Good day, ladies and gentlemen, and welcome to the A. O. Smith Corporation's First Quarter 2016 Earnings Conference Call. At this time, all participant lines are in a listen-only mode to reduce background noise. But later, we will be conducting a question-and-answer session, instructions will follow at that time. As a reminder, today's conference call is being recorded. I would now like to introduce your first speaker for today, Pat Ackerman, Vice President of Investor Relations and Treasurer. You have the floor. Patricia K. Ackerman - Treasurer & Vice President-Investor Relations: Good morning, ladies and gentlemen, and thank you for joining us on our 2016 first quarter results conference call. With me participating in the call this morning are Ajita Rajendra, Chairman and 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. Also in respect of 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 Ajita, who will begin his remarks on slide three. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Thank you, Pat, and good morning, ladies and gentlemen. The first quarter of 2016 was another excellent quarter for A. O. Smith, setting first quarter records for sales and earnings. We continue to see healthy end markets for our consumer products in China and boilers in the…

Our first question comes from the line of Bhupender Bohra from Jefferies. Your line is open.

Hey, good morning, guys. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Morning.

So I just wanted to get some color on the China. Ajita, in the press release you guys have talked about higher selling cost to support expansion in Tier 2 and Tier 3 cities. Can you expand on that, like where is this expansion happening and which particular markets we are talking about here? Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Why don't I give a headline, and John maybe you want to add some color to it? A couple of things. We are expanding into – we have always been expanding and we are expanding into smaller cities. We are expanding our own A.O. Smith stores. We are also investing in some new categories, which is continued investment in water treatment and air purification, and we are also investing in the commercial side of the water treatment market. So there's lots of investment going on for expansion in the future. One of the things as we think and as I have talked about very consistently, we are never going to be dependent on a stagnant portfolio of products in China for growth, okay, because that obviously doesn't last forever. And as we are always going to be investing in new categories to be able to leverage this incredible asset that we have in China, our brand name, our distribution, our manufacturing capability, the very strong team we have in China. So we are constantly investing in these new categories which are going to be our growth engines in the future. And right now, like I said, we are continuing to invest in water treatment and the commercial side of water treatment, air purification expansion geographically. And as we've consistently said in the past, we are looking at mid-teens type margins in China over the long term. There's going to be leverage as our volume grows, but the leverage is going to be less than what you would find in the U.S., because we are investing and because the SG&A in China tends to be much more variable than the SG&A expenses in North America. John, you want to add anything to that? John J. Kita - Chief Financial Officer & Executive Vice President: Yeah. I think the only thing I would add is obviously wage inflation is going up faster in China, and so there is some inflation cost also in that SG&A number.

Okay. Just a follow-on on China, again. When you look at the headline news about the property prices or the residential prices in China, home prices going up and the household formation you talked about in your commentary, can you give us some color? Like as we talk about like some of the consumer markets kind of slowing down, you look at like auto companies talking about slower growth in China over the next five years, how does that hold actually with your 15% view over the next few years here? Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Bhupender, that's a great question. And again, John, you maybe want to add some color. As we look at it, in the appliance, in the consumer appliance categories, we are not seeing that, okay. And some of the things that we look at, if you look at the some of the forecasts we have IMF, UBS, they are forecasting the consumption component of GDP to grow between 7% and 8% in 2016. We are also seeing the sales of retail square footage of housing actually go up. So some of the indicators we are seeing in the macro economy, we hear different numbers and different parts of it, and certainly the export related industries are not doing well. But the consumption based industries seem to be doing well and we are seeing that in our market. John, anything you want to add? John J. Kita - Chief Financial Officer & Executive Vice President: Yeah. And I think just remember that in our China growth model, we're assuming about 7% market growth in water heaters. And we're comfortable with that as appliance sales seem to be going up 6% and 7%, and I think we're going to benefit from the fact that replacement is becoming a bigger component. So those are kind of our assumptions in our 15%.

Okay. Thanks so much. I'll be joining the queue. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: And maybe just one thing also, Bhupender, when we look at – for our 15% growth we look at a market growth of about 7%, and then the other components in terms of things like new products, market share growth, et cetera, are coming in to add up to our 15%. So right now, we feel comfortable with what we see.

Thank you.

Thank you. Our next question comes from the line of Charley Brady from SunTrust Robinson. Your line is open.

Hey. Thanks. Morning. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Morning.

Back on the China question, your comment on the replacement market coming to China, can you just maybe comment on what the replacement market is starting to look like in China and sort of what kind of growth you'd expect over the next 18 months, 24 months out of that? John J. Kita - Chief Financial Officer & Executive Vice President: Well, all we have, Charley, is kind of our survey data. And as we look in Tier 1 cities, if you go back two or three years, that percent was about 35% replacement, and now it's approaching 50%. And that's just logical as penetration in Tier 1 cities is probably approaching 90-plus-%, and units fail. I mean we talk about our units lasting eight years to nine years and we think maybe our competitors' last less, and now replacement is going to become a bigger component.

Does that over time, maybe in the next 12 months, have any positive impact on reducing the promotional spend that you've got to put out there, or is it just something you've got to keep doing because you're still expanding in the market, and now you've got the water and the air added into that? John J. Kita - Chief Financial Officer & Executive Vice President: No, I don't think that by itself results in lower promotional expenses, I don't know if you can see that, but I don't think that would. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: No.

But I guess do you see it coming down, I guess is where I'm getting at? John J. Kita - Chief Financial Officer & Executive Vice President: Well, I think without a doubt, as Ajita said, our long-term objective is to have SG&A as a smaller percent of sales. I mean we want to be able to leverage our top line growth. But right now, we're investing – we're incubating some businesses like Combi Boilers, like water treatment, like air purification. And as we expand the distribution outlets, we incur costs for display, we incur costs for promoters, et cetera. So that's still kind of the mode we're in right now. But clearly, our objective is down the road to be able to leverage that. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Right. And also, we are always very cognizant of these costs and doing things to bring them down. John said something that reminded me. In the past when we had – when we expanded, and we had new promoters, we spent a lot of money training those promoters. Now, we do obviously still train them, but we use things like WeChat and different tools that bring that promotion – the training cost of these promoters down very significantly, okay? So we are always looking at how we make those SG&A expenses go down and become much more productive. But at the same time, as we expand geographically and get into new categories, we are going to have to be spending, investing to make sure that we have the adequate presence in those categories with new competitors.

Great. Thank you.

Thank you. Our next question comes from the line of Matt Summerville from Alembic Global Advisors. Your line is open.

Hey, morning. A couple of questions. First of all, just with respect to steel prices moving higher as of late, and you mentioned this in your prepared remarks, how should we think about the cascade, if you will, or progression of margins as we move through the year, particularly in North America relative to where you are in Q1? And obviously mix may or may not play a role in that, so if you could fold that in, that would be great. John J. Kita - Chief Financial Officer & Executive Vice President: Yeah. I would say, it won't really affect margins much in the second quarter. As you know, there is a lag. But we certainly do see a progression of margins affecting the third quarter and fourth quarter because this increase really started happening in March, late February. And so it's going to affect us in the third quarter and fourth quarter.

I guess as a follow-up and unrelated, moving over to China, historically you've given some quantification of water treatment, air purification revenues. If you're willing to do that for the first quarter and what your expectation is for 2016, that would be helpful. John J. Kita - Chief Financial Officer & Executive Vice President: Yeah. Water treatment did very well, was up 30%. We would expect it would be up about 30% for the year. Air purification did quite well. As we've said it's a seasonal business. It was up about $8 million or $9 million. We didn't basically have a product the prior year. And as we've said in the past, it'll really be the fourth quarter and the first quarter will be the major selling points for air purification. So we're still comfortable with that forecast of $20 million or so, and it'll be primarily first quarter and fourth quarter. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: And we have some market leading products coming out during the year that'll help the fourth quarter season. So we feel pretty good about that forecast.

Great. Thanks, guys.

Thank you. Our next question comes from the line of Mike Halloran from Robert Baird. Your line is open. Mike P. Halloran - Robert W. Baird & Co., Inc. (Broker): Morning, everyone. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Morning, Mike. Patricia K. Ackerman - Treasurer & Vice President-Investor Relations: Morning. Mike P. Halloran - Robert W. Baird & Co., Inc. (Broker): So a couple questions on North America, first on the commercial side. Obviously, you're still expecting growth for the full year. What happened in the first quarter on the volume side? AHRI numbers seem to point to a decent environment still. Anything specific you'd point to there, and then what gives confidence (27:15)? John J. Kita - Chief Financial Officer & Executive Vice President: It really relates, Mike, to what Ajita said, the 55-gallon to 90-gallon electric category, that represented all of the growth. We just recently introduced products to better compete in that portion of the commercial water heater market and we expect to get our share of this market as the year progresses. But that's really the reason we were down a little bit while the market was actually, we think, up a little bit. Mike P. Halloran - Robert W. Baird & Co., Inc. (Broker): Okay. That makes sense. And then talk about the inventory levels on the residential channel in North America, obviously challenged in the first quarter on the comps side. Are you seeing the right sequential patterns in the numbers to help give some confidence in that up 100,000 plus units this year? And maybe just talk about what the customers are saying on that side? John J. Kita - Chief Financial Officer & Executive Vice President: Well, obviously, the first quarter was down, and quite frankly it was…

Thank you. Our next question comes from the line of Robert McCarthy from Stifel. Your line is open. Robert McCarthy - Stifel, Nicolaus & Co., Inc.: Good morning, everyone. Can you hear me? Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Yes. Patricia K. Ackerman - Treasurer & Vice President-Investor Relations: Yes. Robert McCarthy - Stifel, Nicolaus & Co., Inc.: Yeah. Okay. So I guess the question I have, obviously you had some price costs and some movement in this year in terms of North America, and I'll talk to Pat offline about some of the details of that in the back half. But just conceptually going forward, what are you thinking in kind of a steady state environment? You can get a couple of points of price, volumes will be a couple of points, what do you think you can get incremental margins on a sustainable basis in North America for the next couple of years? John J. Kita - Chief Financial Officer & Executive Vice President: Rob, we really haven't come out with a forecast on what margins are going to do in the next couple of years, and there is obviously a lot of variables in that. I mean we still expect that the industry is going to continue to grow, because that 1.1 million completions, that's below the norm we think. So we think that's going to continue to grow. We think that Lochinvar, given where they are specifically from a boiler standpoint, we think will continue to grow at 10%. And they obviously contribute at very attractive margins. So it's certainly our objective to grow margins, but we have not put out any forecast on what they're going to do in the next couple of years. Ajita G. Rajendra - Chairman, President &…

Thank you. Our next question comes from the line of Jeff Hammond from KeyBanc Capital Markets. Your line is open.

Hey, good morning. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Hi, Jeff.

Ajita, just wanted to get back to just this whole inventory dynamic. So when you talk to your distributors about inventories and sell-through and maybe their visibility into the contractor, what's kind of your conclusion on the inventory situation? And I guess around that, any kind of pause or digestion from customers, just given how big the price increase was here for NAECA III water heaters? Ajita G. Rajendra - Chairman, President & Chief Executive Officer: First of all, like I said, this is anecdotal, so I don't have real good facts and numbers, it's conversation. One of the questions we were wondering about was whether people cut back on inventories and had the same dollar investment as opposed to unit investment because of the price increase, which is what I think you're alluding to. From what I understand in talking to some of our larger customers, they did not do that, okay, because their replenishment is really based on units. And so there wasn't any cutback because of that. I think that inventory levels in wholesale are okay. Retail maybe a little low, wholesale are where they should be, normal level. John, anything you can add to that? John J. Kita - Chief Financial Officer & Executive Vice President: No. I think to answer your last question, we have not seen any pushback from the end customer. And I've said this in the past, I mean if you look at what a water heater costs, it is the cheapest appliance out there. It's at a six-year warranty. It's going to last 13 years to 14 years, and it's very energy efficient. So it is a very realistically priced product to the end consumer, which is obviously important. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: So if…

Just on China, you have quite a bit of cash trapped over in China. What's kind of the cost to repatriate that? We've heard about people kind of, with the FX volatility, wanting to kind of move cash out of China. How does that kind of inform your view on that trapped cash? John J. Kita - Chief Financial Officer & Executive Vice President: So we've taken out in the last two years or so $150 million of dividends out of China. When you take it out of China to Europe, you pay about a 10 – not about, you pay a 10% withholding tax to China. And then to bring it back from Europe back to the U.S., it would be an incremental low 20% type charge. So I mean that's the whole discussion going on in Washington, right, is it's very expensive to repatriate money back to the U.S. And until the government makes some changes in it, companies are going to keep it offshore. So we continue to look for opportunities in China. So at this time right now, we're leaving that money there, and we're comfortable with that.

Great. Thanks, guys.

Thank you. Our next question comes from the line of Scott Graham from BMO Capital Markets. Your line is open.

Hey, good morning. John J. Kita - Chief Financial Officer & Executive Vice President: Morning, Scott. Patricia K. Ackerman - Treasurer & Vice President-Investor Relations: Good morning.

So is there anything that you see in the market right now where the increase in steel prices that we've seen cannot be passed on to customers later this year? Ajita G. Rajendra - Chairman, President & Chief Executive Officer: I think, look, the pricing that we had last year is holding in the marketplace. In terms of the future, I really can't speculate in terms of what could or couldn't happen.

But correct me if I'm wrong that we're talking here mostly, right, about the distributors, because on the retail side, it's contracted. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Parts of it, yeah. John J. Kita - Chief Financial Officer & Executive Vice President: Yeah, a portion of it is.

Right. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: A portion of it is, so there are pass-through mechanisms for a portion of it.

And distributors like price increases as long as they're measured historically, right? Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Yeah. Scott, I'm not going to speculate on future pricing, okay? I mean that's something I've never done. If you look at over time, okay, let's look at the past rather than looking at the future, over time when there are significant material price increases, we've been able to pass that on to the marketplace. That's what the history has been. I can't speculate in terms of the future when it comes to pricing for obvious reasons.

No problem. Understand. Hey, was just wondering, piggybacking off of the cash questions, how does the M&A pipeline look? I mean is there any possibility of getting something done this year? Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Obviously, we can't talk about anything that's happening. But I can talk about there was a lull in the market in terms of potential – the activity level in the marketplace. There was a lull for a while, but recently things have picked up a bit. So there are the ups and downs, as you know, and the market is active.

Okay. Here's my last question. We're now toward the end of April, and water heaters are a pretty short cycle business. So I'm just wondering is, you made a comment during your remarks that you guys – or it may have been John, that you guys are expecting the pre-buy effects to impact some of April as well. Are you at a point today based on the most recent data, where the pre-buying maybe now looks more behind you? John J. Kita - Chief Financial Officer & Executive Vice President: Well, I'm not sure, Scott, the pre-buy was last year. That was when the pre-buy happened was last year, and it really happened kind of up through middle of April. I think our order rate, I'd tell you in April is about normal. So again, I think we have favorable comps the last half of the year, and we would hope we're going to see completions grow by 100,000 units, 150,000 units. So we'll certainly have better visibility as we get through the second quarter, but we think right now it's reasonable.

Right. No, John, that's what I'm saying. I know that the pre-buy was last year. John J. Kita - Chief Financial Officer & Executive Vice President: Yes.

What I'm saying is that have you seen in the recent data, where you're now largely done with that comp that the order rates are normalizing and it sounds like you are seeing that. John J. Kita - Chief Financial Officer & Executive Vice President: Yeah, but it's very short period, right, because again the pre-buy went through April 15 of last year, so I mean we're looking at a very short period.

Understood. Thanks.

Thank you. Our next question comes from the line of David Rose from Wedbush Securities. Your line is open.

Good morning. Thank you for taking my call. I had a couple of just quick follow-up questions; most of mine have been answered. I was wondering if you could break out – you broke out the water treatment and purifier sales increases in China, but I didn't capture the water heater number anywhere. What was the growth in water heaters in China, residential? John J. Kita - Chief Financial Officer & Executive Vice President: We really haven't given that out, but both our electric and instantaneous were up.

Okay. Up in mid-single digits, low-single digits? John J. Kita - Chief Financial Officer & Executive Vice President: It depends. I mean gas continues to grow faster than electric, which we expect.

Okay. And then lastly is on Lochinvar. I didn't hear a growth number out of Lochinvar, maybe I missed it. What did they grow in the quarter? John J. Kita - Chief Financial Officer & Executive Vice President: Yeah. Lochinvar had an interesting quarter. As we said, they were up about 15% on the boiler business, but they were down significantly on the residential side. And the reason for that was last year they had a pre-buy. Their units were up 44% compared to the prior year, while the industry was only up 14%. This year, their units were down 39% versus the industry as we said was down 16%. So their residential water heater sales were down over $2 million. So when you incorporate that into the boiler growth, they were up about 3% on a net basis, I think 4%, 5% on a gross basis. And why we're still comfortable with the 10% is they have favorable comps the last half of the year and their new boiler products have been very well accepted in the marketplace. So we think this residential piece was just a lumpy kind of quarter-to-quarter issue. Ajita G. Rajendra - Chairman, President & Chief Executive Officer: Yeah, with a very high buy-in last year. John J. Kita - Chief Financial Officer & Executive Vice President: Yes.

Okay. All right. That's helpful. Thank you very much.

Thank you. And that looks like all the questioners that we have in the queue at this time. So I would like to turn the call back over to management for closing remarks. Patricia K. Ackerman - Treasurer & Vice President-Investor Relations: Thank you all for joining us today. Please take note that we will participate in numerous conferences during the second quarter. Those are Oppenheimer in New York on May 10; KeyBanc in Boston on June 1; Deutsche Bank in Chicago on June 8; Stifel in New York on June 13; and William Blair in Chicago on June 15. Have a wonderful day.