Good day, ladies and gentlemen, and welcome to the A. O. Smith Corporation Third Quarter 2016 Earnings Conference Call. As a reminder, this may call be recorded. I would now like to introduce your host for today's conference, Ms. Patricia Ackerman, Vice President of Investor Relations and Treasurer. You may begin, ma'am.

Thank you, Rania. Good morning, ladies and gentlemen, and thank you for joining us on our 2016 third quarter results conference call. With me participating in the call 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 3.

Thank you, Pat, and good morning, ladies and gentlemen. The third quarter of 2016 was another excellent quarter for A. O. Smith, setting a record for sales. We continue to see healthy end markets for our consumer products in China and commercial water heaters in the U.S. Here are a few highlights. Sales grew 9% to a record $684 million. Excluding the impact from the strengthening U.S. dollar against the Chinese and Canadian currencies, our sales grew 11% in the third quarter. China sales were up 17% in local currency. Third quarter net earnings of $0.47 per share were 15% higher than our earnings per share during the same period last year. We are delighted to welcome the Aquasana team to the A. O. Smith family through our acquisition of the US Water Treatment Company in early August. Aquasana fits squarely in our acquisition strategy to grow our core and expand into new geography. In this case, we are expanding our Asia-based reverse osmosis water treatment platform into the U.S. We are also excited about the opportunities Aquasana's carbon-based products bring us to cross-sell water treatment products in China. We continue to review our capital allocation and dedicate a portion to return to shareholders. During the first three months of the year, we repurchased approximately 1.3 million shares for $100 million. We increased that dividend by 26% six months ago. We also announced a 2-for-1 stock split, which became effective on October 6. John will now describe our results in more details, beginning with slide number 4.

Thank you, Ajita. Sales for the third quarter of $684 million were 9% higher than the previous year. Net earnings of $83 million improved 13% from 2015. Earnings per share of $0.47 improved 15% over last year. Sales in our North America segment of $451 million increased 8% compared with the third quarter of 2015. Increase in sales was primarily due to higher volumes of residential and commercial water heaters in the U.S. The purchase of Aquasana in August added $6.2 million to our North America segment sales. Rest of World segment sales of $240 million increased 11% compared with 2015. China sales increased 17% in local currency, driven by higher demand for our water heaters and water treatment products. On slide 6, North America operating earnings of $101 million were 11% higher than segment operating earnings in the previous year. An operating margin of 22.3% was higher than the 21.7% operating margin one year ago. Higher volumes in the U.S. were the primary driver of the improved North America segment financial performance. Rest of World operating earnings of $31 million improved 14% compared with 2015. Higher China sales were partially offset by increased selling, general and administrative expenses in China. Segment operating earnings were negatively impacted by approximately $2 million due to currency translation, higher selling costs in China to support expansion in Tier 2 and Tier 3 cities and higher advertising costs to promote our products in China during the Summer Olympic Games and the European Football Championship were the primary drivers of higher segment SG&A expenses. Third quarter segment operating margin of 12.9% was slightly higher than one year ago primarily due to smaller losses in India. Our corporate expenses were higher in the third quarter compared with the year-ago period primarily due to $1.2 million of…

Thank you, John. We expect our businesses will collectively grow approximately 8% to 8.25% in local currency and approximately 6% to 6.25% in U.S. dollars in 2016. The assumptions for currency underlying our organic growth forecast are at current rate, with the exception of continued depreciation in the China currency rate to average RMB 6.8 per dollar in the fourth quarter. Specific to our North America segment, we will experience the full impact of higher steel costs in the fourth quarter due to the timing of steel cost realization in our P&L. We expect slower growth in our Lochinvar-branded sales than we've originally projected. Our Lochinvar-branded products have historically grown as a result of the transition from lower-efficiency boilers to higher-efficiency boilers, new product introduction and market share gain. In 2016, we expect our condensing boiler business to grow at 10%, which will be essentially offset by a decline in water heater and non-condensing boiler volume, resulting in minimal growth this year. These factors, in addition to the assumptions John discussed earlier, lead to our expectation that our North America segment operating margin will be between 21.75% and 22% in 2016. This implies North America margins will be down sequentially in the fourth quarter as a result of several unusual events. First, the incremental ERP spend will impact margins negatively by over 100 basis points. Second, we expect lower commercial volumes in the fourth quarter than in the third quarter as we encourage our distribution partners to hold more inventory in advance of our October 1 SAP implementation, which included our commercial water heater plants. And, third, we will experience the full impact from higher steel costs in the fourth quarter. Specific to our Rest of World segment, we are a consumer products company in China, which distinguishes us from…

Thank you. And our first question comes from the line of Scott Graham from BMO Capital Markets. Your line is now open.

Hi. Good morning.

Good morning.

Just wondering if we could – on the third quarter margin, it looks like steel impacted less in the third quarter than it will in the fourth quarter. Could you give us – I know you said, John, and certainly in the text you said it was volumes. Was there anything else impacting the North American margin in the quarter? Was there an increment there from Aquasana that helped?

No, Aquasana has very little impact in the quarter. In fact, it had a negative of about $700,000 or $800,000, but that's in corporate expense because those were the expenses we talked about regarding the acquisition related. So, no, it was primarily the residential and commercial volumes that dropped to the bottom line, if you will. We did have higher steel costs that was partially offset by steel – but price – partially offset by price, et cetera. But that's kind of the magnitude of it.

Got you. Two other questions. Does the one's weakness – like, if we sort of use the year-end – the quarter-end rate, does that go from sort of $0.01 to $0.02 in the fourth quarter and then stay there?

I'm not sure of your question, if you used the fourth quarter EPS or the fourth quarter operating margin or what.

So, from your press release, you indicated there was about a $2 million segment income hit, which translates to just a little bit below $0.01. And just – I was just wondering if that's an average for the quarter rate. So, based on the end of the quarter 3Q rate, does that – is that now $0.02 going forward?

Two million currency (18:25) rate you're talking about?

Yeah...

Yeah – no, I think, in the fourth quarter, it will be similar to maybe a little bit higher because we're using a 6.8 rate. So, it'll be slightly higher than $0.01. But, yeah, a little bit higher than a penny.

Okay. Last question. In the last couple of conference calls, you guys have said that you're looking at more deals this year than you have in some time, both from a change in some of your external resources but also from internal resources. Could you give us an idea of, kind of, what the pipeline looks like? I know good. But is this something that we can expect six months – some type of monetization. I know Aquasana is done. I get that. But just kind of looking for more – size-wise, just some type of thumbnail sketch on what you think maybe the next six months looks like.

Scott, this is Ajita. The pipeline is active as it has been. But for obvious reasons, I can't comment on something that could happen in the future vis-à-vis acquisitions. We're active. The pipeline is interesting, and that's about all I can say at this time.

All right. Let me ask the question in different way. Are you looking at a lot of Aquasana-sized acquisitions? Are you looking at some larger deals? And regionally, could you give us an idea of where you're more active, U.S. or...

There's a wide range of deals. There are little ones and there are larger ones. And that's been – that's about what it's been in the past.

And in all geography.

Yeah.

In all geography...

Around the world.

Got you. Okay. Thanks.

And our next question comes from the line of Alvaro Lacayo from Gabelli & Company. Your line is now open. Alvaro Lacayo - Gabelli & Company: Good morning. I guess, I just wanted some commentary about your expectations for both the residential and commercial water heater shipments and how they've changed and if Q3 had any sort of unique choppiness to it, and then how all that sort of translates to the updated Lochinvar guidance with respect to the water heater piece and the non-condensing piece?

Well, I'll take a shot at it, Ajita, and then you can – I would say that the residential buy-ins we saw in July, which is public, where the industry was up 9% or so, and as we looked at August and September, we think it was up more than that. So, I think we're tracking pretty well to where we thought. I would tell you, on the last call, we said 8%, 9% for the year. We would probably say 8.8% to 8.9% now. So, we're tracking pretty well where we thought. And on the commercial side, same sort of thing. I think we talked about a 2.25% to 2.30% (21:37) level. We saw the second quarter up 30%, which we know is being driven by that 55 to 90 gallon electric. We saw July up about 28% so it's kind of tracking at that level, so I don't think any surprises. Now, to answer your question on Lochinvar, it's really two things. They had a very strong residential market last year, and that's come back to bite us this year. They're going to be down probably 15%. And the non-condensing, which quite frankly we think is probably a shrinking market because of the move to condensing, has got quite competitive and will be down kind of 15% to 20% in that part of the market. Now, it's a relatively small part. It's just over 5%, but it hurts the growth rate. The way we're going to remedy that is we're coming out with some new non-condensing products late this year that we think will help us in that category, as well as other products that – two other categories that Lochinvar has coming out at the end of the year. So, they are having a difficult year from a growth standpoint. Their margins and margin dollars are growing, so that's very positive. And we think, with the new product introductions that are going to happen next year as well as some help from some of their key verticals, their education has been weak and their multifamily – that category – those categories have been kind of flat. We would hope they would grow a little bit. So, going forward, we're comfortable with that 8%. We've modified it a little bit to really just reflect the growth that we've seen historically and kind of modeled that going forward.

Yeah. Just to clarify, when John talked about the verticals, he was talking about the full market verticals have been tapped – those verticals that have been tapped. The only thing that I would add from a Lochinvar perspective is to just reinforce that the condensing boiler part is still growing double-digit, which is what we expect. And the other is that, in going back to residential water heaters, from what we are hearing anecdotally from our distributors, the inventories in the channel seem to be in good shape. And again, I want to remind you. We don't have real good information about that, but we do get anecdotal feedback that is usually pretty good. And the inventories seem to be in reasonable shape. Alvaro Lacayo - Gabelli & Company: Yeah. I mean, it seems like a lot of the moving pieces are related to sort of these one-time items and things that happened last year. So, I was surprised to see sort of a long-term growth rate come down versus just – maybe just the Q3 and Q4.

You mean with Lochinvar? Alvaro Lacayo - Gabelli & Company: Yeah, correct.

Yeah. What happened with Lochinvar last year, and we talked about that at length, is China hurt them because they were down significantly in China last year, as well as the Canadian market last year hurt them. So, again, we just kind of relooked at where they are this year, the new product introductions. Historically, when we've owned them, the condensing has grown 10% and we think we are very much in a position to grow it at 10% going forward, and that's about 60% of the business.

And the water heater part is – our guidance really gets in line with the rest of our North American water heater business at around 4%. Alvaro Lacayo - Gabelli & Company: Got it. Okay.

So, it's just a logical shifting. Alvaro Lacayo - Gabelli & Company: Okay. And then, it will...

When you look at our total portfolio, it's still at the 8% type of growth rate that we've been talking about. Alvaro Lacayo - Gabelli & Company: Okay. And then, I guess, with regards to the Aquasana acquisition, maybe if you could just go over some of the synergies and how you'll be able to leverage the platform that you built out in China to support Aquasana in the U.S. and vice versa.

Yeah. What we've said is it's a very complementary acquisition. So, we are very, very strong in China in the reverse osmosis market. We do not have much in the way of carbon product. In the U.S., Aquasana is very strong in the carbon-related product. They have some RO but it's minimal. So, we think there is truly some sales cross-selling opportunities. One of their important products is a whole-house filter, and that is installed by plumbers. We think we have some potential capability there to expand that. So, much of the opportunities are revenue synergies that we're very comfortable that we can end up getting. And then, on top of that, they have direct marketing capability that we think in the long run will be beneficial to us.

I think, just to add to that, from an acquisition and integration perspective, it's just about two months under the belt and things are on track, no surprises. And things are as we expected.

Yeah. What I didn't say is it obviously gets us into the North American market, which is a...

For water treatment.

Yeah, for water treatment, which is a large market. Alvaro Lacayo - Gabelli & Company: Okay. Thank you very much.

And our next question comes from the line of Matt Summerville from Alembic Global Advisors. Your line is now open.

Thanks. Good morning. I think, Ajita, it was in your closing remarks. You made a comment that you were encouraging some of your distributors to, sort of, I guess, for lack of a better term, pre buy, stock up, buy more than would normally be necessary ahead of I believe you've said an SAP implementation. Can you talk a little bit more about that, if that event has already transpired, how sort of that progressed, how the systems are functioning and, I guess, how much pull-forward, if you will, was there in the Q3, if I understood your comments correctly?

Sure. We had three major factories and a distribution center go on live on SAP. And that's a fairly large portfolio of factories going live at the same time. The date was October 1. It was the go-live date, and all these things are in fairly long transition. Things are on track. I wouldn't say it's completely error free. When someone is doing an SAP transition and they say it's error free, I don't know how to say this nicely, but there's probably more behind the curtain, okay? But things are on track. They are where we expect. The teams are – when issues come up, we've been addressing them very quickly. And so far, the customer is not being impacted any more than we expected and we encouraged some of our customers to buy ahead just because it's a prudent thing to do, and we've done that with every one of our other SAP implementations with other factories. And there was some amount of buy-in, I don't have an exact number, in commercial. In residential, there was hardly any.

Yeah, that's what we would have concluded from the numbers. In commercial, there was some buy-in, but very little on the residential side.

Yeah. But the gist of your question, in terms of how the transition is going and things like that, it's on track.

Got it. And then, just as a follow-up, with respect to China, what's your expectation for the full year for water treatment and air purification revenue? And then, just moving over to India. Can you talk about at what point – if you have a vision to break even, when you think that business starts to break even? Thank you.

I'll start. Water treatment had a very, very strong quarter. In the third quarter, it was up over 40%. Year-to-date, it's up, approaching 40% in local currency terms, so above 30% in U.S. dollars, and we expect – that's what we expect for the year. So, the water treatment business is doing very, very well. Air purification is on track. I think, at the beginning of the year, we said that we would be double sales from about $10 million to $20 million. We're on track to do that. We think we could be a little bit higher than that. So, I'd say both those businesses are doing as good or better than what we expected. With respect to India, you really got to break it into two categories. We have a water heater business there, which, I think we've said publicly, its sales are about $15 million to $16 million now. Let's say, this year, if we need to break even, at probably $30 million to $35 million to get that to break even. What we need is we need some help from the economy growth in housing, which hasn't taken place in the last two years. And then, we have a water treatment business which we've said is in its infancy. And this year will result in a (30:53) couple million dollars of it. We're in about six cities, and that's going to take – we haven't really done the break-even analysis yet on that business.

Yeah. Just to add a little bit of color to both those. In terms of India, the economy is doing well in many sectors, but not in housing and that's what impacts us. So, it's disappointing from that perspective, but we continue to add distribution and gain market share, which has been our game plan. In China, as we look at the growth that we've seen in water treatment and air purification, the really exciting part of this is the fact that, in China, what we have is very strong consumer brand and very strong distribution. And about four years ago or five years ago, we said – we looked at how do we translate that brand into new categories beyond water heating. And obviously, we've been very successful as we move into water treatment, and we think it's a little too early to spike the ball. But we've been on track or ahead when it comes to air purification. And that just tells us and gives us the confidence that there are a number of other categories and segments that we can get into, new segments where we can leverage our brand and our distribution to continue this type of growth in China. So – and when it comes to India, it's the same type of game plan. It's going much slower. But building the brand, building distribution and then saying how do we expand in terms of our categories to be able to access those hundreds of millions of people getting into the middle class.

Got it. Thank you, guys.

And our next question comes from the line of Bhupender Bohra from Jefferies. Your line is now open.

Hi. Good morning, guys.

Good morning.

Good morning.

Hi. So, just a broad question here. When I look at A. O. Smith, like, if you look at the gross margins over the last five years, you have done an excellent job. It used to be a 30% gross margin business. We are inching or have been consistently above, like, 40% over the last four quarters, five quarters here since the second quarter last year. How should we think about – I mean, this is kind of a light manufacturing company. How should we think about going forward over the next two years? And in the previous call, John had mentioned about – think about North America margins starting point to be like 21.5% to 22%. Can you comment on that going forward? Like, should we think about A. O. Smith has to be kind of a 40%-plus gross margin business with North America to be around that 20%-plus EBIT margin?

Well, yes. We're running about 40%, and we've kind of said that, historically, there's three businesses above that, our commercial, our Lochinvar, and our China. And our residential is below that. So, we certainly think those margin – those gross margin levels are sustainable going forward. You can have some volatility depending on steel pricing, et cetera. But we certainly think that's a realistic starting point. I was asked on the last call regarding margins. And I guess, my comment was we have not done the plan yet. We're in the process of doing it right now. But I certainly think that 21.5% to 22% is a good starting point. Now, we've got to incorporate things like Aquasana into that plan, which has a little lower margin. But we certainly think that's a realistic starting point. And now, it's our objective to obviously continue to grow margins. We've said that once we get SAP in, the objective is to optimize it next year. But certainly, we need to start getting some benefit from SAP as we look into the 2018 period, et cetera. Also, we think our spend on SAP next year is less that hits the expense. We don't have that finalized. It's probably $5 million to $10 million less, so we have some positive things helping us with margins, et cetera. And certainly, it's our objective to continue to grow margins.

And also, just to add a little bit, Bhupender, we – when you look at – we have capacity. Most challenged margin business, as John mentioned, is our residential water heater business. And as you know, we have a deficit in housing that's not going to come back real fast, but it will come back. And our incremental margins in our residential segment are in the 30% type of level. So, there is leverage opportunity also as the volume grows. And this – at this stage, again, John mentioned SAP and our ERP system cost. But we also have a number of businesses where we are in the investment stage, probably more so as a portfolio than we would on a longer term basis. And – but all of those are investments for growth. So, as those markets get traction and continue to grow, there's certainly leverage opportunities in every one of those – the segments that we talk about. Lochinvar, we've consistently increased our margin. North America we've talked about. And China, because it's a consumer business, it'll be a little slower. But the opportunity to leverage is certainly there.

Okay. Thanks a lot. Just a second question on price increases. I know, Ajita, you had mentioned that price increases went pretty well. Can you give us what would be the impact – or have they been realized, like, most of it or are we going to see that realization happen in the fourth quarter on both, like, residential? And was it also applied towards commercial?

We had a price increase effective August 1, and we are comfortable with what our guidance is in terms of how the pricing is impacting us. In terms of the marketplace and competitively and things like that, again, for obvious reasons, I'm just not going to comment on what's happening from a competitive perspective. But we are comfortable with the guidance that we have and the pricing that's built in there.

And I think we said in the last call that it ranged from 5 to 8 (37:40) and to answer your question – apply to residential and commercial.

That's right. I missed that. It did apply to both.

Okay. Got it. Thank you so much.

And our next question comes from David MacGregor from Longbow Research. Your line is now open.

Yes. Good morning. Just a few quick questions here. You've taken your cash flow from operations guidance down from $340 million to $325 million. Was that just the greater working capital that you referenced in your remarks?

It was primarily the pension contribution. We decided, in August, to make a pension – voluntary pension contribution, and that was the primary reason.

About $30 million.

Yeah. So, $30 million, $20 million or so, after tax.

Yeah, after tax...

Got it. Thanks. And then, secondly, when you were talking about your North American margins and the fact that you expect them to be down sequentially in 4Q, you talked about the ERP being negative or greater than 100 bps. You talked about the reduced commercial volumes. And then, you talked about higher steel prices. Is there any chance you could quantify for us just what you're expecting in the way of cost inflation pressure on North American margins there?

Yeah. We really haven't disclosed that. But we – I think we said on the last call that, sequentially, steel prices were going to go up because we have a delay, if you will, on what the impact is. And I can tell you the fourth quarter will be the largest hit compared to third quarter.

4Q will be the largest?

Yeah, fourth – Q4 will be the largest.

And then, have you – yeah, I realize you're not going to provide a lot of detail on this at this point. But can you say whether you've settled on your 2017 steel agreements yet, or is that still in negotiation?

Those are still in negotiation, I believe.

Okay. Thanks – great. And then, the last question is just on China. And I'm wondering if you can talk about any change in your share in the tier 1 markets and the extent to which you're seeing certain local brands trying to reposition to play more in the higher price points?

Well, I'll take it, Scott. (39:34) You were just there. So, you can probably say. I don't think we've seen, I mean, the data we looked at where units sold over $400 were still maintaining our share there. I think there's – it's certainly very competitive in the lower end, and I'll say the middle tier. But I think we still have very, very large market share on the high end. And we haven't really seen any change in that.

No – and John is right. I was there last week in both Vietnam and in China and the teams are excited and very upbeat about next year and where we're headed, the new products that are coming out. And so, we feel pretty good about what – our guidance for China.

Great. Thank you very much.

And our next question comes from the line of Jeffrey Hammond from KeyBanc. Your line is now open.

Hey. Good morning, guys.

Good morning.

Hi, Jeff.

Hey. So, I just wanted to come back to price and the margin. So, your fourth quarter guidance, does that reflect that you're getting those price increases you put through?

Yeah, I think it assumes the price increases we talked about. Now, a couple of things. We also said on the last call that, because of some project work, et cetera, you don't necessarily get all the pricing at that time, and we said some of that would carry over into the first quarter, if you will. But, yeah, for the most part, that does assume that. The biggest impact, as we talked about earlier, is SAP is going to add $5 million to $6 million in the fourth quarter compared to the third quarter and $7 million compared to the prior year. So, that's certainly having an effect on fourth quarter margins that we don't think, going forward, will have that impact. And then, the stronger commercial, which was unusual for the third quarter, has – strong commercial is what it did. But again, that was due to the pre-buy.

Okay. Because your implied margin is, kind of, right around 20% or sub-20% for the fourth quarter versus 23% in the first 3 quarters. So, it seems like, I guess, as you look into 2017, I guess, SAP costs roll off and the commercial issue goes away, but the steel dynamic stays with us? Is that the way to think about the moving pieces?

Well, yeah. That's one way to look at it. But I guess, if you talk about a 20% as your starting point and you adjust for SAP, you're over 21%. And then, you adjust for a kind of a leveling off of that – of commercial, you kind of get back to that starting point range that I talked about earlier, that 21.5% to 22%.

Okay...

I mean, clearly, steel is having impact on the margins, without a doubt. We did have a price increase, but we didn't necessarily cover margin with that.

Okay. That's helpful. And then, the – in the – so, you mentioned the res industry numbers. How did your growth line up with that in the third quarter? And then, along those lines, I think you had a product hole in the – in that kind of small commercial category. How are you performing there as you've kind of filled that product hole?

I think that the quarterly market share was pretty similar, up a little bit from the previous quarter. So, again, we're forecasting what the industry is going to be. So, residential is holding pretty well for us. We did introduce that product in the 55 to 90 (43:14). We have gained some share in that. Well, I'll also tell you, we're not back to where our overall commercial margin – I mean, market shares, but we have made progress on that.

Okay. Great. Thanks, guys.

And our next question comes from the line of Ryan Connors from Boenning & Scattergood. Your line is now open. Ryan Michael Connors - Boenning & Scattergood, Inc. (Broker): Great. Thank you. I wanted to discuss a little bit of Aquasana and, specifically, the recent news in, I guess, Milwaukee that the company is in talks with the city about rolling that product out in certain homes where there are lead service lines remaining in operation. Recognizing that you can't necessarily disclose too much on that specific deal but – other than what's in the press. But obviously, that issue is not unique to Milwaukee and there's a lot more attention to this lead issue post Flint, Michigan. So, my question is, how significant a growth opportunity do you think that is for Aquasana, that type of sell-in through a partnership with a municipality? And is that a transformational opportunity for Aquasana, or is that just incremental. And then, also, was that a specific element of the rationale for that acquisition? Or is that something that you're just sort of learning now more about as you get involved with the business?

I'll try to answer all of those. The specific issue in Milwaukee was not a driver for the acquisition. But clearly, the fact that there are lead issues around the country like Flint and many other cities was clearly an indicator for us, among a lot of other things that there is a water treatment opportunity in the U.S. And we have world-leading products that take care of all of these types of pollutants, especially world-leading reverse osmosis products. So, we clearly see the opportunity to bring that technology to the U.S. Aquasana was a great acquisition and a vehicle to get those products into consumers' hands and using the channel that we really don't have a lot of expertise in, which we expect to grow in the future, obviously, in terms of digital reach into every home. The specific instance in Milwaukee, we are working with the local government and the United Way and other agencies, especially since we live here, to get the product out and help as much as possible. That's not going to be necessarily transformational for Aquasana, but it really has a terrific impact in promoting the name and getting the name out there as being a leader in the solutions for some of the problems that we have in many of our cities. So, long term, that's absolutely going to help. Ryan Michael Connors - Boenning & Scattergood, Inc. (Broker): Yeah. And I guess, just following up on the topic. I mean, I guess, one of the things that really jumped out at me reading what the city had said was that it was going to cost them something like $800 million, if they wanted to replace all these service lines. But yet, they could buy every single affected home – the city could buy each home a water filter and it would cost less than $10 million. So, the – to the extent those are the two options for dealing with this issue, it seems like a no-brainer. Is there a model here where the cities actually get involved via some kind of a rebate or something like that and actually fund some of this? Or do you still think most of the sales will be funded by the homeowner?

I think it's going to be a combination. I think cities will get involved and fund some of this. It's hard to tell. But the city of Milwaukee is getting involved. And again, I think that the big opportunity is not only getting the product out there, but getting a brand name out there in terms of being a leader in this category. Ryan Michael Connors - Boenning & Scattergood, Inc. (Broker): Got it. And then, just one final question on that. So, following up on the acquisition discussion earlier, do you feel that, with Aquasana, you've now got the platform you need in water treatment in the U.S.? Or do you feel like there could be a further roll-up on your part that you would still be interested in adding to that platform via acquisition?

Aquasana is a start. We would certainly be interested in appropriately adding to that platform. And that's an ongoing, and that's clearly on strategy, the way we've described our strategy. Ryan Michael Connors - Boenning & Scattergood, Inc. (Broker): Got it. Well, that's very helpful. Thank you.

And our next question comes from the line of Charlie Brady from SunTrust Robinson. Your line is now open.

Hey. Thanks. Good morning, guys.

Good morning.

Wanted to just drill down on the Rest of World op margin assumptions. So, you're saying it's over 13% – slightly over 13% for the year. It implies a pretty strong Q4, call it, 13.5%. Is that a function of just some of the promo advertising spending dropping off from the level it was in Q3? And I know you're not giving 2017 guidance. But would you expect that number flat with where you are in 2016? Or do you see it ramping up again?

Well, I think it's a combination of two things. Traditionally, our fourth quarter in China is our strongest quarter from a sales standpoint. We think that will continue. And, yes, I would think that our advertising as a percent of sales will probably be a lower percentage than what it was in the third quarter because of those two events we talked about. So, I think both of those help, in effect, get the margin – I mean, a relatively strong margin in the fourth quarter. We have not talked about or – where our planning phase. Ajita and I have talked at length. Certainly, it's our objective to grow North – Rest of World margins, and you do that with a combination of things. You leverage the advertising spend and the SG&A in China. Number two, you turn a couple of the businesses that right now we're incubating like air purification. That's going to lose probably $5 million this year. We'll move that towards breakeven as we get higher sales level. We're also incubating the commercial water treatment business where we'll lose $3 million or $4 million this year. So, I think those are ways to grow margin. And then, we talked about we need to get India on a path of improved earnings. So, we haven't come out with an estimate. But certainly, those are some of the things we're looking at.

And also, just to add to that, when we talk about these incubating businesses in China like air purification and commercial water treatment, et cetera, it – we usually have what I call a can-see plan, which is a multi-year plan, that says here's how we are going to get – here are the specific projects and here's how we're going to get our growth margins to the level that – then, we need for it to start contributing to the bottom line. So, it isn't – it's more than we hope it will get there. There's very specific things we know we have to do and executing to get those margins up there just like we did in water purification.

Yeah. That's helpful. Thanks. And just on the Chinese water heater market, I know it's tough to regauge this. But can you talk a little about what you're seeing in terms of the replacement market there. We're getting to the lifetime expectancy of some of these water heaters and kind of what that might add to growth going forward. Are you seeing much of it today?

We are – I'll take a shot. Then, John, you can jump in – from – again, there isn't any real good data, but they have reasonable data in terms of our own warranty cards and things being returned, so where people tell us where we ask the question as to the need for replacement or not. And in the largest cities, we think the replacement is around 50% and, in the smaller cities, probably 30% to 35%. That's the kind of range that we are seeing from the somewhat limited dataset that we have.

(51:49) about comfort level from the standpoint, Charlie, that when we talk about the market – the water heater market growing at 7%, we think that's going to contribute to that.

Right.

And also, what we also see is that the – since the A. O. Smith is at the kind of the top of the food chain as a high-end brand, it's an aspirational brand. So, when people replace lower-end products, very often, they upgrade to the higher-end brands which is our brand.

Got it. Thank you.

And we do have a follow-up from the line of David MacGregor from Longbow Research. Your line is now open.

Yeah. Thanks for taking the follow-up. Just quickly, the 17% organic growth in China, how much of that was from expanded distribution versus kind of same-store sales?

We did expand our distribution, but I really – we don't have a good way of really measuring that. We've tried to do same-store sales, but we've had difficulty because we're continually opening stores and we're continually closing stores that are inefficient, et cetera. I would tell you, the majority of it is the growth in the market and that certainly has been a contributor.

Thank you very much.

And that does conclude our question-and-answer session. I would now like to turn the call back to management for any further remarks.

Thank you for joining us today. Please take note that we will participate in several conferences during the fourth quarter. Goldman Sachs in Boston on November 2, Baird in Chicago on November 8, and Northcoast in New York City on November 10. Have a wonderful day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a wonderful day.