Q1 2021 A. O. Smith Corp Earnings Call
[music].
Good day and thank you for standing by welcome to the a O Smith first quarter 2021 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question give me a a session you will need to press star one.
A telephone if you require any further assistance. Please press star zero piece of advice that today's conference is being recorded I would now like to hand, the conference over to your speaker today Ms. Patricia Ackerman. Please go ahead.
Thank you Mei good morning, ladies and gentlemen, and welcome to the a O Smith first quarter results Conference call I Am Pat Ackerman, Senior Vice President Investor Relations, corporate responsibility and sustainability and our treasurer joined.
Joining me today are Kevin Wheeler, Chairman, and Chief Executive Officer, and Chuck Lauber, 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 other matters that we have described in this morning's press release.
Also as a courtesy to others in the question queue. Please limit yourself to one question and one follow up per turn.
If you have multiple questions. Please rejoin the queue.
I will now turn the call over to Kevin who will begin our prepared remarks on slide three.
Thank you Pat our global a O Smith team delivered first quarter EPS of <unk> 60.
On a 21% increase in sales demonstrating solid execution, despite a pandemic and weather related challenges in our supply chain and operations along with rapidly rising material costs.
I greatly appreciate the diligence of our change of keep each other healthy and safe.
A lot of India, where COVID-19 cases have recently Serge I am pleased that we have experienced steady improvement in this area since the beginning of the year.
North America water treatment grew 12% driven by continued consumer demand for home improvement products, which provide a safe drinking water in the home.
The director of consumer channel with our <unk> brand and the dealer channel contributed to solid growth to start 2021.
Boiler sales grew 12% as we have seen strong demand, particularly within commercial boilers. As a result of a completed projects carried over from 2020 as well as a resilient replacement demand.
Our volumes of U S residential water heaters declined in the first quarter due to weather disruptions at our facility.
Why chain constraints, which limited production.
If not for a limited production based on our surge in customer orders in the quarter.
Our U S residential shipments would have increase compared with 2020.
Strong orders in a quarter, where largely due to extended lead times, our second price increase which was effective April one and announced third price increase effective in June.
Due to continued pandemic related disruptions in restaurant and hospitality, new construction and replacement demand a commercial water heater volumes declined in the first quarter largely in line with our expectations coming into the year.
And China sales increased over 100% in local currency driven by higher consumer demand and the EBIT comparison, compared with a pandemic disrupted first quarter of 2020.
I will now turn the call over to Chuck who will provide more details on our first quarter beginning on slide four thank you Kevin.
First quarter sales of $769 million increased 21% compared with 2020, largely due to a significantly higher China sales.
As a result of higher sales first quarter net earnings increased 89% to $98 million or <unk> 60 per share compared with $52 million a 32 per share in 2020. Please.
Please turn to slide five.
Sales of the North America segment of $553 million increased 4% compared with the first quarter of 2020.
Higher commercial boiler service parts and Tankless water heater sales in the U S improved water heater sales in Canada, a 12% price per.
<unk> growth of 12% growth in water treatment sales and inflation related price increases on water heaters in the U S were partially offset by lower U S residential and commercial water heater volumes rest.
The rest of the World segment sales of $222 million increased over 100% from the first quarter of 2020, driven by a stronger consumer demand in each of our major product categories in China.
Pandemic related Lockdowns and weak end market demand in the first quarter of 2020 provided an easy comparison for the first quarter of 2021.
Currency translation of China sales favorably impacted sales by approximately $14 million.
On slide six North America segment earnings of a $130 million increased 3% compared with the first quarter of 2020, the impact to earnings from higher sales and inflation related price increases on water heaters was partially offset by higher material costs and freight costs and lower water heater volumes in the U S.
Segment operating margin of 23, 6% was slightly lower than the first quarter of 2020.
Rest of the World segment earnings of $12 million increased significantly compared with the first quarter of 2020, which was negatively impacted by the pandemic.
In China, higher volumes, and lower selling and administrative costs contributed to a higher segment earnings as a result segment operating margin of five 3% improved significantly from negative 38, 3% in the first quarter of 2020.
Our corporate expenses of $15 million were similar to the first quarter of 2020 our.
Our effective tax rate of 22, 5% was 110 basis points lower than the prior year largely due to geographical differences in pre tax income.
Please turn to slide seven.
Cash provided by operations of a $104 million increase during the first quarter was higher than the first quarter of 2020, primarily as a result of higher earnings in 2020 compared with the prior year.
Our cash balances totaled $660 million at the end of the first quarter and a net cash position was 559 million our leverage ratio was 5% as measured by total debt to total capital at the end of the first quarter.
We completed a refinancing our $500 million revolver credit facility on April one of this year. We currently have no borrowings on this facility.
During the first quarter, we repurchased approximately one 1 million shares of common stock for a total of $67 million.
Please turn to slide eight.
We upgraded our 2021 EPS guidance. This morning, with a range of between $2 55, and $2 65 per share the midpoint of our range represents an increase of 20% compared with a 2020 adjusted results.
We expect cash flow from operations in 2021 to be between $4 $75 and $500 million compared with $560 million in 2020, we expect higher earnings in 2021 will be more than offset by a higher investments in working capital than in our prior year.
Our 2021 on capital spending plans are between $85 million to $90 million and our.
<unk> on an amortization expense expense is expected to be approximately $80 million.
Our corporate and other expenses are expected to be approximately $52 million, which is similar to 2020 on.
Our effective tax rate is assumed to be approximately 23% in 2021.
Average outstanding diluted shares of a $160 million assumes $400 million worth of shares repurchased in 2021.
I will now turn the call over to Kevin who will summarize our guidance assumptions beginning on slide nine Kevin.
Our businesses continue to navigate through supply chain and logistic challenges. The first quarter was particularly challenging for a north America water heater business.
Severe weather impacted our Ashland city of warrants facilities, a resulted in a week out of production at each plant in the quarter.
Supply chain constraints limited our ability to make up the loss of production within the quarter.
As a result of a surgeon orders of approximately 30% higher in the first quarter last year, our lead times have further extended.
We are working with customers on managing orders, along with our operations and supply chain teams working diligently to meet demand.
However, we expect to be catching up throughout the second quarter and into the third quarter.
Our outlook for 2021 includes the following assumptions.
We have not changed our outlook for a full year U S residential heat.
Peter industry volumes and continues to project a full year volume will be down 2% or 200 balance sheet units in 2021, a small retracement from a record volume shipped in 2020.
We expect commercial industry water heater volumes will decline approximately 4% as pandemic impacted business delay or defer new construction and discretionary replacement installation.
We continue to experience inflation across our supply chain, particularly steel and logistics costs.
Still has increased 25% since we announced our April 1st water heater price increase.
We announced a third price increase in late March on water heaters effective June one at a blended rate of eight 5%.
In China. It is encouraging to see sales of our products continues to remain strong through April.
Our strategy continues to expand distribution to tier four through six cities is on track we.
We see improvement in consumer trends towards treating up for a higher price products across all product categories, driven by differentiated new products launched in the last 12 months of 24 months.
We expect year over year increase.
In local currency sales between 18% to 20% in China.
We assume China currency rates will remain at current levels, adding approximately $50 million and 3 million sales and profits over the prior year respectively.
We have nearly doubled our growth projections and our outlook for our North America boiler sales for mid single digit growth to approximately 10% growth based on a strong first quarter strong backlog and visibility into a quoting activity.
Our expectations are based on several growth drivers.
We believe pent up demand from the declines last year will drive growth.
The transition to a higher energy efficient boilers will continue, particularly as a commercial buildings improve their overall carbon footprint.
In 2020, condensing boilers were 39% of a commercial boiler industry that represents our addressable market, which provides continued opportunity for a leading market share of commercial condensing boilers.
New product launches, including improvements to our flagship crushed commercial condensing boiler with a market differentiating oxygen accenture.
Which continuously measures and optimizes boiler performance and.
And introduction of of a 1 million Btu Btu light duty commercial Nate <unk>.
We continue to project, 13% to 14% full year sales growth in our North America water treatment products.
Similar to that which we have seen in the first quarter.
We view, the mega trends of healthy and safe drinking water as well as a reduction of single use plastic bottles will continue to drive consumer demand for a point of use in port of entry water treatment systems.
We believe margins in this business could grow by a 100 to 200 basis points higher than the nearly 10% margin achieved in 2020.
In India first quarter of 2021 sales of nearly double the prior year.
While India is challenged with recent COVID-19 case resurgence, we project 2021 full year sales to increase over 20% compared with 22000 22020 to incur a smaller a loss of one to two.
$1 million.
Please turn to slide 10.
We project revenue will increase between 14% to 15% in 2021, a strong North America water treatment.
<unk> and China sales enhanced by pricing action.
More than offset expected weaker in North America water heater volumes or sales growth projections include approximately $50 million of benefit from China currency translation.
We expect North America segment margin to be between 23% and 23, 5% and rest of world segment margins to be between seven and 8%.
I'm on slide 11.
Our operations face continued challenges in the first quarter and while we expect continued headwinds in supply chain and logistics in the near term I have confidence in our teams to continue to navigate through this environment.
Along with the strength of our people I believe a O Smith is a compelling investment for numerous reasons.
We have leading share positions in a major product categories.
We estimate replacement demand represents 80% to 85% of U S water heater and boiler volumes.
We have a strong brand premium brand in China, a broad product offering in our key product categories.
Broad distribution and a reputation for quality and innovation in that region.
Over time, we are well positioned to maximize favorable demographics in both China and India to enhance shareholder value.
We are excited for the opportunity we see in our North America water treatment platform.
We have a strong cash flow and balance sheet supporting the ability to continue to invest with a long term with.
With investments in automation innovation, and new products as well as acquisitions and return cash to shareholders.
That concludes our prepared remarks, and we are now available for your questions.
As a reminder to ask a question you will need to press star one on your telephone to Doug a question for.
Please standby, while we compile the Q&A roster.
We have our first a question from the line of Savi <unk> from Jefferies. Your line is now open.
So you mentioned a surge in orders on the residential water heater side could you help quantify the impact of a whether it's a pie with container ships on a quarter.
So that does all of this to come through into Q and then just when you have a large backlog of orders with oak those come on at the older price. Thanks.
Yes. This is Chuck good morning.
We did have some interruptions, we've got two plants that were.
Ashland city of whereas were down due to weather for approximately a week each so that.
It does a couple of things wanted it raises a kind of the orders that come in from a perspective of a it creates a bit of a surge in when lead times extend a bit due to a temporary interruption, we've seen more orders, which extend the lead times.
So that.
Quantification, we do expect to make that up in the second and third quarters.
We would expect that we would get a little bit more normalization of production throughout the second and third quarter on those orders would come in and out of the.
To quantify the surge in orders, it's a <unk>.
Bit difficult, there's a lot of noise in the marketplace from the interruption I just described as well as.
Three price increases at once so.
Not all at once but February April and June and that just creates creates.
Creates a bit of noise, so as far as the effectuate than of kind of the pricing on those.
We work to manage kind of of the orders that come through on a more normalized basis, but.
It does.
The extended lead times to push that.
Realization on a price out slightly so on April one price increase for example is going to be extended a bit but.
When we look at all of our pricing, we would expect that the full impact would be.
Would be implemented when we get into the third quarter.
That's really helpful. And then you could see a decline in commercial water heater volume, but theres been a more positive outlook for restaurants and travel. So could you just talk through how you're thinking about demand in that market.
I think it's still a little early we would agree with you is is COVID-19 and vaccines become more prevalent and things start to open up debt certainly is an opportunity going forward.
It's probably a bit early here in April two to change our outlook. We're still we still believe there is going to be a.
A modest decline as we mentioned about 4%, but overall.
As a possible upside, yes, but probably just a little too early to.
To project debt in late April.
We have our next question of from the line of Damian Karas from UBS. Your line is now open.
Hi, Good morning, everyone. Good morning, good morning.
So I was just hoping you could maybe clarify a little bit on the residential water heaters.
Outlook.
So youre still expecting the market down.
2% this year, but it sounds like you are.
Are incrementally positive on on the demand environment.
And you noted that 30% surge in orders.
So.
Could you just help kind of reconcile that disconnect.
Or do you think this demand is short lived and.
And youre going to therefore see a falloff in the back half of a year.
Yes, I think what Chuck outlined really well as debt. There's just a lot of noise in order of entry now because of lead times because again, we're working on a third price increase.
And so net just pulled orders forward and so as we think about it we'll work through those orders there is certainly going to be some new construction activity, but.
Just remember that we really come into play and completions not starts.
So right now, we just think of that debt.
The 200000, we true.
We talked about is probably the best forecast we can have.
Until we work through this backlog and get to the other side to really understand what was true demand versus.
Just a normal the normal demand brought forward by pricing or extended lead times. So it's again, you'll probably hear a state of this a little bit just a little too early to take these numbers considering a theres. So many variables that we're going to have to work through but.
Yes, one of a better clearer picture by the end of second quarter early third quarter, Yes, I'll just add one comment on when you take a step back and you look at last year. The industry was the highest level of expense since 2006.
There's a lot of noise, we believe because of the pandemic because of some supply chain constraints pushing lead times out and we do expect as we kind of go through the year and particularly when we get into the third and fourth quarter of that the industry may be behind that a bit and that may drive down a little bit of a demand as we get into the back half of the year.
As inventories get a little more comfortable.
Okay. That's helpful.
And I guess.
About once we get into the third quarter on the fourth quarter.
How best do.
Do we think about the <unk>.
Actual financial impact of that 30% or so year to date increases in price.
Correct me, if I'm wrong, but.
It doesn't appear that.
On your expectation is debt.
Sales of our revenues are going to go up by 30% in the back half so yes.
How do we think about the translation of debt.
As announced price increases.
To the top line later this year.
Yes, youre exactly right on on kind of thinking about when you look at the three price increases and you can kind of look at what we've announced we're in that 24% to 27% range. We think as far as you look at a a blended base byproduct category. When you when you look at the residential and commercial market.
So they do they do come in into really what's going to fall into what I would say.
For sure largest part of that would be expected to come in in the fourth quarter and we're going to see a feather in a bit in the third quarter. So you've got a kind of think about the fact that it's not it's not fully implemented probably are a fully impacting us in Q3.
It kind of feathers in as we go throughout the year.
Next to Andrew Jeffrey Hammond from Keybanc capital markets. Your line is now open.
Good morning, This is David Tarantino on for Jeff.
Good morning, David.
So.
On price increases was there any pre buy ahead of price increases and I know you were talking about destocking last quarter. So if any where would be the greatest period of destocking.
Well, we actually believe there has been some destocking in the first quarter, just because of some of the constraints that we've had but when you look at.
Any pre buy we normally limit.
On a 18 month of production. So theres always a pre order I would say that were seeing and thats part of our backlog on a surge right. Now is that you had April orders that were already.
<unk>.
Put in by our customers in the first quarter. Then of course, you have June that just came up and people are getting a line.
And place the orders for that increase so.
There are there's always a order pull forward that we have to work through and again, we'll work through that most of the second quarter and into the third quarter of hope to be had that part of it behind us as we get through July and August.
Okay, and then just as a follow up.
Have you seen or are you like are you seeing on pricing in China.
Well I'll tell you.
Just take the in general we have <unk>.
Inflationary issues across the globe.
And so and we don't get into all of the specifics that we take pricing action, but we've taken price action in almost every one of our businesses.
Some of are a bit different than others, China doesn't quite have the some of the inflationary pressures that we've seen here.
India, maybe a bit different Europe's a little bit different but what we've done is we've taken action to make sure that.
Over time, we're able to address.
These inflationary pressures that we're seeing to date and we believe we have a track record that is going to prove out that we can address these given the appropriate amount of time.
And then just to add on a comment on China, and it's not directly related to pricing, but just mix in.
We're pleased that we're kind of looking at a quarter over quarter, where mix is neutral to positive.
So not necessarily pricing, but our mix. We believe has taken a point where from here through the rest of the year, we forecast it to be.
Kind of a neutral a positive where we had some headwinds last year.
Next is Matt Summerville from D. A Davidson your line is now open.
Around this a little bit, but I was hoping for a bit more specificity in terms of how we should be thinking about the quarterly revenue and earnings cadence in North America with the moving pieces around the pre buys a destocking of the price increases satisfying. These incoming orders you were referring to where do you think.
The high watermark will be on a quarterly basis versus the low watermark.
Yes, there is a lot of moving parts you're exactly right. So.
Let me just try to frame up high level, how we think about it and I've already kind of talk about Duane pricing would potentially be expected to come in and when we look at a cost side right. So if you think about our cost side and we've seen costs go up in multiple categories freight corrugated.
Our resins are phone theres, a lot of categories of gone up but when you think about our biggest category which is steel.
And we've talked a lot about steel pricing going up it's it's coming in we do have a benefit of a 90 to 120 day lag. So when we think about steel costs hitting us.
Progressively gets higher during the year, so year over year steel costs.
We expect it to be on average up over 70%.
But when you look at the quarter cadence kind of back to your question.
Get hit with a highest costs in the third and fourth quarter. So the most pressure on on margins in North America will be in the back half of the year.
As we as we feel the full impact of some of the higher price increases that were seeing on cost side and see some of the pricing more being being more fully implemented in the fourth quarter.
And then with respect to China can you just talk about what your latest assessment is in terms of channel inventories, what you're selling and looked like versus sell through in the quarter and which product lines youre seeing the most relative strength currently thank you.
I'll take the we're seeing very well Q1 was a terrible comp because it was just such a such a.
A low point in time, but.
But you look at it going forward sell out has been robust we're looking at a 6% to 7% sell out throughout the year.
Very pleased that it's growing across all of our core categories. So it's a electric.
Electric water heaters gas tankless.
And water treatment. So that's moving in the right direction and Chuck just mentioned, it's nice to see our mix leaning towards the premium sector and we really saw that we've always really headed on a water treatment throughout the pandemic, but we really saw some nice movement up on a residential <unk>.
<unk> and gas Tankless, I think to some new products, particularly on the gas Tankless, which is a great one.
Product that has the lowest noise level, which is exceptionally important to the Chinese consumer. So overall the business is moving the right direction. We think we're positioned very well over the next few quarters too.
We move that business forward.
From a inventory.
Position I'll, let Chuck review that you have a channel inventories are in great shape lowest point in five years.
Barry.
A very refreshed I'll say so that's all.
Within 90 days basically so it's in great shape in China from a channel inventory perspective.
Next is add on that.
<unk> from Citi. Your line is now open.
Hi, good morning.
Jim.
The rest of the World segment margin improved significantly from the COVID-19 impacted Q1 last year on Incrementals.
It seems just about short of a 50%. So do you anticipate maintaining this level of Incrementals in Q2, which had a less drastic but still a steep sales decline of 2020.
Yes. This is Chuck in a knot.
No no we don't see the same incremental levels going into into the back half of a year back three quarters of a year of Q2.
In China, we're kind of looking at Incrementals in that.
40% range.
And then as you think about kind of how the year plays out in China. We've got a special item that we had last year, which was a social insurance, which helped us for about $12 million last year, which we won't see this year and net the cadence of that by quarter.
We got the most benefit last year in Q in Q2 and Q3. So Q1 was very small last year. So that's a bit of a headwind as we go through the rest of the year on China. So I mean, we're pleased with where the first quarter came out in China, just under 6% that was a pretty solid quarter for what is always a challenging seasonal quarter for us.
With the festivals in the holiday.
In the fourth quarter is always our strongest so as we kind of look at China, and Kevin mentioned, it we would expect.
The back three quarters of the year to progressively improve overall growth rate in that 6% to 7% and then when we get into the fourth quarter approaching double digit operating margins in the fourth quarter similar to what we had last year.
Got it very helpful color.
As a follow up given your raise expectations for operating cash flow.
Continued strong balance sheet and expanded share repurchase authority, what would you need a fee.
To extend 2000 twenty's repurchase beyond the current $400 million and is there any potential for an uptick in the pace of inorganic growth.
Well I'll address a $400 million I think at this time.
We're going to keep it framed at $400 million.
And a do that because we don't want a grow cash and Youre right. We've had a we're going to have a strong cash generation here this year too.
We're going to keep looking to deploy capital. So we're very very.
Actively looking at where we can deploy our capital through acquisition.
And so as we play out the year, we're still focused on.
Deploying deploying the capital in that area and we're going to maintain our repurchase at this point.
At the $400 million, yes, I would just add onto that again things can change over the next six to nine months, we've talked about it we've been very active in the M&A side of it we think there's some opportunities out there.
And where.
We're staying close to those opportunities.
And it always takes two to close.
A close a deal but.
We would prefer to deploy our capital in the M&A side and divested back on ourselves and.
And at the end, we'll take a look at it.
Get through the balance of this year, we'll make a determination of how best to.
To move forward with our capital allocation.
I guess I'll add on on the on the organic growth.
We're pleased with the growth, we're seeing in North America water treatment growing it.
<unk> of 13% for the rest of the year that scenario.
We like the trends that we're seeing in China growing at 6% to 7% for the back three quarters of the year. So.
Couple of areas of growth that we are optimistic about yes, I would just add on that would be organic growth across our product our businesses right now looks pretty strong.
For us to raise of our lochinvar business up to a 10% growth up and we're seeing the debt part of the business, which is a bit surprising to us really bounce back and so if you look across all of our businesses the organic side of it.
Looks.
Pretty strong as we go through the year, we always reserve the right because things can change in this.
Chaotic environment, one of the thing with COVID-19, and so forth, but organically all of our businesses are well positioned.
Next day, Susan Mcnally from Goldman Sachs. Your line is now open.
Good morning, everybody good morning, Hi, Mike.
My first question is you mentioned that you have seen some destocking in the first quarter, but I guess can you give us some more color on where you think inventories are on the channel I know that you kind of you came into the fourth quarter with some excess inventory you came into this year with a do you think debt with the weather in Texas and everything that went on in the first quarter debt Thats basically been depleted.
Good.
And do you think that this pull forward is is in a sense of them just trying to get back to normal or are they looking to actually carry a bit more inventory maybe than they would have prior to the to the past year.
From our perspective on some of the disruptions that Kevin talked about dues of whether we do believe that we have seen some.
Our customers inventories coming down because we.
We're trying to get production out as best we can and satisfy customer needs, but theres been some stress in that area. So for the quarter. We do believe our customers' inventories have decreased when you look at where we started the year.
We would expect that to normalize as we go forward for the remainder of the year and bring down lead times. So we kind of expect more normalization to the inventory levels as we exited the year.
That kind of plays into the guidance of where we talked about our full year outlook for residential.
Our teams are really focused on making sure that.
As we're going through these.
Of these kind of challenging times when it comes to.
Cereal shortages and so forth debt that we're actually producing products for orders that customers actually need and we're not just building of inventory so.
The positive side of this I would like to leave with is that our customers do have stock. They are taking care of their customers and we're working very closely to make sure that continues over the next quarter or so as we work through this backlog.
Okay. That's helpful and then on the commercial side I know that you mentioned that you are clearly catching up on all of your customers are catching up on some of the delays and things that were postponed from last year are you also seeing that.
There was any level of of increased new construction or projects that are really kind of starting to break ground that are coming through in kind of helping some of that backlog as well.
We're seeing.
And we mentioned in the remarks, we are seeing coating activity remained.
Clearly.
Clearly good.
And again as <unk>.
So last quarter, we commented that the projects aren't maybe as large but there is still active so the combination of kind of the.
Pent up demand that we are feeling today.
On a nice backlog that we have and then.
This quoting activity, which could come in at the end of this year, but it will probably carryover to 2022.
So it's been a on the commercial side of the business the higher end of the kind of a boiler watkins of on our side.
It's bounced back a bit more than we anticipated.
Next is David Macgregor from Longbow Research. Your line is now open.
Okay.
Yes, good morning, everyone.
And I guess congratulations on some of the progress in the rest of the World segment, China for certain.
When we look back on the margins that you would generate and the rest of the world business for a long long time before it seems became problematic in China. It was kind of a 13% margin.
I'm just wondering if we step back here for a second and talk.
Longer term, how you're thinking about the potential for margin generation in China, what do we go back a 13% numbers.
I know, there's been a transition to a higher concentration of medium price point of versus premium price point, but.
I think you'd indicated on prior calls that you felt like the margins were relatively equivalent.
I guess I'm, just trying to get a sense of what's the potential on R. O W margins or is there upside based on.
Bruce initiatives, you've undertaken a along the way help us think longer term of a potential there.
Yes, let me so we framed our rest of world margins this year in that 7% to 8% and what we saw last year in the fourth quarter as we were at a double digit.
Margin percentage, when we get a little bit of volume and so.
Yes.
Right now.
10% is kind of where our target is.
In the in the upcoming timeframe not this year, but as we look at that Thats certainly doable in the current environment, where we've got.
A heavier amount of mid price products than we historically have we haven't seen the strength in the trading up on.
The high end of the market, even though Kevin had noted in his remarks that we've seen some positive trends in that area.
At the same level as what we had in the past and those margins will we and a percentage basis or a similar they are lower than the other than the high end of the market. So we do get some pressure on that so.
When we think about a kind of the transition that the business has taken a bit on debt.
Store count efficiency, the SG&A initiatives that we've done.
We have taken cost out of the business.
To grow a bit back into higher margins, we need a little bit more volume.
I'd also like to see some trading up outside of the categories of water treatment has been a pretty good category for us, but we'd like to see more trading up housing coming back would help us to get some of the volume back up and just consumer confidence and the trading up so.
We need a little bit of help in that category to get back to higher margins than what we're experiencing today, but those are some of the areas that we're that we're watching very closely.
And if I could just clarify on that because they do of a second question, but it sounds like what I'm hearing you say is.
It's dependent upon volume and mix up.
And just.
Just for the sake of.
Sort of putting together some longer term construct here. If you were to get the volume you needed a volume moved back up to a much higher level of operating rate.
And you were to get a little bit of a strength on the premium side of this and both water heaters and water treatment is there a structural reason why you can't get back to 13% something changed there or.
Based on some reasonable assumptions not getting ridiculous but.
Per cent still an achievable goal no there has been a structural change there but to your comment I would say the largest driver of that is seeing the market move.
Further into the trading up high end of the of the piece of the market than what it is today right.
Yes, structurally there's no reason that we can't get back there with some of the other factors volume higher end of the market trading up along with some of the restructuring we've done.
Okay. My second question is with regard to Tankless product in the United States and can.
Can you just talk about category growth, what you're seeing there on your share.
Yes.
What would you need to see to commit more capital to that category in the North American market.
Well I mean, I would start out with the back half of the question, we already invested capital in and it's part of our offering I've mentioned many times one of the hot water business and so were clearly where we're looking for is the best solution and a times Tankless is the best and other types of tank is when you look.
At the business today.
We talked a bit about taxes, so tankless has been up a bit and it's interesting because in Texas, It's a warmer climate.
On a lot of the Tankless were installed out doors and.
That's fine.
Because there is an electrical part of thing toward a freeze that debt.
Prevent the unit from a crazy, but we saw an uptick in Texas, because not only did we have a cold weather, but we had no electricity as well and so <unk> for us was up in the quarter.
And it was driven by a one time weather related items net debt that can happen, but overall I mean, I don't want a lead tankless is still part of our long term strategy is part of our residential product offering.
Just like any other products that we have heat pumps in regulated electrics and so forth.
So we're committed to it and over time, we believe we will continue to carve out the appropriate share.
And that product category.
Next question is from a Ryan Connors from Boenning <unk> Scattergood. Your line is now open.
Great. Thanks for taking my question.
I wanted to talk about competitive dynamics a little bit.
Obviously everyone's.
Supply chain is unique.
On a crazy year on the manufacturing front and so sometimes these situations create the opportunity for some market share shifts and we haven't seen that on some other industrial sectors.
Do you think you are coping relative to your peers through all of these supply chain issues and are there opportunities to.
I'll pick up market share outgrow the market.
Given some of the some of the.
Things going on.
Yes, I would tell you from a excluding the weather that I mentioned that impacted our clients I think we are coping very well.
With the supply chain and we're certainly getting our fair share of the raw materials and so forth. So overall I think we're doing well we have a terrific operation and supply chain group and we have terrific suppliers debt.
They're working through their own capacity constraints as they are ramping up or repairing some of the things that were impacted on on the Gulf region. So I think we're doing well that's why as we get into Q2 and Q3, we get back to a normalized level.
Our factories don't have a week out of production.
So overall and then I would tell you from my perspective anytime you have any type of disruption is to execute a diverse and there are some opportunities there and those will have to play out over the next.
Q1, net part of Q3.
Okay.
And then my other one just on kind.
Kind of a tax policy and some of the changes being proposed I know none of it is concrete yet, but specifically this proposal of a bit.
On a going after foreign corporate earnings have you looked at that in any detail and any idea or color on how that might or might not impact.
Your rest of world business in China in particular.
Yes. It is.
Still being formed of course, but we have taken a high level look at that we don't believe that that's going to impact us in a significant way.
Clearly if the corporate tax rate goes up from 21 to 28 or somewhere in between that is a much larger impact.
Next is Nathan Jones from Stifel. Your line is now open.
There is also have proposed changes in here.
For a crazy in the capital gains tax a you're saying that yes, potentially motivate some more sellers of properties that you might be interested in domestically.
When there is uncertainty in tax rate and capital gains I imagine that does get some private owners to think of it a little bit about when the right timing might be to exit so.
Of the mosaic of what's happening in M&A has kind of made up of multiple things and that certainly could be a driver.
Okay, and then I just had one.
Around pricing.
Hi.
A few of your native replacement water heyday of residential water heaters, and youre going to buy one and debt.
A new construction demand is obviously a pretty strong day. So I think a unit demand is pretty good you guys have been through the inflationary cycle as people maybe not quite to this extent do you typically see customers trade down in price point to offset that inflation or does that have any impact on a white customers are looking at what they are buying in terms of what a.
Yes, I would take that.
Rest majority there's not a.
Quite frankly, a lot of trading up within the U S residential water heater business.
So normally speaking that debt that's just the way it is and so we don't see much changes the only thing I would tell you that you might see during this time is.
On our heat pumps or of our high end products.
Of those might be impacted a bit but it's relatively small.
Impact to us when we go through these kind of inflationary times, because quite frankly yield as you said when youre on a hot water youre going to replace it in.
Availability is the number one driver for a consumer.
Great. Thanks for taking my questions.
Thank you.
Next is Kevin Hocevar from Northcoast Research. Your line is now open.
Hey, good morning, everybody a nice.
Start to the year there.
In terms of coming back to price and the price cost relationship it sounds like expectations are.
Pricing of phase in and by fourth quarter, it should be fully implemented.
Do you think at that point youll be fully offsetting the inflationary pressures with them with.
The pricing actions you've announced.
Or.
Or might you need more in order to do that.
Well.
We've announced three price increases in each time, we've announced a price increase we have seen costs go up after that so.
It's hard to predict where costs will go.
Our forecast for the year assumes the cost of kind of where they are right now, particularly on the steel side. So we'll have to see how the year plays out.
When we get to the fourth quarter, when we think about kind of that price cost I mean.
R&R assumption on what we've announced and based on what our cost or a projected out to be we will get to the point, where we're covering costs, but we do expect some pressure on margin.
Yes.
Okay.
And you guys have done a really good job managing SG&A here.
During the quarter and really for the last several quarters and if I look back in recent history. It seems like a first quarter typically has a hyatt.
SG&A spend as a percentage of sales.
For the year. So curious if you expect that.
Dynamic.
Remained here in 2021, where the first quarter is the highest for SG&A as high as a percentage of sales of our.
Would there be any reason that would be different this year.
Yes, I would not say that this year, we would expect SG&A to be at the highest percentage of sales I think I think as I was looking at it for the quarter.
Particularly in China, we had a.
On a pretty good SG&A quarter, we were watching our costs very closely in China with lower volume.
Not a lot of travel and a first quarter of this year compared to last year, we will have to see how that plays out for the rest of the year.
But I wouldn't say that the quarter is going to play out much different than the back three quarters from a percentage of sales.
Next is Damian Karas from UBS. Your line is now open.
Hey, guys just a couple of quick follow ups here.
Sorry, if I missed this but did you mentioned how much tankless was up in the quarter and I am curious how many units you're expecting to push this year for tankless.
No we did not mentioned either.
One of.
So no we haven't mentioned either one.
That data doesn't get public actually tankless debt it doesn't get published it all in and.
We just we haven't really address debt from that.
Net specific product category.
Was a strong quarter, but we haven't quantified it it was certainly up for us.
Okay fair enough.
And then.
Just wanted to ask you about buyback so obviously your guidance.
A little bit better than when you were you came into the year.
And with the potential for a little bit more improvement in rest of the water heaters as well depending on what happens just curious if theres any chance you might buyback more than a $400 million that you had.
They are currently saying for the year.
Not at this point, we're going to stay at a 400.
We'll see how the year plays out and we really focus in on not growing our cash position and reserving the opportunity to deploy that cash in other productive ways. So.
As we stand today, we're going to stay with that 400.
Okay, Great I appreciate all the color alright. Thanks.
No further questions at this time I turn the call back over to MS. Patricia Ackerman.
Thank you all for joining US today, we plan to participate in seven virtual conferences and a second quarter.
Oppenheimer on May 1st on May four.
<unk> closed on May 11, Goldman on Nate <unk>, William Blair on Q per Keybank on June 2nd UBS on June nine and Stifel on June 10 have.
Have a great day bye bye.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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