A.O. Smith Corporation

Good day and thank you for standing by. Welcome to the AO Smith Third Quarter 2021 Earnings Call Conference. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Patricia Ackerman. Thank you, and please go ahead.

Thank you, Evangeline. Good morning, and welcome to the AO Smith Third Quarter Conference Call. I'm Pat Ackerman, Senior Vice President, 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. A friendly reminder that some of our comments and answers during this conference call will be forward looking statements that are subject to risks that could cause actual results to be materially different. Those risks include matters that we have described in this morning's press release, among others. 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. We will be using slides as we move through today's call. You can access them on our website at investor.aosmith.com. I will now turn the call over to Kevin to begin our prepared remarks. Please return to the next slide.

Thank you, Pat, and good morning, everyone. Thank you for joining us today. I'd like to start today's call with a quick snapshot of A.O. Smith. I'm on slide four. We're a global leader in applying innovation and energy-efficient solutions to water heating and treating products that we manufacture and market worldwide. With annual sales of approximately $3 billion and market-leading brands, our products, including water heaters, boilers, and water treatment systems, are manufactured in 22 facilities across the globe. North America is our largest and most profitable market, followed by China, which accounts for 25% of sales. Turn to slide five and our quarterly results. We are pleased with our performance in the third quarter. Our team delivered a record-setting quarter in a turbulent macro environment. Demand for water heaters in North America remains very strong. Our rest of the world segment performed well in the quarter led by China, delivering operating margins of approximately 10%. Costs continued to increase sequentially, and in response, we have taken appropriate pricing actions. We continue to successfully navigate the supply chain and transportation issues facing most companies and have improved our delivery performance since the first quarter. We acquired Giant, a water heater manufactured in Canada, growing our market share in North America, and welcoming a talented group of employees to the A.O. Smith family. And finally, based on our strong performance and continued demand, we're raising our full-year outlook for sales and earnings. Please turn to slide six. Our global A.O. Smith team delivered record third quarter EPS of 82 cents, a 26% increase that was driven in part by a record 20% increase in sales compared with the third quarter of 2020. Demand for our products is robust, particularly in North America, resulting in record quarterly sales and operating earnings. We achieved a strong performance as a result of continued solid execution despite the challenging environment of component shortages, logistical bottlenecks, and materials and transportation cost inflation. I want to take this opportunity to thank my fellow A.O. Smith employees for their dedication and ingenuity as we work to overcome these challenges to meet strong market demand and deliver for our customers. North America water heater sales grew 24%, benefiting from both pricing actions and strong demand. Commercial unit industry demand increased by more than 10% due to resumption of new construction and replacement in the hospitality end market. Residential water heater unit demand also increased in the quarter. In addition, sequential improvements to our product delivery performance enabled us to improve our share position, which was temporary lag in our expectations earlier this year. Our North America boiler sales grew 7%. driven by new construction and replacement demand, as well as new products. We ended September with a record backlog, largely composed of commercial condensing boilers, and October continues to generate strong order rates for these market-leading, energy-efficient boilers. We believe green building incentives and failed return on investment outcomes contributed to strong demand for our condensing boilers. As natural gas prices increase, the return on investment for highly efficient Price becomes more compelling, and we are well positioned to capture share. North America water treatment sales grew 8% in the third quarter. Our water quality dealers performed particularly well. We believe our dealers have been outperforming the market and gaining market share. In China, sales increased 12% in local currency. Each of our major product categories grew year over year. including electric and gas tankless water heaters and residential and commercial water treatment products, along with replacement filters. We estimate that replacement demand for our water heaters in China is about 50% of our units sold. Our newer categories, including Navismith branded commercial water treatment, as well as range hoods and cooktops, continue to gain traction. As a result, we project that combined sales of these products will top $50 million this year. Please turn to slide seven in an overview of our recent acquisition. We are very pleased to welcome the team from Giant Factories to A.O. Smith. Giant is a Canada-based manufacturer of residential and commercial water heaters with a strong position in residential electric water heaters and a trailing 12-month sales of approximately $105 million USD. Giant fits squarely in our core North America water heater business, and is consistent with our strategy to grow through acquisition and further penetrate existing markets. The transaction met several of our acquisition criteria, including expanding our presence and growing our core water heater business in the stable Canada market, leveraging our existing presence in Canada, adding to our sustainability efforts, given most of Giant Water Heaters are fueled by renewable energy sources, and the expectation that it will be accretive to EPS in 2022 with an ROIC in excess of our cost of capital in 2023, ahead of our three-year goal for acquisitions. We are excited to welcome our colleagues from Giant to the A.O. Smith team and look forward to continued excellent customer experience that they have become known for. I'm now on slide eight. Before I conclude, I'd like to highlight some of our ongoing ESG and sustainability efforts. In China, we have reduced energy use in both our non-production activities and our production facilities. As outlined in our 2020 Corporate Responsibility and Sustainability Report, we were honored to be awarded the rating of Model Enterprise in 2020 by the Nanjing Economic and Technological Development Zone as an Environmental Protection Pacesetter. This distinction recognizes the depth of our environmental focus and operational processes to measure and reduce our environmental impact since 2016. As an industry leader committed to innovation and investment in more environmentally sustainable and efficient technologies to heat and treat water, we published a white paper and analytical tool in September to help federal, state, and local policymakers navigate the complexities of building decarbonization policies currently being designed and implemented around the country as part of a broader economy-wide effort to meet U.S. greenhouse gases reduction goals. An executive summary of the white paper is available in the sustainability section of our website. I will now turn the call over to Chuck, who will provide more details on our third quarter. Thank you, Kevin, and good morning, everyone.