A. O. Smith Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
July 28, 2021

There are 13 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Second Quarter 2021 A. O. Smith Earnings Call. At this time, all participants are in a listen only mode.

Operator

After the speaker presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ms. Patricia Ackerman. Thank you. Please go ahead, ma'am.

Speaker 1

Good morning, ladies and gentlemen, and welcome to the A. O. Smith's 2nd quarter results conference call. I am Pat Ackerman, Senior Vice President of Investor Relations, Corporate Responsibility and Sustainability and Treasurer. Joining me today are Kevin Wheeler, Chairman and Chief Executive Officer and Chuck Lauber, Chief Financial Officer.

Speaker 1

Before we begin with Kevin's remarks, I would like to remind you that some of the comments that will be made during this conference call, Including answers to your questions will constitute forward looking statements. These forward looking statements are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters that we have described in this morning's press release. 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 3.

Speaker 2

Thank you, Pat, and good morning, everybody. Our global A. O. Smith team delivered 2nd quarter EPS of $0.73 on a 30% increase in sales, demonstrating solid execution and operational agility despite supply chain and logistic challenges, along with rapidly rising material costs. I am thankful for my fellow A.

Speaker 2

O. Smith employees who tirelessly navigated through the pandemic, followed by weather related production disruptions and continue to navigate supply chain constraints. I appreciate the creativity and the collaboration of our to find solutions that keep our customers supply with water heating and water treatment products. Oil sales grew 35%, driven by strong demand as a result of completed projects carried over from 2020 as well as an active education end market. For reference, our boiler sales were down 15% in the Q2 of 2020, which was negatively impacted by the pandemic.

Speaker 2

North America water treatment grew 17%, driven by continued consumer demand for home improvement products, which provide safe drinking water in the home. Our water quality dealers performed particularly well in the quarter and online promotional shopping days also boosted sales. Consistent with our strategy to build out distribution for North America water treatment, we acquired Master Water Conditioning Corporation. The acquisition supplements our presence in the Northeast and we are excited to add expertise and local water condition and solutions in this region to our family. Our North America water treatment sales, including this acquisition, are expected to be over $200,000,000 in 2021.

Speaker 2

Our volumes of U. S. Tank residential water heaters increased in the Q2. We believe the strong demand is a continued result of extended lead times Caused by production constraints due to strain in the supply chain, finding advance of price increases and incremental new home construction. After our weather related disruptions in production, which we talked about on our Q1 call, we have seen month over month sequential improvement And certain of our suppliers recently noted they see moderation of demand and supply imbalances, but we remain diligent As the imbalances are spotty and we expect supply chain challenges to be with us through the remainder of the year.

Speaker 2

In response to continued material and logistic cost increases, we recently announced a 4th price increase of between 10% 12% effective August 1. In China, sales increased over 26% in local currency, driven by growth in each of our major product categories, including electric and gas tankless water heaters and water treatment products, including commercial and replacement filters. I will now turn the call over to Chuck, who will provide more details on the Q2 beginning on Slide 4. Thank you, Kevin. Record 2nd quarter sales of $860,000,000 increased 30% compared with 2020, which was negatively impacted by the pandemic.

Speaker 2

2nd quarter net earnings increased 74 percent to $118,000,000 or $0.73 per share compared with $68,000,000 or $0.42 per share in 2020. Please turn to Slide 5. Sales in the North America segment of $604,000,000 increased 26% compared with the Q2 of 20 driven by higher volumes of water heaters, boilers and water treatment products and inflation related price increases. Rest of the world segment sales of $263,000,000 increased 39% from the Q2 of 2020. Growth in each of our major product categories in China contributed to local currency growth of 26% in the quarter.

Speaker 2

Currency translation of China sales favorably impacted sales by approximately $20,000,000 India sales more than doubled in the 2nd quarter despite the recent surge in cases of the virus in that region. North America segment earnings of $142,000,000 increased 34% compared with the Q2 of 2020. The impact to earnings from higher volumes Segment operating margin of 23.5 percent improved compared with the Q2 of 2020 segment margin of 21.9%. Rest of the World segment earnings of $22,000,000 increased significantly compared with the loss of $5,800,000 in the Q2 of 2020, which was negatively impacted by shutdowns and reduced consumer spending resulting from the pandemic. In China, higher volumes and lower selling and administrative costs were partially offset by the absence of social insurance waivers, which were received in 2020.

Speaker 2

As a result, segment operating margin of 8.5% improved from a negative 3% in the Q2 of 2020. Our corporate expenses of $12,000,000 were higher than last year, largely due to management incentives. Our effective tax rate of 21.9% was essentially the same as last year. Please turn to Slide 7. Cash provided by operations of $196,000,000 during the first half was higher than during the first half of twenty twenty.

Speaker 2

Higher earnings in 2021 compared with the prior year were partially offset by a larger investment in working capital during the first half of twenty twenty one compared with the same period in 2020. Our cash balances totaled $582,000,000 at the end of June and our net cash position was $476,000,000 Our leverage ratio was 5.5% as measured by total debt to total capital at the end of June. Through June 30, we repurchased approximately 3,000,000 shares of common stock for a total of $198,000,000 Please turn to Slide 8. We upgraded our 2021 EPS guidance this morning with a range of between $2.70 $2.76 per share. The midpoint of our range represents an increase of 5% compared with our prior quarter full year guidance.

Speaker 2

We expect cash flow from operations in 2021 to be between $500,000,000 $525,000,000 compared with $560,000,000 in 2020. We expect higher earnings in 2021 will be more than offset by higher investments in working than in the prior year. Our 2021 capital spending plans are between $85,000,000 $90,000,000 And our depreciation and amortization expense is expected to be approximately $80,000,000 Our corporate and other are expected to be approximately $50,000,000 similar to 2020. Our effective tax rate is assumed to be approximately 23% in 2021. Average outstanding diluted shares of 160,000,000 assume $400,000,000 worth of shares are repurchased in 2021.

Speaker 2

I will now turn the call over to Kevin, will summarize our guidance assumptions beginning on Slide 9. Kevin? Our businesses continue to navigate through supply chain and logistic challenges. That being said, we raised our 2021 top line growth expectation and now project an increase of between 17% 18%, driven by strong demand and price increases implemented in response to rising material and transportation costs. Our revenue outlook for 2021 includes the following assumptions.

Speaker 2

With 7 months of visibility, we've upgraded Our U. S. Residential water heater industry volume forecast to increase approximately 3% compared with last year. We expect continued resilient replacement demand and growth in new home construction. With our 4th price increase in the market and continued consumer demand, We no longer believe there will be channel inventory destocking in the back half of the year.

Speaker 2

We expect commercial industry water heater volumes 2% as pandemic impacted businesses reopen and new construction and replacement installations come back online. We believe the demand we saw in the last few months was partially driven by pre buy activity in advance of the price increases. In China, it is encouraging to see sales of our products continue to remain strong. Our strategy to continue to expand distribution to Tier 4 through 6 cities is on track. We see improvement in consumer trends towards trading up for higher priced We expect year over year increases in local currency sales between 20% 22% in China.

Speaker 2

We assume China currency rates will remain at current levels, adding approximately $51,000,000 $4,000,000 to sales and profits over the prior year respectively. We expect boiler sales will grow by low double digits for the full year compared with last year. We project 13% to 14% full year sales growth in We believe the megatrends of healthy and safe drinking water as well as reduction of single use plastic bottles We'll continue to drive consumer demand for our point of use and point of entry water treatment system. We project margins in this business to grow by 100 basis points above the nearly 10% achieved in 2020. We continue to experience inflation across our supply channel, particularly steel and logistic costs.

Speaker 2

Steel has increased 23% since our 3rd water heater price increase became effective on June 1. We announced a 4th price increase in late June on WATERGIVES effective August 1 at the rate between 10% 12%. We expect North America segment margin to be between 23.75% and 23% and Rest of World segment margins to be approximately 8%. Our procurement and operation team faced continued challenges in the Q2. And while we expect continued headwinds in supply chain and logistics Throughout the remainder of the year, these challenges are moderating and I have confidence in our team to continue to navigate through this difficult environment.

Speaker 2

That concludes our prepared remarks and we are now available for your questions.

Operator

Your first question comes from the line of Brian Blair with Oppenheimer.

Speaker 3

Thanks. Good morning, everyone.

Speaker 2

Good morning. Good morning, Brian.

Speaker 3

The momentum in your boiler sales is very encouraging. You called out Strong trends in the education vertical. So wondering if there's any concern about the sustainability of project activity there? Counter our read on the incremental funding that's coming through. Just looking at the 12% growth in Q1 mid-30s lift Q2, The full year guide implies quite a bit of moderation in the back half.

Speaker 2

Well, I think we had a very strong first half of the year. And again, as we mentioned, the back half It's a bit tougher comp. There's always challenges with COVID-nineteen and the variance out there in the course, labor and so forth. But overall, again, job activity has remained healthy. Recent nonresidential ABI data was positive in June, up I think 57 from 50.

Speaker 2

And our July had been a solid July. We don't see really anything becoming an issue. But again, in this environment, There's all those things that could pop up and be a bit spotty for us. Yes. I mean, I guess the only other thing I would add is that it was an easy comp in Q2 last Sure.

Speaker 2

And we did do a residential early buy program that we pushed back because of the pandemic last year into Q3 that got pulled into Q2, which is normal. That's the normal So when we do that and that helped a little bit on the volume.

Speaker 3

Yes. Appreciate the color there. And to clarify, does the outlook for 13%, 14% North American water treatment growth include Master Water contribution?

Speaker 2

No, that's organic growth of 13% to 14%. So we frame kind of the North America water treatment At around $200,000,000 I think before we were talking about approaching $200,000,000 So with the acquisition at a half year, it's just over 200,000,000

Speaker 3

Excellent. Anything you can offer on margin contribution from that business? And even more importantly, Additional color on what the asset adds to technology, footprints, channel presence. You mentioned Expanding into the Northeast, which is important, but any other color you can offer on strategic impact would be great.

Speaker 2

Yes. I'll take the strategic impact. This is part of our strategy to improve our footprint across North America. It builds up that distribution. The water quality dealer is a bit different than say our wholesale business that buys truckloads of 200 water heaters that are on a regular basis.

Speaker 2

Water quality dealers will buy pallet for maybe a couple of pallets full of product. It's really important that we have these distribution points and this is a start with Master Water. And so that we can improve our service levels, Delivered in 24 hours of smaller quantities and doing it in an effective and productive way. So this is an important First step in kind of building out that framework that we need to be successful in the water quality side of our business.

Speaker 3

Very helpful. Thank you.

Operator

Your next question comes from the line of Scott Graham with Rosenblatt Securities.

Speaker 4

Hey, good morning all. Nice prints.

Speaker 2

Good morning.

Speaker 4

So I had a couple of questions. Hopefully, you can answer them all. I know of each of the price increases. Would you say that you're trending Toward the middle, higher end of the range that you've given in the past?

Speaker 2

I guess, Scott, we just kind of look at the 4 together. And when we accumulate the 4 and get The Q4, the 4th one will be effective. We'll start seeing that in the Q4. We're in about a 40% increase Price increase on the water heating side.

Speaker 4

Okay. Thank you. And then Are we looking at similar type of price increases for boilers?

Speaker 2

Not similar. Boilers are for the most part a lot of our projects are quoted And we are taking steps to adjust our quotes to adjust for the costs. So we have taken steps, but it's not as formal as our residential and commercial business. But we are taking steps and quite frankly, we're taking steps across globally All of our businesses to adjust for the inflationary cost that we've been impacted by and continue to be impacted by. Yes.

Speaker 2

I mean, let me just add a little color to the water heating side because that 40% is specific to water heating. And as you know, steel is the major part Water heating. Costs for us, there's other costs, including freight and foam and so forth, but steel is the largest part. When we kind of look at the cadence of the cost for the year, when we get to the Q4, we're going to be and we have good visibility into the Q4 because you know, we've got 90 to 100 day visibility forward on what we're going to be paying for steel. Our cost Q4 Year over year is going to be 2.5x to 3x higher on just fuel alone.

Speaker 2

So I just want to kind of frame that. The Other businesses outside of water heating certainly have seen some cost increases and we've got price increases at various points, but certainly the water heater side bears the brunt That's still increase.

Operator

Your next question comes from the line of Ethan Buchbinder with Citi.

Speaker 5

Hi, good morning. Thank you for taking my question.

Speaker 2

Good morning.

Speaker 5

So Q1 had weather issues in Ashland and Juarez on top of supply chain constraints, which limited North America water heater production. And supply chain constraints lingering into Q2, how much of production levels improved? And can you quantify the percent utilization within North America water heater production Capacity during the quarter.

Speaker 2

No, not specific. I was telling you that we had month on month improvement. And again, we have terrific suppliers that are also working very hard to raise their capacity. And the important note is we believe that's going to carry on To Q3 and to Q4. So we certainly have plenty demand.

Speaker 2

Our orders are marrying the industry. It's just a matter of us being able to work those overtime hours and Saturdays and we've been a bit constrained with some of the Supply chain issues that we talked about. And of course there's port issues, there's trucking issues that we're working through. But the takeaway is that, it's a sequential improvement and that should carry over into the back half of the year.

Speaker 5

Thank you. That's helpful. In 2020, the cadence of social insurance was heaviest in Q2 and Q3. Understanding that Q4 is normally the highest margin quarter for the Rest of World segment and last year was 11 2% margin with minimal impact from social insurance, what are the potential factors that could keep margin down year over year?

Speaker 2

Yes, this is Chuck. I mean, it's really mostly volume. We really had a strong Q4 last year and that volume really matters on the incremental Base of the business, it really drops nicely to the bottom line. So last year, we had a very strong 4th quarter. We called it out on our call last year and it could have been some pent up demand from the pandemic, not exactly sure all the drivers, but That's probably the major difference.

Speaker 2

There was some social insurance last year and I want to say that it's small. Like you said, it's probably $12,000,000 for the year and the bulk of that fell into Q2 and Q3 and we'll see a similar headwind in Q3 that we saw in Q2.

Operator

Your next question comes from the line of Damian Karas with UBS.

Speaker 6

Hi, good morning everyone.

Speaker 2

Good morning. Hey, good morning.

Speaker 6

So pretty notable change in your view on the water heater Market shipments from down 2%, now up 3% for the year. I was just wondering if you could elaborate on your earlier comments about the inventory de Talking, you're not expecting that anymore and really just elaborate on what's changed since last quarter?

Speaker 2

Well, I'll start with that and Chuck can jump in. We don't move our forecast very often unless we see some clear line of sight. What's really changed is, 1, we didn't plan on floor price increases this year and that makes a big difference in pre buys and buy ahead. And quite frankly, the market's been continued to be stronger than we anticipated and new home construction continues to do very well. So As we were putting this all together and coming to the second half of the year, those are there's been multiple changes that Have changed our opinion for this year to move it up to that 3%.

Speaker 2

Yes. We don't expect inventories to come down Based on the order rate that we've seen, when we looked at the full year outlook for the industry, I mean, last year was basically a record year on residential water heaters. And To be 3% up over a record year is pretty meaningful. But when we kind of look at the first half of the year and then look at the second half of the year, historically, Those volume percentages kind of break down 52% in the first half of the year, 48% in the back half of the year. So last year, it was exactly opposite.

Speaker 2

It was 48% because of all the headwinds that the industry had in production in Q2, But it was 48% front half and 52% back half. And when we looked at the full year, we went back to kind of the normal cadence So we looked at that and said let's go back to that $52.48, thinking about what kind of demand we're seeing. And again, with 4 price increases, it's a little bit Call to read out the total demand, but being and decided to go up 3% with the assumption inventories would not decrease.

Speaker 6

Okay, great. That makes sense. And then I was curious if you've Seeing any market share jostling going on just as a result of the current environment with the supply chain issues and Some of the capacity constraints you and other competitors of yours have had to deal with, maybe you could just talk about kind of at the through your channels and at the regional level if there's what's happening with market share?

Speaker 2

Well, you're right, market share is a bit messy right now because of different price increases in the supply chain. Yes, I would tell you right now, A. O. Smith is lagging a bit, not because we don't have the orders that in house And not because our customers we have a solid customer base with no change there. It's really been just more of Various constraints on what we can produce out of our factories.

Speaker 2

And of course, as we mentioned in the first call, the Gulf Breeze did not help. But when it's all said and done, with no major changes in customers and we'll get our fair share of orders that Over time, this is probably all going to work itself out. But right now, A. O. Smith is lagging a bit and we anticipate that will We minimized by the time we get through the rest of the year.

Operator

Your next question comes from the line of Matt Summerville with D. A. Davidson.

Speaker 7

Thanks. A couple of questions. First on China, I was hoping you could Comment on what selling versus sell through looked like and how you're feeling about your inventory position there?

Speaker 2

Sure, sure. We feel very, very good about our inventory position there. We felt good about it a year ago and it's Significantly improved. It's at its lowest point in 5 years. And I would say that it's probably it's as Fresh as it's been.

Speaker 2

So we're in a great inventory position in the channel in China. Let me help frame kind of the sales growth For the quarter, so we're up 26% in organic local currency. But if you kind of take a look at that, last year we did have some headwind on channel inventories coming down. When we look at sellout and demand for this quarter, We're probably up about mid single digits. We're right in that range, and it's across our whole portfolio of products.

Speaker 2

So we're pleased with the 26% growth. You got to recall last year, China came out of the pandemic earlier than North America, Got into it and came out of it a little sooner, but that was a quarter that was building from April, May June. So Mid single digits up for the quarter and we kind of when we think about the rest of the year, we're kind of looking at something roughly in that same range through the back half of the year.

Speaker 7

And then just sticking with China, can you speak to kind of I'm thinking about the pricing spectrum, right, and how things trended a few years ago, kind of up in that high end, then things Trended more into the mid price point range. Where are you relative to historical peak and maybe the recent trough there with respect to your product That end realization there?

Speaker 2

Let me just frame it kind of quarter over quarter comparison because it's very similar to where we've been in the last couple of quarters. I would say what we've seen is a little bit of improvement in the higher end price on the gas tankless. And on electric, heating and on water treatment, it's roughly the same. So it hasn't changed a great deal. We see some indications of the higher end premium part of the market growing, but we have not seen a great deal of change.

Speaker 2

Pleased though that we've seen a little bit of movement on the gas tankless.

Operator

Your next question comes from the line of Saree Boroditsky with Jefferies.

Speaker 8

Good morning. Good morning. So you had originally talked about some inventory coming out of the channel this year. Now with So, heater is expected to be up 3%, you're no longer talking about that. So, just how are you thinking about ending inventory for the industry?

Speaker 8

And then how does that set up for demand in 2022.

Speaker 2

You're talking North America?

Speaker 8

Yes, North America.

Speaker 2

North America Residential. Well, again, we'll have to see how things play out. There's still 5 months left in the year. And so We've raised it as we've talked about and we'll have to get a better view as the next few months Depending on how we're producing, how people are consuming, how the economy is doing, it's hard to look into 20 22 when we're in July right now. And so we'll get it closer.

Speaker 2

We'll talk more as we get closer to the end of the year. But right now, as we said, demand is up and there's a lot of good momentum in new construction. And so That plays well for the balance of the year.

Speaker 8

Got it. And so with higher North America volumes, you obviously implemented a number of price The margins expectations are a little bit lower. So how are you thinking about matching price costs in the second half of the year? And then how are you thinking about margin in 2022, just as some of these costs hopefully become less of a headwind?

Speaker 2

Yes. I mean, we Since our first price increase was announced November last year, we have just seen costs continue to rise. Every price increase that we have launched Into the marketplace has been consistently followed by higher steel costs and higher costs. So as we go into the back After this year and get to the Q4 where our 4th price increase starts coming into the market and we start seeing it, we're basically matching costs. So we're not covering our margin in the Q4.

Speaker 2

That's a bit of the headwind that we see in the back half. It's too early for us to be Speculating I think on 2022 on what we're going to see on cost. Certainly, we've not seen these types of cost increases in the market, But it's hard to speculate how long they'll be there, whether they'll come back out. Obviously, there's a lot of discussion on transitory inflation, We're not yet ready to kind of predict when we're going to see any relief.

Operator

Your next question comes from the line of David MacGregor with Longbow Research.

Speaker 9

In your prepared remarks, you talked about water treatment and seeing more promotional days. And so I wonder if we could just circle back to that for a moment and just talk about The extent to which you're seeing maybe a little more in the way of expectations from some of your channel partners with respect to your level of promotional channel support?

Speaker 2

No, I would tell you our the promotional channels days that we talked about were pretty much normal. Yes. There wasn't an increase in it, but it's pretty effective. Water treatment, our close rates have been high as People continue to look at water treatment as a health issue for their family. But I don't want to mislead, Those were normal days that just performed at a higher level for us.

Speaker 2

And I think it comes down to the whole megatrend that we're seeing with water quality And the safety part that continues and it continued into the Q2? Water treatment has performed well. I mean, it's 17% increase quarter over quarter, but I just want to remind us that last year it grew by 19%. So as a part of our business last That actually grew in 2020 in Q2 and grew again this year. So pretty resilient, still performing well.

Speaker 9

And how much just for water treatment, how much of that growth would be attributed to expanded distribution as opposed to just a greater pull?

Speaker 2

That's one I can probably can't give you any specific. If you break down our business, it has to do with We have direct to consumer, but of course that's just an ongoing business. We have marketplace. We've done a fairly nice job expanding our dealer network. Can't give you specifics, but that area and we called it out in our remarks has grown substantially and doing a really nice job.

Speaker 2

It has a nice backlog, but can't give you specifics about really The number of new dealers, but going in the right direction and performing very, very well.

Operator

Your next question comes from the line of Nathan Jones with Stifel.

Speaker 10

Good morning, everyone. Good morning, Nathan.

Speaker 2

Good morning.

Speaker 10

I wanted to follow-up on the channel inventory to beat a dead horse here. You guys had expected a destock in the second half. You're now not expecting a destock in the second half. Can you talk about the inputs that go into that in terms of Are you expecting higher demand, customers ordering ahead of price increases and because of supply chain challenges? And do you think the channel inventories end the year at An appropriate level or under or overstocked?

Speaker 2

Yes, I think you've framed the pieces for us a bit. I mean, there is higher demand on the price increase for sure. That always is there. We manage that working with our customers. The constraints we see on supply chain, I think, Encourage people to make sure they have product on hand.

Speaker 2

This will be our projection on 3% up will be another record year back to back. Where we end up on the channel inventory, I think is a little hard to say and I think it will play out a bit on what happens in new construction and what we see As far as the supply chain getting a little more normal.

Speaker 10

Fair enough. And then just a follow-up on India, you So it doubled year over year. Obviously, India has had its issues with COVID. Can you just give us a number relative to where it was in 2019?

Speaker 2

2019, I mean, it's year over gosh, I don't have that in front of us right now. I'd say I'm pretty confident it's Higher than 2019, but I do want to frame it a bit because typically 35% to 40% of our sales are in Q4, But we're really pleased with how the team has performed for the quarter in a really tough environment. Yes. I would just want to add on to it. I mean, India was savaged by COVID and our team did what they needed to do to protect our employees, but more importantly Really developed a strong relationship on the online segment of the business, which helped drive some of the sales we're talking about.

Speaker 2

And even in the pandemic, we introduced New products both in water treatment and in water heating that have done exceptionally well. So we were calling it out because Quite frankly, it's a phenomenal job by a team that really had Severe headwinds throughout the Q2 and throughout the Q1 of the year. And we're looking for the back half again a bit better. And again, as Chuck said, that's where we get About 50% of our sales in those last 4

Operator

months. Your next question comes from the line of Susan Maklari with Goldman Sachs.

Speaker 11

Thank you. Good morning, everyone.

Speaker 2

Good morning, Susan.

Speaker 11

My first question is around the boiler business. You You guided or you held your guide of a low double digit increase this year. And yet you said you saw the sales up about 35% in the quarter. Can you just talk How you're thinking about the back half of this year, some of the orders that are coming through and how we should be thinking about that deceleration on a relative basis that you're expecting in there?

Speaker 2

Again, as we've talked about, the back half is a more difficult comp. And As we look forward, we talked about bringing forward the early buy, which was a record early buy for us from the Q3. So there's a few Items that are a headwind as we get into the second half of the year. So that's the primary reason behind it. Order bookings are good.

Speaker 2

Still seems to be pretty healthy with regards to Our quoting activity, but when we put the numbers together and Chuck will maybe elaborate on them a bit more, that's how we feel it's going to play out the second half of Yes, the only thing I would add is, I'm trying to think about kind of the benchmark for 20 And I believe when you kind of look at 2019, we're up high single digits compared to 2019. We're just confirming that number just to help kind of frame Where we are because 2020 had quite a bit of disruption in Q2. There's a lot of jobs that were closed and a lot of production that was disrupted. I'm trying to help with the 2019 framing and that's roughly It's up about 6% to 2019.

Speaker 11

Okay, Okay, that's helpful. And I guess building on that too, can you talk a little bit about what you're seeing on the commercial water heater side? That had obviously been a bit weaker compared to boilers. Any updates on how that's trending? And obviously, the comps there are a bit easier in the back half.

Speaker 11

How

Speaker 2

Well, commercial water here, it's nice when you reopen the economy. And we're seeing I think we've talked about this in the past. We do have some IoT on our water heaters. We can see how it's being used and so forth. It's It's not a broad view, but it's a snapshot.

Speaker 2

And we're just seeing activity grow. We're seeing restaurants open up. We're seeing people invest back in their business. Overall, it's nice to see the economy or the commercial side of the business starting to reopen And get back to we're not there yet, but back to kind of a normal replacement cycle and maintenance cycle. So that's where we raised our guidance up A couple of points and it's based on those early trends continuing into the back half of the year.

Operator

Your next question comes from the line of Scott Graham with Rosenblatt Securities.

Speaker 4

Yes. Hi. Good morning. Thanks for taking my follow-up here. See if

Speaker 2

we've gotten cut off in the middle of

Speaker 4

my next question But I maybe just wanted to go back to the pricing, guys. And I have tracked with August 4 price increases this year. I don't quite recall the amount of the one from last year in November. Can you remind me of that one?

Speaker 2

I think it was approaching 10%. When we get all three together, we've been kind of accumulating them as we go along. Pat will take a quick look here. But the first one was roughly that amount, I believe. Yes.

Speaker 2

Scott, I'll tell you that's a long time ago. We're welcome to look back at it because we've even chasing these costs for a while.

Speaker 4

Okay. And so the other question I had was, Kevin, around your comments with the supply chain. And I know that water heater volumes were up, But I'm assuming they were up sort of double digit. And the reason I'm Asking that is that the 1st 2 months of the quarter trade data is sort of Up and over 20%. Now that's only the 1st 2 months, but it would just seem like that should be Did you keep pace with the industry in the second quarter, I guess would be the simplest question?

Speaker 2

No, as I mentioned, we lagged a bit in the industry. And you look at the industry, it's up through May 11%, 12% total. Again, quite a bit of that's been driven by price increases in those types of activities along with the new So we have been lagging. And again, it's our order entry It's right in line with the industry. However, some of the constraints that we talked about has caused a few issues for us.

Speaker 2

But again, I look at this, we have great operating people and in the back half of the year, we'll have to work through that. But I wanted to make sure you understand where we were and We're going and we don't see fundamentally anything changing with regards to our customers or our market share as we finally get through These difficult times and finish out 2021. And Scott, just to follow-up, that first price increase Up to 9%. So pretty close to that 10% that I mentioned, but up to 9% is what we went out with.

Operator

And your final question comes from the line of Kevin Hoefier with Northcoast.

Speaker 12

Hey, good morning, everybody. Wondering if, to that point on the supply chain issues, expectation of 3% volume growth for the year, Do you think with all the actions you're taking and it sounds like things are getting better, do you think you'll be

Speaker 2

able to grow in line with

Speaker 12

the industry and maybe make up for that In the back half of the year or does that perhaps defer some shipments for you guys to 2022?

Speaker 2

Yes, I would tell you our expectation is to certainly queue up with the industry and to close that gap by year end. Again, The orders are there, it's just a matter and our customers are just a matter of working like I said, go back to work in those 9 hours, working that Occasional Saturday to close that gap. And that's going to be all predicated on our supply chain, which again, and I've talked to many of our key suppliers. They're all getting better at it. They're all coming online a bit more.

Speaker 2

And we're anticipating that's going to carry over to the back half of the year and we'll be able to ramp up At a much higher rate than we had in the first half.

Speaker 12

Okay, great. And then on the water heater side, So if you back if I back into the numbers, it seems like water heater sales probably grew 25%, 26% in that in the second quarter. So wondering if you can just is that I don't think you historically give price volume or anything, but is that mostly price or fairly split between price volume? And I think you guys made a comment that 40% pricing will be kind of once everything is in effect in the Q4, that will be what pricing is. So Does that mean we should be thinking water heater price water heater sales up 40% in the 4th quarter plus or minus whatever our Volume expectation is?

Speaker 2

Yes. Let me just go back to kind of the price volume Forward portion of Q2 and yes, we typically don't, but I think it's very helpful in the environment that we're in that we give a little more data. In Q2, when we kind of look at the amount that we were up in North America, I'll frame this North America, 40% of that roughly was price And the rest was basically volume. So the bulk of it was volume, but there was a percentage of about 40% of that increase that was price. On the Q4, could you frame that again on the Q4 question, please?

Speaker 12

I think you mentioned that just for modeling purposes, I think you had mentioned that when all four price increases are in effect, it would be 40% cumulative. So does that mean that that water heater portion of North America sales should be up 40% in the Q4 once all those are implemented, plus or minus Whatever we think volume and mix

Speaker 2

does. Yes, that's roughly right. I mean, the 4th price increase comes into the 4th quarter and it's early on in the 4th Quarter, but that's a good way to look at it. Yes, I would say that plus or minus though, there's going to be some drag probably and With that pricing at the 4th quarter.

Speaker 12

Okay. All right. Thank you very much. There

Operator

There are no further questions at this time. I would like to turn the call back over to Ms. Patricia Ackerman.

Speaker 1

Thank you for joining us Today, we plan to participate in 2 virtual conferences in the Q3, Jefferies on August 3 next week and D. A. Davidson on September 22nd. Have a great day.

Operator

This concludes today's conference call. You may now disconnect.

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Earnings Conference Call
A. O. Smith Q2 2021
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