Good day, ladies and gentlemen, and welcome to the A. O. Smith Corporation Fourth Quarter 2018 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 is being recorded. I'd now like to introduce your host for today conference, Patricia Ackerman, Senior Vice President of Investor Relations. Please begin.

Thank you, Norma. Good morning, ladies and gentlemen, and thank you for joining us on our 2018 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. In order to provide improved transparency into the operating results of our business, we provided non-GAAP measures, adjusted net earnings, adjusted earnings per share and adjusted effective income tax rates. For 2017 that exclude the estimate of our total -- that exclude the total tax expense related to U.S. Tax Reform. And for 2018 that exclude the restructuring and impairment costs associated with our plant closure in Renton, Washington. Reconciliation some 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 Kevin, who will begin our prepared remarks on slide four.

Thank you, Pat, and good morning, ladies and gentlemen. Our mid-single digit sales growth in 2018 was driven by positive end markets for our boilers, residential water heaters in the U.S. and continued demand for water treatment products in China. Here are a few highlights. Record sales at 3.2 billion grew over 6%. Record adjusted earnings per share grew 20%. We are 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 significantly grew to approximately $400 million in 2018. As we experienced rapid organic water treatment growth in China, we added several bolt-on acquisitions in the U.S. and in Europe, launched water treatment products in India and Vietnam and added water treatment engineers and technologists to our global engineering centers. We achieved exclusive supplier status for Lowe’s water treatment business in the U.S. We continue to review our capital allocation and dedicated portion of our cash to return to shareholders. In 2018, we repurchased nearly 4 million shares for approximately $200 million. We announced two dividend increases in 2018 and the five year compound annual growth rate of our dividend is 30%. We repatriated over $300 million in overseas cash to the U.S., increasing the flexibility of our balance sheet. John will now describe our results in more detail beginning with slide five.

Sales for the year $3.2 billion grew over 6% compared with the prior year. Adjusted net earnings of $449 million increased 19% from 2017. Adjusted earnings per share of $2.61 increased 20% compared with 2017. Sales in our North America segment of $2 billion increased 7% compared with 2017. The increase in sales was primarily due to higher volumes of residential water heaters and boilers and pricing actions related to steel cost increases. North America water treatment sales including the newly launched Lowe's business in the third quarter incrementally added approximately $29 million to our North America segment sales. Rest of World segment sales of nearly $1.2 billion increased 5% compared with 2017. China sales increased nearly 2% on a local currency basis. The Chinese currency favorably impacted the translation of China sales by approximately $23 million. In China higher water treatment sales including consumables were partially offset by lower sales of electric water heaters and air purifiers. Water heater and water treatment sales in India increased approximately $8 million or over 40% in 2018 in local currency terms compared with 2017. On slide eight, North America adjusted segment earnings of $471 million were 10% higher than segment earnings in 2017. The favorable impact from higher sales of residential water heaters and boilers and the pricing actions in the U.S. were partially offset by higher steel costs and onetime costs associated with the launch of the water treatment products at Lowe's. As a result of these factors 2018 segment margin of 23% was higher than the 22.5% generated in 2017. Rest of World earnings of $149 million or flat compared with 2017. The impact of profits from lower sales of electric water heaters and air purifiers, as well as higher SG&A expenses were offset by the favorable impact to profits…

Thank you, John. Our outlook for 2019 includes the following assumptions. We project U.S. residential water heater industry volumes will increase between 100,000 to 150,000 units in 2019 due to continued new construction and expansion of replacement demand, as well as continued growth in tankless units. Boiler revenues grew 9% in 2018, driven by solid demand for condensing boilers and new product related market share gains. We expect our boiler sales to grow approximately 10% in 2019. We improved profitability in India in 2018 due to scale in our water heater and water treatment businesses from losing over $7 million in 2017 to under $5 million loss in 2018. We project India water heater EBIT will be positive in 2019 and improvements to continue for water treatment. And our total India business will be profitable in 2020. The overall loss in India is expected to be $2 million to $3 million in 2019. Our forecast for the Chinese currency in 2019 is slightly weaker than it is today and over 4% weaker than last year. Almost all of the FX impact is expected in the first half of 2019. As previously discussed, we believe customer inventory in China grew in the first half of 2018, with the majority of the growth occurring in the first quarter and was relatively flat the last half of the year after a decline in the fourth quarter. We estimate 2018 sales increased at least 5% due to the customer inventory built. We are assuming continued weakness in the Chinese economy and relatively flat consumer demand for the full year in 2019. Without the impact of the 2018 China or channel inventory build, we're projecting full year sales to be down approximately 3% to 6% in local currency, all of which will occur in the…

Thank you. [Operator Instructions] Our first question comes from Scott Graham of BMO Capital Markets. Your line is open.

Yes. Hi, good morning.

Hey, Scott. Good morning.

So China, the 2019 view that you have, I guess, the simple 40,000 [ph] question is as we've been kind of chasing what the declines or the deteriorating situation in China is with sales guidance for some time. And now we have a first quarter that looks very difficult. I guess, the questions that come from there are; A, what gives you the confidence that you can eliminate the inventory in the channel mostly in the first half of the year. I guess, because I -- you thought you'd be able to do that by the year-end. And secondly, it does appear as if your sales in China throughout 2018 were -- I understand that housings has been weak, but retail sales which is also an important number weaker, but still pretty decent. Do you think you're losing away from the inventory build, do you think you're losing share in China now?

A lot of questions there, Scott. So I'll start with the last one, from a share standpoint when we look at the water heater market, what we're seeing for data it was probably down 2% to 3% in 2018. And if we lost any share it was minimal. So the water heater market was just very weak and it's what you said. I mean housing -- every housing metric we look at is weak and it's gotten weaker. Water treatment, we had a good year especially on consumables, but we'd also say we lost a few points of share there and that was really driven by the fact that we didn't have those mid-price products that we had talked about on an earlier call and we now have those late in the year. I mean, your real question is we were up and we thought we'd be up for the year in October and we're now down and I think it's a variety of factors. One is, we didn't take the inventory down in the fourth quarter as much as what we anticipated and that's because the online holiday sales were not as good as what we thought. Number two, we had originally said that we thought that the second half of the year would be better in China. We are not forecasting that now. This is based on kind of a level the economy stays weak. Then when we look at next year now the assumptions are that our sell out if you will is kind of level with 2018. So we're not going to have much of a pickup. We're going to see some recovery in air purifier water treatment because of the new products, et cetera. But you're right, the first quarter is difficult because last year we picked up our inventory build occurred in the first quarter. And we say that’s not…

So it’s actually not what I -- there's an opportunity here now in this first quarter for you to essentially flush this channel inventory out, we can suggest that you had.

No, Scott, I wouldn't necessarily agree with that. What we're really saying is last year's first quarter probably had let's say $40 million to $50 million of inventory build in it and we're saying that's not going to repeat itself. So no, I don't think that's flushes out the inventory because we're having a weak quarter. It's just I'll say a very difficult comp because we built the inventory up last year and we're saying we're not going to build it up. We hope to take it down some in the first quarter. Now whether that'll happen will depend. But I will tell you every housing metric we look at is negative. We ask the same question about retail sales that they're up 8%. And actually one of my advisors said, well you know retail sales also include some consumer commercial spending, et cetera not capital spending but -- so it's not a good number in our mind. All I can tell you is the market decline in water heaters was 2% to 3%. So it was very weak, water treatment was up and air purifier was down 30%, 40%. So we think after the first quarter we get to kind of a stable point. Again some of the new products we have in place starts adding. Water treatment consumables had a very good year, we went from $20 million to $30 million and we expect that to continue to increase. So it's just getting through the first quarter. So I don't know, if I answered all your questions, Scott.

For the most part John and I very much appreciate the broadness of your answers. If I could just sneak this one in within China would the down 2% to 3% market estimate that you're suggesting here was it weaker on the electric side than it was on the gas side would you say?

Surprisingly the gas was weaker. I mean, if you would have asked me I would have thought that the electric would have been down the numbers we saw for the year was gas was down 4% electric was down about 1%.

Thanks.

Thank you. Our next question comes from Matt Summerville of D.A. Davidson. Your line is open.

Thanks. Just to clarify, are you talking about the channel has $50 million John of excess inventory? And then A.O. Smith itself is sitting on some amount of excess inventory. Can you just sort of…

No, let me -- I'll clarify that. So we're only talking about channel inventory and that's why we can't be exact, right. I don't know exactly what's in my customer inventory levels. I have pretty good indication, we've done a lot of discussions with them, we've done some analysis, we've looked at what we think is sell out year-over-year. And that's why we’ve come to this 5%. Our inventory levels at A.O. Smith are really not up at all, they are no different than what they were. So we're only talking about channel inventories and that's why we're estimating because we don't have exact information.

Got it. And then for -- just sticking with China, for 2019, can you also clarify how much you expect water treatment to grow as well as air purification? And then what is A.O. Smith doing from a costs reduction standpoint in China and how much savings is baked in to that 12% to 12.5% segment margin? Thank you.

Well. So air purifier, we expect to be up it was about $23 million, $24 million, it will be in the low-30s. We think that's the new product that we're bringing into play. We think water treatment will be up low-double digits, again led by the consumable piece, which is doing very well. Whereas -- and these numbers have base headcount, ultimate headcount reduction of about 10%. And we're expecting to take advertising down 10% to 15%. And that will occur throughout the year. I will tell you certainly one of the factors we face is that a decent portion of our SG&A expenses is fixed because it’s labor and we can take some of it out obviously, which we're doing and also store set kind of amortization. So we are certainly looking at every opportunity on SG&A that we can.

Yes, I would just like to add on that, I mean, those are the three areas that we've outlined over the last couple of calls. Certainly headcount is going to be reviewed regularly so that we get the right size of the business. SG&A, constantly looking for ways to improve productivity and make those cuts that are appropriate for the business so the business continue to go forward. In the end, the store efficiencies remain high in our list as we continue to evaluate unproductive stores and take action with them overtime. But all the SG&A and all the cost reductions that we've talked about, we've implemented those over the last six months or so and we'll continue to make progress on them, but they're going to come in time. And we'll eventually get to that point where the business is right sized to the amount of sales that we have into the market. So that's an ongoing priority for our businesses along with increasing our sell out and driving new product sales.

Thank you. Our next question comes from Jeffrey Hammond of KeyBanc. Your line is open.

Hey, good morning guys.

Good morning.

So just back on the margin in China, so I think you said down $50 million in sales and down kind of a 50% decremental on that, is that incorporate any kind of onetime restructuring charges in there or is that the true decremental? And then, I guess, with that big dip I'm just struggling on how you get back to kind of near flat margins in Rest of World?

Well, so no that's really kind of it -- we said kind of publicly in the past, if you look at our gross margin at 41% that's more than in China in our commercial and Lochinvar boiler higher than that, Lochinvar boilers. So looking at that sort of -- and then contribution margin would be a little bit higher. Now obviously we're going to have some benefit from reduction in headcount and reduction in some SG&A. But you also have significant plant efficiencies when you’re taking out -- when you compare that to the prior year. So that is a significant decline over the first quarter. And then we are taking our margin assumptions down about on the low end of point. And again we expect India to improve, and so how we get there is the headcount reductions continue throughout the year, the SG&A and specifically advertising continues. And then you start getting hopefully our estimate of this low-end of 3 comes to play and you'll have some volume benefit. So that's how we get there.

Okay, helpful. Just on North America, do you announced any or contemplated any additional price in North America?

We -- pricing is always a subject that comes up on these calls. And what I would tell you is that and what we said in the past that A. O. Smith has the history of dealing with costs and addressing those over time. And that's our position and will continue to be our position as we go forward.

Okay. And then just on -- there has been some deflation in steel, what's kind of the timing where you’d start to see some of the benefits from some of these lower inputs on cold roll?

It starts a little bit in the second quarter, and certainly the last half of the year if it stays where it is now, we’re assuming, we've talked to our consultants and I think their feeling is and I can't tell you necessarily why, but their feeling is we’ve kind of hit the bottom and that their expectation is that steel costs will increase from here, we'll continue to monitor that, et cetera. But you really get -- we start getting the benefit starting in the second quarter.

Thank you. Our next question comes from Robert McCarthy of Stephens. Your line is open.

Good morning, everyone. How are you today?

Good morning.

Good morning.

All right, great. I guess, the first question, in terms of China and the 1Q compare, give us some sense of when do you think you're just going to have a better sense of the trajectory and visibility? I mean, do you think you'll have a comment sometime during 1Q in terms of how you're thinking about things shaking out, because obviously, your guidance is highly predicated on kind of how this all plays out in the near-term, and it's going to affect the various outcomes for the full year. And obviously, bears are somewhat skeptical given the fact that you've had to take down numbers for China versus October. What gives you any greater sense of visibility? So maybe you could just talk about what you're going to be looking for and what will that allow you to cast maybe a better view on China for the full year? When will we expect an incremental update, because, 1Q is really the hinge?

Well, I'll start, Kevin can add, I'm not sure we'll have an incremental update. Obviously, we're going to continue as the quarter goes along, monitoring it very closely. I think what we have to kind of see as some of the statistics come out to play. So again housing has continued to be negative there's no doubt about that. Certainly, it would be positive we think from a consumer confidence standpoint if something got resolved with respect to the U.S., China trade issues. So we certainly think that would be a positive. So those are kind of the things we're monitoring.

Okay. Just to add on to that, Q1 is normally one of our lower quarters. So spring festival is coming up and so we'll get a better read as we continue to get through March and then obviously into the second quarter, which is a busier quarter for us. And again, as we're going to look at this, it'll be by product category, by channel really looking closely at our sellout as organization. And then also making sure that we introduce a lot of mid-price point products and in a lot of different channels and we expect those to add incremental sales to our business. So as we get into the latter part of the second half of the year, we'll get a read on the China economy. As John said, we'll get a read on tariffs, so where they're going. So there's a few things that have to kind of work themselves through for us to give you a better answer than we are today.

Okay. And then just switching gears over the longer term then. Obviously you mentioned the strength in tankless and I think in particular tankless gas in North America, that's a solid product category overall and you do have a suite of products there and a reasonable share. But that seems to be an area that seems to be gaining some strength and anecdotally it sounds like the cost of installs coming down. Are you concerned over the longer term that that product category could eat into kind of traditional tank and kind of what would be your response there? And how we manage that going forward, because it seems to be a category that could be, particularly attractive in the context of the replacement cycle.

Okay. And are you talking North American or?

Talking North America tankless gas.

Yes. Our view hasn't really changed. We were in the hot water business. And as we go forward, we bring various solutions to consumers whether that be tank, tankless, if you look at very strong tank year just recently, we expect to be up in the 300,000 to 350,000 units increase this year. Tankless, we expect we’ll probably come -- we’ll decline a bit from 2017 a strong year, but still be in that low-double digits growth. So, overall, I would agree probably the installation would decline, the cost of it would become more affordable. But again, as we step back as an organization, we provide various solutions because not every solution is the right solution for every consumer. And I think the broad breadth of our product line both residential and commercial provides those solutions. So as we go forward, we're comfortable where the market is moving. I think we're in position with products to capitalize on that. You look at our brand, our strength in distribution, our sales organization. So as a whole, the industry itself were comfortable where it's going and we believe A.O. Smith will continue to be a major player and a market leader in those categories.

It still is obviously we are monitoring it’s very close, but it still is about 8% of the total market. So, I mean, it is a small part of the total market.

Thank you. Our next question comes from Ryan Connors of Boenning & Scattergood. Your line is open.

Great, thank you. Just want to continue on the China topic for a minute. On some of these past calls you've talked about the issue of consumer trade down I guess and we've seen some of that all the way up to the apples of the world. And you mentioned John that you've got limited if any share loss, but can you just talk about the growth or lack thereof in the various strata of the market from the high end on down and how that's impacted you as a player presumably on the high end.

Well, I would tell you and there's no good data. But I would tell you we don't think the high end has been growing in this marketplace. You still have well to do people in China that there's still that group that is buying. But my guess is you're not seeing a lot of trading up going in this environment where the economy is not doing very well. But again the fact that we really haven’t lost share on the water heater, I think kind of says that that's the place so that everything's kind of stable when you look at the different strata. But that’s an estimate, we just don't have good data on that.

And I would just echo that that's kind of the feedback that we get back from our sales organization, distributors and our store promoters that the premium market is relatively stable and not a lot of trade down. But the trade up has slowed or is not where it has been in the past.

Got it, okay. And then my other question is just can you discuss the relative impact and I guess the interplay between the deceleration in growth in China just on an organic basis versus the trade issues. When you mentioned Kevin potential trade resolution of some kind being a catalyst, but -- I think you'd be right in terms of the stock price certainly would probably trade that way. But what, -- how do you divvy up what's happening to you in China from people were discussing a slowdown in China long before these trade issues. So how much of this is just a natural deceleration in the market versus really related to trade and therefore potentially that being a catalyst?

Yes, I would tell you from a macro perspective we don't know exactly how that would parcel out. Wonder there has been a slowing down in China, but certainly if you just take it back from a consumer point of view in tariffs or in your market starts to slow down and just simply the way we've described it is the Chinese consumer is no different than a U.S or any other consumer when their job has slowed down, when they've seen maybe some layoffs in various parts of the industry and their friends that they simply just pull back. And so, we believe that tariff has had some impact on consumer confidence on their spending patterns just for the fact that that's what we would do here in the U.S. And my comment is if the tariffs and when the tariffs get resolved it will take some time, but that will remove that one uncertainty for the consumer and that should free up. We know today based on some of the information we get back that the Chinese consumer is saving more and more and that normally is an indication of their uncertainty and again once they feel things are settled down and there's more confidence in where the economy is going to go, we believe those resources and funds will free up. So that's where we're at. Certainly there has been a slowdown a bit from the housing side, but certainly on the other side, we really believe consumer confidence has been impacted by the tariffs and what's been going on in the recent months.

Thank you. Our next question comes from Mike Halloran of Baird. Your line is open.

Hey, good morning everyone.

Good morning.

So first, what's the best estimate now that exiting 2018 for the splits on replacement versus newbuild oriented splits on China water heaters for your core business?

I mean, it’s hard to say, I don't think we have a data, you're talking about the China business. I don't think, none of -- I haven't seen any different data except that’s 50%.

50% in tier 1 and a little bit less.

And nothing that is necessarily increasing. I haven't gotten any updated data.

And what percentage is replacement on your water treatment side at this point? What part is consumables?

I went all of -- the consumable part this year was about $30 million, so it was up from $20 million last year. So the consumable are tracking very nicely, we would expect that to again be over $40 million when we look at 2019. So that's progressing and tracking just the way we would have thought.

And then in North America, just from a cadence through the year. I suppose on China as well. It seems like China you're saying stable cadence from here, if you can adjust for the inventory side. In other words, no improvement, no deterioration in market from current level. Maybe just give us some thoughts on the U.S. as well on how you're viewing the cadence of underlying trends from here?

Well from the U.S. side of the business, I'll break that out residential and commercial. We talked about our residential guidance about $100,000 and $150,000. Again you got to remember that's coming off we believe a pretty strong year of over 300,000 residential type units. So modest growth, there is some talk about some housing slowdown, but still modest growth and of course 85% of that's going to be replacement. On the commercial front, as we talked earlier we just came back from a large industry expo AHR and the consensus from our customers, from our sales organization is that there is about a 3% to 4% growth out there. Our order book is still pretty solid. And so, we're optimistic in the first half of the year, and we're a bit more conservative in their comments in the second half. But overall both sides of the channel residential and commercial not growing, extending rapidly, but solid growth in both sections.

Thank you. And our next question comes from David MacGregor of Longbow Research. Your line is open.

Yes, good morning everyone. John, just want to go back to China and you talked earlier in the call about building representation in middle price points. So just I guess first of all just some clarification, when you talk about stable 2019 in China, are you talking about still seeing maybe some weakness in the premium market, but that you're going to pick up share in the middle price points? And as a consequence of all in that's going to provide you with your stability. Or just what are you expecting that would come incremental to your growth from participating in a segment of the margin that presumes doing a little bit better.

Well we would hope and that's what we hope the last three quarters of the year that we will what I have said is that sell out we would expect for the year to be relatively stable. And if we can pick that up a little bit we'll be able to do two things, one either take inventories down a little bit or move from the 2% to 3% or whatever down for the year. So we don't expect basically where we are that the premium market is going to change much, we'll maintain share there. And we hope that there is some growth in the midpoint area and we have new products for that.

Can you give us any sense from a sizing standpoint, how much bigger the commercial opportunity is in mid-price point versus kind of your legacy franchise in the premiums?

I won't say it's necessarily significantly bigger, it's just when we had price increases going back kind of into 2017 and 2018, we had moved out of that market. And so, what we were trying to do so we have been in that market, the price increases we’ll get out. So we call mid-price as RMB 3,000 to RMB 5,000. And so, now this is what we're putting products back into that, which will specifically help us we think on the online, which is growing.

Thank you. Our next question comes from Andrew Cohen of Northcoast Research. Your line is open.

Thanks. I understand with China the Tier 2 and Tier 3 city footprint has how you roll out or how many places you roll out the change at all, are you guys approaching I guess expanding the locations differently or how has that been impacted?

Well, certainly we’re much more selective in not growing at the same rate that we've had in the past. So yes, it slowed a bit again, we're continuing to opening new stores in distribution points, but at the same time as be candid, we're also making adjustment. So the net increase was -- is fairly marginal over the year. So that's where we're heading from a strategic standpoint. We still believe Tier 2, Tier 3 and Tier 4 cities have opportunity particularly 3 and 4 and we’ll continue to look for those right partners and expand as appropriate.

And I think that's consistent with what the last couple of years have been and that we've been adding 100 to 200 to 300 net, but it's a combination of sum in the Tier 2, 3, 4 and then closing some of the nonproductive stores. So we think that pattern will continue.

Okay, thank you. And then on Lowe’s do you consider it to be fully rolled out and if you could give any color on how you think it's tracking going into 2019?

Yes, just some quick color, certainly we're -- I don't know if anything's ever always ruled out because you're always making tweaks and improving your displays and working with your customer to improve sales. But, overall yes, it's been rolled out and I would tell you it's -- the business is on track. We look forward to a terrific 2019 with Lowe’s as a partner.

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

Hi, thanks. Good morning, guys. Good morning, Pat.

Good morning.

So I'm going to continue beating the dead horse of China here for a little longer. I just want to make sure I understand the commentary around Q1 in Rest of World with China. You're saying China down 50% local currency in sales year-on-year with a 50%...

No, I think, we said $50 million, 20% in local currency, which is 20% and that's about equates to $50 million.

Okay, great. Thanks. That's helpful. Connect with that question, I guess my bigger question maybe though as you look out to the back half of the year for Rest of World and China, I mean, what gives you the -- given the visibility you've got, what gives you the confidence that you're going to see maybe just a flat market and not a continuation of a down market in China?

Well, again we're assuming that some of our as ancillary product lines like air purification will improve a little bit. The commercial water treatment will improve, the commercial will improve, the new midpoint products we have will offset any further weakness in the market. But it's hard to say, I mean, what we are calling is for the market to really be stable to where it was or down a little bit and we have some items that will offset that decline.

Thank you. And a follow-up from Scott Graham of BMO Capital Markets. Your line is open.

Hi. Would you mind telling us specifically what the Lowe’s number was in the quarter and how much is left to go on the field that was referred to a couple of questions ago for 2019?

Yes, I would tell you that we hit the numbers that we talked about in the past. And that there's again we probably not get into specifics about certain customers, particularly Lowe’s and other public companies. So what I would tell you is that, we launched the fil is in, there's always going to be adjustments to additional areas of our product displays and product inventory. And that the overall outlook that we had with Lowe’s is on track and again we look forward to continue in 2019.

Understand. And then just this last one for me. So at the Investor Day, you guys talked about a couple of different initiatives that you're going to pursue. And I was hoping you can kind of update us on them with respect to what the plans are for 2019? Specifically tankless, your desire to increase your penetration there and also in digital.

Well, I'll take both of those. Tankless, I'm not specifically understand exactly where it's going, but on the tankless side of the business we are going to continue to expand our product offering bringing new products to market with features and benefits to be more competitive. We've talked about that, we look to be doing that in the second half of the year. And as far as digital, I think we're one of the premier companies, particularly in the water heater and the water treatment side, where digital has been an ongoing program for us for over a decade. We continue to enhance our websites, our e-commerce business, our ability to create demand through various digital media and marketing activities. And that's going to continue to move forward by both parts of our organization whether we are in water heating, boilers or quite frankly in water treatment. That was a very generic answer, but that's about I think where we're going to be at with that with any more specifics.

Thank you. We have a follow up from Jeffrey Hammond of KeyBanc, Your line is open.

Yes. Just on North America, just wanted to kind of unpack. I mean it seems like you're implying kind of 5% to 10% growth on that business for the year. Is that the right way to think about it?

Yes, I think it's like close to low -- between 6% and 7%.

Okay. And then just what kind of growth rate so you're expecting for water treatment all-in?

Well, obviously we get the benefit of the full year of Lowe’s. And we're probably looking at an increase well we are looking at increase of the other businesses. So it will be up 40% or so from the prior year. So with the benefit of the full year of Lowe’s obviously. And we are expecting the other businesses to grow nicely. And then Lochinvar again we continue that to be we're talking about the boilers growing at 10%. And we haven’t mentioned that Lochinvar obviously had a great quarter. I mean they're -- the boiler market was up 15% in the fourth quarter for us. So it was very, very good quarter. So I think their backlog is in good position going forward as we look to the first half of the year et cetera. So…

Okay, thanks.

Thank you. Our next follow up is from Robert McCarthy of Stephens. Your line is open.

Got a few follow ups. If you can hear me right?

Yes, we can.

Yes. So China, can you talk about just kind of in terms of the organic growth rate for the fourth quarter and for the first quarter. Any directional view of kind of the pricing impact, and how we should be thinking about it across your product portfolio?

I mean, I have not heard of the significant price adjustments at all. And I don't know, Kevin if you have. But talking to our China people, I don't think there has been significant price adjustments by any means.

So as you'd assembled organic growth you wouldn't see a negative price variance in terms of -- okay. And then two more questions, on the tankless gas side, again I think your share right now within that market is kind of high-single digit to low-double digits within this category in the U.S. I mean is there -- and you do have some products there obviously, but I guess the question is, do you think at some point is it make versus buy decision whether you could take a technology or good adjacency and use your brand. Would that be a particular area of potential acquisition for you?

Well, I think we’re always looking for potential acquisition that adds value. And again, going back to the tankless part of the business, we do have terrific products. We're continuing to bring new products out with our partners. And so it's again, I want to make sure we emphasize this is one of our solutions, not the solution. And yes, we're at low-double digits, but at the end of the day that's not where it's going to stay. And we continue to move forward and gain share and expand our products. So overall tankless is -- we're always looking for ways to improve our business whether it be products, manufacturing, logistics working with our customers. So I think our strategy is in space and we'll continue to execute it as we have in the past.

The last question is just North America kind of -- I mean, one of your areas of potential capital deployment is around or has been and will continue to be U.S. residential filtration or filtration products. I mean can you talk about the TAM there, the total investable market and where you want to play in there, because it seems to be a very difficult market that’s highly unconsolidated, a lot of ready substitutes. I mean do you see a future there for capital deployment and do you see a future for a business there a little longer term?

Certainly, long-term in the North America water treatment we see a significant business. We look at it somewhere as an opportunity when it’s fragmented bringing somebody like us to be able to maybe do some consolidations and so forth in the right areas. I have said many times that this has opened a lens of our acquisitions possibilities and we continue to go down that path whether it’d be capabilities, products, distribution dealers and work in our acquisition pipeline it certainly we’re very active in that space. So, yes, 100% for sure that we believe there is a viable and going market in North America water treatment and we believe there’s lot of opportunities for A.O Smith and our brand.

Okay, thanks.

Thank you, this concludes the Q&A portion, I like turn the call back over to Patricia Ackerman, for closing remarks.

Thank you for joining on our call today. We have one conference in the first quarter, we’ll participate in the Boenning & Scattergood Conference in London on March 14. Have a great day.

Ladies and gentlemen, thank you for your participation in today’s conference. You may disconnect, have a wonderful day.