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A.O Smith Corporation (AOS)

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A. O. Smith Corp. (AOS)

Q4 2016 Earnings Call

February 02, 2017 10:00 am ET

Executives

Patricia K. Ackerman - A. O. Smith Corp.

Ajita G. Rajendra - A. O. Smith Corp.

John J. Kita - A. O. Smith Corp.

Analysts

Robert McCarthy - Stifel, Nicolaus & Co., Inc.

Jeffrey Hammond - KeyBanc Capital Markets, Inc.

Bhupender Bohra - Jefferies LLC

Matt Summerville - Alembic Global Advisors LLC

Patrick Wu - SunTrust Robinson Humphrey, Inc.

R. Scott Graham - BMO Capital Markets (United States)

Alvaro Lacayo - Gabelli & Company

Samuel H. Eisner - Goldman Sachs & Co.

Brandon Rollé - Longbow Research LLC

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the A. O. Smith Corporation Fourth Quarter 2016 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. As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, the Vice President of Investor Relations and Treasurer, Patricia Ackerman. You may begin.

Patricia K. Ackerman - A. O. Smith Corp.

Thank you, Bruce. Good morning, ladies and gentlemen, and thank you for joining us on our 2016 results conference call. With me participating in the call are Ajita Rajendra, Chairman and Chief Executive Officer; and John Kita, Chief Financial Officer.

Before we begin with Ajita'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 Ajita who will begin his remarks on slide three.

Ajita G. Rajendra - A. O. Smith Corp.

Thank you, Pat, and good morning, ladies and gentlemen. 2016 was another excellent year for A. O. Smith, setting records for sales and earnings. We continue to see healthy end markets for our consumer products in China and for boilers and commercial water heaters in the U.S. Here are a few highlights.

Sales grew 6% to a record of $2.7 billion. Excluding the impact from the strengthening U.S. dollar against the Chinese currency, our sales grew 8% in 2016. China sales are up 19% in local currency. Among several revenue growth drivers, A. O. Smith branded water treatment sales grew over 40% in local currency. Our e-commerce sales in China reached nearly $200 million.

Net earnings of $1.85 per share was 17% higher than our earnings per share in 2015. We welcomed the Aquasana team to A. O. Smith through our acquisition of the U.S.-based water treatment company in early August. A. O. Smith global sales of water treatment product totaled $194 million in 2016.

We continue to review our capital allocation and dedicate a portion of our cash to return to shareholders. During 2016, we repurchased approximately 3.3 million shares for $135 million. We announced a 17% increase to our dividend last month. The five-year compound annual growth rate of our dividend is over 25%. We announced a 2-for-1 stock split which became effective on October 6.

John will now describe our results in more detail, beginning with slide number four.

John J. Kita - A. O. Smith Corp.

Thank you, Ajita. Sales for the year of nearly $2.7 billion were 6% higher than the previous year and 8% higher in local currency terms. Net earnings of $326.5 million improved 15% from 2015. Earnings per share of $1.85 improved 17% over last year.

Sales in our North America segment of $1.74 billion increased 2% compared with 2015. The segment benefited from a full year pricing related to the U.S. regulatory change in April of 2015 as well as a price increase related to steel and other cost inflation in August 2016. Higher volumes of boilers and commercial water heaters in the U.S. also contributed to higher sales.

Lower volumes of U.S. residential water heaters partially offset these benefits. The purchase of Aquasana in August added $18.4 million to our North America segment sales. Rest of world segment sales of $966 million increased 11% compared with 2015. China sales increased 19% in local currency, driven by higher demand for water heaters, water treatment and residential air purification products.

A. O. Smith branded water treatment sales in China totaled nearly $148 million in 2016, compared with $110 million in 2015. Sales of in-home air purification systems almost tripled to $26 million in 2016 compared with $9 million in 2015.

On slide six, North America operating earnings of $386 million were 14% higher than segment operating earnings in the previous year. And operating margin of 22% was 200 basis points higher than the 20% operating margin one year ago.

Pricing actions, lower material costs in the first half of the year and higher boiler and commercial volumes in the U.S. were partially offset by lower residential water heater volumes in the U.S. These factors were the primary drivers of the improved North America segment financial performance. Rest of world operating earnings of $129 million improved 14% compared with 2015.

Higher China sales were partially offset by increased selling, general and administrative expenses in China. Segment operating earnings were negatively impacted by almost $8 million due to China currency translation. Higher selling cost in China to support expansion in Tier 2 and Tier 3 cities and higher advertising costs to support brand building were the primary drivers of higher segment SG&A expenses. Segment operating margin of 13.4% was higher than one year ago.

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