A. O. Smith Corporation (AOS) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the A.O. Smith Corporation Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Pat Ackerman, Vice President, Investor Relations and Treasurer. You may begin.

Thank you, Danielle. Good morning, ladies and gentlemen, and thank you for joining us on our second quarter 2013 conference call. With me participating in the call are Paul Jones, Executive Chairman; Ajita Rajendra, Chief Executive Officer; and John Kita, Chief Financial Officer. Before we begin with Ajita'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. In order to provide improved transparency into the operating results of our business, we are providing non-GAAP measures including adjusted earnings, adjusted EPS and adjusted segment operating earnings that exclude certain items, as well as non-operating pension costs consisting of interest costs, expected return on planned assets, amortization of actuarial gains and losses and curtailments. Prior year results are provided on a comparable basis. Ajita, I will now turn the call over to you.

Thank you, Pat, and good morning, ladies and gentlemen. We continued to see the benefits in our performance from the housing recovery in the U.S. and our expanding consumer business in China. Here are a few highlights from a very strong quarter. Our organic growth drove sales 13% higher to $549 million. Sales of A. O. Smith branded products in China grew 35%. Our adjusted earnings of $0.52 per share were 33% higher than the $0.39 per share recorded last year. Incremental margins associated with higher volumes of water heaters and boilers were the key drivers of the higher earnings. Based on our solid performance, strong balance sheet, and expected 2013 free cash flow of approximately $100 million, our board increased the allocation of shares available for repurchase by 2 million shares. John will now describe our results in more detail.

Thank you, Ajita. Sales in the second quarter of $549 million were 13% higher than the previous year, driven by higher volumes of residential water heaters in the U.S. and higher sales of A. O. Smith branded products in China. Adjusted earnings of $48 million improved 34% from our second quarter performance last year. As previously announced, we transferred the majority of our residential water heater production from our Fergus, Ontario plant to other North American facilities during the second quarter. As a result of the capacity rationalization, we incurred a pretax restructuring and impairment charge of $4.2 million in the second quarter related to employee severance costs and impairment of assets. Additional restructuring charges related to equipment relocation costs are expected to total approximately $2.5 million for the remainder of the year. We project net pretax savings of $3 million to $4 million in 2013 and approximately $10 million in 2014. Adjusted earnings in 2013 excluded after-tax non-operating pension costs of $3 million, and after-tax restructuring and impairment costs of $3.1 million. Adjusted earnings in 2012 excluded after-tax pension costs of $1 million. Adjusted earnings of $0.52 per share improved 33% compared with $0.39 per share last year. Adjusted EPS in the current period excluded non-operating pension costs of $0.03 per share, and restructuring costs of $0.04 per share. Adjusted EPS in 2012 excluded non-operating pension costs of $0.01 per share. Sales in our North American segment of $389 million increased 6% over last year. This segment includes our U.S. and Canadian water heater and boiler operations. Higher volumes of residential water heaters in the U.S., as well as higher boiler volumes more than offset lower volumes of commercial water heaters in the U.S. The results for our China, India and European water heating businesses and our water treatment business in Asia are captured in our Rest of World segment. Segment sales of $170 million increased 33% compared with last year, driven by increased demand for water heaters and water treatment products in China. We are encouraged by the market acceptance of our newer A. O. Smith branded products in China. We continue to innovate our product lines with features and benefits which provide value to our customers and differentiate our brand. We introduced our eighth upgrade to our electric water heater offering in the second quarter and the products have been well received. Other recent innovations include an ultra-quiet gas tankless water heater product line and water treatment products which have longer-lasting filters and waste less water. The return on our investment in engineering and innovation is one of the success factors of our business in China. North American adjusted operating earnings of $63 million were 20% higher and adjusted operating margin of 16.1% was 1.8 percentage points higher than last year. Improved performance was due to higher incremental margins associated with increased volumes of water heaters and boilers in the U.S., as well as improved pricing associated with a price increase effective in the second quarter of last year and lower material costs. Rest of World adjusted operating earnings of $22 million improved 82% compared with last year. Higher sales and improved mix of A. O. Smith branded projects in China and smaller losses at our non-A. O. Smith branded water treatment business drove operating margins higher. Our adjusted corporate expenses were $13.3 million, an increase from the prior year primarily due to lower interest income, as well as expenses related to our acquisition activity and higher stock-based compensation costs related to shorter amortization periods. Cash provided by continuing operations was $106 million in the first half of 2013 compared with $30 million last year, primarily driven by higher earnings from operations, and a smaller investment in working capital. Our liquidity position and balance sheet remains strong. Our debt-to-capital ratio declined to 14%. We have sizable cash balances located offshore and our net cash position was over $250 million at the end of the second quarter. We project our cash flow from continuing operations for 2013 to be between $240 million and $260 million. Our capital expenditures are expected to be $80 million to $90 million, which includes approximately $40 million for capacity expansion in China and India to meet growing demand for our water heaters in those regions. Our depreciation and amortization expense is expected to be between $55 million and $60 million this year. I will now turn the call back to Ajita who will summarize our outlook and acquisition strategy. Ajita?

Thanks, John. Our outlook for 2013 includes the following assumptions. First, we expect that sales growth of A. O. Smith branded products in China will be approximately 18% in 2013, largely driven by products with new features and benefits that provide incremental value to our customers. We also have seen a positive impact in sales coming from online purchases, and we expect online sales to more than double in 2013 from $5 million last year. You can infer from our 18% revenue growth assumption for the year, that we expect our growth in China will slow to low-double digits in the second half of the year. We believe that tighter housing regulations implemented earlier this year will have the government's desired impact and slow new home occupancy. And we also have a difficult year-over-year comparison in the fourth quarter due to record fourth quarter sales in 2012. Second, we expect our Lochinvar brand to continue to benefit from the transition from lower efficiency, non-condensing boilers to higher efficiency condensing boilers. Lochinvar branded condensing boilers continue to offer a compelling payback in the form of energy savings, and we have built a reputation for innovation and product quality. As a result, we expect Lochinvar branded sales to grow 10% in 2013, well ahead of GDP growth in the U.S. Third, we are cautiously optimistic about the developing recovery in the U.S. housing and the overall economy in the U.S. We expect residential water heater volumes in the U.S. to be 400,000 units higher than last year, based on an increase in housing completions, as well as in replacement units. Even though the industry experienced strong commercial volumes in the first half of 2013, which we believe was partially due to a pre-buy related to a Northern California regulatory change, we expect commercial volumes to be up about 4% for the full year. Our outlook for the U.S. water heater business has improved from 3 months ago, and based on that, we have increased our 2013 adjusted EPS guidance to be between $1.84 and $1.90 per share. The midpoint of our new range represents a 20% increase over 2012 adjusted EPS of $1.56 per share. This guidance does not include the restructuring and impairment expenses associated with the planned rationalization, the settlement with a former supplier, non-operating pension costs or future acquisitions. Our GAAP EPS guidance is now expected to be $1.62 to $1.68 per share due to the impact from the restructuring and impairment expenses, partially offset by the settlement income, neither of which were in our GAAP guidance at the beginning of the year. Strong performance in our North American segment also prompted us to update our high-level 2015 aspirations for our organic business. Based on our expectations for EBIT margins driven by new construction and 10% revenue growth in our Lochinvar branded products through 2015, we are reviving our North American segment margin expectation to approximately 15.5% from the previously recorded 14.5%. This revision incorporates expenses related to the implementation of an Enterprise Resource Planning system of approximately $11 million in 2015. Expenses related to the ERP system are projected to be approximately $5 million this year and $15 million in 2014. We expect significant benefits from the system after its planned implementation is completed in North America by late 2015. We continue to expect organic growth of 7% per year through 2015, resulting in revenues of $2.4 billion to $2.45 billion. Our Rest of World segment margin expectation continues to be 13% by 2015. Our earnings aspirations for our existing portfolio of businesses are now expected to be approximately $2.25 per share by 2015 versus the previously disclosed $2.15 per share. As you can see, this continues to be an exciting and transformative time for our company. We have cash and borrowing capacity for additional acquisitions, and our pipeline of acquisitions supporting our stated growth strategy to expand our global footprint in water heating and water treatment solution is active. Based on our core competencies, our strategic focus for growth is simple: hot water and clean water. We are pursuing actionable acquisitions in these 2 areas around the world. We are also pursuing acquisitions which expand our core product lines. We are particularly keen on products and technologies that offer energy and water efficiency gains. And finally, we are considering water-related adjacencies which can leverage our distribution, water heating know-how and brand to provide value to our shareholders. We expect our businesses to generate approximately $100 million of free cash flow in 2013. As a result, our board increased our authorization to repurchase shares resulting in approximately 2.5 million shares available. We may repurchase shares through a combination of opportunistic open market purchases, stock trades and 10b5-1 automatic trading plans. We believe our free cash flow borrowing capacity and existing cash of over $450 million are adequate to support the repurchase program, as well as our active acquisition strategy. You have seen this last chart before, we show this only as a reminder that we will be a financially disciplined acquirer. You should know that while we came close to completing a handful of acquisitions over the past 12 months, we have walked away for various reasons. In the end, we held fast to our financial criteria. Our transactions will be focused on value creation and creating returns for our shareholders. This concludes our prepared remarks, and now we are open for your questions.

[Operator Instructions] And our first question comes from Charley Brady from BMO Capital Markets.

I just want to clarify on the China growth. Your comments here, when you mentioned A. O. Smith branded products, I mean, there's not a meaningful percentage of non-A. O. Smith, right? I mean, there's nothing into that wording?

Well, we've been consistently using that, Charley, for about the last year. What we're excluding is the small piece of non-branded water treatment business, primarily, is what's being excluded from that.

Okay. Has the water treatment business in China, is that above breakeven now?

On a total basis, it's approaching breakeven. I mean, we had a great quarter in the A. O. Smith branded piece that more than doubled year-over-year, and the sales were over $10 million in the quarter. So it's a -- it had a great quarter, the new products seem to be catching hold.

The 35% growth in China is pretty robust growth. And I'm guessing -- and obviously, it's not being repeated in the second half. I'm just trying to understand, I mean what -- that was pretty outsized growth. Was it a function of new product introductions, so we're stocking the channel? Or exactly, what drove such a strong performance in China?

I mean, it was across the board. We brought out the new series 8 electric, that was very, very well received. Our super quiet instantaneous product has been extremely well received. As I said previously, our water treatments sit very well during the quarter. And then even some of our energy efficient like heat pump, which is coming off a small base was up significantly. So it was really across the board. But a lot of it was driven by new products. There might have been some stocking of inventory, the best we can tell it wasn't significant, but bringing out the new series 8, there certainly could have been some. But no, it was a fantastic quarter.

Okay. And just one more, I'll hop back in the queue. On the -- in North America, $3.6 million non-operating pension costs, is that -- does that continue into the second half?

Yes, that's -- we talked about that at the beginning of the year, and that's what we said it was -- the run rate for the year would be, so pension costs were up about $17 million year-over-year, and we talked about why, but yes, we would expect that'll be the same number over the last half of the year, each quarter.

And our next question comes from William Bremer from Maxim Group.

First and foremost, I was wondering, given the volatility in the underlying commodity prices that we've seen, have -- has the company been able to capitalize on this given its strong balance sheet?

From what standpoint, I'm not sure the question...

Have you been able to utilize, say, forward contracts and lock in some prices in copper and steel?

Well, the whole problem is, there is not a very liquid market in steel. Copper, we're a small user of it, so yes, we do have a few forward contracts. We've explored looking at steel contracts, but it's still in its infancy. And because the markets are not very liquid, the pricing isn't very efficient, but we continue to look at that.

Right. Okay. Now some of the other industrials companies that I cover do perform some steel activity. Let's go to the boilers, if I may. Can you give us the contribution for Lochinvar for the quarter?

Well, we don't separate out that. But I will say that Lochinvar has exceeded the 10% growth year-to-date, and their margins are up year-over-year. So the new products they brought out, which we haven't talked about in update, they brought out a larger craft condensing boiler last year. They have expanded that up to 5 million BTU. That's been very well received in the marketplace. So that's contributing to their very nice growth.

How's Lochinvar's bookings or backlog look at this time?

Well, the backlog looks strong and what it should be at this time of the year. Overall, the Lochinvar acquisition is meeting or beating expectations. And it's right on track for our 2015 expectation.

Very nice. And then just one housekeeping, if I may. On the corporate expense line, $14.5 million, a little higher than what I was anticipating. Can you tell me if there was some onetime items in there that I might have missed? Or what's a good run rate going forward?

Well, I think that a good run rate is $12 million to $12.5 million a quarter. We talked about in the notes here that we did have some, I'll call them, onetime or unusual related to acquisition activity that was relatively sizable in the quarter. But I think a reasonable run rate is that $12 million to $12.5 million.

And same question on the tax rate going forward.

Yes, I think a tax rate of 31% plus or minus is a reasonable rate.

And our next question comes from Scott Graham from Jefferies.

So I was wondering, you had positive pricing in this quarter. And with steel maybe starting to turn the corner a little bit, I was wondering if that -- if pricing -- I know you're anniversary-ing the year ago. But is a price increase now back on the table in the markets? Have you guys in the next...

This is Ajita. When it comes to pricing, you know that we don't really talk about anything that going forward. And over time, we've been able to balance out commodity prices with pricing in the marketplace, there are ups and downs. But over time, it balances out.

Well, fair enough. And then from what I'm -- if we would have not increased prices from here, it would seem that with the anniversary-ing of the price, that pricing essentially should be neutral in the second half, right?

I can't really comment anymore on prices, Scott.

Fair enough, fair enough. I wanted to ask about the acquisition pipeline. And obviously, it's now been 2 years and counting since we've had something of size. I know you walked away from a number of deals. Would you -- with the share repurchase being increased I'm just kind of wondering, is that a signal that you continue to be, maybe, frustrated with some of the pricing that's out there?

No. I think that we continue to look for acquisitions that fit our strategy. And it goes back to the fact that we are going to be very disciplined in terms of the financial and strategic criteria that we put out, and we're not going to compromise on it. And we've looked -- it's active, we are looking, you can see by some of the increase in corporate expenses that we've gone quite far down the line on some of them. But if it didn't seem right, feel right, and didn't fit strategically, we walked away from it. So it doesn't change anything from a strategic viewpoint, our outlook viewpoint, in terms of how acquisitions fit into our long-term strategy.

Of course. Okay, 2 others. Could you give us same-store sales in Tier 1, 2 and 3? At least give us some color on that for China?

Same-store sales for both were up very nicely, both Tier 1, Tier 2 and Tier 3. So that continues to be pretty much across-the-board. It was not in any specific region per se.

Okay. And last question probably also for you, John. What have been the ERP expenses in the first half of the year, and with the $5 million for '13 and $15 million for '14, when would we start to be able to exact some type of a return on that?

Well, as we said in there, we expect -- we've incurred about $2 million in the first half of the year, so $2 million, first half or so on, and $3 million in the second half of the year. 2014 will be the largest year because that's when we'll be starting the implementations, et cetera. We expect to start, as we talked about in the press release, getting benefits late 2015, but at a run rate, annual run rate, in 2016. North America, we expect to have down late in 2015.

And our next question comes from Sanjay Shrestha from Lazard Capital Markets.

It's Aditya Satghare here. Two questions. First, just a follow-up on China here. How should we think about the benefit from the store footprint optimization so far this year?

Well, we mentioned that we expect the stores to be in the 5,000 to 5,500 range. They were up a little bit in the second quarter as we opened some in Tier 2 and Tier 3, more Tier 2 and Tier 3. I think we are seeing some benefits as we talked about late last year when some of the inefficient stores were being closed either by us or by our partners. So I think that has provided some value. And again, we -- both us and our partners continue to look at that very closely to make sure the stores make sense.

Got it. And the second question is on the Lochinvar. So how -- I mean, can you sort of give us some more color on the potential to take the Lochinvar product line outside the U.S. and into particularly China, right? And give us any update on the potential in that market?

The potential to take that product to China is very high. It's going to take some time. The market really hasn't developed in terms of import those types of products. But it's happening. And like anything else in China, it's happening at a very fast pace. So we expect that there'll be a low level of sales later this year going into the first quarter of next year starting out. And for it to start increasing from there. So it's going to take time to build up, but certainly, long-term, there's tremendous potential for that product line and those types of products in China.

And our next question comes from Matt Summerville from KeyBanc.

Couple of questions. Just, John, another one on the share repurchase. Is the objective simply to offset incentive comp-related stuff from options, et cetera, or is the objective to lower the share count over time?

I'd say it's a combination. We've said that we will, at the minimum, buy back the comp-related, et cetera. But also, in this situation there's an opportunity as we look out over a period of time to reduce the share count. So I think that it could be a combination of both, but we've said, at a minimum, there will be the incentive-related.

And then just with this ERP, the numbers that you shared with us, John, is that what you're budgeting or what you actually expect to incur from an expense standpoint? I've never seen a company-wide ERP implementation that's been anywhere near budget.

Well, that's the expense portion of it. We obviously have a capital portion of it also. And that, also, will be in our numbers obviously. So we spent some time with our systems integrator, and we know what you're saying, but our intent is going to be to come on budget.

So how much of the system costs will end up getting capitalized then?

Well, traditionally, it's about 50% to 60%, and we think that'll be the case here.

Got it. Okay. And then you mentioned launching, I believe in Q2, the series 8 electric wall-hung product. What is the ASP differential on that versus the seventh generation?

My understanding is, it was up about 5%.

Okay. And help me understand. So the 8 comes out, there is some level of sell-in to the channel. What happens with the series 7 that are already on the shelves? And I -- help explain how that shift occurs and who ends up, at the end of the day, paying for it?

What -- this is Ajita. It's kind of a running transition. We don't bring back inventory. It's a running transition that happens at retail where when they run out of series 7, they go into series 8, and they have promotions behind it, et cetera. The other thing that we are now doing much more of is using the older models for our Internet sales. So that, that way we balance out and make sure that we can have a very robust online business that doesn't interfere with our retail business. And so that's another area which we are balancing out and utilizing the older models to manage.

Got it. And then with respect to Tier 1, 2 versus 3, 4, however, you bucket it. How would you describe same-store units, not same-store revenue, but same-store units?

Both were up, units.

Okay. Can you give any more granularity there, were unit volumes up...

No. We really haven't gotten into unit basis because there's so much price mix-type issues. So we've been pretty much talking about dollars, if you will. But units were up at both locations.

But I think one thing we can say is that, latter part of last year, and last year, we saw the major cities slow down. Now the major cities are coming back up and we are seeing the growth across the board in the large cities also, the mega cities like Beijing and Shanghai.

And that sort of gets to my question, Ajita, what would you attribute that shift or that re-acceleration to? Is it simply your product refresh or are you seeing household formations accelerate, consumer sentiment accelerate upwards? Help me understand what has caused that transition.

I think it's, as John said earlier, it's a combination of all those reasons that he mentioned. The new products, our product set, the market, people feeling a little better, part of it. I think that there was a certain amount government -- the government brought in restrictions in housing at the end of last year. And so there was a little bit of a peak in terms of buying at the end of last year. So as people get in, that would have pushed some volume into the first quarter of this year because there was a higher level of activity of people actually buying apartments to get ahead of those restrictions and regulations. So I think it's a combination of all those things that have made the market pretty strong in the first half.

And those restrictions kick in when, Ajita?

Well, the restrictions were early this year. And in fact, and what we've been told is the decorating aspect normally trails 3 to 6 months after the actual closing, if you will. And so that's -- the comment our people have made to us is certainly the second quarter was helped by that. Clearly though, it's also being helped by the higher price associated with some of the new products. I mean, whether it's series 8, whether it's the super quiet that carries a fairly decent premium, or whether it's the water treatment products that are out there. They all carry higher selling prices, if you will, than their predecessors.

That's helpful color. Where are you guys right now in terms of store count? And what is the net add/closure target for the year?

We're at -- we have said we'll be about between 5,000 and 5,500. We're about 5,450 at the end of the second quarter. I think that's a plus of a couple of hundred units, I think, for the year. And again, those are primarily Tier 2 and Tier 3. We would expect to be in that range. So 5,000 to 5,500.

Okay, great. And then with -- John, with interest rates moving up, what is the funded status of your pension at the end of the second quarter?

At the end of the second quarter, our best estimate is we've moved nicely from about low 80s to about 90% funded at the end of the second quarter. So as we've talked, we have a glide path in place. And we've done some things to de-risk a little bit, if you will. But there's been a big improvement over the first half of the year.

And then just, sorry, one more question. You mentioned $100 million free cash flow. You have $240 million to $260 million operating, $85 million or $90 million, whatever the number is, in CapEx. How does that math work, am I missing something?

No. We have dividends. We take out dividends. We have some share repurchases...

Okay, so that's free cash -- all right, that's free cash after dividends and share buyback. I got it. Okay, perfect.

And our next question comes from David Rose from Wedbush Securities.

I think most of my questions have been answered, but maybe just a couple last ones. Is it possible to bucket some of the margin improvement in North America business by price mix and raw materials?

I'm sorry. I didn't see the first part of it.

If you can bucket the margin improvement that...

No. We normally don't disclose that information.

Yes, I know it's not something you just...

All 3 were certainly contributors and relatively comparable.

So John, I know it's not something you disclose often. But if you can provide a little bit of color in terms of what expectations should be on a go-forward basis with steel prices and how we should think about the offset. Typically, there isn't an offset when steel prices go down that passes on. So you don't always get the gain immediately or the hit immediately. So how should we think about that falling through in the next couple of quarters?

I won't be specific on steel, but I'll say traditionally, if you look at the commercial market and the residential market, it's traditionally about 52% to 53% first half of the year, 47% to 48% the second half of the year. And that's been pretty consistent over the last 7 years. And you look at -- much of that is affected in the third quarter. So I mean, as we would expect and historically, the third quarter margins get impacted by volume. There's been a slight increase in steel, so it could be affected by that also. But that's what our expectations would be.

And your tone going into Q2 was, as always, fairly conservative. And so there are some, I think, pleasant surprises in the margin side. I think one of the issues you had addressed in terms of potential headwinds was some operating inefficiencies in the closure of the Canadian operations. Did you see that -- those inefficiencies in the quarter?

We had some, but not as high as expected. Both our Canadian and our U.S. plants performed better than what we would have expected, so we did have some inefficiencies but not as much as expected.

Okay. And anything else operationally that exceeded your targets, better cost or quality, some other metrics that you can provide for us?

No. But I'll say that the operations are performing very well. And what we've consistently said that incremental volume is going to be very beneficial to us. And we saw the first 2 quarters of 2013 were the highest quarters we've seen since 2008. And so I think it kind of supports what we've been saying as we get help from the housing recovery and commercial construction, those will be beneficial and we saw that in the first half of the year.

And then last. I'm assuming that the mix shift impact or the pull-forward in the commercial boilers wasn't as significant as you had thought?

I'm not sure how to answer that. I'll say that the commercial market's been interesting. The April numbers were very good. May and June numbers are up, not out; but our May was pretty good. But our June was lower, and significantly lower than the prior year because basically, last year's June was the highest month of the whole year. So we've talked about we get some of this lumpiness, if you will, month-by-month. But we -- so June was lower, not necessarily lower than expectations, but it was lower.

And our next question comes from Samuel Eisner from Goldman Sachs.

So I have a couple of questions again on the -- just the pre-buy that you guys called out. Is there a way to kind of parse out how much the benefit was, say, in the second quarter and also in the first quarter? And in particular on the margin line, how much of a mix benefit you got from the pre-buy?

Well, we certainly, we talked about -- you're talking about the pre-buy associated with Northern California, I assume?

Yes.

Yes. We certainly saw that benefit in the first quarter. We had estimated the industry units, I think, were up 4,000, 5,000 units, so we estimated half of that was associated with the pre-buy. That certainly helped us in the second and the first quarter. And it was not a significant effect I don't think on really the second quarter.

Okay, great. And then in China, you mentioned that store openings are running a little bit faster than I think you were anticipating. Are the new stores that are being opened in the Tier 2 and Tier 3 cities, are those stores being opened by Suning and Gome, or those some your specialty stores? Just help me understand a little bit, who is actually building these new stores?

I think the net increase was primarily our specialty stores, primarily. Suning and Gome are kind of floating, they've been closing some and opening some for a net, not much but increase. But I think for the most part, it's been specialty stores. And we've said one of the advantages to us is we have a much smaller footprint. We can much easier open it up in the Tier 2 and Tier 3 cities than our partners who have to build a 5- or 6-store operation, if you will.

Great. No, that's definitely helpful. And then just lastly, in terms of the guide here, so if I look at the second half, basically you guys are flat for the second half over last year. So I'm just curious if you can maybe just go through a walk there. That kind of help me understand for the second half of '13 versus second half of '12, is everything just the same or are there some puts and takes there that are different, just help me understand that a little better.

Well, I would say we're up a little bit from last year's second half. And certainly, the first half was a great first half, helped by volume. And we're stepping back and taking a look. I mean, there's some potential headwinds that we're trying to understand with respect to the housing recovery. Obviously, recent housing starts weren't great, interest rates up. So -- I mean, we're taking a relatively positive view. I think last year's second half was about $0.82 or $0.83. And right now, our midpoint would be about $0.87. So again, there's some potential headwinds we're just stepping back and taking a look at. But obviously we've just had a great first half of the year.

And our next question comes from Robert Kelly from Sidoti. Robert J. Kelly - Sidoti & Company, LLC: You talked about a lot of the success in China being related to new product growth. Could you put a number or a percentage contribution from new products this quarter?

I really can't. I don't really have that data. But obviously, that was a big benefit, is that the 4 major areas where we saw growth were in electric, wall-hung and that clearly benefited from the series 8. The instantaneous side was up significantly and I can tell you the super quiet was a big component of that. The water treatment, as I said, more than doubled and a big component of that was -- that's the combination, I think. The marketplace is much more accepting, understanding now the need for water treatment. But also, we have a unique distinct product which I think has been very well received. So I can't give you a number, but clearly, those 3 were big contributors. Robert J. Kelly - Sidoti & Company, LLC: Okay. Was it a quarter of your growth, half of your growth? Any help as far as the percentage.

I just really don't know. Okay. We don't break it down that way, so I can't really.

And part of it is because, introducing new products and the new products replacing the older products, that's the normal cycle of doing business in China in the consumer business. So it's not -- so the frequent introduction of new products usually with features and benefits that command a higher price is the norm, in terms of business. So the new products come in, they essentially replace the old products and depending on what we add to the new products, they are usually at higher prices.

So when we came out with new features, for example, on the electric series 8 new features and new cosmetics, and we're able to have a price increase associated with that. And as Ajita said, that's been the norm, how we've been operating for the last 10 years in that country. Robert J. Kelly - Sidoti & Company, LLC: Great. Any idea after 2Q, after the product launches, what your share in China is?

We're forecasting about 25%, so we've seen some share increase. Robert J. Kelly - Sidoti & Company, LLC: Great. And just one final one. You talked about the strength in North America. Where are you at utilization-wise in North America?

We still have significant capacity. You have an industry that in 2006 was 9.6 million units. This year, it's going to be, we're estimating 8.4 million units, so there's still certainly a reasonable capacity. But it's time for us to have to...

And part of what we've been doing during that time is, as you've seen, we've maintained our margins during the time when the volume has dropped. And we've been working really hard at making sure we are improving our processes and becoming really efficient. And you can see the impact of that with the incremental volume which is coming at a very healthy margin.

And our next question comes from William Bremer from Maxim Group.

Yes. Just 2 quick follow-ups. In terms of Lochinvar, deploying it in China, what is sort of like the ramp-up of installing that type of unit there? There was a huge ramp up here domestically in terms of the underlying certifications to get installed for that type of component here. Is it going to take longer there? And my second question is an update on India. Just given the volatility of the rupee and what you're seeing there, I do realize the CapEx going forward, but if you could give us some color on how things are progressing there as well?

I think it's going to be -- the ramp-up in China is going to be slow. Like I said that the -- this is the Lochinvar product. It's going to take a while for the product to build up and for the market to be really accepting of this type of product.

And as we've kind of said, we have to put the infrastructure in place to be able to train, install, aftermarket, et cetera. And also we talked about the licensing requirements there are a little more strict than they are other places. So that's taking a little longer than we expected. But as Ajita said earlier, and we have to bring in new product, a new idea to the marketplace. But they're certainly interested in energy efficiency and we think down the road, it'll be a plus.

The longer term potential is certainly there; it's going to take some time to build up. India on the other hand, the devaluation of the rupee is certainly hurting us. The economy isn't as robust as we had expected. But from a unit volume viewpoint, the business is growing and we are very happy with the growth that they're seeing there.

And as we have said, Bill, 80% of sales are in the second half of the year, so kind of stay tuned.

And I am showing no further questions. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.