Good morning, ladies and gentlemen, and welcome to the A. O. Smith Corporation Third Quarter 2018 Earnings Call. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Patricia Ackerman, Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you, Adam. Good morning, ladies and gentlemen, and thank you for joining us on our 2018 third quarter results conference call. With me participating in the call are Ajita Rajendra, Executive Chairman; Kevin Wheeler, Chief Executive Officer; and John Kita, Chief Financial Officer. Before we begin with Kevin'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 Kevin, who will begin our prepared remarks on slide 3.

Thank you, Pat, and good morning, ladies and gentlemen. Here are a few comments about our third quarter. We achieved sales of $754 million, net earnings of $0.61 per share or 13% higher than our earnings per share in 2017. We continued to review our capital allocation and dedicated portion of our cash to return to shareholders. We repurchased 1.7 million shares for approximately $106 million through the first nine months of the year. We plan to continue buying back our shares at a previously stated $135 million annual pace using a 10b5-1 plan. We expect to opportunistically buy back up to $65 million worth of shares in the open market in 2018. We announced a 22% increase to our dividend in October. This is the second increase this year. The five-year compounded annual growth rate of our dividend is about 30%. We repatriated nearly $300 million during the first nine months of 2018 using the proceeds to repurchase our shares and pay down floating rate debt. Our A.O. Smith-branded water treatment products are now in 1,700 Lowe's stores nationwide. John will now describe our results in more detail beginning on slide 4.

Sales for the third quarter of $754 million were 1% higher than the same quarter in 2017. Net earnings in the third quarter of $105 million increased 12% from the third quarter in 2017. Third quarter earnings per share of $0.61 increased 13% compared with the same quarter in 2017. Sales in our North American segment of $487 million were flat compared with the third quarter of 2017. Pricing actions in 2018 on water heaters and boilers related to higher steel and freight costs were more than offset by lower water heater volumes. North America water treatment sales comprised of Aquasana, Hague and our recently-launched water treatment products at Lowe's, incrementally added $9 million to our North America segment sales. Rest of World segment sales of $274 million increased 1% compared with the same quarter in 2017. China sales growth was 2.5% in local currency. Higher sales of water treatment products and air purifiers in China were partially offset by a decline in electric water heaters compared with the prior year. Currency translation reduced sales by approximately $6 million compared with the third quarter 2017. On slide 6, North America segment earnings of $106 million were 4% lower than segment earnings in the same quarter in 2017. The unfavorable impact from lower sales of water heaters and higher steel and freight costs were partially offset by pricing actions. Spending associated with the launch of water treatment products at Lowe's amounted to approximately $2 million. As a result of these factors, North-American segment margin of 21.7% was lower than last year. Rest of World earnings of $39 million increased nearly 16% compared with third quarter of 2017, primarily as a result of lower expenses associated with employee incentive programs and smaller losses in India. As a result, third quarter segment margin…

Okay. Thank you, John. Our outlook for 2018 includes the following assumptions. We project U.S. residential water heater industry volumes will increase 250,000 to 300,000 units in 2018. This assumption is lower than our July forecast. Based on our shipments in September, we believe the industry will be down approximately 100,000 units in the second half of the year. This assumption includes tankless units. Similarly, we revised our forecast for U.S. commercial water heater volumes. Based on year-to-date shipments and a difficult fourth quarter comparison, we now forecast a 5% decline in volumes. As a result of significantly higher steel prices and inflation and freight and other costs, we announced a price increase effective in early June, which average approximately 10% on the majority of our U.S. water heater products. Given recent significant depreciation of the China currency, we now project a full year translation benefit of approximately $23 million compared with sales in 2017 which is $10 million lower than our July forecasts. The translation benefit to earnings is approximately $3 million for the year. Our projection assumes that China currency will appreciate slightly from current levels during the fourth quarter of 2018, resulting in a translation detriment of approximately $12 million to sales and $2 million to earnings in the fourth quarter compared with the rates in 2017. We expect the losses in India to decline from $7.5 million loss in 2017 to approximately $5 million loss in 2018. For the full year, we expect sales in China in local currency to grow approximately 3%. Sales continue to be negatively impacted by a slowdown in housing sales, which we believe is primarily driven by a slowdown in the China economy, increasing consumer anxiety surrounding international trade issues. We launched our water treatment product portfolio in over 1,700 Lowe's…

And your first question comes from Doug Clark of Goldman Sachs. Doug, your line is open. Doug Clark - Goldman Sachs & Co. LLC: Hey, guys. Good morning, and thanks for taking my question. My first one, just looking at China, lower growth for this year and then also kind of lower growth again for next year. I'm curious, and you didn't really mention just competitively and even this morning, a competitor actually had a fairly nice kind of year-on-year growth in water heaters. So, I'm wondering if there's anything kind of competitively that you think has changed recently, and then also if you could comment on just how inventory levels sit today. It sounds like that might be a little bit of a headwind heading into next year as well. Thanks.

I'll start, Kevin. Our market share has been basically held steady year-to-date so in the water heater business. And so, we saw the industry declining actually some in the third quarter. So, I'm not sure which competitor you're talking about. But our market share has held steady for the year-to-date. Inventories are up about the same percent from second to third quarter, as they were last year from second quarter to third quarter. That's not unusual because we're entering our highest-selling season, which is the fourth quarter. I will tell you, though. Inventory levels are still elevated as we talk, and we'll kind of evaluate as the fourth quarter happens with respect to the online selling holidays, et cetera. Doug Clark - Goldman Sachs & Co. LLC: Okay. Great. And then, my follow-up. I'm just curious on the traction with the formaldehyde product that I believe you launched in 3Q in Rest of World.

The new products were received very well by the Chinese consumer, growing about 40% growth rate. They have done very well during the summer months. And during the winter months, the leaching of formaldehyde will decline a bit. So, we'll see a sales drop in Q4. But overall, the products were received well. We believe formaldehyde has a benefit to the consumer, and we look forward to next year as we get into the summer months and growing that particular business with our Chinese consumer. Doug Clark - Goldman Sachs & Co. LLC: All right. Great. Thanks a lot.

And your next question comes from Matt Summerville of D.A. Davidson. Matt, your line is open. Matt J. Summerville - D. A. Davidson & Co.: Thanks. A couple of questions. Can you just provide a little more granularity around China in the third quarter? What did the water heater business actually do on a year-over-year basis water treatment? And then, I just want to understand, was the air purification business overall up 40% year-over-year? I want to make sure we have that number correctly. John, if you can just go through...

Yeah. Air purification was up 40%, but it's off a very low level. So, I think it was up about $3 million. And as Kevin said, it was really the formaldehyde sales, which quite frankly we saw declining a little bit as we got into the last month because you're getting out of the summer months. But air purification was up about $3 million. Water treatment, we said, was up over 20%. Then, you had the two negatives, were the currency of $6 million. And then, electric water heaters were down. And that's how you ended up flat. Matt J. Summerville - D. A. Davidson & Co.: Got it. And then, I guess, relative to the inventory position you guys described coming out of the second quarter in China, have you made any progress to-date in drawing down those inventories? Or do you sort of need to wait for the online season to really kick in in the back part of the year before you're able to do that?

Yeah. I'll tell you, our days on hand were down in the third quarter. However, that's really not a great measurement, considering the volatility. We used the – a 90-day forward forecast, and we have some seasonality that could be misleading. So, we're using a variety of inventory measures by customer, by product category, by percentage increase, offline, online. And so, overall, inventories are elevated. We look for a stronger fourth quarter, and we'll continue to evaluate our sales through the busy season, Singles' Day and other promotions 12-12. And we'll determine, if necessary, if we need to take additional actions on promotions or any kind of a bundling activity. Matt J. Summerville - D. A. Davidson & Co.: Thank you.

And your next question comes from Jeff Hammond of KeyBanc Capital Markets. Jeff, your line is open.

Hey. Good morning, guys.

Good morning.

Thanks for the color on 2018. Just – maybe just hitting on the comment about China and the lower growth rate into 2019 but confidence back to double digit. Just as you think about that 15% long-term growth rate and some of the maturity in water heaters growth in that market, how are you thinking about kind of potentially revising that long-term growth rate?

Well, I'll tell you, the – long term, we firmly believe that the U.S. and China economies are intertwined in that the trade issues and so forth that we're facing today and some of the slowdown in the economy will get resolved. There is certainly a growing middle class that will continue. Right now, they're saving money rather than spending due to some of the uncertainty. But going forward, we expect to – for the economy to grow certainly double digits as we go forward as the consumer confidence comes back. And as far as rating part of the business?

Yeah. I think, Jeff, when we modeled, we've done some modeling out. And basically, we think China can get back to low-double digits once the economy recovers and housing starts growing. And when you look at that weighted average models there, you end up with about a 7% growth going forward. We just felt it's not appropriate to pull that out at this point because we are entering a period here where housing has been down. Now, as Kevin said, China and the U.S. need each other. We've talked to a lot of consultants. I mean, there is a possibility this thing gets resolved at the G20. If it doesn't, I think the thought process is sometime early-to-mid next year it does get resolved. And so, we certainly think, as Kevin said, you have a growing middle class. You have the urbanization going on. You have household formation. And right now, the consumer is saving. We've got that from some of our banks because their confidence is down. But we do think, going forward, certainly a 7% or so once we get through this hiccup, if you will, is achievable – total company.

Okay then.

And I would just add, again, our premium brand, our broad distribution, the innovation that we bring to market, as the economy turns around, we feel good that we can leverage those going forward into the future.

Okay. And then, just help me with the 4Q bridge. I think year-to-date, you're up 6.6%. You're saying 7% growth for the year. Maybe I'm confused with some of the moving pieces on currency. But how should we think about 4Q core growth rate in North America and China?

Well, so in North America, we would tell you we're forecasting the industry to be up over 150,000 sequentially. So, we didn't really talk about residential. But in our mind, what happened is July and August were kind of proceeding as we expected. And then, quite frankly, September was down quite a bit. And so, we think the quarter was down close to 125,000 units. Now, when we look at October, we look at our order rate, we look at our shipments, sequentially we're getting back to where we thought we would be. So, we're forecasting the fourth quarter to be up about 50,000 to 75,000 over the prior year, but up 150,000 to 175,000 over the third quarter. So, I think that's – we'll certainly see health on both commercial and residential as we move to third quarter to fourth quarter. Quite frankly, on China, we're forecasting it to be relatively flat, up a little bit year-over-year but that's – in the fourth quarter. That's really driven by the fact that you may recall last year's fourth quarter was up 25% almost from the prior year. So, we have a very difficult comp there. So, then water treatment continues to grow in the quarter. And Lochinvar we think will be sequentially relatively flat, but that's a good fourth quarter for them. So, I don't know if that helps.

Yeah. That's perfect. And then, just last one on the inventory destocking. I mean, it seems like you're not going to make a whole lot of progress this year destocking. When do you think that destock, as you model it out, when do you think that destocking or what are you assuming when that destocking is kind of out of the way?

I think that primarily will be driven by the economy in its recovery. So, as we look at it, right now, we're continuing to drive some inventories down, use the promotions that we talked about in Q4. And again, as the economy returns, when that is, we're not 100% sure, but that will be the primary driver for us to drive some of our inventories down.

Okay. Thanks, guys.

And your next question comes from Scott Graham of BMO Capital Markets. Scott, your line is now open.

Yeah. Hi. Good morning. I just want to make sure I understood one of your statements there, John. Is this the official day when you, as a company, take down your 8% organic goal to 7%? Is that what you're saying?

I mean, Scott, what I said is we did the modeling and if China grows at 10%, what we certainly think is doable, then the growth model is 7%. And quite frankly when, from where we are, we think that's a reasonable objective, obviously. And you've talked about it in the past. You have law of large numbers. We now have a $1.1 billion business, so growing at 15% becomes difficult. And so I would tell you, as we look forward, once the China economy recovers, we think that 7% is achievable.

Right. But then, I think you all – that's very helpful, John. Thank you. I think then I also heard you say that, in these sort of more turbulent times, be it some things going on in the U.S. which I want to ask you about as well as China, that your organic guidance for this year is kind of what you expect during that period. Is that, am I putting words in your mouth?

I'm not sure the question. So, this year, what we've said is 7%. And I think when we look at next year, organically in local currency, we're saying our best estimate, by the way it's preliminary, is 5.5% to 7% and then imputed in there is China growing at about 3%. And what we would think happens is China starts growing a little bit more as the year goes on next year as some of these trade issues become addressed. I will tell you. We were all in China two weeks ago. And you don't have to do anything but pick up the paper and turn on the TV to see that there's discussions about the trade. And the consumer confidence levels we see are down. But again, if you look at China's 1.2 billion people, it's got a growing middle class and they say they're saving now instead of spending, that will turn. So, as we look into next year, China is not as much as the model but North America is more as we have the price increase, we have the addition of Lowe's and we think boilers continue to grow at 10%.

Yeah. Got you. On North America, what I want to maybe triangulate toward is maybe some type of an idea on the volumes. It looks to me as if when we consider the pricing realizations that you're getting that the organic volumes were – in North America in total were sort of close to down low-single digit. And if that assumption is correct particularly on – well, frankly both sides, the water heater side which is just as replacement-oriented in commercial as it is in residential, why would we see a number that weak this quarter? Was there destocking in North America?

I would tell you that, when we looked at Q2, it was very strong. And then, as we got into Q3, as we talked about, it was much weaker. And what it indicated to us that there was a larger pre-buy than we anticipated. So, in Q3, we had an adjustment there. We were probably a bit too optimistic. But again, we had a really poor September. We see October coming out and rebounding very well. And I will tell you, I've been in this industry about 30 years and there is always a difficulty in predicting how a price increase is going to be implemented and how it's going to be executed in which the balance between the quarters and this proved out to be very similar. But as you look at it going forward into Q4, we think that adjustment has been made. We look for solid growth in Q4 and any of the gap, I think we can attribute to a larger pre-buy than we initially thought.

And I think the other thing, Scott, is we still are forecasting the industry to be up 250,000 to 300,000, and you're working with completions that are probably up 50,000. So, I mean, we're still having a strong industry for the year. When you talk about replacements being up 200,000, completions being up 50,000 plus because we're saying 250,000 to 300,000, so we- as Kevin said, we are probably a little optimistic as we saw in the first couple of quarters. But these volumes can fluctuate quarter-to-quarter.

Understood. Thanks.

Your next question comes from Charley Brady of SunTrust Robinson Humphrey. Charley, your line is open.

Good morning, guys and Pat.

Good morning.

Good morning.

I just – on China, on the margin in Q3, you commented you had some lower employee incentive. I see on the guidance you got out for 2019. Can you give us a sense, I mean, we've permanently taken some costs out of there because you obviously – the expansion rate has probably slowed or this was sort of a kind of a one-off aberration in Q3 that the margin really popped up there?

Well, so the way – Charley, what we looked at is China was fairly optimistic at the midyear point that they were going to be able to meet their objective, which would have called for bonus somewhat similar to the prior year. But as we got through the quarter – through the third quarter, it became obvious that they were not going to. So, there was an adjustment down at the accrual that they had made in the third quarter. I think you have to look at it kind of year-to-date, to kind of look at the margins, et cetera, because there was some benefit in the third quarter because of what we had booked in the first and second quarter.

Can you quantify what that reversal would have been? I guess, I'm trying to get to what a normalized – given the volume rate in Q3 in China, what a normalized margin would have been for Rest of World.

Yeah. It was close to a $5 million reversal of the accrual, if you will. So where we stand now at the end of the third quarter is where you should be which is three quarters of what you expect to pay.

Got it. Thanks very much. And I guess, on the – as we look to the U.S. market in water treatment, you've rolled out in the Lowe's, you commented there was some disruption there as you tried to ramp up capacity. Can you just expand upon that a little bit and where have sales been pushed from 3Q into 4Q or even into 2019?

The disruption that we talked about was we had to double our capacity at our Hague facility in Columbus. That – for the most part, the equipment came in. Everything was going according to plan. But we did have some labor issues up there. So, we were unable to really produce the quantity that we needed for Lowe's. We are – expect to be back on track but we're close to on track now. And we – you're looking at – as I mentioned in the remarks that we'll sell about $14 million to Lowe's, which we anticipated $14 million to $15 million. So, there'll be no disruption there. But there's one that it just took a little bit longer for us to ramp up and to get the inventory in the stores and into their distribution centers.

Thanks for that. And then, just continuing on the water track, that's an area, in terms of M&A perspective, you made a few acquisitions in there, you're kind of building up a platform, you got the Lowe's distribution. I mean, can you just talk about kind of opportunities you see – the additional opportunities you see in the water market in North America to make that a bigger piece of North America?

From – on the water treatment side, I think we've demonstrated that there are opportunities as we've entered this particular business segment. If you look back several years, we didn't even have a water treatment business. And through acquisitions in China and then recently with the acquisition of Aquasana and Hague, we've been building that portfolio. It certainly widens our lens for the ability to look for acquisitions that will complement the other parts of the business. So, the answer, is it our lenses is wider? Absolutely. I'll be continuing to look for opportunities that complement our business and also enhance our capabilities? The answer is yes. And we'll continue to look for those and we'll – again, we have to look for the right business, the right return and the right fit for our company. But certainly, there are opportunities out there for our business to expand in water treatment and to acquire additional companies going forward.

Thank you.

Your next question comes from Michael Halloran from Baird. Michael, your line is open. Mike P. Halloran - Robert W. Baird & Co., Inc.: Good morning, everyone.

Good morning. Mike P. Halloran - Robert W. Baird & Co., Inc.: So, just one for me, back to the Rest of World margin questions. I certainly understand the dynamic around incentive comp. But as you look forward to next year and you guys see a lower growth rate, how does that impact your variable spending process? Because, obviously, a lot of the margin – lack of margin leverage in that segment has come from the magnitude of growth opportunities, promotional opportunities and all those things to drive the top line growth. Does that calculus change at all as you move into next year at a slower growth rate?

I mean, certainly, Mike, we're – for example, we're putting in a hiring freeze right now from an SG&A standpoint primarily. We're accelerating the closure of – our store closures, the nonproductive stores. And, yes, we are very – going to take a very hard look at our direct selling and our advertising budgets as we go into next year to rightsize it until the market recovers, which we expect it will. Mike P. Halloran - Robert W. Baird & Co., Inc.: Thanks. That's what I needed. Appreciate it.

And your next question comes from David MacGregor of Longbow Research. David, your line is open.

Thank you. Good morning, everyone.

Hi. Good morning.

I'm just wondering, you may have covered this and I may have just missed it. But within the China water heaters, did you talk about units versus ASPs?

I think they're pretty similar, Pat, right?

Yeah.

Yes. The decline is pretty similar, yeah.

Okay. And then, you talked a few points here in the call this morning about just the weaker consumer, the weaker sentiment, the weaker consumer confidence over there. I mean, I guess I'm not all that familiar with the Chinese consumer. But it seems like, in America when that happens, the consumer typically trades down. So, are you seeing them trade down over there? And if that's the case, I'm just wondering, does that bring you more in conflict with sort of mid-price point product and from a competitive standpoint, does this sort of mandate or require you to kind of extend your line structure down market and just adjust for that?

Well, I'd say we're not necessarily seeing trade-down, but I don't think you necessarily see the trade-up that you had been seeing. We've talked about in, on previous calls that especially on the online market, we're bringing out, I'll call them, some mid-priced products that are more in the sweet spot. I mean, what happened is, if you think of the, I'll call it the RMB 3,000 to RMB 5,000, we were in that spot for some of our category and then we raised prices a year ago and moved out of that category. So now, we're bringing back some products to attack the high end of that market, which we think will help us from a sales next year. But I would say we haven't seen trading down. But I think, as you said, if consumer confidence wanes, you probably don't see them trading up. I think what we're really seeing is they're saving rather than spending. That's it, point.

Right. And just second question just if the 8% is now 7% and kind of the growth across the model maybe slowing here a little bit. As you think about kind of the next platform for growth, and it certainly sounds like there's a lot of potential in water treatment. Congratulations by the way on the progress with sort of the listings at Lowe's. But do you start looking at tankless water heaters a little differently now and start thinking about maybe making a bigger commitment to that category? Thanks.

Well, tankless today, in the U.S., represents about 8% of the total market. And I would tell you that we have made a commitment to the tankless category and new products and in bringing them out both with rack systems on commercial and so forth. So, the way we look at it is we are in the hot water business. And so, we provide hot water solutions to our various customers in various channels. And tankless is a component of it, which is growing, and tank is also a component of it. And again, trying to provide the best solution for that consumer is our goal. Not so much guiding towards one technology or the other. So overall, we'll continue to invest in tankless technology and bring new products out that we need to compete, as well as on the tank side of the business. So, for us again, I would go it's more of a solving a consumer's hot water issue rather than it is more from a tankless perspective because we look at both of those as products that we need to have to be competitive in the market long term.

Thank you very much.

And your final question comes from Alvaro Lacayo from Gabelli. Alvaro, your line is open. Alvaro Lacayo - Gabelli & Company: Good morning. Just two questions. One, the small question I didn't quite hear what the growth rate for the quarter was for Lochinvar and separately for boilers. And then secondly, bigger picture, I wanted to hear some updated thoughts on how you guys are seeing the replacement cycle in residential water heaters in the U.S. and sort of how you're seeing it and how it's incorporated – in what level it's incorporated in the long-term growth rate that you guys are seeing, whether it be 7% or 8% or however you guys are seeing it shape up?

So, Lochinvar for the quarter was a little bit of a mixed bag there. Condensing boilers did very well. They were up about 7% to 8%. Their non-condensing boilers were down year-over-year about $3 million and that maps directly to their China distributor whose sales were down $3 million compared to last year's third quarter, and we believe that was driven by tariffs. And then, when you look at the residential water heater – I mean, the water heater portion of the business, that was also down. So, they were up almost 2%. When we look at the full year and we look at the whole product portfolio of Lochinvar, we expect them to be up over 9% for the year. The second question was kind of, how do we look at the water heater going forward? We've done a fair amount of modeling of water heater. I assume you're – what you're really talking about is the drop in the industry from 2007 to 2011. We've done a lot of modeling work and gotten some replacement data. And as we've talked in the past, the replacement is about 14 to 14.5 years. But it's a very elongated bell curve. It goes from 5 all the way out to plus-20. In fact, over half of them are replaced in over 15 years. So, when we incorporate that and then you look at – so it's going to be spread over a wide period of time. And then, when you incorporate the housing stock, which is about 120 million houses and we're talking about an industry of 9.5 million units, we think that we'll be very muted at that. And BRG has some estimates of the water heater industry through 2021, and I think those estimates are 3-plus-percent. So, in that – when we were talking about the 7%, we think that 4% growth is very reasonable. Alvaro Lacayo - Gabelli & Company: Thank you.

And that concludes our Q&A session for today. I will now turn the call back over to Ms. Ackerman.

Thank you very much for joining us today, and have a good day.