we think about the rest of the year, you know, we're kind of looking at something roughly in that same range through the back half of the year.

And then just sticking with China, can you speak to kind of, I'm thinking about the pricing spectrum, right, and how things trended a few years ago kind of up in that you know, high-end than things trended, you know, more into the mid-price point range. Where are you relative to historical peak and maybe the recent trough there with respect to your product set and realization there?

Let me just frame it kind of quarter-over-quarter comparison because it's very similar to where we've been in the last couple quarters. I would say, you know, what we've seen is a little bit of improvement in the higher-end price on the gas tank list. And on electric heating and on water treatment, it's roughly the same. So it hasn't changed a great deal. We see some indications of the higher end, you know, premium part of the market growing, but we have not seen, you know, a great deal of change. Please know that we've seen a little bit of movement on the gas tankless.

Your next question comes from a line of Seri Boroditsky with Jefferies.

Good morning. So you had originally talked about some inventory coming out of the channel this year. Now with residential heaters, except to be up 3%, you're no longer talking about that. So just how are you thinking about ending inventory for the industry? And then how does that set up for demand in 2022?

All right. You're talking North America?

Yeah, North America.

North America residential? Well, again, we'll have to see how things play out. There's still five months left in the year. And so... We've raised it as we've talked about, and we'll have to get a better view as the next few months, you know, depending on how we're producing, how people are consuming, how the economy is doing. It's hard to look into 2022 when we're in July right now. And so we'll look at it closer. We'll talk more as we get closer to the end of the year. But right now, as we said, demand is up, and there's a lot of good momentum in new construction. And so that plays well for the balance of the year.

Got it. And so with higher North America volumes, you obviously implemented a number of price increases, but margins expectations are a little bit lower. So how are you thinking about matching price costs in the second half of the year? And then how are you thinking about margin improvement in 2022 – Just as some of these costs hopefully become less of a headwind.

Yeah, I mean, since our first price increase was announced November last year, we have just seen costs continue to rise. Every price increase that we have launched into the marketplace has been consistently followed by higher steel costs and higher costs. So, you know, as we go into the back half of this year and get to the fourth quarter where our fourth price increase starts coming into the market, and we start seeing it, you know, we're basically matching costs, so we're not covering our margin in the fourth quarter. That's a bit of the headwind that we see in the back half. It's too early for us to be kind of speculating, I think, on 2022 on what we're going to see on costs. Certainly, we've not seen these types of cost increases in the market, but it's hard to speculate how long they'll be there, whether they'll come back out. You know, obviously, there's a lot of discussion on transitory inflation, but... we're not yet ready to kind of predict when we're going to see any relief.

Your next question comes from a line of David McGregor with Lung Bowl Research.

In your prepared remarks, you talked about water treatment and seeing more promotional days. And so I wonder if we could just circle back to that for a moment and just talk about the extent to which you're seeing maybe a little more in the way of expectations from some of your channel partners with respect to your level of promotional channel support?

I will tell you the promotional channel days that we talked about were pretty much normal. There wasn't an increase in it, but pretty effective. Water treatment, our close rates have been high as people continue to look at water treatment as a and health issue for their family. But I don't want to mislead. Those were normal days that just performed at a higher level for us. And I think it comes down to the whole mega trend that we're seeing with water quality and the safety part that continues, and it continued into the second quarter.

I mean, water treatment has performed well. I mean, it's a 17% increase quarter over quarter. But I just want to remind us that last year it grew by 19%. So it was a part of our business last year that actually grew in 2020 in Q2 and grew again this year. So pretty resilient, still performing well.

And how much – just while we're on water treatment, how much of that growth would be attributed to expanded distribution as opposed to just greater pull?

You know, that's – That's one I probably can't give you any specific on. If you break down our business, it has to do with we have direct-to-consumer, which, of course, that's just an ongoing business. We have marketplace. We've done a fairly nice job expanding our dealer network. I can't give you specifics, but that area, and we called it out in our remarks, has grown substantially and doing a really nice job. It has a nice backlog. But I can't give you specifics about really – the number of new dealers, but going in the right direction and performing very, very well.

Your next question comes from a line of Nathan Jones with Stiefel.

Good morning, everyone. Good morning, Nathan. I wanted to follow up on the channel inventory to beat a dead horse here. You guys had expected a D-stock in the second half. You're now not expecting a D-stock in the second half. Can you talk about the inputs that go into that in terms of how you're expecting higher demand, customers ordering ahead of price increases and because of supply chain challenges? And do you think the channel inventories end the year at an appropriate level or under or overstocked?

Yeah, I think you've framed the pieces for us a bit. I mean, there is higher demand on the price increase for sure. That always is there. We manage that working with our customers. The constraints we see on supply chain, I think, you know, encourage people to make sure they have product on hand. You know, this will be our projection on 3% up will be another record year back-to-back. Where we end up on the channel inventory I think is a little hard to say, and I think it will play out a bit on what happens in new construction and what we see, you know, as far as the supply chain getting a little more normal.

Fair enough. And then just to follow up on India, you said it was doubled year over year. Obviously, India's had its issues with COVID. Can you just give us a number relative to where it was in 2019?

2019, I mean, it's year over – gosh, you know, I don't have that in front of us right now. I'd say I'm pretty confident it's higher than 2019, but I do want to frame it a bit because typically, you know, 35% to 40% of our sales are in Q4. But we're really pleased with how the team has performed for the quarter in a really tough environment.

Yeah, which I just want to add on to it. I mean, India was savaged by COVID. And our team did what they needed to do to protect our employees, but more importantly, really developed a strong relationship on the online segment of the business, which helped drive some of the deals we're talking about. And even in the pandemic, we introduced new products both in water treatment and in water heating that have done exceptionally well. So we were calling it out because, quite frankly, it's a phenomenal job by a team that really had severe headwinds throughout the second quarter and throughout the first part of the year. And we're looking for the back half to get a bit better. And, again, as Chuck said, that's where we get about 50% of our sales in those last four months.

Your next question comes from the line of Susan McLaurie with Goldman Sachs.

Thank you. Good morning, everyone. Good morning, Susan. My first question is around the boiler business. You know, you guided or you held your guide of a low double-digit increase this year, and yet you said, you know, you saw the sales up about 35% in the quarter. Can you just talk to how you're thinking about the back half of this year, some of the orders that are coming through, and how we should be thinking about that deceleration on a relative basis that you're expecting in there?

Again, as we've talked about, the back half is – a more difficult comp. And as we look forward, we talked about bringing forward the early buy, which was a record early buy for us from the third quarter. So there's a few items that are a headwind as we get into the second half of the year. So that's the primary reason behind it. Order bookings are good. Still seems to be pretty healthy with regards to our quoting activity. But when we put the numbers together, and Chuck will maybe elaborate on them a bit more, that's how we feel it's going to play out the second half of the year.

Yeah, the only thing I would add is, you know, I'm trying to think about kind of the benchmark for 2019. And I believe when you kind of look at 2019, we're up high single digits compared to 2019. We're just confirming that number just to help kind of frame that. where we are because 2020 had quite a bit of disruption in Q2. There's a lot of jobs that were closed and a lot of production that was disrupted. So, you know, I'm trying to help with the 2019 framing, and that's roughly – it's up about 6% to 2019. Okay.

Okay. Okay. That's helpful. And I guess building on that, too, can you talk a little bit about what you're seeing on the commercial water heater side? You know, that had obviously been a bit weaker compared to boilers. You know, any updates on how that's trending? And, you know, obviously the comps are a bit easier in the back half. How should we be thinking about it?

Well, commercial water heater, it's nice when you reopen the economy. And we're seeing – You know, I think we've talked about this in the past. We do have some IoT on our water heaters, and we can see how it's being used and so forth. It's not a broad view, but it's a snapshot. And we're just seeing activity grow. We're seeing, you know, restaurants open up. We're seeing people invest back in their business. So, you know, overall, it's nice to see the economy or the commercial side of the business growing. starting to reopen and get back to, we're not there yet, but back to kind of a normal replacement cycle and maintenance cycle. So that's where we raised our guidance up a couple points, and it's based on those early trends continuing into the back half of the year.

Your next question comes from the line of Scott Graham with Rosenblatt Security.

Yes, hi, good morning. Thanks for taking my follow-up here. See if we've gotten cut off in the middle of my next question for you. But I maybe just wanted to go back to the pricing, guys. And I have tracked with August, you know, four price increases this year. I don't quite recall the amount of the one from last year in November. Can you remind me of that one?

Yeah, I think it was approaching 10%. We had all three together. We've been kind of accumulating them as we go along. Pat will take a quick look here.

But the first one was roughly that amount, I believe. Yeah, Scott, I tell you, that's a long time ago. We'll have to look back at it because we've even changed these costs for a while.

Okay. And so the other question I had was, you know, Kevin, around your comments with the supply chain. And I know that water heater volumes were up. But I'm assuming they were up, you know, sort of double digit. And the reason I'm asking that is that, you know, the first two months of the quarter trade data, you know, is sort of up and over 20%. Now, that's only the first two months, but it would just seem like that should be a – did you keep pace with the industry in the second quarter, I guess, would be the simplest question? Yeah.

Now, you know, as I mentioned, we lagged a bit in the industry. And you look at the industry, it's up through May, you know, 11%, 12% total. Again, quite a bit of that's been driven by price increases and those type of activities, along with the new construction and so forth. So we have been lagging. And, again, our order entry is right in line with the industry's. However, you know, some of the constraints that we talked about has caused a few issues for us. But, again, I look at this. We have great operating people. And in the back half of the year, we'll have to work through that. But I wanted to make sure you understand where we were and where we're going. And we don't see fundamentally anything changing with regards to our customers or our market share as we finally get through these difficult times and finish out 2021.

And, Scott, just to follow up, that first price increase was up to 9%. So pretty close to that 10 that I mentioned, but up to 9 is what we went out with.

And your final question comes from the line of Kevin Javier with North Coast.

Hey, good morning, everybody. I'm wondering if, to that point on the supply chain issues, you know, expectation of 3% volume growth for the year. Do you think, you know, with all the actions you're taking, and it sounds like things are getting better, do you think you'll be able to grow in line with the industry and maybe make up for that in the back half of the year? Or does that perhaps, you know, defer some shipments for you guys to 2022?

Yeah, I would tell you our expectation is to certainly give up on the industry and to close that gap by year end. Again, the orders are there. It's just a matter, and our customers are there. It's just a matter of You know, working, like I said, go back to working those nine hours, working that occasional Saturday to close that gap. And that's going to be all predicated on our supply chain, which, again, and I've talked to many of our key suppliers. They're all getting better at it. They're all coming online a bit more. And we're anticipating that's going to carry over to the back half of the year, and we'll be able to ramp up production at a much higher rate than we had in the first half.

Okay, great. And then... on the water heater side, you know, so if you back, if I back into the numbers, it seems like water heater sales probably grew 25, 26% in that, in the second quarter. So I wonder if you can just, is that, I don't think you historically give price volume or anything, but is that mostly price or fairly split between price volume? And I think you guys made a comment that, you know, 40% pricing will be, you know, kind of once everything's in effect in the fourth quarter, that'll be what pricing is. So, Does that mean we should be thinking, you know, water heater sales up 40% in the fourth quarter, plus or minus whatever our volume expectation is?

Yeah, well, let me just go back to kind of the price volume portion of Q2. And, yeah, we typically don't, but, you know, I think it's very helpful in the environment that we're in that we give a little more data. So in Q2, when we kind of look at the amount that we were up in North America, I'll frame this North America, 40% of that, roughly, was price, and the rest was basically volume. So the bulk of it was volume, but there was a percentage of about 40% of that increase that was price. On the fourth quarter, you know, could you frame that again on the fourth quarter question, please?

I think you mentioned that, you know, just for modeling purposes, I think you had mentioned that when all four price increases are in effect, it would be 40% cumulative price. So does that mean that that water heater, you know, portion of North America sales should be up, you know, 40% in the fourth quarter once all those are implemented, plus or minus, you know, whatever we think volume and mix does?

Yeah, that's roughly right. I mean, the fourth price increase comes into the fourth quarter, and it's early on in the fourth quarter, but that's a good way to look at it.

Yeah, I would say that plus or minus, though, there's going to be some drag probably with that price in the fourth quarter.

Okay. Okay. All right. Thank you very much.

There are no further questions at this time. I would like to turn the call back over to Ms. Patricia Ackerman.

Thank you for joining us today. We plan to participate in two virtual conferences in the third quarter. Jeffrey's on August 3rd next week and D.A. Davidson on September 22nd. Have a great day.

This concludes today's conference call. You may now disconnect.