Q3 2019 Earnings Call

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Ladies and gentlemen, thank you for standing by welcome to the A.O. Smith third quarter 2019 results.

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19.

The dealer Chief executive.

Your.

And chocolate Albert Chief financial.

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Good morning, ladies and gentlemen.

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I'm pleased to review several items regarding our third quarter performance.

Sales are in North America segment increased 6% and operating margin performance in North American improved approximately 200 basis points over last year.

Our north American water heater and operations continue to perform well.

Equally pleased with our commercial water heater performance, where we continue to outperform the market.

Productivity within North America water treatment manufacturing in the effectiveness of our direct to consumer channel continued to improve.

And water rights performance are right on track so our expectations.

We announced a 9% increase to our quarterly dividend rate in early October to 24 cents per share, which represents a five year CAGR of 24%.

In China, while the third quarter came in where we expected.

We are disappointed you see further weakness in demand and expect that to continue in Q4.

Moving to slide four point.

[noise] as weakness in or end markets in China persist.

We have implemented further cost reduction actions.

Over the course or the last 10 months into Q1 2020, we're targeting a 20% reduction in headcount from December 2018 levels.

We continue to review and rationalize brand building <unk> advertising spend.

So in expenses travel costs and other S.P. they spent.

By the ended the year on a net basis, we will close over 700 non productive stores.

We're continuing our aggressive cost reduction programs in both manufacturing processes and product costs.

And we'll continue to work with our distribution customers programs to reduce their inventory.

Total annualized savings as result of these actions is estimated to be $38 million to $40 million.

Which approximately 28 million will be realized in 2019.

I'll now turn over the call the truck, who will review our third quarter results in more detail John Thank you Kevin.

Filter the third quarter of 728 million were 3% lower same quarter in 2018.

Earnings in the third quarter of 87 million declined 17% from the third quarter in 2018, and third quarter earnings per share declined 13% for 53 cents.

Sales in our North America segment, the 515 million increased 6% compared with the third quarter of 2018.

Higher water heating TV heater and boiling volumes in the U.S. were supplemented by 16 million themselves in our recently acquired water right business.

Rest of the World segment sales of 220 million declined 20% compared with the same quarter in 2018.

China sales declined 20% in local currency, primarily related to weak consumer demand and previously disclosed channel inventory levels.

A weaker Chinese currency unfavorably impacted translate sales by approximately $6 million.

India sales grew at 9% local currency compared with the same period 2018.

On slide six North America, <unk> North America segment earnings of 122 million were 15% higher than segment earnings in the same quarter in 2018, driven by the favorable impact your profits from higher U.S. water heater and boiler volumes as well as lower steel cost improvement in the profitability of.

Water rights sales without water rights and incremental profit from water rights.

As a result third quarter 2019 segment margin of 23.6% improved from 21.7% achieved in the same period last year.

Rest of the World earnings of 4 million declined significantly compared to third quarter 2018, the unfavorable impact your process from lower trying to sales and a higher mix of mid priced product.

Which have lower margins more than offset the benefit to profit.

Lower SGN expenses in that region.

As a result of these factors segment margins declined to 1.9% compared with 14.3% in the same quarter of 2018.

Our corporate expenses of 10 million were lower in the current quarter compared to the third quarter last year, primarily due to incentive based compensation.

Interest costs were higher in the third quarter than a year ago due to higher debt levels associated with the acquisition of water in April .

For the year, we expect interest expense would be approximately 11 million.

Cash provided by operations of 280 million during the first nine months of 2019 was lower than 289 million than the same period of 2018 as a result of lower earnings which were partially offset by lower investment in working capital compared to a year ago.

Our liquidity and balance sheet remains strong our debt to capital ratio was 16% at the end of the third quarter.

We have cash balances totaling 514 million located offshore and a net cash position as 195 million at the end of September .

During the first nine months to 2019, we repurchased approximately 4.9 million shares I don't stop for a total of 230 million.

Approximately 4.1 billion shares remained on her existing repurchase authority at the end of September .

On slide nine.

We expect our cash flow from operations in 2019 to be approximately 400 million compared with 450 million in 2018, primarily due to lower earnings.

Our 2019 capital spending plans are approximately 80 million and depreciation and amortization expense is expected to be approximately 75.

In 2019.

Our corporate and other expenses are expected to be approximately 46 million in 2019, essentially the same as last year.

Our effective tax rate is expected to be approximately 22% in 2019.

We expect to purchase our shares in the amount of approximately 300 million in 2019, and we expect average diluted outstanding shares in 2009 seem to be approximately 167 million.

On slide 10, we continue to see headwinds in our markets in China. The fourth quarter is typically the strongest consumer demand quarter of the year. However, with continued weak year over year consumer demand and persistently high channel inventory levels, we are forecasting the fourth quarter in China to be similar on the top.

Outlined and operating profit line to the third quarter of 2019.

As a result, we revised our 2019 Dps guidance to a range of between 225 $2 in 28 cents per share.

A 13% decline at the midpoint compared with last year.

Ill now turn the call to Kevin who will summarize our guidance and business assumptions for 2019, beginning on slide 11.

Okay. Thank you Chuck.

Our outlook for 2019 includes the following assumptions.

First let me start with China.

We saw year over year consumer demand in the third quarter decline compared with first half of the year and project full year sales to be down approximately 90% in local currency terms.

Combined with our expected four points of unfavorable currency translation.

Our 2019, China shows projection is a decline of approximately 23%.

Our forecasts for the Chinese currency in Q4, it's essentially level, where it is today.

The sales declined 19% local currency is roughly equally attributable to weaker consumer ban demand the change in China inventory year over year based on our projections of year end channel inventories.

Total channel inventory remained relatively unchanged from the second quarter at approximately four months.

Historically channel inventory increases in Q3 as it did in 2018 as the market prepares for the higher fourth quarter sales.

This year the channel did not experience the third quarter inventory increase.

While we expect that consumer demand will be higher than other quarters of the year as the fourth quarter is typically a period of high promotion and buying in China. Our assumption is the fourth quarter demand will run.

At a year over year decline similar to what we saw in the third quarter.

We project, that's the channel inventory will be reduced nearly one month.

We expect that we will exit the year would channel inventory levels remain above normal.

Normal isn't the two to three month range.

In the U.S., we project residential water heater industry volumes will be down 102 150000 units in 2019.

Commercial industry water heater volumes are expected to be up 4% to 5% primarily driven by growth in the light surface electric models.

Based on where their sales growth of 5% year to date.

We expect our North America boiler sales to grow approximately 5% for the full year.

We project in your water heater EBIT will be positive in 2019, and we expect India will achieve breakeven in 2020.

Please advance to slide 12.

We project revenue will decline by approximately 5% for the year in us dollars and 3.5% in local currency.

We see sales growth in North America, with our water heater boiler and water treatment products.

Collectively expected to grow approximately 4% in 2019, including $40 million to $45 million and water rights sales.

EPS is projected to be two hours and 25 cents.

And to those are 28 cents.

We expect North America segment margin to be between 23, and a half to 23 three quarter percent.

And rest of World segment margins to be approximately 4.25%.

We're pleased with how our North America segment.

Is performing particularly on the water heater side on lower industry volumes.

We see long term growth drivers and water treatment solutions and boilers across North America.

In the near term the Chinese economy remains weak and were taken further action to rightsize the business, while continuing to invest in innovation.

We have a strong brand.

Broad product cooperating in our key product categories.

Distribution and the reputation for quality and innovation.

Overtime, we are well positioned to maximize favorable demographics in both China, and India to enhance shareholder value.

Our replacement markets remained stable.

Which we believe represents approximately 85% of North America water heater and boiler volumes.

We have strong cash flow and balance sheet, providing an opportunity to continue to invest in ourselves.

Acquisitions and return cash to shareholders.

That concludes our prepared remarks.

We are now available for your questions.

Thanks.

As a reminder, ask question you need to press star one on your telephone.

To withdraw your question press the pound.

Please stand by only compare the Kenny roster.

Also in the interest of time, please limit yourself to one question on one and one follow up.

Our first question will come from the line Robert Mccarthy from Stephens, maybe getting.

Your line maybe on me Robert.

Once again, Robert Mccarthy your line maybe on mute.

And our next question will come from the line of Jeff Hammond from Keybanc you may begin.

Hey, good morning, guys.

All right when I guess morning.

Just on China I guess.

Just a lower expectation margin topline are you seeing that is more.

A great more aggressive destock are weaker consumer demand and then just on inventory.

Should we expect kind of first half 20 to.

To still be under margin pressure as you guys continue destock and when do you think that.

Under wraps up and gets back to normal.

Yes.

This is Chuck so when we look at kind of the change from our last guidance, what we really have seen as the consumer demand our sell out down a bit decline since you've it's kind of running flat year over year that was our assumption. So we've seen a week a weaker decline in and consumer to domain excuse me it's.

Consumer demand of about 5% to 8% percent. So what that does it pushed back a little bit our inventory reduction that we were expecting at the end of Q.

Three.

Good news is inventories did not go up typically at the end of Q3 inventory as we go up in that 12% to 15% range.

This year the remained flat so even last year. The inventories went up at that low end to that range. So as we go out the back half the year, we're looking at a bit of weaker Q4 based upon that weaker consumer demand and the need to inventories are still going to be needing we still expect inventories to come down by about a month, which is going to cause a headwind.

So to your question of going on at the end of the year.

We're looking at going on at the ended the year somewhere around three months and as Kevin mentioned typically it's in that two to three month range that we would have as channel inventory. So we do have a bit of a hand with heading into next year.

Okay.

Thank you said commercial North America commercial.

Sounds better and was good in the quarter.

Can you just give us the the water treatment core growth.

And just talk about I guess.

Let's say that really at least what you saw on residential water heaters.

Well I'll take the residential water heater side of it.

First in Q3, we expected residential to bounce back a little bit stronger than it did.

And although it was positive.

Not nearly where we expected it to be at the end.

Based on through August the industry was down 194000, we look at our September we don't see much more of an improvement.

Once we get that data coming out.

Our industry so.

Overall, we took the industry downturn, a 50000 compared to what we did in Q on our Twoq Q2 call.

And is simply we just don't think in Q4, we can make up that that.

That delta.

And so but when you look at it again.

Remember there is 120 million households out there and we estimate somewhere in those households is about 132 million water heaters.

And so.

100 hundred 50000 units.

There can be some variability there from year to year, we're coming off.

Two two straight years of over 4% growth. This one it looks like is going to be down in the 1.5% range. So overall, we feel pretty good about a water heater business we.

Don't see we see going forward or replacement market remaining strong.

So overall, the residential business slight down year, but there is some variations from year to year.

And I am water treatment sound the water treatment side in North America water treatment that is.

Last year, it a bit of a tough comp because we haven't some ramp up going on with one of our major customers, but if you look at the base business. We grew at about 9% for the quarter. So the base business is growing nicely.

Like the back half of the year trajectory on on growth as well as continuing to look and improvements in operations.

Okay. Thanks, I'll get back in Q.

Thank you.

Our next question comes online.

Sorry, Burdiss came from Jefferies. Sir you may begin.

Thanks. Good morning, Good morning, I appreciate the commentary on North America, Atlanta feed to the begins to results a little bit more you talked a lot of 4% price increase that August .

This has been received by the market are you seeing similar price increases from competitors or just in general any changes in the competitive dynamics.

Well, we're going to be very consistent here since with the only public company.

What I will say is we announced and implemented a 4% increase as stated in August and that's been implemented.

Okay and then.

Based on the 20% total head count reduction in China can you just confirm that will be another 5% reduction in the fourth quarter and maybe.

Provide some color on where those head count reductions are occurring if you feel like the business will be right size for the 2020 market conditions at this point.

Yes, sorry. This is Chuck so we've increased that percentage from 15% to 20 from the last quarter, we did that based on the.

Continued weakness in consumer demand.

Hey, we'll we'll look at whether that would be increased as we go forward.

There will be some of that that goes into Q1, it's going to be over the course of probably the next two quarters that we'll see that come out.

The areas impacted it's been largely across the board we have not what we've been very careful to do is maintaining our R&D and engineering capabilities maintain that investment. So that we can continue to lead with innovative products that we have not we have not leaned on those types of head count reductions, but it's been pretty much across.

Fourth.

Yes, a little color to that what's important for us as we're going forward in making the adjustments for the current environment that we're in that the business overall, whether it'd be an operations manufacturing engineering, we're still in position.

When the economy turns that we can ramp up quickly. So it's very strategic way that we're doing it.

We know the economy is going to come back. We just we don't know exactly when and we want to position our cost structure to the involved but also the ability for us to ramp up when the economy comes back and be able to service our customers at the appropriate level. So it's a balance here and we're looking at it from from all sides.

I appreciate the color. Thank you guys.

Thank you and next question Brian .

Mike.

Hi, everyone from Baird you may begin.

Hi, good morning, everyone. So wondering Mike. So so just some thoughts on China here from a from competitive dynamic market share perspective last couple of quarters, you've given some some some good detail about how you think you're tracking versus the market.

Both at the high end as well as kind of overall.

Maybe you can just give us an update there and then specifically talk about how you think you're performing versus market as well as competitive situation.

Let me too. This is Kevin lets just talk Q3, because we look at this quarter by quarter and it does vary in Q3, our gas tank with share we'd be held our share.

And on wall hung electric and water treatment, we were down slightly about 200 basis points.

On the water heater electric side of it we know exactly where that those share decline within a couple of regions will take some action there.

And you get to remember in Q2, we also talked about that we had improved on market share in Q2, So we gave a little bit back.

But again, there's variation from quarter to quarter, we don't see any issues there we expect to recover our share.

Over time in and we have the products the distributions to.

To to handle that.

With regards to competition certainly every China has been a competitive market for the past 20 years. We have people that are have entered into our space on the premium side and we have to compete and we're competing on a regular basis.

Now again, we're in a market thats, a little bit down and so it's we have some mid price point products that have done fairly well and we have some premium products that.

I continue to.

Provide value to consumers, but theres a balance there. So overall when you step back our share.

Is continuing to be inline with our expectations and you will tend to see a little bit <unk> up and down quarter to quarter.

I think Mike on your commentary a question about high end of the market.

The water treatment side when you look at this year to date compared to 2018, we've seen it pretty stable, we haven't seen any decline.

Consistent with what I think we've talked about another quarters with on the water heating side, both gas and electric and saw the high end come down a couple hundred basis points as far as the total market percentage market.

Okay that makes sense, there and then.

The margins in the fourth quarter.

Yeah, I think Chuck you said about consistent with this third quarter I think the math I ran was close to breakeven just confirm that one way or another and then.

More importantly, just maybe talk about some of the puts and takes going into the fourth quarter to get to that margin profile. How much of this is just really volume de leverage versus.

Maybe including severance or some of these other one off kind of cost items any kind of color on that on the puts and takes in fact is there would be helpful as well.

Yes, so so the Q4 volume it munis largest it's largely volume in.

Hold on the second here.

Yes, its largest largely it's largely volume Mike the puts and takes compared to last year.

Think of it in terms of 50% channel inventory carve out that's going to hurt our volume and the other 50% of it being part of just lower consumer demand.

The puts and takes on the on the.

On the.

On the head count reduction and those other cost I mean, we still have some costs going into that head count reductions and severance in Q4, although those benefits for are higher than the cost that we've incurred.

We've got a little bit of the plants the plants inefficiencies that occur in the third our inefficiencies that occur at the low end of that rate also so those two can offset each other.

But the the risks on kind of the Q4 number.

Probably relate more along consumer demand and what happens to channel inventory, because we're forecasting channel inventory to come down by about a month.

That's super helpful. I appreciate it thank you.

Back to and back to your question on Q4, Yes, we think of it as being pretty much a breakeven quarter for the fourth of the quarter in China, the fourth quarter in China to be pretty much breakeven.

Great guys and Scott about that thank you appreciate it.

Thank you and our next question comes on line of Damon Mcgrover from Longbow, You may begin.

Hi, good morning, everyone.

Wanted to start off by.

We're on China.

Parsing out if we can sort of the difference between what you might be seeing in your mid price point product versus your premium price point product and.

If we're able to talk about that four months of surplus inventory are you able to parse out.

How many months are you on terms, it's just we isolate the premium because it seems like the mid price points, probably turning relatively well given where the markets by greater than maybe the concentration of that might be in premiums. So that's four months on the aggregate inventory what would it be on the premium.

Yes, I mean, I'll say that right now in Q3 in Q4, what we're seeing a sell into the channel.

More heavily weighted towards the bid price lower margin product.

The channel does have more of the higher price product thats, taking longer to move in this sort of an environment.

To parse it out in Splitted.

We don't we don't have that kind of clarity exactly right now I will say, we see we see a changing over time, because we know that we're selling mostly and thats where margins are lower in these two quarters, we're selling a larger percentage of mid price product with lower margins.

As far as a month. So we've got about four months of inventory today I want to help define that a little bit. So four months think of it in terms of.

The guidance, we gave so down 23% from last year, and we're thinking of four mindset as you take that that number in divided by 12 and Thats roughly the number of.

Dollars, we kind of having the inventory so I wanted to frame and a bit because we're not we're not looking at it as the next three months sell out we're kind of looking at it as the 12 month average and working to get that down so as the total year volume goes down that that hurdle, we got a little bit more aggressive, but it's it's about four months looking.

To go to about three months by the end of year.

Okay. Thanks for that and then I guess as a follow up just maybe talk about the boiler business I guess.

You produced guidance twice so far this year can you just talk about performance and the third quarter with maybe a little more granularity and also I guess any color you can find in terms of just the backlog dynamics are you seeing backlogs up or down the boiler business and just what this quoting activity look like in the boiler business.

The the boiler business is if this kind of a mixed message.

Going to send here.

The activity between quoting has been very active and it's been that way throughout the year actually still then from last year and we're getting a lot activity there.

Much more than actually turning into orders right now, we're seeing more and more jobs being delayed or postponed and we can make some speculation around labor shortage and things of that nature, but when you look at it the the 5% and we're forecasting.

We are gaining share in most of our categories that we compete in but we have this backlog of.

Quoting that just hasn't been released as we expected. The good news is we do expect it to be released over time.

There is there's just a kind of a delay between much further delay between quoting and actually turning into orders than we've seen in the past, but overall the commercial business seems to be good and we're getting our fair share of the jobs that are being turned into orders and we look for that the carryover.

Into next year.

Thank you and our next question comes from the line Robert Mccarthy from Stephens you may begin.

Can you hear me we can ride.

Well, it's amazing when you get operate a phone.

Yes.

It's all happened all of us or over about it well thanks better on the numbers.

No.

Nevertheless, I.

I guess, one thing thinking about China.

One thing, we can say and I'm not trying to be impolitic, but clearly there is there's a bit of the visibility yes, you're here understandably with respect to the channel and what's occurring just given the fact that you've taken down your assumptions consistently it then obviously.

Certainly twoq versus Threeq, you, but I think next years the year the right as opposed to peg and new year starts on the 20 cents, but are you going to be in a position to really guide with any granularity or visibility your conviction. When you report fourth quarter for China, given just the dynamic nature what were.

Right now.

Well, let me take that either I, but we've been asked more than once are we at the bottom.

And we kind of said Hey, we hope so.

And.

But we really don't know the data is a little bit unclear and what we're going to look at it is we were coming off the difficult Q3 consumer demand was down as we talked about we're going to look at Q4, and that's going to give us kind of that vision into into 2020.

But it's one of these markets. So we entertain month by month.

Quarter by quarter, and and hopefully we get through Q4, maybe there's a phase one of the China agreement that may help going into 2020, but but but we don't know what we do know instead, we're trying to give you our best view based on the data we have today.

Q4 is going to be a a critical quarter as we set up going into 2020 and we're in the middle we're finding plenty process right now.

But we just need to see how Q4 plays out.

Alright. Thank you for that I appreciate that and then moving on to cut it back to North America, and obviously I think there's some limits on what you want to talk about given competitive.

Amex or whatnot, but just in terms of the granularity I mean is rather you can say about kind of.

Relative growth rates.

In the near term.

For tank versus tank lifts and have you seen.

Pronounced shift there given the fact that particularly some application for tank was that you all in cost coming down there seems to be at the margin more of a preference for it. It is so historically over the last couple of years been a better growth rate in association with it what can you what can you give us because clearly underneath the hood.

We are seeing a little bit about a different growth rate.

For North America, and I just highlighted the fact that you did miss consensus numbers for third quarter and you did take down some of the assumptions for fourth quarter. So any kind of visibility as to if there's a potential sea change going on there in the fourth quarter would be helpful. In terms of granularity.

Yes.

Let me try to take some of that.

As far as a sea change no, but we don't see a sea change and if you look at the Tankless side of the business just growing.

Certainly faster than it's been a tank type that delta has changed quite substantially I mean, we're down about one 1.6% on tank and Tankless. It does up maybe into 3.5% range. So there's if anything theres a contraction we between the two.

And so there's no meaningful change again, you look at this quarter to quarter I've been in this industry 30 years and I, it's difficult to predict.

These swings because quite frankly, when you look at it a couple of hundred thousand 150000, 100000 units, it's relatively small number when you bake it into the millions that we sell so what I'll come back to his we believe our north American.

Tank replacement market remains solid.

We are still a participant and the gas tank was business and have.

You know low double digit share that we're continuing to improve we're going to be filling gaps in that category at the Tankless category in 2020, So no changes.

Our distributors seems still feel fairly confident going into two ended the quarter into next year. So overall.

That was a long way to say that.

It's pretty much status quo has has been.

From the from the beginning of the year.

And Rob I want I want to come back to China real quick here.

Mentioned about visibility into the channel inventory in China, we have pretty we think we have good visibility into the channel inventory what were is what we're a little bit struggling with is sell out in consumer demand, that's really the change our estimate quarter over quarter.

And just.

Remembering that we don't we don't control the channel inventories our customers' inventory, we certainly worked with them.

Try to help them moving through the channel, we have promotion programs and work with them closely but the built the delta in variable from the last the last outlook as really the step down the consumer demand.

Thank you and our next question will come from my David Macgregor from Longbow, You may begin.

Yes, thanks for taking the follow up.

To ask about you filed an 8-K back earlier in October just.

Looking at amendments to the articles incorporation.

Just wondering if you could just talk about the motivation for we're incorporating these various defensive measures.

Sure.

Hi, David This is Pat.

Hi, Pat that high the amendment was basically to bring our.

Our charter and bylaws up too.

Our peers and current standard so.

It was really just some benchmarking that we had done and looked at what best practices for shareholder proposals and for direct got director nominees.

So it really was benchmarking and best practices that drove the amendment.

Got it thanks for for addressing that and then just follow up question.

Actually last quarter, both the sort of the split between mid price point in premium price point in China, and you said you get back to us with that so just wondering if we could follow up with that question again and give us a better sense proportion.

In the Chinese business and.

And I guess, if there's anything you could be doing longer term to improve the contribution margin on the middle price point product comes into scale.

Yes. So this is Chuck so we.

We don't we don't necessarily have granularity into the change of mid mid price point, we have introduced many many more products not many more products. We introduced more products into 3000, 5000, RMB range, which like we said before the contribution margin is isn't as high as the contribution Mark.

And in the high end of the market.

But we aren't we are working on cost reduction programs like we always do you have cost reduction programs to lower product costs as well as improved production productivity and process improvements. So we continue to work on that right now, it's a heavier mix towards the I'll call. The high end of the mid priced products because of the fact that the channel has more.

For higher end products into today than than than it does Ms. Mid priced that those those newer models are really well received in the marketplace right now and our customers continue to want to introduce those at the same at the same time worked diligently to over time take down the channel inventory on some of the higher price models that are in the market.

Okay.

Thanks, Kim we have a follow up from the line.

And then from Keybanc you may begin.

Hey, good morning.

Just on the.

There has been the recent news article about higher entering the North America water heater market and building a plan can you just speak and clearly the market's pretty rational few players good returns just.

What are you seeing out there and what are your expectations from that new entrant. Thanks.

What I can tell you is what's been publicly announced is that they are going to they've indicated and announced so they're going to enter the electric water heater market and that they have an investment in South Carolina.

$60 million.

We have seen any product in the market and we don't know quite frankly.

Much more than what they what they published.

What I, what I would tell you is that.

Regardless, we always have competition.

And Aaos Smith longstanding relationships with customers, we have the broadest portfolio of products in the market technology.

Yes.

Hi service levels, and and long term relationships.

With and the market share so at the end there will be it looks like and other competitor with.

A partial lot.

And if and when that starts to materialize, they're talking about next year Q4 will deal with it.

As we have with all of other competitors. So that there's not much to said. The then what you read and I think what we bring as of value in our market share and and our broad products of both residential commercial.

And close and so forth that.

We're in good position to continue to move forward and be successful in this and in our markets.

Okay, Great and then just.

Back to the water treatment was Chuck was the 9% that.

That exclude that large customer or or that would have included that tough comp.

That was that excluded the load in of ramp up for the large customer because we had an unusually high ramp up of a customer. So the 9%. We've used more is kind of the baseline growth of the base business.

Thank you.

We have a follow up from Robert Mccarthy you may begin.

Yeah, No I mean, I guess a question I would have is can you give us any kind of updated embedded expectations for the relationship with Lowe's.

And.

Anything change there in terms of what is kind of translated into your guidance for this year and thinking about next year.

Now really we can.

We're we're not going to talk about specific customers.

Going forward, particularly on performance.

Overall, our water treatment business as we said continues to improve nets in all categories, whether it be our dealer network.

Our direct to consumer retail and wholesale so overall the business is improving we are becoming more productive margins are moving up.

And the businesses.

Moving into right direction as we continue to.

To penetrate these these market segments.

And then just a follow up on.

On the entrance of GE and higher I mean, I guess it stands to reason, though that.

Worked through a pretty material price increase several years ago worked out but that was in the context, I guess, a tacit oligopoly I mean clearly.

Do you think going forward if it gets more competitive environment with more players that does lead to lower return thresholds and definitely.

Put a cap or put some pressure on on on non North American margins, how do you think about trading.

Profitability versus growth in North America going for if the market changes.

What I don't think they're mutually exclusive and we don't trade but.

But let's just let's just take this from a much more macro picture located and I'm not going to get into specifics.

Regarding this potential competitor.

But if you look at the investment that Theyre, they've announced making $60 million I can tell you from our perspective were 10 x. that.

It takes a lot of investment.

Engineering.

Ken relationship sales organizations.

To be a major player in this market and we feel we're in great shape. We invested has said about $600 million in building. This business over the last 60 to 70 years and it's it's one that.

We feel good about going forward and we think we have the the pillars to whether be product manufacturing engineering, and so forth to compete down the road.

That's what we're going to do that's what we've done for the last 60 70 years and we'll continue to do that in the future.

Thank you and we do have a follow up from David you may begin.

Yes, thanks for taking the other call. The other question, we haven't talked much on this call, but raw materials and you did indicate in your prepared remarks and your press release that has been positive influence on North American margins.

And just talk about I guess, the extent to which.

That contribution could grow going forward I mean.

Markets.

Standpoint, it's come down pretty substantially.

Not clear to what extent your contract versus spot exposed in the us put into your indirect is probably coming through favorably as well.

Should we think about the margin contribution from raws as we move from Fourq to and into the first half of next year well for Q4 will just kinda talk about those those steel cost are set in advance. We've we kind of have a 90 to 120 day lag on when we when we see those steel cost whether to go up or down seek.

On a can look back and and look at Q4, and it's our best cost position in Q4 and on steel for 2019.

So in keeping in mind, though just send them margin side. So we do have some large retail customers that have formula pricing that also moved the other way. So while there is some margin expansion certainly.

Opportunity when steel goes down there is also that.

Corresponding headwind on pricing that offsets it so.

Looking through the ended the year. It it is our best steel position Q4.

Okay. Thank you.

Thank you and I'm not showing any further questions at this time I like to turn the call back to over two Patricia for closing remarks.

Thank you all for joining us on our call today, we will participate in several conferences over the course in the fourth quarter. The first is the Baird conference in Chicago, We will be there on November 5th spend in the morning of November six.

And we'll participate in the Steven Conference in Nashville on November 14.

Have a great day.

Okay.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.