Good day and thank you for standing by. Welcome to the second quarter 2021 A. O. Smith earnings call. At this time, all participants are in a listen- only mode. After the speaker presentation, there will be a question- and- answer session. To ask a question during the session, you need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Ms. Patricia Ackerman. Thank you. Please go ahead, ma'am.
Good morning, ladies and gentlemen, and welcome to the A. O. Smith second quarter results conference call. I am Pat Ackerman, Senior Vice President of Investor Relations, Corporate Responsibility and Sustainability, and Treasurer. Joining me today are Kevin Wheeler, Chairman and Chief Executive Officer, and Chuck Lauber, Chief Financial Officer. Before we begin with Kevin's remarks, I would like to remind you that some of the comments that will be made during this conference call, including answers to your questions, will constitute forward-looking statements. These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters that we have described in this morning's press release. Also, as a courtesy to others in the question queue, please limit yourself to one question and one follow-up per turn. If you have multiple questions, please rejoin the queue.
I will now turn the call over to Kevin, who will begin our prepared remarks on slide three.
Thank you, Pat, and good morning, everybody. Our global A. O. Smith team delivered second quarter EPS of $0.73 on a 30% increase in sales, demonstrating solid execution and operational agility despite supply chain and logistics challenges, along with rapidly rising material costs. I am thankful for my fellow A. O. Smith employees who tirelessly navigated through the pandemic, followed by weather-related production disruptions, and continue to navigate supply chain constraints. I appreciate the creativity and the collaboration of our team to find solutions that keep our customers supplied with water heaters and water treatment products. Boilers sales grew 35%, driven by strong demand as a result of completed projects carried over from 2020, as well as an active education end market. For reference, our boilers sales were down 15% in the second quarter of 2020, which was negatively impacted by the pandemic.
North America water treatment grew 17%, driven by continued consumer demand for home improvement products, which provide safe drinking water in the home. Our water quality dealers performed particularly well in the quarter, and online promotional shopping days also boosted sales. Consistent with our strategy to build out distribution for North America water treatment, we acquired Master Water Conditioning Corporation. The acquisition supplements our presence in the Northeast, and we are excited to add expertise and local water conditioning solutions in this region to our family. Our North America water treatment sales, including this acquisition, are expected to be over $200 million in 2021. Our volumes of U.S. tank residential water heaters increased in the second quarter.
We believe the strong demand is a continued result of extended lead times caused by production constraints due to strain in the supply chain, buying in advance of price increases, and incremental new home construction. After our weather-related disruptions in production, which we talked about on our first quarter call, we have seen month-over-month sequential improvement, and certain of our suppliers recently noted they see moderation of demand and supply imbalances. We remain vigilant as the imbalances are spotty, and we expect supply chain challenges to be with us through the remainder of the year. In response to continued material and logistic cost increases, we recently announced a fourth price increase of between 10% and 12%, effective August 1st.
In China, sales increased over 26% in local currency, driven by growth in each of our major product categories, including electric and gas tankless water heaters and water treatment products, including commercial and replacement filters. I will now turn the call over to Chuck, who will provide more details on the second quarter, beginning on slide four.
Thank you, Kevin. Record second quarter sales of $860 million increased 30% compared with 2020, which was negatively impacted by the pandemic. Second quarter net earnings increased 74% to $118 million, or $0.73 per share, compared with $68 million or $0.42 per share in 2020. Please turn to slide five. Sales in the North America segment of $604 million increased 26% compared with the second quarter of 2020, driven by higher volumes of water heaters, boilers, and water treatment products, and inflation-related price increases. Rest of the World segment sales of $263 million increased 39% from the second quarter of 2020. Growth in each of our major product categories in China contributed to local currency growth of 26% in the quarter. Currency translation of China sales favorably impacted sales by approximately $20 million.
India sales more than doubled in the second quarter, despite the recent surge in cases of COVID-19 in that region. North America segment earnings of $142 million increased 34% compared with the second quarter of 2020. The impact to earnings from higher volumes and inflation-related price increases was partially offset by higher material and freight costs. As a result of these factors, segment operating margin of 23.5% improved compared with the second quarter of 2020 segment margin of 21.9%. Rest of the World segment earnings of $22 million increased significantly compared with the loss of $5.8 million in the second quarter of 2020, which was negatively impacted by shutdowns and reduced consumer spending resulting from COVID-19. In China, higher volumes and lower selling and administrative costs were partially offset by the absence of social insurance waivers, which were received in 2020.
As a result, segment operating margin of 8.5% improved from the - 3% in the second quarter of 2020. Our corporate expenses of $12 million were higher than last year, largely due to management incentives. Our effective tax rate of 21.9% was essentially the same as last year. Please turn to slide seven. Cash provided by operations of $196 million during the first half was higher than during the first half of 2020. Higher earnings in 2021 compared with the prior year were partially offset by a larger investment in working capital during the first half of 2021 compared with the same period in 2020. Our cash balances totaled $582 million at the end of June. Our net cash position was $476 million. Our leverage ratio was 5.5%, as measured by total debt to total capital at the end of June.
Through June 30, we repurchased approximately 3 million shares of common stock for a total of $198 million. Please turn to slide eight. We upgraded our 2021 EPS guidance this morning with a range of between $2.70 and $2.76 per share. The midpoint of our range represents an increase of 5% compared with our prior quarter full year guidance. We expect cash flow from operations in 2021 to be between $500 million and $525 million, compared with $560 million in 2020. We expect higher earnings in 2021 will be more than offset by higher investments in working capital than in the prior year. Our 2021 capital spending plans are between $85 million and $90 million, and our depreciation and amortization expense is expected to be approximately $80 million. Our corporate and other expenses are expected to be approximately $50 million, similar to 2020.
Our effective tax rate is assumed to be approximately 23% in 2021. Average outstanding diluted shares of 160 million assume $400 million worth of shares are repurchased in 2021. I will now turn the call over to Kevin, who will summarize our guidance assumptions beginning on slide nine. Kevin?
Our businesses continue to navigate through supply chain and logistic challenges. That being said, we raised our 2021 top-line growth expectation and now project an increase of between 17% and 18%, driven by strong demand and price increases implemented in response to rising material and transportation costs. Our revenue outlook for 2021 includes the following assumptions. With seven months of visibility, we've upgraded our U.S. residential water heater industry volume forecast to increase approximately 3% compared with last year. We expect continued resilient replacement demand and growth in new home construction. With our fourth price increase in the market and continued consumer demand, we no longer believe there will be channel inventory destocking in the back half of the year. We expect commercial industry water heater volumes will increase approximately 2% as pandemic-impacted businesses reopen and new construction and replacement installations come back online.
We believe the demand we saw in the last few months was partially driven by pre-buy activity in advance of the price increases. In China, it is encouraging to see sales of our products continue to remain strong. Our strategy to continue to expand distribution to Tier 4 - 6 cities is on track. We see improvement in consumer trends towards trading up for higher-priced products across all of our product categories, driven by differentiated new products launched in the last 12 - 24 months. We expect year-over-year increases in local currency sales between 20% and 22% in China. We assume China currency rates will remain at current levels, adding approximately $51 million and $4 million to sales and profits over the prior year, respectively. Boilers sales grew 24% in the first half of 2021.
The comparison will be tougher in the back half of the year, we expect boilers sales will grow by low double digits for the full year compared with last year. We project 13%-14% full-year sales growth in North America water treatment. We believe the mega trends of healthy and safe drinking water, as well as reduction of single-use plastic bottles, will continue to drive consumer demand for our point-of-use and point-of-entry water treatment systems. We project margins in this business to grow by 100 basis points above the nearly 10% achieved in 2020. We continue to experience inflation across our supply channel, particularly steel and logistic costs. Steel has increased 23% since our third water heater price increase became effective on June 1st.
We announced a fourth price increase in late June on water heaters, effective August 1st at the rate between 10% and 12%. We expect North America segment margin to be between 23.75% and 23%, and rest of world segment margins to be approximately 8%. Our procurement and operation team faced continued challenges in the second quarter. While we expect continued headwinds in supply chain and logistics throughout the remainder of the year, these challenges are moderating, and I have confidence in our team to continue to navigate through this difficult environment. That concludes our prepared remarks, and we are now available for your questions.
As a reminder, to ask a question, you need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Bryan Blair with Oppenheimer.
Thanks. Good morning, everyone.
Good morning, Bryan.
The momentum in your boilers sales is very encouraging. You called out strong trends in the education vertical. I'm wondering if there's any concern about the sustainability of project activity there. It would counter our read on the incremental funding that's coming through. Just looking at the 12% growth in Q1, mid-30s lift Q2. The full year guide implies quite a bit of moderation in the back half.
Well, I think we had a very strong first half of the year, again, as we mentioned, the back half is a bit tougher comp. There's always challenges with COVID-19, the variants out there, and of course, labor and so forth. Overall, again, job activity has remained healthy. Recent non-residential ABI data was positive in June, up, I think, 57 from 50. We had a solid July. We don't see really anything becoming an issue, but again, in this environment, there's always things that could pop up and could be a bit spotty for us.
I guess the only other thing I would add is that it was an easy comp in Q2 last year. We did do a residential Early Buy program that we pushed back because of the pandemic last year into Q3 that got pulled into Q2, which is normal. That is the normal cadence of when we do that. That helped a little bit on the volume.
Yeah, appreciate the color there. To clarify, does the outlook for 13%-14% North American Water Treatment growth include Master Water contribution?
No, that's organic growth of 13%-14%. We framed kind of the North America Water Treatment at around $200 million. I think before we were talking about approaching $200 million. With the acquisition at a half year, it's just over $200 million.
Excellent. Anything you can offer on margin contribution from that business and, even more importantly, additional color on what the asset adds to technology, footprints, channel presence? You mentioned expanding into the Northeast, which is important, but any other color you can offer on strategic impact would be great.
Yeah. I'll take the strategic impact of it. This is part of our strategy to improve our footprint across North America and build out that distribution. The water quality dealer is a bit different than, say, our wholesale business that buys truckloads of 200 water heaters that are on a regular basis. Water quality dealers will buy pallet, maybe a couple pallets full of product. It's really important that we have these distribution points, and this is a start with Master Water, so that we can improve our service levels, deliver in 24 hours of smaller quantities and do them in an effective and productive way. This is an important first step in kind of building out that framework that we need to be successful in the water quality side of our business.
Very helpful. Thank you.
Your next question comes from the line of Scott Graham, Rosenblatt Securities.
Hey, good morning, all. Nice print.
Good morning.
I got a couple of questions. Hopefully, you can answer them all. I know of each of the price increases. Would you say that you're trending toward the middle, higher end of the range that you've given in the past?
I guess, Scott, we just kind of look at the four together, and when we accumulate the four and get to the fourth quarter, the fourth one will be effective. We'll start seeing that in the fourth quarter. We're at about a 40% price increase on the water heating side.
Okay. Thank you. Are we looking at similar type of price increases for boilers?
Not similar. Boilers are, for the most part, a lot of our projects are quoted, and we are taking steps to adjust our quotes to adjust for the cost. We have taken steps, but it's not as formal as our residential, standard commercial business. We are taking steps, and quite frankly, we're taking steps across globally of all of our businesses to adjust for the inflationary cost that we've been impacted by and continue to be impacted by.
Yeah. Let me just add a little color to the water heating side, because that 40% is specific to water heating. As you know, steel is the major part of water heating costs for us. There's other costs, including freight and foam and so forth, but steel is the largest part. When we look at the cadence of the cost for the year, when we get to the fourth quarter, we have good visibility into the fourth quarter because as you know, we've got 90 to 100-day visibility forward on what we're going to be paying for steel. Our cost Q4 year-over-year is going to be 2.5x to 3 x higher on just steel alone. I just wanted to frame that.
The other businesses outside of water heating certainly have seen some cost increases, and we've got price increases at various points, but certainly the water heater side bears the brunt of that steel increase.
Your next question comes from the line of Eitan Buchbinder with Citi.
Hi, good morning. Thank you for taking my question.
Good morning.
Q1 had weather issues in Ashland and Juarez on top of supply chain constraints, which limited North America water heater production and supply chain constraints lingering into Q2. How much have production levels improved, and can you quantify the percent utilization within North America water heater production capacity during the quarter?
No, not specifics. I always tell you that we had month-on-month improvement. Again, we have terrific suppliers that are also working very hard to raise their capacity. The important note is, we believe that's going to carry on into Q3 and to Q4. We certainly have plenty of demand. Our orders are mirroring the industry. It's just a matter of us being able to work those overtime hours and Saturdays. We've been a bit constrained with some of the supply chain issues that we talked about. Of course, there's port issues, there's trucking issues that we're working through. The takeaway is that it's a sequential improvement. That should carry over into the back half of the year.
Thank you. That's helpful. In 2020, the cadence of social insurance was heaviest in Q2 and Q3. Understanding that Q4 is normally the highest margin quarter for the rest of world segment, and last year was 11.2% margin with minimal impact from social insurance, what are the potential factors that could keep margin down year-over-year?
This is Chuck. It's really mostly volume. We really had a strong Q4 last year, and that volume really matters on the incremental base of the business. It really drops nicely to the bottom line. Last year, we had a very strong fourth quarter. We called it out on our call last year, and it could have been some pent-up demand from the pandemic. Not exactly sure all the drivers, but that's probably the major difference. There was some social insurance last year, and I want to say that it's small. Like you said, it's probably $12 million for the year, and the bulk of that fell into Q2 and Q3. We'll see a similar headwind in Q3 that we saw in Q2.
Your next question comes from the line of Damian Karas with UBS.
Hi, good morning, everyone.
Good morning.
Hi.
Hey. Good morning.
Pretty notable change in your view on the water heater market shipments from down 2% to now up 3% for the year. I was just wondering if you could elaborate on your earlier comments about the inventory destocking. You're not expecting that anymore, and really just elaborate on what's changed since last quarter?
I'll start with that and Chuck can jump in. We don't move our forecast very often unless we see some clear line of sight. What's really changed is, one, we didn't plan on four price increases this year, and that makes a big difference in pre-buys and buy ahead. Quite frankly, the market's continued to be stronger than we anticipated, and new home construction continues to do very well. As we were putting this all together and coming to the second half of the year, there's been multiple changes that have changed our opinion for this year to move it up that 3%.
We don't expect inventories to come down based on the order rate that we've seen. When we looked at the full-year outlook for the industry, last year was basically a record year on residential water heaters, and to be 3% up over a record year is pretty meaningful. When we look at the first half of the year and then look at the second half of the year, historically, those volume percentages break down 52% in the first half of the year, 48% in the back half of the year. Last year it was exactly opposite. It was 48% because of all the headwinds that the industry had in production in Q2, but it was 48% front half and 52% back half. When we looked at the full year, we went back to the normal cadence, too.
We looked at that and said, "Let's go back to that 52/48," thinking about what kind of demand we're seeing. Again, with four price increases, it's a little bit difficult to read out the total demand and decided to go up 3% with the assumption inventories would not decrease.
Okay, great. That makes sense. I was curious if you've seen any market share jostling going on just as a result of the current environment with the supply chain issues and some of the capacity constraints you and other competitors of yours have had to deal with. Maybe if you just talk about through your channels and at the regional level, what's happening with market share?
Well, you're right, market share is a bit messy right now because of different price increases in the supply chain. Yeah, I would tell you right now, A. O. Smith is lagging a bit. Not because we don't have the orders in-house, not because our customers. We have a solid customer base with no change there. It's really been just more of various constraints on what we can produce out of our factories. Of course, as we mentioned in the first call, the Gulf freeze did not help. When it's all said and done, with no major changes in customers, and we'll get our fair share of orders, that over time, this is probably all going to work itself out.
Smith is lagging a bit, and we anticipate that will be minimized by the time we get through the rest of the year.
Your next question comes from the line of Matt Summerville with D.A. Davidson.
Thanks. A couple of questions. First, on China, I was hoping you could comment on what sell-in versus sell-through looked like and how you're feeling about your inventory position there.
Sure. We feel very, very good about our inventory position there. We felt good about it a year ago, and it's significantly improved. It's at its lowest point in five years, and I would say that it's as fresh as it's been. We're in a great inventory position in the channel in China. Let me help frame the sales growth for the quarter. We're up 26% in organic local currency. If you take a look at that, last year, we did have some headwind on channel inventories coming down. When we look at sell-out and demand for this quarter, we're probably up about mid-single digits. We're right in that range. It's across our whole portfolio of products. We're pleased with the 26% growth.
You got to recall last year, China came out of the pandemic earlier than North America, got into it and came out of it a little sooner. That was a quarter that was building from April, May, and June. Mid-single digits up for the quarter, and when we think about the rest of the year, we're looking at something roughly in that same range through the back half of the year.
Just sticking with China, can you speak to, I'm thinking about the pricing spectrum, and how things trended a few years ago, up in that high- end then things trended more into the mid-price point range. Where are you relative to historical peak and maybe the recent trough there with respect to your product set and realization there?
Let me just frame it quarter-over-quarter comparison, because it's very similar to where we've been in the last couple quarters. I would say, what we've seen is a little bit of improvement in the higher-end price on the gas tankless. On electric water heaters and on water treatment, it's roughly the same. It hasn't changed a great deal. We see some indications of the higher end premium part of the market growing, but we have not seen a great deal of change. Pleased, though, that we've seen a little bit of movement on the gas tankless.
Your next question comes from the line of Saree Boroditsky with Jefferies.
Good morning.
Morning.
You had originally talked about some inventory coming out of the channel this year. Now with residential heaters expected to be up 3%, you're no longer talking about that. Just how are you thinking about ending inventory for the industry, and then how does that set up for demand in 2022?
You're talking North America?
Yeah, North America.
North America residential? Well, again, we'll have to see how things play out. There's still five months left in the year. We've raised it, as we've talked about, and we'll have to get a better view as the next few months, depending on how we're producing, how people are consuming, how the economy's doing. It's hard to look into 2022 when we're in July right now. We'll look at it closer. We'll talk more as we get closer to the end of the year. Right now, as we said, demand is up, and there's a lot of good momentum in new construction. That plays well for the balance of the year.
Got it. With higher North America volumes, you obviously implemented a number of price increases, but margins expectations are a little bit lower. How are you thinking about matching price cost in the second half of the year? How are you thinking about margin improvement in 2022, just as some of these costs hopefully become less of a headwind?
Yeah. Since our first price increase was announced November last year, we have just seen costs continue to rise. Every price increase that we've launched into the marketplace has been consistently followed by higher steel costs and higher costs. As we go into the back half of this year and get to the fourth quarter where our fourth price increase starts coming into the market and we start seeing it, we're basically matching costs. We're not covering our margin in the fourth quarter. That's a bit of the headwind that we see in the back half. It's too early for us to be speculating, I think, in 2022, on what we're going to see on cost. Certainly, we've not seen these types of cost increases in the market. It's hard to speculate how long they'll be there, whether they'll come back out.
Obviously, there's a lot of discussion on transitory inflation, but we're not yet ready to predict when we're going to see any relief.
Your next question comes from the line of David MacGregor with Longbow Research.
In your prepared remarks, you talked about water treatment and seeing more promotional days. I wonder if we could just circle back to that for a moment and just talk about the extent to which you're seeing maybe a little more in the way of expectations from some of your channel partners with respect to your level of promotional channel support.
I would tell you the promotional channels days that we talked about were pretty much normal, and there wasn't an increase in it, but it's pretty effective. Water treatment, our close rates have been high as people continue to look at water treatment as a health issue for their family. I don't want to mislead, those were normal days that just performed at a higher level for us, and I think it comes down to the whole mega trend that we're seeing with water quality and the safety part that continues, and it continued into the second quarter.
Water treatment has performed well. I mean, 17% increase quarter-over-quarter, but I just want to remind us that last year it grew by 19%. It was a part of our business last year that actually grew in 2020, in Q2, and grew again this year. It was pretty resilient, still performing well.
Just while we're on water treatment, how much of that growth would be attributed to expanded distribution as opposed to just greater pull?
That's one we probably can't give you any specific on. If you break down our business, it has to do with, we have direct-to-consumer, which of course, that's just an ongoing business. We have marketplace. We've done a fairly nice job expanding our dealer network. That area, and we called it out in our remarks, has grown substantially and doing a really nice job. It has a nice backlog. Can't give you specifics about really the number of new dealers. Going in the right direction and performing very, very well.
Your next question comes from the line of Nathan Jones with Stifel.
Good morning, everyone.
Morning, Nathan.
Morning.
I wanted to follow up on the channel inventory to beat a dead horse here. You guys had expected a destock in the second half. You're now not expecting a destock in the second half. Can you talk about the inputs that go into that in terms of are you expecting higher demand, customers ordering ahead of price increases and because of supply chain challenges? Do you think the channel inventories end the year at an appropriate level or under or overstocked?
I think you framed the pieces for us a bit. I mean, there is higher demand on the price increase for sure. That always is there, and we manage that working with our customers. The constraints we see on supply chain, I think, encourage people to make sure they have product on hand. Our projection on 3% up will be another record year back-to-back . Where we end up on the channel inventory I think is a little hard to say, and I think it'll play out a bit on what happens in new construction and what we see as far as the supply chain getting a little more normal.
Fair enough. Then just to follow up on India, you said it would double year-over-year. Obviously, India's had its issues with COVID-19. Can you just give us a number relative to where it was in 2019?
2019, gosh, I don't have that in front of us right now. I'd say I'm pretty confident it's higher than 2019. I do want to frame it a bit because typically, 35%-40% of our sales are in Q4. We're really pleased with how the team has performed for the quarter in a really tough environment.
Yeah. I just want to add on to it. India was ravaged by COVID. Our team did what they needed to do to protect our employees, but more importantly, really develop a strong relationship on the online segment of the business, which helped drive some of the sales we're talking about. Even in the pandemic, we introduced new products both in water treatment and in water heating that have done exceptionally well. We were calling it out because quite frankly, it's a phenomenal job by a team that really had severe headwinds throughout the second quarter and throughout the first part of the year. We're looking for the back half to get a bit better. Again, as Chuck said, that's where we get about 50% of our sales in those last four months.
Your next question comes from the line of Susan Maklari with Goldman Sachs.
Thank you. Good morning, everyone.
Morning, Susan.
My first question is around the boilers business. You held your guide of a low double-digit increase this year. Yet you said you saw the sales up about 35% in the quarter. Can you just talk to how you're thinking about the back half of this year, some of the orders that are coming through, and how we should be thinking about that deceleration on a relative basis that you're expecting in there?
As we've talked about, the back half is a more difficult comp. As we look forward, we talked about bringing forward the Early Buy, which was a record Early Buy for us from the third quarter. There's a few items that are a headwind as we get into the second half of the year. That's the primary reason behind it. Order bookings are good. Sales seem to be pretty healthy with regard to our quoting activity. When we put the numbers together, and Chuck will maybe elaborate on them a bit more, that's how we feel it's going to play out the second half of the year.
Yeah. The only thing I would add is, I'm trying to think about the benchmark for 2019, and I believe when you look at 2019, we're up high single digits compared to 2019. We're just confirming that number just to help frame where we are. 2020 had quite a bit of disruption in Q2. There was a lot of jobs that were closed and a lot of production that was disrupted. I'm trying to help with the 2019 framing, and that's roughly. It's up about 6% to 2019.
Okay. That's helpful. I guess, building on that too, can you talk a little bit about what you're seeing on the commercial water heater side? That had obviously been a bit weaker compared to boilers. Any updates on how that's trending? Obviously, the comps there are a bit easier in the back half. How should we be thinking about it?
Commercial water heater, it's nice when you reopen the economy. We're seeing, I think we've talked about this in the past. We do have some IoT on our water heaters, and we can see how it's being used, and so forth. It's not a broad view, but it's a snapshot. We're just seeing activity grow. We're seeing restaurants open up. We're seeing people invest back in their business. Overall, it's nice to see the economy or the commercial side of the business starting to reopen and get back to, we're not there yet, but back to a normal replacement cycle and maintenance cycle. That's where we raised our guidance up a couple of points, and it's based on those early trends continuing into the back half of the year.
Your next question comes from the line of Scott Graham with Rosenblatt Securities.
Yes. Hi, good morning. Thanks for taking my follow-up here. Seems we've gotten cut off almost in the middle of my next question for you. I maybe just wanted to go back to the pricing, guys. I have tracked with all those four price increases this year. I don't quite recall the amount of the one from last year in November. Can you remind me of that one?
Yeah. I think it was approaching 10%. When you get all three together, we've been accumulating them as we go along. Pat will take a quick look here.
I'll see if I-
The first one was roughly that amount, I believe.
Yeah. Scott, I tell you, that's a long time ago. We'll have to look back at it because we've been chasing these costs for a while.
Okay. The other question I had was, Kevin, around your comments with the supply chain, and I know that water heater volumes were up, but I'm assuming they were up double- digit. The reason I'm asking that is that, the first two months of the quarter trade data is up and over 20%. That's only the first two months, but it would just seem like that should be. Did you keep pace with the industry in the second quarter, I guess, would be the simplest question?
No. As I mentioned, we lagged a bit in the industry. You look at the industry, it's up through May 11, 12% total. Quite a bit of that's been driven by price increases and those types of activities, along with the new construction and so forth. We have been lagging. Again, our order entry is right in line with the industry. However, some of the constraints that we talked about has caused a few issues for us. Again, I look at this, we have great operating people, and in the back half of the year, we'll have to work through that. I wanted to make sure you understand where we were and where we're going. We don't see fundamentally anything changing with regards to our customers or our market share as we finally get through these difficult times and finish out 2021.
Scott, just to follow up, that first price increase was up to 9%. Pretty close to that 10% that I mentioned, but up to 9% is what we went out with.
Your final question comes from the line of Kevin Javier with NorthCoast.
Hey, good morning, everybody. Wondering if, to that point on the supply chain issues, expectation of 3% volume growth for the year, do you think, with all the actions you're taking, and it sounds like things are getting better, do you think you'll be able to grow in line with the industry and maybe make up for that in the back half of the year? Or does that perhaps defer some shipments for you guys to 2022?
I would tell you our expectation is to certainly keep up with the industry and to close that gap by year-end. Again, the orders are there, and our customers are, it's just a matter of working, like I said, go back to working those nine hours, working that occasional Saturday to close that gap. That's going to be all predicated on our supply chain, which again, I've talked to many of our key suppliers. They're all getting better at it. They're all coming online a bit more. We're anticipating that's going to carry over to the back half of the year, and we'll be able to ramp up production at a much higher rate than we had in the first half.
Okay, great. On the water heater side, if I back into the numbers, it seems like water heater sales probably grew 25%-26% in the second quarter. I wonder if you can I don't think you historically give price volume or anything, but is that mostly price or fairly split between price volume? I think you guys made a comment that 40% pricing will be, once everything's in effect in the fourth quarter, that'll be what pricing is. Does that mean we should be thinking water heater sales up 40% in the fourth quarter, plus or minus whatever our volume expectation is?
Yeah. Let me just go back to the price volume portion of Q2, and yeah, we typically don't, but I think it's very helpful in the environment that we in, that we give a little more data. In Q2, when we look at the amount that we were up in North America, I'll frame this North America, 40% of that roughly was price, and the rest was basically volume. The bulk of it was volume, but there was a percentage of about 40% of that increase that was price. On the fourth quarter, could you frame that again on the fourth quarter question, please?
I think you had mentioned that when all four price increases are in effect, it would be 40% cumulative. Does that mean that that water heater portion of North America sales should be up 40% in the fourth quarter once all those are implemented, plus or minus whatever we think volume and mix does?
Yeah, that's roughly right. The fourth price increase comes into the fourth quarter, and it's early on in the fourth quarter, but that's a good way to look at it.
Yeah, I would say that plus or minus, though, there's going to be some drag probably with that pricing in the fourth quarter.
Okay. All right. Thank you very much.
There are no further questions at this time. I would like to turn the call back over to Ms. Patricia Ackerman.
Thank you for joining us today. We plan to participate in two virtual conferences in the third quarter, Jefferies on August 3rd, next week, and D.A. Davidson on September 22nd. Have a great day.
This concludes today's conference call. You may now disconnect.