A. O. Smith Corporation (AOS) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the A. O. Smith Corporation's First Quarter 2016 Earnings Conference Call. At this time, all participant lines are in a listen-only mode to reduce background noise. But later, we will be conducting a question-and-answer session, instructions will follow at that time. As a reminder, today's conference call is being recorded. I would now like to introduce your first speaker for today, Pat Ackerman, Vice President of Investor Relations and Treasurer. You have the floor. Patricia K. Ackerman - Treasurer & Vice President-Investor Relations: Good morning, ladies and gentlemen, and thank you for joining us on our 2016 first quarter results conference call. With me participating in the call this morning 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 in respect of 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 - Chairman, President & Chief Executive Officer: Thank you, Pat, and good morning, ladies and gentlemen. The first quarter of 2016 was another excellent quarter for A. O. Smith, setting first quarter records for sales and earnings. We continue to see healthy end markets for our consumer products in China and boilers in the U.S. We believe that our organic growth prospects differentiate us from most other industrial companies. Here are a few highlights. Sales grew 3% to a record of $637 million. Excluding the impact of the strengthening U.S. dollar against Canadian and Chinese currencies, our sales grew 5% in the first quarter. China sales were up 17% in local currency. Record first quarter net earnings of $0.83 per share were 28% higher than our earnings per share during the same period last year. We continue to review our capital allocation and dedicate a portion to return to shareholders. We repurchased approximately 430,000 shares for $30 million during the first quarter. We increased our dividend by 26% three months ago. John will now describe our results in more detail beginning with slide four. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Thank you, Ajita. Sales for the full year of $637 million were 3% higher than the previous year. Net earnings of $73.5 million improved 26% from 2015. Earnings per share of $0.83 improved 28% over last year. Sales in our North America segment of $424 million declined 1% compared with the first quarter of 2015. Price increases implemented in April 2015 in the U.S. and Canada for residential and commercial water heaters, as well as higher boiler sales were more than offset by lower volumes of residential and commercial water heaters in the U.S. January and February 2016 industry volumes declined 16%, primarily due to a pre-buy in the 2015 first quarter. We expect the trend continued in March. Rest of World segment sales of $217 million increased 11% compared to 2015. China sales increased 17% in local currency, driven by higher demand for water heaters and A. O. Smith branded water treatment products, as well as seasonal demand for our in-home air purifier products. On slide six, North America operating earnings of $92 million were 29% higher than segment operating earnings in the previous year, and operating margin of 21.7% was significantly above the 16.6% operating margin one year ago. Higher prices in the U.S. and Canada and lower material costs contributed to the significantly improved segment performance. The impact to profits from lower residential and commercial water heater volumes in the U.S. and $3 million of incremental costs associated with our ERP implementation partially offset these favorable factors. Rest of World operating earnings of $27 million improved 3% compared with 2015. Higher China sales were partially offset by increased selling, general and administrative expenses in China and a larger loss in India. Segment operating earnings were reduced by approximately $1.5 million due to China currency translation. Higher selling costs to support expansion in Tier 2 and 3 cities and our e-commerce platform in China, as well as higher developmental costs associated with new products, including expansion of our air purification product portfolio in China, were the primary drivers of higher segment SG&A expenses. As a result of these factors, first quarter segment operating margin of 12.4% was 100 basis points lower than a year ago. Our corporate expenses increased in the first quarter compared with the year-ago period, primarily as a result of higher expenses at our Corporate Technology Center. Our effective income tax rate in the first quarter of 2016 was 29%. The rate was similar to the prior-year quarter and lower than our previously disclosed effective tax rate guidance for the full year 2016 of 30.5% to 31%, due to the early adoption of a new accounting standard for share-based compensation. The lower effective tax rate compared with our previous guidance benefited our first quarter 2016 results by $0.02 per share. Cash provided by operations during the first quarter was $27 million compared with flat operating cash flows during the same period last year, driven primarily by higher earnings in the 2016 period. Our liquidity position and balance sheet remain strong. Our debt to capital ratio was 16% at the end of the first quarter. We have cash balances totaling over $640 million located offshore, and our net cash position was approximately $354 million at the end of March. During the first quarter, we repurchased, under a 10b5-1 automatic trading plan, approximately 430,000 shares of common stock for a total of $30 million. We had approximately 2.15 million shares remaining on our existing repurchase authority at the end of the first quarter. This morning, we announced an increase in the midpoint of our 2016 EPS guidance and a range between $3.47 and $3.55 per share. The midpoint of our EPS guidance represents an 11% increase in EPS compared with our 2015 results. Please turn to slide nine for several 2016 assumptions. We expect our cash flow from operations in 2016 to be approximately $330 million, which is less than 2015, primarily related to expected higher outlays for working capital this year compared with 2015. Due to the strong growth of our water treatment business in China, we will reach the capacity of our existing lease facility in the next few years. Our 2016 capital spending plans include approximately $20 million related to construction of a new water treatment manufacturing and air purification assembly facility in China. Total cost for the facility, which is expected to be completed in 2018, will be approximately $65 million. In addition, we will complete capacity expansion at two North America plants in 2016 at a cost of approximately $7 million. Our 2016 capital spending plan also includes approximately $9 million to support the ERP implementation. We've revised our capital spending plans for 2016 and now expect capital expenditures to be between $110 million and $120 million in 2016, a reduction of approximately $10 million due primarily to changes to the construction timeline of our new plant in China. Our depreciation and amortization expense is expected to be approximately $70 million in 2016. We successfully completed three ERP go-live milestones since 2014. We expect to convert the vast majority of our North America plant sites by the end of 2016. Expenses related to our ERP implementation were about $16 million in 2015 and are projected to be approximately $24 million in 2016, higher than the previous year due to the large number of scheduled go-live events in 2016. The majority of the remaining 2016 incremental ERP cost is expected to occur in the fourth quarter of 2016. Our corporate and other expenses are expected to be approximately $48 million in 2016, higher than the $43 million in 2015, primarily due to higher expenses at our Corporate Technology Center and expected lower interest rate than last year on cash deposits in China. Our effective tax rate is expected to be approximately 30.5%, higher than the 29.7% rate experienced in 2015 due to a change in our geographic earnings mix. We expect to continue to repurchase shares at a value equal to our free cash flow after dividends, or approximately $175 million in 2016. The repurchase amount is higher than our original estimate of $150 million for the year, as we incorporated the lower capital spending projection into our repurchase plan. This is consistent with our stated policy to maintain our net cash balance at approximately $350 million. As a result, we expect our average diluted outstanding shares for the year will be 88 million. This is the high end of our previous guidance as adoption of the share-based compensation standard results in more diluted shares outstanding. I will now turn the call back to Ajita, who will summarize the business assumptions in our 2016 outlook and our growth strategy beginning on slide 10. Ajita? Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Thank you, John. We expect our business to collectively grow between 9% and 9.5% in local currency and between 7% and 7.5% in U.S. dollars in 2016. The assumptions for currency underlying our organic growth forecast are at current rates, with the exception of a modest decline assumed in the China currency rate. We expect steel prices to remain firm, as they are up over $150 per ton since the beginning of the year. This will have a negative impact on margins starting in the second half of the year. Specific to our North America segment, we expect four months of pricing benefit in 2016 as the 2015 price increases in the U.S. will anniversary in late April. We expect U.S. residential water heater volumes will grow by 100,000 to 150,000 units in 2016, primarily as a result of new construction. We are seeing a trend emerge in the commercial water heater industry. The majority of the growth in commercial industry units so far in 2016 has been in the 55-gallon to 90-gallon electric category. You may recall similarly sized electric residential units were discontinued by NAECA III. Driven by continued growth in the small electric category, we expect U.S. commercial water heater volumes will grow 10,000 units in 2016 after strong growth in 2015. Residential and commercial boiler sales growth in the first quarter exceeded 15% as the continuing transition to condensing boilers and Lochinvar's new product introductions drove growth. Recall that about 55% of our Lochinvar-branded products are boilers and related products, including parts. The remainder, which is composed of residential and commercial water heaters, which declined in the first quarter primarily due to a heavy pre-buy a year ago. Our Lochinvar-branded sales are seasonally skewed to the second half of the year, which coincides with the heating season. The water heaters we sell in Canada are manufactured in the U.S. The Canadian dollar weakness has resulted in a significant product cost increase to our Canadian operations in 2016, which has been partially offset by announced price increases. The magnitude of this headwind is over $5 million. These factors, in addition to the assumptions John discussed earlier, lead to our expectation that our North America segment operating margin will be between 20.5% and 21% in 2016. Specific to our Rest of World segment, we are a consumer products company in China, which distinguishes us from most industrial companies operating in China. In local currency, our sales in China have grown by 18% in 2014, 16% in 2015, and 17% in the first quarter of this year, despite a softer China economy. We have various growth drivers underpinning our China business, which give us confidence to project an annual growth rate of approximately 15% in local currency for 2016. These drivers include: overall water heater market growth driven by household formation and an emerging replacement market; geographic expansion; market share gains; growth in water treatment and air purification products; and an improved product mix. The Rest of World segment operating margin for 2016 will be similar to last year's margin of 13%. I'm now moving on to slide 11. Especially in these volatile and uncertain economic times, we believe our long-term annual 8% organic growth potential and our stable defensive replacement market, which we believe represent approximately 85% of North American water heater and boiler volumes, positively differentiates A.O. Smith among other industrial companies. Coupled with growth and stability, we have a strong balance sheet poised to take advantage of strategic acquisitions that add shareholder value as well as allow us to return cash to shareholders. That concludes our prepared remarks, and now we are available and open for your questions.

Our first question comes from the line of Bhupender Bohra from Jefferies. Your line is open.

Hey, good morning, guys. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Morning.

So I just wanted to get some color on the China. Ajita, in the press release you guys have talked about higher selling cost to support expansion in Tier 2 and Tier 3 cities. Can you expand on that, like where is this expansion happening and which particular markets we are talking about here? Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Why don't I give a headline, and John maybe you want to add some color to it? A couple of things. We are expanding into – we have always been expanding and we are expanding into smaller cities. We are expanding our own A.O. Smith stores. We are also investing in some new categories, which is continued investment in water treatment and air purification, and we are also investing in the commercial side of the water treatment market. So there's lots of investment going on for expansion in the future. One of the things as we think and as I have talked about very consistently, we are never going to be dependent on a stagnant portfolio of products in China for growth, okay, because that obviously doesn't last forever. And as we are always going to be investing in new categories to be able to leverage this incredible asset that we have in China, our brand name, our distribution, our manufacturing capability, the very strong team we have in China. So we are constantly investing in these new categories which are going to be our growth engines in the future. And right now, like I said, we are continuing to invest in water treatment and the commercial side of water treatment, air purification expansion geographically. And as we've consistently said in the past, we are looking at mid-teens type margins in China over the long term. There's going to be leverage as our volume grows, but the leverage is going to be less than what you would find in the U.S., because we are investing and because the SG&A in China tends to be much more variable than the SG&A expenses in North America. John, you want to add anything to that? John J. Kita - Chief Financial Officer & Executive Vice President: Yeah. I think the only thing I would add is obviously wage inflation is going up faster in China, and so there is some inflation cost also in that SG&A number.

Okay. Just a follow-on on China, again. When you look at the headline news about the property prices or the residential prices in China, home prices going up and the household formation you talked about in your commentary, can you give us some color? Like as we talk about like some of the consumer markets kind of slowing down, you look at like auto companies talking about slower growth in China over the next five years, how does that hold actually with your 15% view over the next few years here? Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Bhupender, that's a great question. And again, John, you maybe want to add some color. As we look at it, in the appliance, in the consumer appliance categories, we are not seeing that, okay. And some of the things that we look at, if you look at the some of the forecasts we have IMF, UBS, they are forecasting the consumption component of GDP to grow between 7% and 8% in 2016. We are also seeing the sales of retail square footage of housing actually go up. So some of the indicators we are seeing in the macro economy, we hear different numbers and different parts of it, and certainly the export related industries are not doing well. But the consumption based industries seem to be doing well and we are seeing that in our market. John, anything you want to add? John J. Kita - Chief Financial Officer & Executive Vice President: Yeah. And I think just remember that in our China growth model, we're assuming about 7% market growth in water heaters. And we're comfortable with that as appliance sales seem to be going up 6% and 7%, and I think we're going to benefit from the fact that replacement is becoming a bigger component. So those are kind of our assumptions in our 15%.

Okay. Thanks so much. I'll be joining the queue. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: And maybe just one thing also, Bhupender, when we look at – for our 15% growth we look at a market growth of about 7%, and then the other components in terms of things like new products, market share growth, et cetera, are coming in to add up to our 15%. So right now, we feel comfortable with what we see.

Thank you.

Thank you. Our next question comes from the line of Charley Brady from SunTrust Robinson. Your line is open.

Hey. Thanks. Morning. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Morning.

Back on the China question, your comment on the replacement market coming to China, can you just maybe comment on what the replacement market is starting to look like in China and sort of what kind of growth you'd expect over the next 18 months, 24 months out of that? John J. Kita - Chief Financial Officer & Executive Vice President: Well, all we have, Charley, is kind of our survey data. And as we look in Tier 1 cities, if you go back two or three years, that percent was about 35% replacement, and now it's approaching 50%. And that's just logical as penetration in Tier 1 cities is probably approaching 90-plus-%, and units fail. I mean we talk about our units lasting eight years to nine years and we think maybe our competitors' last less, and now replacement is going to become a bigger component.

Does that over time, maybe in the next 12 months, have any positive impact on reducing the promotional spend that you've got to put out there, or is it just something you've got to keep doing because you're still expanding in the market, and now you've got the water and the air added into that? John J. Kita - Chief Financial Officer & Executive Vice President: No, I don't think that by itself results in lower promotional expenses, I don't know if you can see that, but I don't think that would. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: No.

But I guess do you see it coming down, I guess is where I'm getting at? John J. Kita - Chief Financial Officer & Executive Vice President: Well, I think without a doubt, as Ajita said, our long-term objective is to have SG&A as a smaller percent of sales. I mean we want to be able to leverage our top line growth. But right now, we're investing – we're incubating some businesses like Combi Boilers, like water treatment, like air purification. And as we expand the distribution outlets, we incur costs for display, we incur costs for promoters, et cetera. So that's still kind of the mode we're in right now. But clearly, our objective is down the road to be able to leverage that. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Right. And also, we are always very cognizant of these costs and doing things to bring them down. John said something that reminded me. In the past when we had – when we expanded, and we had new promoters, we spent a lot of money training those promoters. Now, we do obviously still train them, but we use things like WeChat and different tools that bring that promotion – the training cost of these promoters down very significantly, okay? So we are always looking at how we make those SG&A expenses go down and become much more productive. But at the same time, as we expand geographically and get into new categories, we are going to have to be spending, investing to make sure that we have the adequate presence in those categories with new competitors.

Great. Thank you.

Thank you. Our next question comes from the line of Matt Summerville from Alembic Global Advisors. Your line is open.

Hey, morning. A couple of questions. First of all, just with respect to steel prices moving higher as of late, and you mentioned this in your prepared remarks, how should we think about the cascade, if you will, or progression of margins as we move through the year, particularly in North America relative to where you are in Q1? And obviously mix may or may not play a role in that, so if you could fold that in, that would be great. John J. Kita - Chief Financial Officer & Executive Vice President: Yeah. I would say, it won't really affect margins much in the second quarter. As you know, there is a lag. But we certainly do see a progression of margins affecting the third quarter and fourth quarter because this increase really started happening in March, late February. And so it's going to affect us in the third quarter and fourth quarter.

I guess as a follow-up and unrelated, moving over to China, historically you've given some quantification of water treatment, air purification revenues. If you're willing to do that for the first quarter and what your expectation is for 2016, that would be helpful. John J. Kita - Chief Financial Officer & Executive Vice President: Yeah. Water treatment did very well, was up 30%. We would expect it would be up about 30% for the year. Air purification did quite well. As we've said it's a seasonal business. It was up about $8 million or $9 million. We didn't basically have a product the prior year. And as we've said in the past, it'll really be the fourth quarter and the first quarter will be the major selling points for air purification. So we're still comfortable with that forecast of $20 million or so, and it'll be primarily first quarter and fourth quarter. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: And we have some market leading products coming out during the year that'll help the fourth quarter season. So we feel pretty good about that forecast.

Great. Thanks, guys.

Thank you. Our next question comes from the line of Mike Halloran from Robert Baird. Your line is open. Mike P. Halloran - Robert W. Baird & Co., Inc. (Broker): Morning, everyone. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Morning, Mike. Patricia K. Ackerman - Treasurer & Vice President-Investor Relations: Morning. Mike P. Halloran - Robert W. Baird & Co., Inc. (Broker): So a couple questions on North America, first on the commercial side. Obviously, you're still expecting growth for the full year. What happened in the first quarter on the volume side? AHRI numbers seem to point to a decent environment still. Anything specific you'd point to there, and then what gives confidence (27:15)? John J. Kita - Chief Financial Officer & Executive Vice President: It really relates, Mike, to what Ajita said, the 55-gallon to 90-gallon electric category, that represented all of the growth. We just recently introduced products to better compete in that portion of the commercial water heater market and we expect to get our share of this market as the year progresses. But that's really the reason we were down a little bit while the market was actually, we think, up a little bit. Mike P. Halloran - Robert W. Baird & Co., Inc. (Broker): Okay. That makes sense. And then talk about the inventory levels on the residential channel in North America, obviously challenged in the first quarter on the comps side. Are you seeing the right sequential patterns in the numbers to help give some confidence in that up 100,000 plus units this year? And maybe just talk about what the customers are saying on that side? John J. Kita - Chief Financial Officer & Executive Vice President: Well, obviously, the first quarter was down, and quite frankly it was down more than we expected. We would have thought it would have been down 300,000 or so, the pre-buy that we said last year and it will turn out to be down more than 400,000. We're still comfortable with that 100% increase -- I mean, 100,000 unit increase for a couple of reasons. One is we obviously have very favorable comps as we get to the last half of the year. We expect completions to be up about 100,000 to 150,000, so that should pass through. We just completed our regional sales managers, and I think as the input we got from them is that they're positive and their customers are positive for the year. So we'll continue to monitor it. But yeah, it did start out a little slower than we thought, but we think that forecast of $9 million, $9.1 million is certainly achievable at this point. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Yeah. Mike P. Halloran - Robert W. Baird & Co., Inc. (Broker): Great. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: And also, Mike, in terms of what customers are saying and what we're hearing in the marketplace, so this is anecdotal, but things we are hearing and consistently is that there was – obviously the buy-in was bigger than we anticipated, I thought it was. And part of the reason, which is what we're hearing, is that, normally, when there is a buy-in because of a price increase, it's the distributors who buy in. But this time, it seems like contractors bought in also, okay, that's what we're hearing. And the reason is that some of the new NAECA III type units were slightly bigger than the older units. So it was a tight fit, especially in multifamily housing, which is doing very well. And so there seems to be a new component of the buy-in. In talking to other plumbing industry suppliers to the wholesale marketplace, obviously people we don't compete with, also their thoughts in terms of new construction is very similar to ours, in that 1.1 million to 1.2 million type new construction. And so putting it all together, talking about what the sell-through rates are at distribution, we feel pretty good about the forecast and the guidance. Mike P. Halloran - Robert W. Baird & Co., Inc. (Broker): Great. I appreciate the additional color.

Thank you. Our next question comes from the line of Robert McCarthy from Stifel. Your line is open. Robert McCarthy - Stifel, Nicolaus & Co., Inc.: Good morning, everyone. Can you hear me? Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Yes. Patricia K. Ackerman - Treasurer & Vice President-Investor Relations: Yes. Robert McCarthy - Stifel, Nicolaus & Co., Inc.: Yeah. Okay. So I guess the question I have, obviously you had some price costs and some movement in this year in terms of North America, and I'll talk to Pat offline about some of the details of that in the back half. But just conceptually going forward, what are you thinking in kind of a steady state environment? You can get a couple of points of price, volumes will be a couple of points, what do you think you can get incremental margins on a sustainable basis in North America for the next couple of years? John J. Kita - Chief Financial Officer & Executive Vice President: Rob, we really haven't come out with a forecast on what margins are going to do in the next couple of years, and there is obviously a lot of variables in that. I mean we still expect that the industry is going to continue to grow, because that 1.1 million completions, that's below the norm we think. So we think that's going to continue to grow. We think that Lochinvar, given where they are specifically from a boiler standpoint, we think will continue to grow at 10%. And they obviously contribute at very attractive margins. So it's certainly our objective to grow margins, but we have not put out any forecast on what they're going to do in the next couple of years. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: But also I think it's – you can say that our most challenged category from a margin perspective is our residential water heater category, which we've talked about in the past. And again, we've said in the past that we expect 20% to 25% type incremental in that category and we feel pretty comfortable with that. Robert McCarthy - Stifel, Nicolaus & Co., Inc.: Now, that's helpful. And then switching gears to China and about water treatment, could you just expand about some of the investments you've made there on the CapEx side and does it point to some of your ambitions as to how big that market could be? Obviously, you had 30% growth I think in water heaters in the quarter. I think that was probably just a nominal number. But maybe you could just – not water, excuse me, in water treatment in China, but could you speak about kind of the opportunity you see there? Do you think there is a chance that perhaps investors are kind of underselling that opportunity over the longer term? John J. Kita - Chief Financial Officer & Executive Vice President: Well, CMM has put out an estimate that they think the water treatment market can grow over approximately 30% for the next several years. And the basis for that is the low penetration rate of units in China. We also are familiar with the water issues they have. We have the best product in the market. It wastes less water, longer lasting filter. And it's RO which is the area that is the preferred method for water filtration in China. So we're very comfortable as we look out that a 30% growth rate is achievable. And so whether investors are incorporating that or not, I mean we think we're building a very good water filtration business. Last year, the A.O. Smith brand sold $110 million worth; that was up from $75 million the previous year and up $43 million the prior year. We also have some small sales in Vietnam, some small sales in Turkey, and we're also still selling the legacy business. So I think we're developing a very solid water filtration business. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: I think also to add to that, as I look out into the future in terms of our – again, to be the leader, we have to have market leading products and we have a tremendous portfolio of products in the pipeline which I feel very good about. The other thing which I alluded to at the beginning of the conversation is that we are also now expanding and stepping into the commercial side of the water treatment business. This would be appliances for small restaurants and things like that. So we feel very good about the potential for water treatment in China and frankly around the world in emerging markets. Robert McCarthy - Stifel, Nicolaus & Co., Inc.: Thanks for your time.

Thank you. Our next question comes from the line of Jeff Hammond from KeyBanc Capital Markets. Your line is open.

Hey, good morning. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Hi, Jeff.

Ajita, just wanted to get back to just this whole inventory dynamic. So when you talk to your distributors about inventories and sell-through and maybe their visibility into the contractor, what's kind of your conclusion on the inventory situation? And I guess around that, any kind of pause or digestion from customers, just given how big the price increase was here for NAECA III water heaters? Ajita G. Rajendra - Chairman, President & Chief Executive Officer: First of all, like I said, this is anecdotal, so I don't have real good facts and numbers, it's conversation. One of the questions we were wondering about was whether people cut back on inventories and had the same dollar investment as opposed to unit investment because of the price increase, which is what I think you're alluding to. From what I understand in talking to some of our larger customers, they did not do that, okay, because their replenishment is really based on units. And so there wasn't any cutback because of that. I think that inventory levels in wholesale are okay. Retail maybe a little low, wholesale are where they should be, normal level. John, anything you can add to that? John J. Kita - Chief Financial Officer & Executive Vice President: No. I think to answer your last question, we have not seen any pushback from the end customer. And I've said this in the past, I mean if you look at what a water heater costs, it is the cheapest appliance out there. It's at a six-year warranty. It's going to last 13 years to 14 years, and it's very energy efficient. So it is a very realistically priced product to the end consumer, which is obviously important. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: So if you look at the different components – the different segments of people buying, if you think of new construction, it's going to happen. If you think of forced replacement, it's going to happen. If you think of – there is about, we think, 20% to 25% depending on the year and the economy of the replacement market is discretionary replacement. Now, that component you can say, wait a minute, maybe price does impact it, we don't have any real good facts. But at the end of the day, someone's going to buy a water heater maybe once, maybe twice in a lifetime. So it's not a price point that people have in their minds as being something familiar. When they are in the market, they go in and they check on a price and then they decide whether they're going to go ahead or not. That component could be impacted, but we don't really see evidence of that. We'll know more as time goes on because we have techniques, which we do track things like that and track people who buy water heaters and some of the reasoning. But some of those things – that data lags and we'll have to – it'll take us some time to really get to the bottom of that.

Just on China, you have quite a bit of cash trapped over in China. What's kind of the cost to repatriate that? We've heard about people kind of, with the FX volatility, wanting to kind of move cash out of China. How does that kind of inform your view on that trapped cash? John J. Kita - Chief Financial Officer & Executive Vice President: So we've taken out in the last two years or so $150 million of dividends out of China. When you take it out of China to Europe, you pay about a 10 – not about, you pay a 10% withholding tax to China. And then to bring it back from Europe back to the U.S., it would be an incremental low 20% type charge. So I mean that's the whole discussion going on in Washington, right, is it's very expensive to repatriate money back to the U.S. And until the government makes some changes in it, companies are going to keep it offshore. So we continue to look for opportunities in China. So at this time right now, we're leaving that money there, and we're comfortable with that.

Great. Thanks, guys.

Thank you. Our next question comes from the line of Scott Graham from BMO Capital Markets. Your line is open.

Hey, good morning. John J. Kita - Chief Financial Officer & Executive Vice President: Morning, Scott. Patricia K. Ackerman - Treasurer & Vice President-Investor Relations: Good morning.

So is there anything that you see in the market right now where the increase in steel prices that we've seen cannot be passed on to customers later this year? Ajita G. Rajendra - Chairman, President & Chief Executive Officer: I think, look, the pricing that we had last year is holding in the marketplace. In terms of the future, I really can't speculate in terms of what could or couldn't happen.

But correct me if I'm wrong that we're talking here mostly, right, about the distributors, because on the retail side, it's contracted. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Parts of it, yeah. John J. Kita - Chief Financial Officer & Executive Vice President: Yeah, a portion of it is.

Right. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: A portion of it is, so there are pass-through mechanisms for a portion of it.

And distributors like price increases as long as they're measured historically, right? Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Yeah. Scott, I'm not going to speculate on future pricing, okay? I mean that's something I've never done. If you look at over time, okay, let's look at the past rather than looking at the future, over time when there are significant material price increases, we've been able to pass that on to the marketplace. That's what the history has been. I can't speculate in terms of the future when it comes to pricing for obvious reasons.

No problem. Understand. Hey, was just wondering, piggybacking off of the cash questions, how does the M&A pipeline look? I mean is there any possibility of getting something done this year? Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Obviously, we can't talk about anything that's happening. But I can talk about there was a lull in the market in terms of potential – the activity level in the marketplace. There was a lull for a while, but recently things have picked up a bit. So there are the ups and downs, as you know, and the market is active.

Okay. Here's my last question. We're now toward the end of April, and water heaters are a pretty short cycle business. So I'm just wondering is, you made a comment during your remarks that you guys – or it may have been John, that you guys are expecting the pre-buy effects to impact some of April as well. Are you at a point today based on the most recent data, where the pre-buying maybe now looks more behind you? John J. Kita - Chief Financial Officer & Executive Vice President: Well, I'm not sure, Scott, the pre-buy was last year. That was when the pre-buy happened was last year, and it really happened kind of up through middle of April. I think our order rate, I'd tell you in April is about normal. So again, I think we have favorable comps the last half of the year, and we would hope we're going to see completions grow by 100,000 units, 150,000 units. So we'll certainly have better visibility as we get through the second quarter, but we think right now it's reasonable.

Right. No, John, that's what I'm saying. I know that the pre-buy was last year. John J. Kita - Chief Financial Officer & Executive Vice President: Yes.

What I'm saying is that have you seen in the recent data, where you're now largely done with that comp that the order rates are normalizing and it sounds like you are seeing that. John J. Kita - Chief Financial Officer & Executive Vice President: Yeah, but it's very short period, right, because again the pre-buy went through April 15 of last year, so I mean we're looking at a very short period.

Understood. Thanks.

Thank you. Our next question comes from the line of David Rose from Wedbush Securities. Your line is open.

Good morning. Thank you for taking my call. I had a couple of just quick follow-up questions; most of mine have been answered. I was wondering if you could break out – you broke out the water treatment and purifier sales increases in China, but I didn't capture the water heater number anywhere. What was the growth in water heaters in China, residential? John J. Kita - Chief Financial Officer & Executive Vice President: We really haven't given that out, but both our electric and instantaneous were up.

Okay. Up in mid-single digits, low-single digits? John J. Kita - Chief Financial Officer & Executive Vice President: It depends. I mean gas continues to grow faster than electric, which we expect.

Okay. And then lastly is on Lochinvar. I didn't hear a growth number out of Lochinvar, maybe I missed it. What did they grow in the quarter? John J. Kita - Chief Financial Officer & Executive Vice President: Yeah. Lochinvar had an interesting quarter. As we said, they were up about 15% on the boiler business, but they were down significantly on the residential side. And the reason for that was last year they had a pre-buy. Their units were up 44% compared to the prior year, while the industry was only up 14%. This year, their units were down 39% versus the industry as we said was down 16%. So their residential water heater sales were down over $2 million. So when you incorporate that into the boiler growth, they were up about 3% on a net basis, I think 4%, 5% on a gross basis. And why we're still comfortable with the 10% is they have favorable comps the last half of the year and their new boiler products have been very well accepted in the marketplace. So we think this residential piece was just a lumpy kind of quarter-to-quarter issue. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Yeah, with a very high buy-in last year. John J. Kita - Chief Financial Officer & Executive Vice President: Yes.

Okay. All right. That's helpful. Thank you very much.

Thank you. And that looks like all the questioners that we have in the queue at this time. So I would like to turn the call back over to management for closing remarks. Patricia K. Ackerman - Treasurer & Vice President-Investor Relations: Thank you all for joining us today. Please take note that we will participate in numerous conferences during the second quarter. Those are Oppenheimer in New York on May 10; KeyBanc in Boston on June 1; Deutsche Bank in Chicago on June 8; Stifel in New York on June 13; and William Blair in Chicago on June 15. Have a wonderful day.