A.o. Smith Corporation · NYSE:AOS
A.o. Smith — Smith A O — Investor Day (September 2012)
78 slides from A.o. Smith's investor day presentation, Sep 26, 2012
Slide 1: Analyst Day
Analyst Day September 26, 2012 Exhibit 99.1
Slide 2: Agenda
Agenda 9:00 a.m. Welcome Paul Jones, Chairman & CEO Global Business Ajita Rajendra, President & COO Ashland City Plant Preview Steve Anderson, SVP Manufacturing & Supply Chain 9:55 a.m. Break 10:00 a.m. Ashland City tour 11:00 a.m. Global Manufacturing Steve Anderson Strategic Aspirations & Acquisit
Slide 3: 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
Slide 4: Investment Case
Investment Case Leader in water heaters In North America and China, platform to become leader in India Stable North American replacement market; operating leverage when new construction recovers Strong balance sheet and cash flow to support future growth Strength of our China distribution, manufactu
Slide 5: A. O. Smith History
A. O. Smith History Founded in Milwaukee, Wisconsin (1874) A legacy of engineering excellence Commitment to integrity and ethical business conduct
Slide 6: A. O. Smith History
A. O. Smith History For over 134 years, A. O. Smith Corporation has grown through diversity, innovation and its steadfast commitment to the customer 1936 – Company patents process for glass lining water heater tanks 1950 – AOS introduces cathode protection for water heater tanks 1995 – AOS enters Ch
Slide 7: Global Business Strategy
Global Business Strategy Ajita Rajendra, President and COO
Slide 8: Segment Revenue
Segment Revenue ROW China/India = 91% Europe/Middle East = 9% NA 2012 Second Quarter North America 74% Rest of World 26% Largely stable replacement Lochinvar 10+% growth in 2012
Slide 9: North America Residential
North America Residential
Slide 10: AHRI data: U.S. Water Heater Residential Market Segment
AHRI data: AOS actual shipments and AOS estimates of competitors’ shipments U. S. Water Heater Market Segment Residential Market 0% 10% 20% 30% 40% 50% Includes Lochinvar pro forma
Slide 11: U.S. Residential Water Heater Market Segment by channel
2011 – 8.1 mm Units Retail Wholesale U.S. Residential Water Heater Market Segment Wholesale channel is “50%” of the market Retail channel is “50%” of the market A. O. Smith’s Customers
Slide 12: Strong Replacement Sales: North American Residential Water Heaters
Peak housing starts: 2.1 million Water Heaters Strong Replacement Sales North American Residential Water Heaters Note: Includes tankless 2,000 4,000 6,000 8,000 10,000 New Construction Replacement
Slide 13: North America Residential Strategic Priorities
North America Residential Strategic Priorities 2012 to 2015 Influence decision makers Nurture Key customer Enhance digital marketing Continue to emphasize lean manufacturing and continuous improvement programs
Slide 14: Brand Building - Sustained Investment
Brand Building – Sustained Investment New High Efficiency Products National Advertising Public Relations
Slide 15: Web Strategy
Web Strategy Dominant visibility in search engines for our brands and downstream channel partners Cultivate positively impactful recommendations Inspire and facilitate visitor goals Drive measurable downstream value “Very Sleek Model & has great features” Discover New Products Find a Spec Sheet Driv
Slide 16: Social Media Strategy
Social Media Strategy Retail - Reduce complaints, increase praise • Engage publicly. Resolve privately. Confirm publicly. • Cultivate and showcase positive reviews Goal: Improve published sentiment on Lowes.com & Google Wholesale - Increase awareness and preference • Publish blog on hotwater.com, sy
Slide 17: North America Commercial
North America Commercial
Slide 18: AHRI data: U.S. Water Heater Commercial Market Segment
AHRI data: AOS actual shipments and AOS estimates of competitors’ shipments U. S. Water Heater Market Segment Commercial Market* Includes Lochinvar pro forma *Commercial water heater segment as defined by AHRI, total commercial units as reported by AHRI = 145,000
Slide 19: Innovation, training and 24/7 service drive market leadership
Innovation, training and 24/7 National account customer service drive market leadership Energy Efficient Cyclone Game changing energy efficient commercial product launched in 1997 and upgraded frequently Up to 96% thermal efficiency dramatically lowers operating costs offering short payback Achieved
Slide 20: North America Commercial Strategic Priorities
North America Commercial Strategic Priorities 2012 to 2015 Sustain investment in high efficiency products and innovation leadership Develop delivery of hot water solutions Improve inventory and delivery programs Maintain technical and applications expertise
Slide 21: Lochinvar
Lochinvar
Slide 22: Lochinvar
Lochinvar
Slide 23: Acquisition Fits Squarely within Strategic Objectives
Geographic Expansion Core Product Expansion Acquisition Fits Squarely within Strategic Objectives Core product expansion ~ Lochinvar: Complementary product line up to 3.5 million BTUs ~ Lochinvar: approximately 50% hydronic heating application and 50% other hot water applications Higher growth, ener
Slide 24: Combination Creates Compelling Value
Combination Creates Compelling Value Purchase price of $418 million plus earnout, paid in cash • 7.5 times adjusted EBITDA including tax benefits Lochinvar’s complementary product offerings are a logical expansion of AOS global water heating platform • One of the leading North American manufacturers
Slide 25: Lochinvar End Markets
2/3 commercial end markets; 1/3 residential end markets Lochinvar End Markets
Slide 26: Trend to Higher Efficiency, Condensing Boilers
Trend to Higher Efficiency, Condensing Boilers Source: BRG North American Commercial Boiler Volume (Units)
Slide 27: High Efficiency Portfolio Lifecycle
High Efficiency Portfolio Lifecycle U.S. Conversion to Condensing Technology Other Emerging Markets Time China High Efficiency Boilers x
Slide 28: Lochinvar Strategic Priorities
Lochinvar Strategic Priorities 2012 to 2015 Sustain investment in innovation and technology leadership Further leverage training Continue to invest in new product development Maximize China boiler opportunity
Slide 29: China Water Heating
China Water Heating
Slide 30: China/Asia now 24% of Sales & Growing
China/Asia now 24% of Sales & Growing China sales have grown over 25% (CAGR) over the last 9 years China India
Slide 31: Nanjing, China
Nanjing, China Since 1995 Products designed for Chinese consumers Experienced Chinese managers Strong retail presence Consistently strong growth Second manufacturing site will increase capacity to 3 million units in 2014 (50% increase)
Slide 32: Leading residential brands; ten-year market share trend
Leading residential brands measured in currency; Tier One Market: GFK - CMM data sampling several thousand largest retail stores Ten-Year Market Share Trend
Slide 33: Market Share by Price Category
Data Source: CMM Retail Survey January 2012 -150 Best Selling Models Market Share by Price Category Electric Market Share Gas Market Share
Slide 34: Distribution Channel Expansion: 5,400 stores
We are selling currently in 5,400 stores and plan to add 600 retail stores in 2012, largely in tier 2 cities. We have been assisting distributors to open A. O. Smith specialty stores. We plan to add 200 new stores each year, reaching 1,700 A. O. Smith stores at the end of 2014. Three Year Plan (AOS
Slide 35: Mega Trends - China
A. O. Smith customer demographic expected to continue to grow rapidly Mega Trends - China Significant growth in AOS target demographic
Slide 36: China's Megatrends and Company Specific Factors Driving AOS Growth
China’s Megatrends and Company Specific Factors Driving AOS Growth Urbanization and Growing Middle Class Expect Tier 2 and Tier 3 market and cities to further develop Green and Safe (more money for cleaning up environment, saving energy, health) Strong A. O. Smith brand, capable local managers, key
Slide 37: Wall-hung Electric
Wall-hung Electric Good/Better/Best • Mechanical / Electronic Controls • Steel / Plastic Jacket • Single / Dual heating elements • Single / Dual power input 1.5/2.0/3.0KW/5.0KW • Solar and gas auto-switch • Dual tank slim model Dual tank slim model Solar and gas auto-switch
Slide 38: Good/Better/Best (Natural gas)
Good/Better/Best (Natural gas) • 8L/10L/11L/12L/13L/16L/20L/28L • Non-modulating / Modulating • Non-condensing / condensing • Power venting / Balance Flue • Indoor/Outdoor • CO Sensor interlock Gas Tankless
Slide 39: Heat Pump
60L/80L integrated Wall-hung 150L/200L Split/integrated Floor-standing 240L/300L Split/Integrated floor-standing 2KW/3KW compressor $50 dollar per unit savings compared with using copper coils. Heat Pump Launched aluminum “micro-channel” cost-down split floor-standing heat pump.
Slide 40: Solar-Assist Electric
Solar-Assist Electric 60L/80L/100L/120L/150L/200L Roof-top / balcony mount Pressurized tank Cost reduction in 2012
Slide 41: AOS China Brand Strategic Priorities
AOS China Brand Strategic Priorities 2012 to 2015 Continue to build brand and expand distribution Grow commercial markets, including hydronic Continue cost reduction processes Develop web based sales and marketing strategy Improve tankless and heat pump capabilities Exploit developing replacement/up
Slide 42: Leverage the A.O. Smith brand in water treatment channels
Leverage the A.O. Smith brand in our existing water heater channels • 1,100 retail stores at the end of 2011 RO main focus Product development focused at customer needs and technical improvements Highly fragmented, $300 million market A. O. Smith Branded Water Treatment Systems: Retail Channel Displ
Slide 43: AOS Branded Point of Use Products
400 GPD tankless; power and pump; USB interface for monitoring filter; Leakage detector 75 and 50 GPD with tank, power and pump; USB interface for monitoring filter; Leakage detector 125 GPD with tank; No pump and thus no power needed! AOS Branded Point of Use Products 2011: 900 stores in tier 1 cit
Slide 44: SWT Strategic Priorities
SWT Strategic Priorities 2012 to 2015 Expand customer base and drive sales growth Invest in AOS brand Improve profitability Achieve best in class quality and delivery Maximize replacement filter opportunity
Slide 45: India
INDIA
Slide 46: Products Designed for India Market
Products Designed for India Market
Slide 47: India Geographic Expansion
India Geographic Expansion +800 outlets in 2012, totaling 1,700 at year end (AOS brand water heaters) +100 Jaquar dealers in 2012, totaling 1,100 at year end (co-branded water heaters) $0 $5 $10 $15 $20 Millions Sales
Slide 48: India Strategic Priorities
India Strategic Priorities 2012 to 2015 Build brand Establish manufacturing center of excellence Introduce new products Expand distribution Enter water treatment market Explore commercial opportunity
Slide 49: Energy Efficiency/Clean Water
Energy Efficiency/Clean Water
Slide 50: A. O. Smith's Vision
A. O. Smith’s Vision To be a leading, globally diversified provider of innovative, energy efficient products used to heat and clean water, providing extraordinary value to customers and maximizing returns to our shareholders.
Slide 51: Achieving Our Vision
Achieving Our Vision 450+ Engineers • North America • China • India • Europe 10 Engineering Centers • Specific Product Engineering • Global Engineering • Corporate Technology Focused Innovation Center
Slide 52: Global Engineering Centers
Global Engineering Centers Fergus, Canada Veldhoven, Netherlands Shanghai, China Nanjing, China Bangalore, India McBee, SC Johnson City, TN Lebanon, TN Milwaukee, WI Lishui, China
Slide 53: Technological Capabilities
Technological Capabilities Electric tank-type Gas tank-type Gas tankless Heat pumps Solar Boilers and industrial water heaters Water treatment Enabling electronics Materials Simulation
Slide 54: Innovative Products
Innovative Products Awards Appliance DESIGN Magazine • 2011 Excellence in Design Award • Silver Medal - Next Hybrid ® • Bronze Medal - Cirrex ® Green Builder Magazine • Hot 50 Products of 2011 • Next Hybrid ® Building Products Magazine • 2010 Green Product Award • Voltex ® Company Confidential
Slide 55: TI ie | oea:osama — | AMERICA'SWoRST
TI ie | oea:osama — | AMERICA'SWoRST BATTERIES | FIXINGS =~“) || ONHEALTHCARE | CREDITCARD Nees | mere Sez? (Eg be C NOVEMBER 2010 | CONSUMERREPORTS.ORG R t =
Slide 56: Hybrid vs. solar
Hybrid vs. solar While some solar heaters save almost as much as hybrid electrics, most take far longer to pay for themselves. Brand & model installed cost (est) Tank size (gal) HYBRID ELECTRIC HEATERS All are Energy Star-qualified and eligible through 2010 for federal tax credit of up to 30 percent
Slide 57: New Products
New Products Voltex Effex NEXT Hybrid Cirrex Tankless TM TM TM TM
Slide 58: 2015 Strategic Aspirations and Acquisitions
2015 Strategic Aspirations and Acquisitions Paul Jones, Chairman and CEO
Slide 59: Vision
Vision Performance Aspiration A. O. Smith Grow faster than the market and achieve greater than $3 billion in sales, with more than $1 billion from emerging regions and, with a return of 14% EBIT in 2015. To be a leading, globally diversified provider of innovative, energy efficient products used to
Slide 60: Values: Enterprise Strategy Framework
Values A. O. Smith Enterprise Strategy Framework Conduct business with integrity- Live our Values every day Build our brand reputation and deliver our brand promise. Emphasize high growth markets worldwide. Leading market share position for every segment of our business. Bring to market a continuous
Slide 61: Our Geographic Environment
China India North America Our Geographic Environment North America • Slow GDP growth • Large but mature market • 2015 Regulatory changes – electric product • Strong brands • Boiler industry transition to 55% condensing by 2016 China • GDP projected at 7-8% range • Sluggish economy at present / trans
Slide 62: A. O. Smith's Capital Allocation Options
A. O. Smith’s Capital Allocation Options Organic growth (capital expenditures) Acquisitions Return cash to shareholders • Dividends • Share repurchase
Slide 63: Water-Themed Adjacencies
Water-Themed Adjacencies Acquire new platforms for growth A. O. Smith Growth Strategy Adjacencies Geography Expand/ Grow the Core New Products & New Technologies Water Heating Water Treatment Geographic Growth China India Other High Growth GDP markets Core
Slide 64: Geographic Expansion: Higher Growth Regions
Geographic Expansion: Higher Growth Regions Source: World Bank, Economist US 2012 GDP Growth
Slide 65: Investment Criteria
Investment Criteria Value creation opportunities ROIC in excess of cost of capital by second or third year Meet risk adjusted IRR hurdle rates Margin accretion with growth rates higher than US GDP Accretive to earnings in the first year
Slide 66: Alignment and Execution
Alignment and Execution Alignment Clearly defined strategy and goals Clear definition of what we will and will not do Clearly identified priorities Disciplined process • Clear financial metrics • Continuously challenge assumptions • Develop/monitor execution ability (People) • Continuously monitor p
Slide 67: Total Stock Return
Total Stock Return Cumulative returns*, period ending 6/30/12 * includes dividends 17% 126% 101% 5.45% 58% 1% 1% 72% 10% 0% 30% 60% 90% 120% 150% 1 year 3 year 5 year AOS S&P 500 S&P 600
Slide 68: 2015 Financial Aspirations
2015 Financial Aspirations John Kita, Executive Vice President and CFO
Slide 69: Path to Achieve 2015 Revenue Growth
Path to Achieve 2015 Revenue Growth Aspirations $1,835* $215 $375 $2,425 $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 NA Organic ROW Organic * Includes full year Lochinvar (proforma) This suggests annual organic revenue growth in excess of 7 percent
Slide 70: North America Organic Revenue Growth
North America Organic Revenue Growth US housing starts to1.2 million by 2015 Commercial Industry units to 150,000 by 2015 Grow approximately 10 percent per year North America Water Heaters $1.1 billion to $1.2 billion Lochinvar $200 million to $290 million $1,835* $215 $375 $2,425 $0 $500 $1,000 $1,
Slide 71: Rest of World Organic Revenue Growth
Rest of World Organic Revenue Growth AOS Branded Sales $372 million to $650 million India $18 million to $85 million 2015 Global Water Treatment revenues over $100 million • 15% (2X China GDP) • Grow > 30 percent per year • Enter water treatment Grow at least 25 percent per year SWT $16 million to $
Slide 72: $775 million Organic Growth
$775 million Organic Growth China/India 24% of Sales in 2011 & Growing to 32% by 2015 6% 7% 10% 9% 10% 13% 16% 22% 24% 32% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% China/India NA
Slide 73: Organic Growth Provides Premium Returns
Organic Growth Provides Premium Returns $- $500 $1,000 $1,500 $2,000 $2,500 $3,000 2010** Aspiration 0% 2% 4% 6% 8% 10% 12% 14% 16% Sales EBIT Margin ** 2010 EBIT excludes $35.4 million in flood costs * excludes corporate expenses
Slide 74: Organic 2015 EBIT Aspirations
Organic 2015 EBIT Aspirations 14.5% 13% 14% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% North America Rest of World Total excl Corporate
Slide 75: Acquisitions: Dry Powder
* Excludes over $300 million organic cash generation (estimate for 2013 to 2015 timeframe) Acquisitions Dry Powder for acquisitions*: Appr $400 million cash offshore Appr $400 million borrowing capacity Appr $800 million available for acquisitions Assumptions for acquisitions: Purchase Price of $800
Slide 76: > $2 Billion Developed Regions > $1 Billion Emerging Regions
> $2 Billion Developed Regions > $1 Billion Emerging Regions Emerging Regions over 33% of Revenues in 2015 Including acquisitions, achieve greater than $3 Billion in sales, with over $1 Billion from emerging regions Composition of revenues based on organic growth and acquisition aspirations
Slide 77: Reaffirming 2012 EPS Guidance; Introducing 2015 EPS Aspirations
Reaffirming 2012 EPS Guidance; Introducing 2015 EPS Aspirations 2008, 2009 and 2010 are Non-GAAP, EPS all periods is Continuing Operations Only 2011 excludes the impact from the second quarter one-time settlement and increase to the warranty reserve and the hedged RBC shares. 2012 excludes the impac
Slide 78: Thank you!
Thank you!