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A.O Smith Corporation (AOS)

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A. O. Smith Corporation (AOS)

Q3 2017 Earnings Conference Call

October 25, 2017 10:00 AM ET

Executives

Patricia Ackerman - Vice President, Investor Relations and Treasurer

Ajita Rajendra - Chairman and Chief Executive Officer

John Kita - Chief Financial Officer

Analysts

Matt Summerville - Alembic Global Advisors

Charley Brady - SunTrust Robinson Humphrey

Samuel Eisner - Goldman Sachs

Jeff Hammond - KeyBanc Capital Markets

Scott Graham - BMO Capital Markets

Lawrence DeMaria - William Blair

Robert Aurand - Longbow Research

Andrew Cohen - Northcoast Research

Scott Graham - BMO Capital Markets

Jeffrey Hammond - KeyBanc Capital Markets

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the A. O. Smith Corporation Third Quarter 2017 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. [Operator Instructions] As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Patricia Ackerman, Vice President, Investor Relations and Treasurer. Please proceed.

Patricia Ackerman

Thank you, James. Good morning, ladies and gentlemen and thank you for joining us on our 2017 third 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 3.

Ajita Rajendra

Thank you, Pat, and good morning, ladies and gentlemen. A double digit sales growth in the third quarter was driven by continued strong demand for our consumer products in China and positive end markets for our boilers and residential water heaters in North America.

Here are few highlights. Sales grew 10% to $750 million. Currency fluctuations had a negligible impact to sales in the third quarter. China sales were up nearly 13%. A. O. Smith branded water treatment sales grew 31% year-to-date and air purification product revenue doubled.

So record setting earnings at $0.54 per share were 15% higher than our third quarter earnings per share in 2016. We are delighted to work on the Hague team to the A. O. Smith family, through our acquisition of the U.S. based water softener company in early September. Hague fits squarely in our acquisition strategy to grow our global water treatment platform. We are excited about the global opportunities, Hague's innovative and high quality products bring us as well as Hague’s experience water quality dealer network.

We continue to review our capital allocation and dedicate a portion of our cash to return to shareholders. Through the first nine months of 2017, we repurchased approximately 1.9 million shares for $103 million. We announced a 17% increase to our dividend earlier this year. The five year compound annual growth rate of our dividend is over 25%.

A. O. Smith joined the S&P 500 Index in July. We are honored to join this prestigious group of U.S. Company. Our inclusion is a significant milestone in our company’s rich 143 year history.

John will now describe our results in more details beginning with Slide number 4.

John Kita

Sales for the third quarter of $750 million were 10% higher than the previous year. Net earnings in the third quarter of $94 million increased 13% from 2016. Third quarter earnings per share of $0.54 increased 15% compared to 2016. Sales in our North America segment of $486 million increased 8% compared to the third quarter of 2016.

The increase in sales was primarily due to increase sales of boilers, higher volumes of residential water heaters and pricing actions related to steel cost increases.

North American water treatment sales comprised with weaker Hague as well as full quarter of Aquasana incrementally added approximately 8 million to our North America segment sales.

Rest of world segment sales of $270 million increased 12% compared with 2016. China sales increased 13%, driven by higher demand for our consumer products in the region, led by water treatment and air purification products, and pricing actions primarily due to higher steel and installation cost.

On Slide 6, North America operating earnings of $110 million were 10% higher than segment earnings in the prior year. The same from higher sales of boilers and residential water heaters and the pricing action in the U.S. were partially offset by higher steel cost. These factors drove third quarter 2017 segment margins higher to 22.7% compared with 22.3% last year.

Rest of world earnings of $34 million improved 9% compared with one year ago. Higher China sales including pricing action were partially offset by higher steel cost, higher fees paid to installers and increased selling, general and administrative expenses. Cost associated with the expansion of retail outlets in tier two and tier three cities had sell the company’s water treatment and air purification products and higher water treatment product development engineering parts was primary dives the higher SG&A in China.

Third quarter segment margin was 4.5% compared to 4.9% last year due to these factors. Our corporate expenses were lower than one year ago. Our effected income tax rate in the third quarter 2017 was 28.8%, the rate was more than the 20.7% experienced during the third quarter last year, primarily due to lower state income taxes.

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