A.o. Smith Corporation · NYSE:AOS

A.o. Smith — Investor Presentation (2018)

60 slides from A.o. Smith's investor presentation, 2018

  1. Slide 1: Spring 2018 Analyst Presentation

    Spring 2018 Analyst Presentation

  2. Slide 2: Forward Looking Statements

    Forward Looking Statements This presentation contains statements that we believe are “forward‐looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward‐looking statements generally can be identified by the use of words such as “may,” “will,” “expect,” “i

  3. Slide 3: Investment Case

    Investment Case  Manufacturer of residential and commercial water heaters, boilers and water treatment products  Market share leader in major businesses  Stable/growing North American replacement market; operating leverage as new construction recovers  Strong balance sheet and cash flow to suppo

  4. Slide 4: Sales & Adjusted Operating Margin

    Sales & Adjusted Operating Margin* $3,500 20% Sales Adj EBIT Margin $3,000 Sales in millions $2,500 15% NOTE $2,000 10% 2010 through 2014 adjusted $1,500 for non-operating pension costs and certain non- $1,000 recurring items 5% $500 $0 0% 2010 2011 2012 2013 2014 2015 2016 2017 * excludes corporate

  5. Slide 5: Adjusted EBITDA: 21 Percent CAGR

    Adjusted EBITDA: 21 Percent CAGR Adjusted EBITDA $601 $600 2010 10.6% of Sales 2017 20.1% of Sales $535 NOTE $500 $473 2010 through 2014 adjusted for non-operating pension $400 $374 costs and certain non- $333 recurring items $300 $270 $197 $200 $158 $100 $0 2010 2011 2012 2013 2014 2015 2016 2017 5

  6. Slide 6: Adjusted Earnings Per Share: 26 Percent CAGR

    Adjusted Earnings Per Share: 26 Percent CAGR $2.50 $2.17 NOTE $2.00 $1.85 $1.58 2010 through 2014 $1.50 adjusted for non‐ $1.22 operating pension costs $1.03 and certain non‐recurring $1.00 $0.78 items; 2017 adjusted for $0.54 U.S. Tax Reform expense $0.50 $0.43 $0.00 2010 2011 2012 2013 2014 2015 2

  7. Slide 7: Segment Revenue

    Segment Revenue • Boilers growing 10% NA • Water heaters growing North America 64% Rest of World 36% ROW • China/India = 95% • Europe/Middle East = 5% 7 2017 full year

  8. Slide 8: U.S. Water Heater Market Segment: Residential Market

    U.S. Water Heater Market Segment Residential Market 50% AHRI data + tankless: AOS actual shipments 40% and AOS estimates of competitors’ shipments 30% 20% 10% 2017 market share data 0% Other 8

  9. Slide 9: U.S. Residential Water Heater Market Segment Wholesale Retail

    U.S. Residential Water Heater Market Segment Wholesale Retail Retail Wholesale channel channel is is “~55%” of the “~45%” market of the Large Regional Distributors market A. O. Smith's 2017 – 9.2 mm Units Customers 9

  10. Slide 10: Water Heaters - Strong Replacement Sales

    Water Heaters ‐ Strong Replacement Sales U. S. Residential Water Heaters Peak housing starts: 2.1 million 10,000 thousands of units 8,000 New Construction 6,000 Replacement 4,000 2,000 Note: Includes tankless 0 10

  11. Slide 11: U.S. Commercial Gas Market Share

    U.S. Water Heater Market Segment Commercial Gas Market* 2017 market share data AHRI data: 60% AOS actual shipments and AOS estimate of competitors' 50% shipments 40% 30% 20% *Commercial gas water heater 10% segment as defined by AHRI, total 2017 commercial units as 0% reported by AHRI = 94,000 units

  12. Slide 12: Energy Efficient Cyclone

    Energy Efficient Cyclone  Game changing energy efficient commercial product launched in 1997 and recently upgraded  Up to 96% thermal efficiency dramatically lowers operating costs offering short payback  Represents 63% of AOS commercial gas water heater revenues 12

  13. Slide 13: U.S. Commercial Gas Market: Energy Efficient Units

    U.S. Commercial Gas Market: Energy Efficient Units more than Doubled in Seven Years to 45 percent of units sold in 2017 100,000 2017: Commercial Gas Industry Units >90% Efficiency 80,000 42,523 units 2009: (45% of total) <90% Efficiency 60,000 19,000 units (29% of total) 40,000 20,000 ‐ Source: AHRI

  14. Slide 14: Lochinvar End Markets

    Lochinvar End Markets Boilers 58% Water Heating 42% 2/3 commercial end markets; 1/3 residential end markets 14

  15. Slide 15: Trend to Higher Efficiency, Condensing Boilers

    Trend to Higher Efficiency, Condensing Boilers – 43 percent of units sold in 2015 North American Commercial Boiler Volume (Units) 100,000 90,000 Actual Forecast 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Non‐Condensing Commercial Boilers Condensing Commercial Boilers 15 Source: BRG Bu

  16. Slide 16: Boiler Sales Dollars: Condensing vs. Non-Condensing

    Boiler Sales Dollars* Condensing vs. Non‐Condensing Condensing Non‐Condensing 8% 2 14% 2 0 0 0 92% 1 86% 4 Non‐Condensing Condensing 7 16 *Residential Boilers & Commercial Boilers

  17. Slide 17: China Exceeds $1 B; now 34% of Sales & Growing

    China Exceeds $1 B; now 34% of Sales & Growing 1,000 China 800 China sales have US$ millions grown 21% (CAGR) 600 over the last 10 years 400 200 0 17

  18. Slide 18: AOS China Built on Premium Brand and Distribution

    AOS China Built on:  Premium Brand  Extensive Distribution and Service Network Nanjing  Innovative New Products & World Class Manufacturing  Local Management Team and Organizational Development 18

  19. Slide 19: Fifteen Year Water Heater Market Share Trend

    Fifteen Year Water Heater Market Share Trend 30.00% A.O.Smith 25.00% Haier Midea 20.00% Macro Market Share Wanhe 15.00% Rinnai 10.00% Noritz Ariston 5.00% Sakura Siemens 0.00% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Leading residential brands measured in curre

  20. Slide 20: Market Share by Price Category

    Market Share by Price Category Electric Market Share Gas Market Share Others 60.00% Others Siemens 90.00% Haier Ariston Ariston 80.00% 50.00% Midea Wanhe Haier 70.00% Macro A.O.Smith Sakura 40.00% 60.00% Value Market Share Value Market Share Noritz 50.00% Rinnai 30.00% A.O.Smith 40.00% 20.00% 30.00%

  21. Slide 21: Broad Distribution Channel

    Broad Distribution Channel  Over 9,000 retail counters in China  30% of outlets in Tier 1 cities; 70% in Tier 2/3 cities 100% 23% 21% 20% 36% 33% 35% 35% 36% Percentage of Sales 80% 29% 30% 33% 60% 10% 22% 26% 25% 25% 40% 26% 24% 30% 54% 45% 38% 37% 31% Regional Stores 20% AOS Specialty Stores 18%

  22. Slide 22: Product Line developed in China

    Product Line developed in China Residential & Gas & Electric Commercial Commercial Heat Pump Air Pressurized Purifier Solar Water Purifier Combi Wall‐hung Gas Boiler Electric Tankless 22

  23. Slide 23: Professional Team of Local Management

    Professional Team of Local Management 23

  24. Slide 24: Mega Trends - China

    Mega Trends ‐ China Significant growth in AOS target demographic A. O. Smith customer demographic continues to grow rapidly Growth of 10 times during this decade • 2010: 18 mm households • 2020: 200 mm households Source: McKinsey Insights China – December 2015 24

  25. Slide 25: Different Water Treatment Technologies

    Different Water Treatment Technologies Pore Size Rust Removal Active Carbon - improves taste (for good 5000 nm Carbon incoming water areas as in the US and Europe) Pore Size Micro-Filtration - removes sediment and colloids Sediment & Colloids 1000 nm MF (can correct basic water pollution problem) Po

  26. Slide 26: Reverse Osmosis Is Gaining Market Share

    Reverse Osmosis Is Gaining Market Share CMM Water Treatment Market by Technology 100% 3.0% 3.0% 2.7% 5.3% 5.0% 4.0% 5.3% 5.0% 90% 8.4% 7.8% 7.0% 8.0% 5.9% 7.7% 80% 20.7% 24.9% 70% 31.4% 60% 44.3% 59.0% 50% 72.4% 81.1% 83.1% 40% 67.6% 64.1% 30% 55.5% 20% 40.2% 27.0% 10% 15.5% 10.0% 8.0% 0% Data:CMM 2

  27. Slide 27: Side Stream Membrane Technology

    Side Stream Membrane Technology  Unique patented design  Increases RO membrane life - industry leading three year life  Reduces waste water up to 50 percent - 1 gallon clean to 1 gallon waste  Provides market place differentiation 27

  28. Slide 28: Tankless Water Treatment and China Water Treatment Sales

    Tankless water treatment – enabled by side‐stream membrane technology  Provides immediate clean water  Minimizes risk of post RO membrane contamination – No storage tank needed  Leverages membrane rolling capabilities to produce hi-flow RO products – Constant flow rates up to 0.9 gallons per minu

  29. Slide 29: Major Brands CMM Market Share Water Purifier

    Major Brands CMM Market Share By Value Water Purifier 50.0% A. O. Smith 45.0% 40.0% Midea 35.0% Qinyuan 30.0% Angel 25.0% Litree 20.0% 15.0% 3M 10.0% Haier 5.0% Ecowater 0.0% 2011 2012 2013 2014 2015 2016 2017 Data Source: CMM‐GFK December ‐2017 29

  30. Slide 30: Air purifiers - the market need is clearly visible

    Air purifiers ‐ the market need is clearly visible Bird’s Nest – Beijing: PM 2.5 PM 2.5 45 453 A very A healthy unhealthy day day 30

  31. Slide 31: China Air Purifier Market Growth Opportunity

    China Air Purifier Market Growth Opportunity Unit sales per 1000 Urban Households for China and its neighbors Annual Air Purifier Sales Volume Projection by (units per 1000 Urban households) Euromonitor 80.0 Unit Sales per 1000 urban households 70.0 China’s air pollution 60.0 may drive urban 50.0 Ch

  32. Slide 32: China Mega Trends Driving Growth

    China Mega Trends Driving Growth  We are positioned to reach Internet consumers using the internet Middle and affluent class trade up and value  A. O. Smith is a strong foreign brands foreign brand Middle and affluent classes are growing  Our Premium Consumer brand is positioned for the middle an

  33. Slide 33: Mega Trends - India

    Mega Trends ‐ India Significant growth in AOS target demographic A. O. Smith target demographic: Millions of households, upper middle class percent, 2000 prices SOURCE: India Urbanization Econometric Model Updated 2010 33

  34. Slide 34: Building Distribution

    Building Distribution  A cities (pop >1.5 Mn) Distribution in 25 out of 25 cities  B Class cities (pop .5 to 1.5) Mn) Distribution in 63 of 68  Class C cities (pop .1 to .5 Mn) Distribution 316 of 400 NATIONAL RETAILERS REGIONAL RETAILERS Headquarters and Manufacturing (Bengaluru) Major Distribut

  35. Slide 35: Business Model In India Similar to China

    Business Model In India Similar to China  Attractive Growth Demographics  Leveraging Global Capabilities with Products Designed for the Indian Market  Building Brand & Expanding our Distribution  Introducing New Product Categories with Water Treatment  Local Management 35

  36. Slide 36: Acquisition Strategy

    Acquisition Strategy Acquisition Strategy 36

  37. Slide 37: Growth Strategy: Acquisitions

    Growth Strategy: Acquisitions Geographic Growth  China Geography  India  High Growth GDP markets Expand/ Grow the Core  New Products & New Technologies Core  Water Heating  Water Treatment Adjacencies Adjacencies  Water-themed platforms for growth  New technologies beyond water for China 37

  38. Slide 38: Investment Criteria

    Investment Criteria  Value creation opportunities  ROIC in excess of cost of capital by third year  Meet risk adjusted IRR hurdle rates  Margin accretion with growth rates higher than U.S. GDP  Accretive to earnings in the first year 38

  39. Slide 39: A. O. Smith's Capital Allocation Options

    A. O. Smith’s Capital Allocation Options  Organic growth (capital expenditures)  Acquisitions – $387 million net cash – 15 percent leverage ratio (debt/total capital)  Return cash to shareholders: $260 million projected in 2018 – Dividends  Increased 29 percent in first quarter 2018 – Share repu

  40. Slide 40: Growth Strategy: Organic Growth

    Growth Strategy: Organic Growth High Growth: 36% of sales growing 14% (China, India & NA water treatment) • 5.0% Boilers: 6% of sales growing 10% • 0.6% NA water heaters: 58% of sales growing ~4% • 2.4% Total annual sales growth • 8.0% 40

  41. Slide 41: China Growth Model

    China Growth Model Water Heater Market Growth Approx 15% Fast growth Market Share Gains Growing & Average Ancillary Selling Price Products Increases 41

  42. Slide 42: Growth and Stability

    Growth and Stability Offense Defense  Organic growth of 8%  NA water heaters and boilers ~85% • High growth businesses growing replacement approximately 14 percent  Market share leader in NA, China • Boilers growing 10%  Strong balance sheet; net cash position  Call option on NA new constructio

  43. Slide 43: Investor Contact

    INVESTOR CONTACT Vice President, Investor Relations and Treasurer Direct: 414‐359‐4130 Email: packerman@aosmith.com 43

  44. Slide 44: Appendix

    APPENDIX 44

  45. Slide 45: First Quarter Results

    First Quarter Results $ in millions 2018 2017 change % chg. Sales $ 788.0 $ 740.1 $ 47.9 6.5% Net Earnings 98.8 87.7 Restructuring & Impairment Expenses 5.0 ‐ Adjusted Net Earnings $ 103.8 $ 87.7 $ 16.1 18% 45

  46. Slide 46: First Quarter Adjusted EPS

    First Quarter Adjusted EPS $ in millions 2018 2017 change % chg. EPS $0.57 $ 0.50 Restructuring and Impairment Expenses 0.03 ‐ Adjusted EPS $0.60 $ 0.50 $0.10 20% 46

  47. Slide 47: First Quarter Sales

    First Quarter Sales $ in millions 2018 2017 change % chg. North America $ 501.7 $ 487.3 $ 14.4 3% Rest of World 293.8 259.5 34.3 13% Intersegment (7.5) (6.8) (0.7) Total $ 788.0 $ 740.0 $ 48.0 6.5% 47

  48. Slide 48: First Quarter Adjusted Earnings

    First Quarter Adjusted Earnings $ in millions, except percentages 2018 2017 change % chg. Adjusted Segment Earnings North America $ 112.7 $ 104.2 $ 8.5 8% Rest of World 36.0 32.4 3.6 11% Total Adjusted Segment Earnings 148.7 136.6 $ 12.1 9% Corporate (14.3) (14.0) (0.3) ‐2% Interest Expense (2.3) (2

  49. Slide 49: Cash Flow from Operations

    Cash Flow from Operations ($ in millions) Highlights 50 $43  Operating cash provided by operations of 40 $43 million 30  Debt to capital ratio of 15% 20  Cash balance: $680 million 10  Net cash position: $387 million 0  Stock repurchase: 520,000 shares totaling ‐10 approximately $33 million ‐20

  50. Slide 50: 2018 EPS Guidance and 2017 EPS

    2018 EPS Guidance and 2017 EPS As of January 30, 2018 2018 2017 Guidance $3.00 Adjusted EPS $2.55 to $2.61 $2.17 $2.58 $2.50 $2.17 $2.00 $1.85 $1.58 $1.50 $1.22 $1.03 $1.00 $0.78 $0.54 $0.50 $0.34 $0.43 $0.00 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Midpoint Note: 2009 through 2014 and 2017

  51. Slide 51: 2018 Assumptions

    2018 Assumptions ($ in millions) 2018 Projections Operating Cash Flow approximately $475 Capital Expenditures approximately $100 Depreciation and Amortization approximately $ 80 Corporate/Other Expense approximately $ 48 Effective Tax Rate approximately 22% Stock Repurchase approximately $135* Share

  52. Slide 52: 2018 Outlook

    2018 Outlook  Tailwinds  U.S. residential water heater industry volumes increase 250,000 to 300,000 units, including tankless;  Boiler revenue growth of approximately ten percent  Announced 10% average price increase on U.S. wholesale water heaters related to steel and other cost inflation effec

  53. Slide 53: 2018 Outlook - continued

    2018 Outlook ‐ continued  Revenue growth between 10 and 10.75 percent in USD  Adjusted EPS between $2.55 and $2.61  North America segment margin expected to be 21.75 to 22.25 percent  Rest of World segment margin expected to expand at least 30 to 40 basis points from 2017 53

  54. Slide 54: Adjusted Earnings and Adjusted EPS

    Adjusted Earnings and Adjusted EPS (dollars in millions except per share data) The following is a reconciliation of net earnings and diluted EPS to Three Months Ended adjusted earnings (non‐GAAP) and adjusted EPS (non‐GAAP): March 31, 2018 2017 Net Earnings (GAAP) $ 98.8 $ 87.7 Restructuring and imp

  55. Slide 55: Adjusted Segment Earnings

    Adjusted Segment Earnings (dollars in millions) The following is a reconciliation of reported segment earnings to adjusted segment earnings (non‐GAAP) Three Months Ended March 31, 2018 2017 Segment Earnings (GAAP) North America $106.0 $ 104.2 Rest of World 36.1 32.5 Inter‐segment earnings eliminatio

  56. Slide 56: Adjusted 2018 EPS Guidance and Adjusted 2017 EPS

    Adjusted 2018 EPS Guidance and Adjusted 2017 EPS (unaudited) The following is a reconciliation of diluted EPS to adjusted EPS (non‐GAAP) (all items are net of tax) 2018 Guidance 2017 Diluted EPS (GAAP) $2.52 ‐ 2.58 $ 1.70 Restructuring and impairment per diluted share 0.03 ‐ U.S. Tax Reform income t

  57. Slide 57: Corporate Responsibility and Sustainability

    Corporate Responsibility and Sustainability – Aligns with our Values A. O. Smith will preserve its good name Ethics and Compliance Social Contribution Diverse & Safe Workforce A. O. Smith will be a good place to work A. O. Smith will be a good citizen Product Responsibility Environmental Impacts A.

  58. Slide 58: Products - Efficiency, Conservation and Innovation

    Products – Efficiency, Conservation and Innovation Energy Efficiency Conservation  We believe our global product portfolio is the most  Our patented Reverse Osmosis efficient in the industry (RO) membrane wastes 50 percent  Our electric residential water heaters achieve less water than traditiona

  59. Slide 59: Manufacturing Plants - Reducing Energy Usage and Environmental Impacts

    Manufacturing Plants – Reducing Energy Usage, Water Consumption and Environmental Impacts  Chairman’s Green Star award established in 2009– annual competition given to the plant which demonstrates the largest social, economic and environmental benefit over a three year period  Johnson City, TN - p

  60. Slide 60: People - Doing Business Safely, with Integrity

    People – Doing Business Safely, with Integrity and Supporting Communities  Established in 1954, the President’s Safety Award annually recognizes the plant with best record for workplace safety  Established in 1955, the A. O. Smith Foundation supports our communities  Guiding Principles establishe

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