Good day, ladies and gentlemen, and welcome to the First Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Patricia Ackerman. You may begin.

Thank you. Good morning, ladies and gentlemen, and thank you for joining us on our first quarter 2019 earnings call. With me today are Kevin Wheeler, Chief Executive Officer; John Kita, our retiring Chief Financial Officer; and Chuck Lauber, our incoming 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 and adjusted earnings per share for 2018 that exclude the restructuring and impairment costs associated with our plant closure in Renton, Washington. Reconciliation from GAAP measures to non-GAAP measures are provided in the appendix at the end of this presentation and also on our website. 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 gentleman. Our first quarter results met our expectations and are aligned with our previously communicated projection for China of over year-over-year sales, as a result of a channel inventory build in the first quarter of 2018. Company sales of $748 million declined 5% from the prior year. Earnings per share of $0.53 declined 12% from the prior year. We repurchased approximately 900,000 of our shares for approximately $46 million. We are pleased to announce the acquisition of Water-Right, one of the strongest names in residential and commercial water treatment solutions, earlier this month. Please advance to slide five for more details on this strategic acquisition. Water treatment solution providers, Water-Right squarely supports our growth trajectory in water treatment and enables us to expand beyond our strong presence in the direct-to-consumer and retail channels with Water-Right’s capabilities in the wholesale and water quality dealer channels. The water treatment category in the U.S. is evolving from a taste and odor market to a health and safety market as families become more aware of contaminants in their drinking water. Water-Right brings us additional solutions for residential and commercial applications. Water-Right’s product portfolio and channel access strengthens A. O. Smith’s ability to serve customers seeking drinking water safety at any stage of their life, from school and college age where portability and refillable bottles are prevalent, through first apartment to home ownership when whole house products are desired. The purchase price of a $107 million represents a trailing EBITDA multiple of approximately 9 times, after the expected tax benefit related to a Section 338(h)(10) election. Water-Right meets our return on invested capital objective in the first full year. We expect Water-Right to add approximately $45 million of revenue in 2019. The positive impact to earnings in 2019 is expected to be minimal to the interest and purchase accounting and one-time costs. At this time, I would like to thank and acknowledge John Kita, who is on his last earnings call before retiring from A. O. Smith after about 30 years. We have transformed to a pure play water company during his tenure as CFO. And John was integral in communicating the potential of A. O. Smith to investors. We wish John well in his retirement.

Thank you, Kevin. We have been working diligently the last several months on my CFO transition to Chuck Lauber. Combining his background and 19 years of experience with A. O. Smith with the strong internal financial and accounting team, I am confident that transition will be seamless. Chuck will now describe our results in more detail, beginning on slide six.

Thank you, John. Sales for the first quarter of $748 million were 5% lower than same quarter in 2018. Adjusted earnings in the first quarter of $89.3 million, declined 14% from the first quarter in 2018. On slide seven, first quarter adjusted earnings per share of $0.53 were 12% lower than the same quarter in 2018. Sales in our North America segment of $522 million increased 4% compared with the first quarter of 2018. The increase in sales was primarily due to higher volumes of boilers and water treatment products and our mid-2018 water heating price actions related to steel and freight cost increases, which were partially offset by lower residential water heater volumes. Rest of the World segment sales of $232 million declined 21% compared with the same quarter in 2018. China sales were down 18% in local currency, primarily related to channel inventory build which occurred in the first quarter of 2018 and did not repeat in 2019. Our China results essentially met the forecast we stated at our January earnings call. The weaker Chinese currency unfavorably impacted translated sales by approximately $13 million. India sales grew approximately 30% in constant currency, compared with the same period in 2018. On slide nine, North America segment earnings of $116 million were 3% higher than segment earnings in the same quarter in 2018. Favorable impact from higher sales of boilers and the mid-2019 pricing actions were partially offset by higher steel and other input costs as well as the unfavorable impact from lower residential water heater volumes. Weakness in the North America water treatment business as a result of tariff related cost increases and lower than expected volumes drove first quarter 2019 segment margin slightly lower to 22.2% compared with the adjustment segment margin of 22.5% last year. Rest of…

Thanks, Chuck. Our outlook for 2019 includes the following assumptions. We project U.S. residential water heater industry volumes will increase between 100,000 and a 150,000 units in 2019 due to continued new construction and expansion of replacement demand as well as continued growth in tankless units. Commercial industry water heater volumes are expected to be up 1%. Based on a strong first quarter, we expect our boiler sales to grow approximately 10% in 2019. We improved profitability in India in 2018 due to scale and our water heater and water treatment businesses from losing over $7 million in 2017 to under a $5 million loss in 2018. The overall loss in India is expected to be $2 million to $3 million in 2019. We project India water heater EBIT will be positive in 2019 and improvements to continue for our water treatment in 2019, and that overall in India, we will be profitable in 2020. Our forecast for the Chinese currency in 2019 is essentially level with where it is today, weaker than last year. All the negative FX impact is expected in the first half of 2019. As previously discussed, we believe 2018 Chinese sales increased at least 5%, due to the customer inventory build in the first half 2018. 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 channel inventory build, we are projecting full-year sales to be down approximately 6% to 8% in local currency terms, the majority of which will occur in the first half of this year. Combined with our expected 1 point of unfavorable currency translation, our 2019 China sales projection is a decline of 7% to 9%. Please advance to slide 14. We see continued momentum in North America, with our water heater, boiler and water treatment products, collectively expected to grow up to 9% in 2019, including approximately $45 million in Water-Right sales. Our profitability improvement and sales growth in India is also encouraging. Our business model in China is solid for the long-term opportunity, and we continue to forecast low-teen margins for the full year. We have near-term challenges to navigate through as the China economy remains weak. We project revenue growth will be between 2.5% and 3.5% for the year in U.S. dollars and 3% to 4% in local currency. EPS is projected to be between $2.69 and $2.75. We expect North America segment margin to be between 23% and 23.25%, and Rest of World segment margins to be between 11.75% to 12%. Our stable defense replacement markets, which we believe represent 85% of North America water heater and boiler volumes, positively differentiates A. O. Smith from other industrial companies. 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 we are now available for your questions.

[Operator Instructions] Our first question comes from Alvaro Lacayo of G.research. Your line is open.

Good morning. And congrats John on a very successful tenure as CFO.

Thank you.

I wanted -- my first question was around focus on North America, the volume in water heaters and water treatment volumes that you called out as being -- I guess water treatment soft and I believe residential water heater shipment was negative. The shipment data shows that through February, it looks like shipments were positive, think about 3%. Maybe if you could just give me some color around what March looked like and maybe some commentary around what that means for your performance in the quarter. And then, with water treatment, if you provide some color on the magnitude of the price increases and maybe just some commentary around competitive response, and what was the delta between the volume that you were expecting versus what you saw?

Okay. This is Kevin. Let’s talk about North America water heaters first. You’re right. Through the first couple months, the market was up about 50,000 units. But, as we saw in March, based on our March shipments, we’re actually estimating that the industry will be marginally down to flat. And so, we still feel the forecast of 100,000 to 150,000 is valid, but we gave back we believe some of the units in March. What that does for us is, we had a little bit of a share decline, and that’s mainly just due to order patterns and how our distributors order. We don’t see anything of a material issue going forward. So, we project our full-year market share will remain flat. And we expect that the industry will grow as we have previously forecasted. Now, with regards to -- you mentioned water treatment and pricing, I’m not sure -- if you could clarify, that would be helpful.

I think, the comment was that volume was a little bit lower than anticipated due to cost base, price increases from reacting to the tariffs. I was just wondering what kind of a price increase you implemented, and then how the volume is -- the delta between the expectation and the actual on the volumes for water treatment.

Yes. This is Chuck, Alvaro. Really not pricing, it’s really just volume. So, we’re a little disappointed with our first quarter for water treatment. So, our volumes are a little off. We started a little slow with one of our major customers but we feel pretty good about the momentum that we have gone into the rest of the year. The tariff-related costs are just recovered some of those, but we still have tariff-related costs and some of the filtration products that we have coming out of China. And on the water treatment side, we’ve got some inefficiencies we had in Q1 that really we believe are behind us. So, as we look at the North America water treatment business, Q1 is really the low point for us for the year, and we just see that number improving throughout the year. So, we see increased volume as we go throughout the year and we also see that the efficiencies in our softener production are overcome, and we see improvement in March, we see improvement in April. So, the momentum is good in our North America water treatment.

Thanks for the color. And then, just on Rest of World, are there any further actions from a cost reduction standpoint? And I appreciate the comment around the severance offsetting some of the headcount benefits in Q1. But, if you could tell me, maybe from a magnitude perspective, how much fixed cost reduction to expect from a year-on-year perspective going forward?

So, if we look at -- and we’re talking China, right. So, China, so we did get the headcount reduction cost behind us. So, we only see improvement on the headcount going forward. When we’re looking at magnitude -- and if you’re looking at a percentage of SG&A, and most of the savings are cost and the advertising side that really are more building than they are direction promotion type costs. But, I will take it as a percentage of SG&A, and we’re probably mid single digits as a percentage of SG&A when you’re looking at cost reduction year-over-year.

I just want to add a little bit to that. Again, we’ve taken the steps and we’ve talked about this our call a few times that we want to right size the business for the market that we’re participating in today. We believe we’ve taken the steps. But, you should all know that we continue to monitor the market. And if additional actions are required from us, we’ll make those decisions as we go forward throughout the year.

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

Good morning. This is Drew Haroldson on for Matt Summerville. I have just a couple of questions. First, do you believe that the inventory channel correction in China will be largely complete at the end of the second quarter, or if not, when would you expect that pressure to alleviate?

Yes. This is Chuck, Drew. Yes. So, we -- the inventory in China is -- it built last year really, we saw that build in the first half of the year and larger percentage was in the first quarter than in the second quarter. For the last three or four quarters, it’s been pretty stable. Our assumption, when we kind of look at forward on the year is that it’d be flat to down. But, we don’t see a lot of decrease in that in our forecast for the rest of the year.

Got it. And then, just as a quick follow-up. Can you talk about the cadence throughout the quarter in China? It seems as though, some data points pointed to a better overall sentiment in March versus January and February. Did you also see that in your business?

Yes. We -- that’s gone up and down quite frankly. If you look at just the macro environment, we would tell you, it still remains a challenge. Consumer demand is weak, but we are seeing some stabilization and some -- I don’t want to say improvement, but certainly just stable consumer demand. So, we are seeing some of those signs. But, I would tell you that we need to see more than just a few months. And so, as we’re looking at it, going forward, that’s why we project it relatively flat. And so, we see more of a positive sign with some of the government possible stimulus packages and some of the other things that could help consumer demand if the tariff issue gets resolved. But, we are seeing some, but I would tell you, we need to see a few more months before we’re willing to say that there’s a positive momentum in China.

Yes. This is Chuck. So, I mean, the first quarter is always difficult in China because of the spring festival, and it’s a bit harder to get a handle on what the market is doing. So, as you kind of go into the second quarter, hopefully we’ll see a little bit better feel.

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

Hi. Good morning, guys. So, just on China. I think first quarter, you gave us some good color on kind of how first quarter was going to shape up. And I think you said you still expect decline. But, can you just maybe give us a finer point on the magnitude of the year-on-year decline you expect in China in 2Q and what kind of decremental margins you’d expect?

So, for Q1, we gave the guidance that Q1 would be down roughly $50 million. And last January, we talked a bit about the inventory build happening in 2018, predominantly in the first quarter, but did happen throughout the first half of the year. I mean, we don’t know our channel inventory numbers precisely. But, when we kind of take a step back and look at it, we would kind of gauge the Q2 impact to be made roughly half of that of Q1. So, the volume, we’re saying 50 in Q1. So, we would take that in Q2 as roughly half.

Okay. Then, the decrementals tied to that, because I think you had pretty high decrementals?

No. It kind of would be similar to the first quarter. We had that ass kind of a 50% to operating earnings.

Okay. And then, how do you get to -- I mean, it just seems like a very backend-loaded year. How do you get to the margin assumptions for Rest of World? Like, what needs to happen in the second half to kind of get to that high 11% to 12% range?

Yes. I mean, what really kicks in a bit is some of the cost reduction programs that we talked about. We really don’t see the headcount reductions until we start entering into the second quarter. So we see that -- we would see -- we’re really being hurt by volume obviously in this first 2 quarters, and we’re talking about the numbers Q1 and Q2. And we expect that to flatten out, so the back half, the China -- from our sales perspective, we expect to be better. And then India, so we’ve got improvement in India. When you look at kind of how India lays out for the year, it’s very seasonal. They’re clearly -- their strength is in the back half of the year. So, really when you look at India, all of our losses accumulate in the first 2 quarters, and we’re profitable in the back half the year, when we look at our projection, which is a pretty big swing quarter -- half-over-half.

Our next question comes from David MacGregor of Longbow Research. Your line is open.

Just first of all, first question, really on China, and you had talked in the past about rolling out some mid-price point water heaters in China. So I guess, I’d just start off by just asking if you could talk about the early experience with that rollout? And what did that represent as a positive offset within the Chinese growth compare? And what was the impact of cannibalization on the premium product?

Well, let’s just start out with the rollout. And we’ve been rolling out midpoint products now for the last several months, and we’ll continue to roll them out into the remaining half of the second quarter and third quarter this year. And I want to get specific because at the end, on the gas side, we are filling our line with the 0 cold water. We are in those mid-price point products, which are important because we vacated those gaps on the offline but we also supports our online sales. On the electric side, our wall-hung business, we’ll introduce a mid-price steel jacket model. We’re also going to upgrade one of our high end models with several features, with regulators and displays and slimline-type tank design. Water treatment, we will introduce 2 new high end products as well. One more of a DIY easy filter replacement. The other is boiling water with the tap -- luxury tap. So we have mid-price point products, and we also have new high end products that we are launching almost simultaneously, and they are -- right now, we’re seeing improvement in our online sales. We are seeing some improvement in our mid-price point range. Now, I’d tell you that this is early and each product takes some time to get out through certification. But the steps we’re taking, we feel really good about our new product, we feel they’re having the impact, and they will have the impact over the rest of this year. And as far as cannibalization, we have a high end part of the market, which we continue to do well in on the water heater side of it, that’s tankless and electric wall hung. I would tell you, people aren’t probably trading up, but we don’t see a lot of trading down. Water treatment’s a little bit different story, but we do see some trading down going on there, so maybe a little bit of cannibalization. But overall, the product offering is meeting our expectations, and it’s just a matter of getting them out into our distributors, into our distribution to have the full impact throughout 2019.

Yes. And this is Chuck. And I talked a little bit about cost reduction but I just want to emphasize that we haven’t cut back on R&D or our new product development or launching new products. So we’re very upbeat and excited about the products that are coming out.

Our next question comes from Scott Graham of BMO Capital Markets. Your line is open. Scott, if your telephone is muted, please unmute.

Hi. Good morning. And John, I wanted to just extend congratulations to you. You had a terrific run here at the company

Thanks, Scott.

I wanted to maybe first ask about the organic for the year or better yet, as you’re calling it, sales in local currency, which I understand now means inclusive of Water-Right. It looks to me as if your organic expectation for the company is now 1.5% to 2.5%, is that -- am I calculating that right?

We are just taking a look at that, Scott.

So, we said Water-Right sales would be $45 million this year.

So, I think, it’s about 1.5%?

It’s about 1.5%. Yes. That’s correct.

Okay. All right. The China water heater market, I know in the past you guys have had a pretty good beat on knowing what that market is running at, in total, not just your channel. Do you have an idea where that is right now? It was kind of -- I think you guys were kind of saying it was a little bit negative last quarter. Do you know where it is now?

What we look at from data, from our third-party -- this is Chuck, again. It’s -- the ABC data that we use through the third-party, and it doesn’t include our specialty stores, just the retail. What they’re showing down for electric and gas is roughly in that 9% to 10% range for the first quarter. So they got the market down in that level with online and are performing a bit better, of course. Online is up a bit and offline down more than online’s up.

Would you then say that’s a deterioration from last quarter, right? From what you see?

Yes, we would say that. Last quarter was running less than that.

[Operator Instructions] Our next question comes from Robert McCarthy of Stephens. Your line is open.

Congratulations, John, on a great career. What I would say is the following, I guess the first thing I’d like you to just go through. Could you -- could you all talk about in the context of some of these acquisitions kind of how you perceive the total addressable market for water treatment in North America? And where you want to play? Maybe if you could give us a sense of the total addressable market, some of the growth drivers and where you see the ability to create value for the company and where you want to play?

Let’s just talk about Water-Right and then I’ll tug back into our other acquisitions. And we’ve talked about Water-Right fits squarely in our strategy particularly from a residential and commercial point-of-view and some dealer network. But if you go back, you look at our strategy. Water-Right really complements our prior two acquisitions. Aquasana was our first acquisition and that provided carbon products and also provided a solid direct-to-consumer platform. That filled out 2 of our channels that we wanted to participate out of the 5. We also then acquired Hague, and there’s a large water softening market out there, and Hague’s innovative water softening products helped fill out that product portfolio for us. It also helped us enter into the water quality dealer network as well. And if you remember, we took those 2 acquisitions, we are able to put them together and offer a full package, which helped us in improving our big box retail position. Now as you go forward here, where does Water-Right fit in? Water-Right fits in that residential and commercial problem water area. And they bring new products that help fill out that part of our business. They will -- they also brought a stronger dealer network, which now -- we’ve more than doubled our water quality dealer network, and by the way that was with minimal overlap. And they also helped us enter into the wholesale side of the business. More of the specialty wholesale side of the business as well. So when you put all 3 of these acquisitions together, they complement the 5 channels, which are residential and light commercial that we want to participate in. And as we go forward, our -- we firmly believe that the water quality in the United States, in North America will continue to deteriorate over time and that each one of these product or channel categories and the products that we offer will add value to those specific -- our customers that are purchasing through those channels. So going forward, we are very bullish on our water treatment business. We still believe that it’s in its early stages as people become more aware of their -- the quality of the water throughout the United States and so forth. So those all tied together and having a filtration carbon, having a water softening, having RO system, now moving through now being able to leverage our commercial network that we have throughout the United States with water heaters and boilers that’s another key component. And we believe you wrap this up completely, this will provide -- we had talked about at least high single digits growth going forward and improved profitability, as we continue to build out and implement our strategy -- our water treatment strategy across North America.

This is Chuck. And just circling back to the total addressable market. I mean we estimate the North America market to be around $2 billion as a total addressable market. So, as Kevin said, we like the trends, and it’s a large market that we think has a lot of potential as it evolves.

Great. And then maybe if you could expand your comments with respect to China and the water treatment trends you’re seeing there in terms of growth? And then touch on air purification as well. Just give us the latest state-of-play of what you’re seeing in terms of the market dynamics there in terms of growth?

Yes. Water treatment continues to be a bright spot for us in China. It didn’t pop in the numbers this quarter, and the reason why is because we’ve talked about that inventory build last year. So if we look at kind of our water treatment business in China, we’re looking at -- so for the quarter, we were down probably low single digits. Just slightly down on our sales. Now that the sellout was still kind of a bright spot when you look at what the sellout was and what we see in the marketplace. When we look at our year for water treatment, we see about 8% year-over-year growth, and we see consumables that are continuing to grow. So we’re very happy with the consumable business. It’s about a $30 million base last year, growing at about 30%. And it grew at 30% Q1, and we expect it to grow at 30% for the year. So water treatment continues to be a good product for us.

And then, I would just add that this is not a -- water treatment is not a product that’s tied to new construction, it’s really tied to health and safety. And those are primary with the Chinese consumer, particularly with children. So we expect that to continue to grow and to have value for many, many years to come.

I think you touched on -- you mentioned air purification. We really have moved into more of a formaldehyde product as we go into air purification. I think we’re kind of really just entering into that time of the season. So the summertime is when you really see formaldehyde in China being more of an issue. So we’re -- we’ve got some new products that we’ve launched there. We’ve got fresh air product that is well mounted, that we’re excited about coming into the market. Last year, our sales probably in the -- down a bit obviously, but probably in the $25 million range. And this year, we expect with our formaldehyde product to grow a bit, probably grow up to maybe $30 million. This is what our projection is. So we see a little bit of a positive there, but it really predicates a bit on what happens this summer in the formaldehyde.

We still believe air purification, based on what we know today, has a place in our portfolio. And we’re also having a few new products there into more of the mid-price range to help the -- boost sales as well and address some of the consumers that we haven’t been able to with our higher end products. So overall, air purification remains part of our portfolio, and we believe it will -- may not be as we’ve talked in the past, may not be that 30% to 40% growth, but we still believe it’s solid double digits going forward.

Our next question is a follow-up from Jeff Hammond of KeyBanc Capital Markets . Your line is open.

Just a follow-up on water treatment. I just want to level set kind of how big do we think that business is in 2019, now that you’ve included Water-Right? And what’s kind of the core growth all in for water treatment? And does that change at all given the slow start?

So, Jeff, I think you’re talking about just North America piece, right?

Yes, North America.

Yes. So, the Water-Right adds about $45 million. So we’re looking at this year, the North America water treatment approaching $155 million of revenues and approaching a 10% operating margin return. And we would expect -- as we go forward, we would expect to have an expansion on the operating margin probably in the 200 to 300 basis points. When we look at kind of the growth rate. We kind of -- you break it down, and you’ve got different growth rates probably for filtration products and get -- versus softeners. But overall, we would say, we’d be approaching high single-digit growth rates going forward. So when we kind of roll it all in and you look at 2020 and you’ve got a full year of Water-Right, we would be approaching $190 million, $200 million as we get into 2020. And we’re looking at continue to expand margins and a nice growth rate for the North America piece.

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

Hi. Good morning, again. I got cut off at the knees there. I’m not sure...

Scott, that was John.

Yes. I actually thought it was you, Kevin. So help -- if you could help me understand the lows? It looks to me like -- you tell me if I’m wrong on this, but you are maybe a little bit off track on where the lows water treatment selling lands in 2019. Kind of what happened there? And may be why?

Well, I want to go back to we launched in August of last year, and we talked about on a couple of calls. We started out a little bit slower than we expected. We had some capacity issues in our Combi’s facility. And so we just got off to a slow start. But as Chuck mentioned early on in the call, we’re seeing month-on-month growth in the space, and our capacity issues are clearly behind us right now, and our efficiencies continue to improve as we continue to build scale. So are we behind a little bit? Yes, we are. Do we think we have the programs and the foundation set to go forward? And the answer is, yes. And like you said, we’re starting to see that. We talked about having a good margin, we’re off to a nice start in April. So it’s -- moving forward, it’s just going to be more timing, and we’ll eventually get to the numbers that we talked. It would just be at a little bit slower rate.

Got you. And before I get cut off, so I do have another question. Going back to China, I have not in a long time heard as many new product launches being teed up for the rest of the year, and it’s definitely exciting. It does also, however, beg the question of mix. Historically, I think you have always hoped to get Rest of World margin into the 15% range. I -- just trying to understand kind of how -- what you’re thinking now with longer term on Rest of World margin with a lot of new price coming in that are undoubtedly going to be lower margin in China than your core water heater offering. Could you maybe talk around that a little bit?

Well, let’s just start with that, we have introduced a number of new products, particularly the mid-price. And if you remember, we were just trying to fill some gaps that we created through a price increase. But also, online is becoming more prevalent, and that just doesn’t have the same type of price point. So we need to make sure that we have the products to compete to guard the volume and the share that we have. Now our margins -- I would tell you, our -- byproduct are not going lower. Now our price points are, but we are -- the reason we are introducing new products, we’re taking steps to drive cost out and diminish that price cost ratio. So, margins are going to remain solid, as they have been. Our average selling price is going to drop a bit. But overall -- and by the way, just to go back, we may not have talked about all these new products that we’ve launched, but we’ve been very consistent over the last decade of introducing many, many products at a time. And of course, the number of products are going to get larger as you enter new categories. So this is not -- it’s a little bit out of our behavior because of the mid-price points, but the rest of them are just normal business -- being in a consumer business, and plants business, we’re always introducing new products every 12 to 18 months.

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

Hi. You kind of touched on some of the -- but I’m curious -- I mean, you seem to have gone in China into some tangential lines of business recently, and I’m wondering, if this is a one-off, or if you are trying to become more of a broad range scope of products in that market?

I would tell you our strategy, let me just articulate that. We’re always looking at new product categories to grow. In China there is a growth market, has a lot of opportunity but we have high criteria for our product launches. One, they have to be able to leverage our brand and our distribution, that’s number one. And number 2, we don’t enter any product category that we don’t believe we can add significant value to the product category going forward. So if you look at your purification, we felt we could bring added value formaldehyde and so forth. But we’re also going to continue. We’re always incubating products. We’re incubating Combi boilers today. We’re incubating air purification. We have a very nice growing commercial water treatment business that’s moving toward profitability. So yes, we’re going to enter new product categories but they’re always going to be within our core and being able to leverage what we’ve been able to develop and build, which is our branded distribution over the last 20 years.

Does that include -- like you’ve got now Hague and Water-Right which are North American products. Are you looking for how those fit into the Rest of World market, or kind of...

I would tell you right now, we already are selling the water softeners that are from Hague. We’ve been doing that over last couple of years, right? In fact that’s how we started our -- we need to know the Hague business as they were customer -- or we were a customer of theirs from China. So yes, but that fits again squarely into being into the bathroom, being into the kitchen with our brand and our distribution it’s not a large part of the market but it’s one that it’s a natural synergy from the companies and the products we have, both in North America and it can go both ways back to China which it does in reverse osmosis.

Our next question is a follow-up from David MacGregor of Longbow Research. Your lines open.

Yes. Thanks for taking the follow-up. I may get cut off again. So, let me just give you 2 or 3 questions in a row there. First of all, I guess, pricing your anniversarying the second half or the midyear 2018 price increase, do you have additional pricing actions in place to carry the third quarter compare? And secondly, I guess replacement demand from 2007 to 2009, industry sales were down about 20%, as I recall. And so I’m interested in how you think about North American replacement demand against that historical pattern. How much of a drag, if any, is replacement demand on the overall growth? And then if I could just through a third in. I guess just on boilers. Can you talk us through, quickly how severe weather-driven spike in sales has impacted subsequent quarters’ growth? And do you feel you may have pulled forward some growth there?

That was quite a list, thank you. I’m going to take the first one, if pricing -- and we don’t comment on pricing as we go forward. As we talked about that was implemented last year, you’re right, it’s anniversarying right now. We are constantly always reviewing our cost positions and so forth, but we don’t comment on future pricing actions. And as far as the replacement demand, I’m glad you asked that because it’s an important point that we get many times on the road with regards to “I think you’re going toward, hey, is there a cliff coming because of what happened in 2007, 2008?” And what we’ve articulated last few years so have done quite a bit of research and study. We went back to 1970 and really laid out our replacement market in a number of different ways and what we have concluded quite frankly is yes, so we have a bell curve but it’s an elongated bell curve. It goes anywhere from 5 years to 20-plus years. And then if you look at the overall replacement market, our replacement market is really 14x what’s the available housing out there, which is $120 million. When you put that all together, and our assessment that we may have some blips here and there, but there is no cliff at all affect. It’s going to just kind of level out over the years as it always has and continue we believe at a similar replacement pace that we’ve seen over the last 5 or 10 years. And as far as boilers...

Yes. And back to your question on boilers in Lochinvar and the -- or the seasonal weather, the cold weather I think was your question. I mean what we saw mostly was residential products, we don’t believe that that’s going to impact kind of the normal seasonality of the boiler business for the back half of the year.

Our next question is a follow-up from Alvaro Lacayo of G.research. Your line is open.

My follow-up is just the North American water treatment market. If you could break down the $2 billion or so in sales that you gave as an addressable market, if you could break it down by channel, and I think you’ve called out retail, direct-to-consumer, wholesale and water quality dealer. And then maybe you can give some commentary around how many stores you’re actually at Lowe’s or if you reach sort of the total amount of stores that you intend -- that you plan to reach? And then on the wholesale dealer channel, is that all incremental to you guys and how big is that?

Okay. We’ll give you some approximations here. When you talk about the overall water treatment market by channel, about 40% to 50% of it is dealers, about -- again 15%, and these are approximate, 15% to 20% is on the wholesale side of the business. 15% is retail and 10% is basically other.

Yes. I mean, that’s why we’re really pleased to have Water-Right joint because the largest part of the market is in that dealer wholesale piece and they bring us a bit of a footprint there that’s going to be very helpful to us.

And going back to how much is that going to be incremental, it’s surprisingly the number of dealers that we brought on with the Water-Right acquisition and we lay them on top of the dealers we have in Hague, there was very, very little overlap. So, most of it is going to be incremental. And by the way, it’s going to cover some areas that we were not in and give us a broader national footprint as we continue to grow that over the next few years.

And with Lowe’s, are you fully launched there, or is there more stores in the pipeline? And just to give us an idea, how many stores you’re in?

For the most part, yes. We are fully launched, and we are just moving forward with our store displays and generating consumer demand for our products. I would not expect any real meaningful loading, if you will, going forward. Just so we’re clear, I mean, Lowe’s has over 1,720-plus stores so it’s taken us a while to get in there, but we’re fully integrated their displacement so forth. And prepared to go forward with them.

There are no further questions. I would turn the call back over to Patricia Ackerman for any closing remarks.

Thank you for joining us today on our first quarter results conference call. We will participate in the following conferences this quarter: Oppenheimer in New York on May 7th; KeyBanc in Boston on May 29th; and The William Blair Conference in Chicago on June 5th. Have a great day.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. And you may all disconnect. Everyone, have a great day.