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A.O Smith Corporation (AOS)

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A. O. Smith Corporation (AOS)

Q4 2017 Earnings Conference Call

January 30, 2018 10:00 AM ET

Executives

Patricia Ackerman - IR

Ajita Rajendra - Chairman and CEO

John Kita - CFO

Analysts

Charlie Brady - SunTrust

Scott Graham - BMO Capital Markets

Mike Halloran - Baird

Robert McCarthy - Stifel

Jeff Hammond - KeyBanc Capital Markets

David MacGregor - Longbow Research

Presentation

Operator

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

I would now like to turn the conference over to your host, Patricia Ackerman, Vice President, Investor Relations and Treasurer. You may begin.

Patricia Ackerman

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

In order to provide improved transparency in to the operating results of our business, we provided non-GAAP measures, including adjusted net earnings, adjusted earnings per share and adjusted effective income tax rate for 2017 that exclude the estimate of our total tax expense related to US tax reform. Reconciliations from GAAP measures to non-GAAP measures are provided in the appendix at the end of this presentation and also on our website.

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 4.

Ajita Rajendra

Thank you, Pat and good morning, ladies and gentlemen. Our double digit sales growth in 2017 was driven by continued strong demand for our consumer products in China and positive end markets for our boilers and water heaters in North America. Here are a few highlights. Record sales of $3 billion grew nearly 12%. China sales were up 18% in local currency and up 16% in US dollar terms, reaching over $1 billion in 2017. China water treatment sales grew 35% and air purification sales grew 75% to $45 million.

Our global water treatment sales exceeded 300 million in 2017. We are very proud of the global water treatment platform we have built over the last seven years. Beginning in 2011 with about $35 million of water treatment sales in China, we grew significantly to almost $240 million last year. As we experienced rapid organic water treatment growth in China, we added several bolt-on acquisitions in the US and Europe, launched water treatment products in India and Vietnam and added a significant number of water treatment engineers and technologists to our global engineering center.

As a result of our investments, we project our global water treatment sales to be approximately $400 million in 2018. Record setting adjusted net earnings of $2.17 per share was 17% higher than our earnings per share in 2016. We are delighted to welcome the Hague team to the A. O. Smith family through our acquisition of the US 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 experienced water quality dealer network. We continue to review our capital allocation and dedicate a portion of our cash to return to shareholders. We repurchased over 2.5 shares for approximately $139 million. We announced a 29% increase to our dividend earlier this month. The five year compound annual growth rate of our dividend is over 25%. AOS joined the S&P 500 index as of July 2017. We are honored to join this prestigious group of US companies. Our inclusion is a significant milestone in our company's very rich history.

John will now describe our results in more detail, beginning with slide number 5.

John Kita

Before we discuss the financial results of our fourth quarter and full year, I will provide details of the new tax law impact. Our one-time tax charge in the fourth quarter is estimated to be 82 million or $0.47 per share and is primarily related to the mandatory repatriation tax on undistributed earnings under US tax reform. The one-time charge is expected to be paid over eight years. We project our effective income tax rate in 2018 to be between 22% and 22.5%.

We expect to repatriate approximately 200 million in the first half of 2018 and use the proceeds to repay floating rate debt. Our capital allocation strategy will remain focused on three pillars. One, to support our growth with capital spending; two, to pursue acquisitions, which expand our core water heating and water treating platforms globally as well as expand our product lines, primarily in China; and three, to return cash to shareholders. We will continue to review opportunities within the three pillars and discuss with our board.

Read the rest of this transcript for free on seekingalpha.com