Earnings Call: Q1 2021

Apr 29, 2021

Good day and thank you for standing by. Welcome to the A. O. Smith First Quarter 2021 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ms. Patricia Ackerman. Please go ahead. Thank you, May. Good morning, ladies and gentlemen, and welcome to the A. O. Smith's Q1 results conference call. I am Pat Ackerman, Senior Vice President, Investor Relations, Corporate Responsibility and Sustainability and our Treasurer. Joining me today are Kevin Wheeler, Chairman and Chief Executive Officer and Chuck Laubert, Officer. Before we begin with Kevin's remarks, I'd like to remind you that some of the comments that will be made during this conference call, Including answers to your questions will constitute forward looking statements. These forward looking statements are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters that we have described in this morning's press release. If you have multiple questions, please rejoin the queue. I will now turn the call over to Dan, who will begin our prepared remarks on Slide 3. Thank you, Pat. Our global A. O. Smith team first quarter EPS of $0.60 on a 21% increase in sales, Demonstrating solid execution, the systemic and weather related challenges in our supply chain and operation, along with rapidly rising material costs. I greatly appreciate the diligence of our team to keep each other safe. Outside of India, where COVID-nineteen cases surged, I am pleased that we have experienced steady improvement in this area since the beginning of the year. North America water treatment percent driven by continued consumer demand for home improvement products, which provide safe drinking water in the home. The direct to consumer channel with our Aquasana brand and the dealer channel contributed to solid growth to start 2021. Boiler sales grew 12% as we have seen strong demand, particularly within commercial boilers as a result of completed projects carried over from 2020 as well as a resilient replacement demand. Our volumes of U. S. Tank residential water heaters declined Due to weather disruptions at our facility, supply chain constraints, which limited production. If not for limited production based on our surge in customer orders in the quarter, our U. S. Residential shipments would have increased compared with 2020. Strong orders in the quarter were largely due to extended lead times, our second price increase, which was effective April 1st and announced 3rd price increase effective in June. Due to continued pandemic related disruptions in restaurant and hospitality new construction and replacement demand, Our commercial water heater volumes declined in the Q1, largely in line with our expectations coming into the year. In China, sales increased over 100% in local currency, driven by higher consumer demand and the easy comparison compared with the pandemic disrupted Q1 of 2020. I will now turn the call over to Chuck, who will provide more details On our Q1, beginning on Slide 4. Thank you, Kevin. 1st quarter sales of $769,000,000 increased 21% Compared with 2020, largely due to significantly higher China sales. As a result of higher sales, 1st quarter net earnings increased 89% to $98,000,000 or $0.60 per share compared with $52,000,000 or $0.32 per share in 2020. Please turn to Slide 5. Sales in the North America segment of $553,000,000 increased 4% Compared with the Q1 of 2020, higher commercial boiler, service parts and tankless water heater sales in the U. S, Improved water heater sales in Canada, a 12% price percent growth in 12% Growth in water treatment sales and inflation related price increases on water heaters in the U. S. Were partially offset by lower U. S. Residential and commercial water heater volumes. Rest of the World segment sales of $222,000,000 increased over 100% from the Q1 of 2020, driven by Stronger consumer demand in each of our major product categories in China. Pandemic related lockdowns and weak end market demand in the Q1 of 2020 provided an easy comparison for the Q1 of 2021. Currency translation of China sales favorably impacted Sales by approximately $14,000,000 On Slide 6, North America segment earnings of $130,000,000 increased 3% compared with the Q1 of 2020. The impact to earnings from higher sales and inflation related price increases on water heaters was partially offset by higher material costs and freight costs and lower water heater volumes in the U. S. Segment operating margin of 23 point 6% was slightly lower than the Q1 of 2020. Rest of the World segment earnings of $12,000,000 increased significantly compared with the Q1 of 2020, which was negatively impacted by the pandemic. In China, higher volumes and lower selling and administrative costs contributed to higher segment earnings. As a result, Segment operating margin of 5.3 percent improved significantly from negative 38.3% in the Q1 of 2020. Our corporate expenses of $15,000,000 were similar to the Q1 of 2020. Our effective tax rate of 22.5% was 110 basis points lower than the prior year, largely due to geographical differences in pretax income. Please turn to Slide 7. Cash provided by operations of $104,000,000 Increase or during the Q1 was higher than the Q1 of 2020, primarily as a result of higher earnings in 2020 compared with the prior year. Our cash balances totaled $660,000,000 at the end of the Q1 and our net cash position was 559,000,000 Our leverage ratio was 5% as measured by total debt to total capital at the end of the Q1. We completed refinancing our $500,000,000 revolver credit facility on April 1 this year. We currently have no borrowings on this facility. During the Q1, we repurchased approximately 1,100,000 shares of common stock for a total of 67,000,000 This morning with a range of between $2.55 $2.65 per share. The midpoint of our range represents an increase of 20% compared with the 2020 adjusted results. We expect cash flow from operations in 2021 to be between 4.70 $500,000,000 compared with $560,000,000 in 2020. We expect higher earnings in 2021 More than offset by higher investments in working capital than in our prior year. Our 2021 capital spending plans between $85,000,000 $90,000,000 and our depreciation and amortization expense is expected to be approximately $80,000,000 Our corporate and other expenses are expected to be approximately $52,000,000 which is similar to 2020. Our effective tax rate is assumed to be approximately 23% in 2021. Average outstanding diluted shares of $160,000,000 assumes $400,000,000 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 9. Kevin? Our businesses continue to navigate through supply chain and logistic challenges. The Q1 was particularly challenging for our North America water heater business. Severe weather impacted our Ashland City and Juarez facilities and resulted in a week out of production at each plant in the quarter. Supply chain constraints limited our ability to make up the lost production within the quarter. As a result of a surge in Orders are approximately 30% higher than the Q1 last year. Our lead times have further extended. We are working with customers on managing orders along with our operations and supply chain teams working diligently to meet demand. However, we expect to be catching up throughout the second quarter and into the third Our outlook for 2021 includes the following assumptions. We have not changed our outlook for full year U. S. Residential Heater industry volumes and continues to project a full year volume will be down 2% or 200,000 units in 2021, A small retracement from the record volume shift in 2020. We expect commercial industry water heater volumes will decline approximately 4% As pandemic impacted business delay or defer new construction and discretionary replacement installation. We continue to experience inflation across our supply chain, particularly steel and logistics costs. Steel has increased 25% since we announced our April 1 water heater price increase. We announced a third price increase in late March on water heaters Effective June 1 at a blended rate of 8.5%. In China, it is encouraging to see sales of our products continue to remain strong through April. Our strategy continues to expand distribution to Tier 4 through 6 cities is on track. We see improvement in consumer trends towards trading up For higher priced products across all product categories driven by differentiated new products launched in the last 12 to 24 months. We expect year over year increase in local currency sales between 18% to 20% in China. We assume China currency rates will remain at current levels adding approximately $50,000,000 $3,000,000 to sales and profits over the prior year, respectively. We have nearly doubled our growth projections and our outlook for our North America boiler sales from mid single digit growth to approximately 10% growth Based on a strong Q1, strong backlog and visibility into quoting activity, our expectations are based on several growth drivers. We believe pent up demand from the declines last year will drive growth. The transition to higher energy efficient boilers will continue, particularly as commercial buildings improve their overall carbon footprint. In 2020, condensing boilers were 39% of the commercial boiler industry. That represents our addressable market, which provides continued opportunity for our leading market share commercial condensing boilers. New product launches, including improvements to our flagship Crest commercial condensing boiler with a market differentiating oxygen sensor, which continuously measures and optimizes for the performance and introduction of a 1,000,000 BTU light duty commercial Knight FDXL. We continue to project 13% to 14% full year sales growth in our North America water treatment products, similar to that which we have seen in the Q1. We believe the megatrends of healthy and safe drinking water as well as a 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 believe margins in this business could grow by 100 200 basis points higher than the nearly 10% margin achieved in 2020. In India, 1st Quarter 2021 sales were nearly double the prior year. While India is challenged with recent COVID case resurgence, We project 2021 full year sales to increase over 20% compared with 2020 To incur a smaller loss of $1,000,000 to $2,000,000 Please turn to Slide 10. We project revenue will increase between 14% to 15% in 2021, as strong North America water treatment, Broiler and China sales enhanced by pricing action more than offset expected weaker North America water heater volumes. Our sales growth projections include approximately $50,000,000 of benefit from China currency translation. We expect North America segment margin to be between 23% 23.5% and Rest of World segment margins to be between 7% 8%. I'm on Slide 11. Our operations faced continued challenges in the Q1. And while we expect Continued headwinds in supply chain and logistics in the near term, I have confidence in our teams to continue to navigate through this environment. Along with the strength of our people, I believe A. O. Smith is a compelling investment for numerous reasons. We have leading share positions in our major product categories. We estimate replacement demand represents 80% to 85% of U. S. Water heater and boiler volumes. We have a strong brand, premium brand in China, a broad product offering in our key product categories, Broad distribution and a reputation for quality and innovation in that region. Over time, we are well positioned to maximize favorable demographics In both China and India to enhance shareholder value. We are excited for the opportunity we see in our North America water treatment platform. We have strong cash flow and balance sheet supporting the ability to continue to invest for the long term With investments in automation, innovation and new products, as well as acquisitions and return cash to shareholders. That concludes our prepared remarks and we are now available for your questions. Please stand by while we compile the Q and A roster. We have our first question from the line of Saree Boroditsky from Jefferies. Your line is now open. So you mentioned the surge in orders on the residential water heater side. Could you help quantify the impact of the weather and supply chain issues in the quarter? Do you expect those orders to come through in 2Q? And then just when you have a large backlog of orders, will those come in at the older prices? Thanks. Yes, this is Chuck. Good morning. We did have some interruptions. We've got 2 plants that were Down. Ashland City and Juarez were down due to weather for approximately a week each. So that does a couple of things. 1, It raises kind of the orders that come in from a perspective of it, it creates a bit of a surge And when lead times extend a bit due to a temporary interruption, we see more orders, which extend the lead times. So that quantification, we do expect to make that up in the second and third quarters. That we would get a little bit more normalization of production throughout the second and third quarter and those orders would come in. Now to quantify the surge in orders, It's a bit difficult. There's a lot of noise in the marketplace from the interruption I just described as well as 3 price increases at once. So Not all at once, but February, April June, and that just creates a bit of noise. So As far as the effectuation of kind of the pricing on those, we work to manage kind of the orders that come through on a more normalized basis. But The extended lead times do push that realization on price out slightly. April 1 price increase, for example, is going to be extended a bit. But when we look at all of our pricing, we would expect that the full impact would Would be implemented when we get into the Q3. That's really helpful. And then you still expect to see a decline in commercial water heater volumes, There's been a more positive outlook for restaurants and travel. So could you just talk through how you're thinking about demand in that market? I think it's still a little early. We would agree with you as COVID and vaccines become more prevalent and Things start to open up that certainly is an opportunity going forward. It's probably a bit early here in April To change our outlook, we're still we still believe there's going to be a modest decline, as we mentioned, about 4%. But overall, is there possible upside? Yes, but probably just a little too early to project that in late April. We have our next question from the line of Damian Karas from UBS. Your line is now open. Hi, good morning, everyone. Good morning. Good morning. So I was just hoping you could maybe clarify a little bit on the Residential water heaters outlook, I mean, so you're still expecting the market down 2% this year, but it sounds like you're incrementally positive on the demand environment. And you noted that 30% surge in orders. So could you just help kind of reconcile that disconnect? Do you think this demand is short lived and you're going to therefore see a fall off in the back half of the year? Yes. I think what Chuck outlined really well is that there's just a lot of noise in order entry now Because of lead times, because again, we're working on a 3rd price increase. And so that just pulls orders forward. And so as we think about it, we'll work through those orders. There's certainly going to be some new construction activity, but Just remember that we really come into play in completions, not starts. So right now, we just think That's the $200,000 we traced what we talked about is probably the best forecast we can have until we work through this backlog and get to the other side to really understand what was true demand And get to the other side to really understand what was true demand versus just normal demand brought forward by pricing or So it's again, you probably hear us say this a little bit too early to take these numbers considering there's so many variables That we're going to have to work through, but we'll have a better curve picture probably in the Q2, early Q3. Yes. I'll just add one comment. And when you take a step back and you look at last year, the industry was the highest level it's been since 2,006. There's a lot of noise, we believe, because of the pandemic, because of some supply chain constraints pushing lead times out. And We do expect as we kind of go through the year and particularly when we get into the 3rd Q4 that the industry may be behind that a bit and that may drive a little bit of the demand as we get into the back half of the year as inventories get a little more comfortable. Okay. That's helpful. And I guess, thinking about once we get into the Q3 and the Q4, how best do we think about The actual financial impact of the 30% or so year to date increases in price, I mean, correct me if I'm wrong, It doesn't appear that your expectation is that sales or revenues are going to go up by 30% in So what's how do we think about the translation of those announced price increases to the top line later this year? Yes. Well, you're exactly right on kind of thinking about when we look at the Three price increases and if you kind of look at what we've announced, we're in that 24% to 27% range, we think, as far as you look at A blended vape byproduct category, when you look at the residential and commercial market. So they do come in Into really what's going to fall into what I would say, for sure, largest part of that would be expected to come in, in the 4th quarter. We're going to see it feather in a bit in the Q3. So you got to kind of think about the fact that it's not fully implemented probably or fully impacting us in Q3. It kind of feathers in as we go throughout the year. Next is Jeffrey Hammond from KeyBanc Capital Markets. Your line is now open. Good morning. This is David Tarantino on for Jeff. Good morning, David. So, on price increase, Was there any pre buy ahead of price increases? And I know you were talking about destocking last quarter. So if any, where would be the greatest period of Well, we actually believe there's been some destocking in the Q1 just because of some of the constraints that we've had. But When you look at any pre buy, we normally limit it to a month of production. So there's always a Pre order, I would say, that we're seeing and that's part of our backlog and our surge right now is that You had April orders that were already input or put in by our customers in the Q1. Then of course you have June that just came up and People are getting the line and place their orders for that increase. So there is always a order pull forward That we have to work through. And again, we'll work through that most of the second quarter and into the third quarter and hope to be have that part of it behind us as we get through July August. Okay. And then just as a follow-up, what have you seen or are you like are you seeing on pricing in China? Well, I'll tell you just taking in general, we have So, inflationary issues across the globe. And so and we don't get into all the specifics that we take pricing action, but we've taken pricing action In almost every one of our businesses, some are a bit different than others. China doesn't quite have the some of the inflationary pressures that we've seen here. Andy, it may be a bit different. Europe's a little bit different. But what we've done is we've taken action to make sure that Over time, we're able to address these inflationary pressures that we're seeing today. And we believe we have a track record that's going to Prove out that we can address these given the appropriate amount of time. And then just to add on a comment on China and it's not directly related to Pricing, but just mix. And we're pleased that we're kind of looking at it quarter over quarter where mix is neutral to positive. So not necessarily pricing, but our mix, we believe, has taken a point where from here through the rest of the year, we forecasted to be Kind of a neutral positive where we had some headwinds last year. Next is Matt Summerville from D. A. Davidson. Your line is now open. Around this a little bit, but I was hoping for a bit more specificity in terms of how we should be thinking about the quarterly revenue and earnings cadence In North America with the moving pieces around the pre buys, the destocking, the price increases satisfying these incoming orders you were referring to, Where do you think the high watermark will be on a quarterly basis versus the low watermark? Yes, there's a lot of moving parts. You're exactly right. So Let me just try to frame up high level how we think about it. And I've already kind of talked about when pricing would potentially be expected to come in. And When we look at our cost side, right, so if you think about our cost side and we've seen costs go up in multiple categories freight, corrugated, Our resins, our foam, there's a lot of categories that have gone up. But when you think about our biggest category, which is steel, And we've talked a lot about steel pricing going up. It's coming in. We do have a benefit of a 90 to 120 day lag. So when we think about steel Cost hitting us, it progressively gets higher during the year. So year over year steel costs, Just we expect it to be on average, up over 70%. But when you look at the quarter cadence, kind of back to your We get hit with the highest costs in the 3rd Q4. So the most pressure on margins in North America will be in the back Half of the year, as we feel the full impact of some of the higher price increases that we're seeing on cost side And see some of the pricing being more fully implemented in the Q4. And then with respect to China, can you just talk about what your latest assessment is in terms of channel inventories, what your sell in look like versus Sell through in the quarter and which product lines you're seeing the most relative strengths currently? Thank you. Yes. I'll take the we're seeing very well, Q1 was a terrible comp because it was just such a low point in time. But you look at it going forward, Sellout has been robust. We're looking at a 6% to 7% sellout throughout the year. Very pleased that it's going across all of our core categories. So it's So electric water heaters gas tankless and water treatment. So that's moving in the right direction. And Chuck just mentioned, It's nice to see our mix leaning towards the premium sector. And we really saw that we've always Really had an on water treatment throughout the pandemic, but we really saw some nice movement up on our residential electric and gas tankless. I think there's some new products, particularly on the gas tankless, which is a grade one product that has the lowest noise level, which is exceptionally important to the Chinese Consumer. So overall, the business is moving in the right direction. We think we're positioned very well over the next few quarters to Move that business forward. From the inventory position, I'll let Chuck Review that with Yes, the channel inventories are in great shape, lowest point in 5 years, Very refreshed, I'll say, so that it's all within 90 days basically. So It's in great shape in China from a channel inventory perspective. Next is Aidan Buchtinder from Citi. Your line is now open. Hi, good morning. Good morning. The Rest of the World segment margin improved significantly from the COVID impact of Q1 last year and incrementals, they seem just about short of 50%. So So do you anticipate maintaining this level of incrementals in Q2, which had a less drastic but still steep sales decline in 2020? Yes. This is Chuck. No, we don't see the same incremental levels, going into the back half of the year or the back 3 quarters of the year of Q2. In China, we're kind of looking at incrementals in that 40% range. And then as you think about kind of how the year plays out in China, we've got a special item that we had last year, which was social insurance, which Helped us for about $12,000,000 last year, which we won't see this year. And that the cadence of that by quarter, We got the most benefit last year in Q2 and Q3. So Q1 was very small last year. So That's a bit of a headwind as we go through the rest of the year in China. So I mean, we're pleased with where the Q1 came out in China, just under 6%. That was a Pretty solid quarter for what is always a challenging seasonal quarter for us with the festivals and the holiday. And the 4th quarter is always our strongest. So as we kind of look at China and Kevin mentioned it, we would expect The back three quarters of the year to progressively improve overall growth rate in that 6% to 7%. And then when we get into the Q4, approaching double digit operating margins in the Q4, similar to what we had last year. That's very helpful color. And as a follow-up, given your raised expectations for operating cash flow, Continued strong balance sheet and expanded share repurchase authority, what would you need to see to expand 2020's repurchase beyond the current 400,000,000 And is there any potential for an uptick in the pace of inorganic growth? Well, I'll address the $400,000,000 I think at Tom, we're going to keep it framed at $400,000,000 We kind of do that because we don't want to grow cash. And you're right, we've had it We're going to have a strong cash generation year this year too. We're going to keep looking to deploy capital. So we're very, very Actively looking at where we can deploy our capital through acquisition. And so as we play out the year, we're still focused on Deploying the capital in that area, and we're going to maintain our repurchase at this point, at the 400,000,000 Yes, I would just add on to that. Again, things can change over the next 6 to 9 months. We've talked about it. We've been very active In the M and A side, we think there's some opportunities out there and we're staying close to those opportunities. And again, it always takes To close the deal, but we would prefer to deploy our capital in the M and A side and invest back in ourselves. And at the end, we'll take a look at it as we get through the balance of this year, we'll make a determination how best to move forward with our capital allocation. Yes. I guess I'll add on the organic growth. I mean, we're pleased with the growth we're seeing in North America water treatment, Yes, growing at 12% to 13% for the rest of the year, that's an area of growth. We like the trends that we're seeing in China, growing at that 6% to 7% for The back three quarters of the year. So a couple of areas of growth that we're optimistic about. Yes, I would just add on. I mean, organic growth across our product our businesses right now looks pretty For us to raise our walk and bar business up to a 10% growth, we're seeing that part of the business, which is a bit surprising to us, Really bounced back. And so if you look across all of our businesses, the organic side of it looks Pretty strong as we go out through the year. We always reserve the right because things can change in this chaotic environment where I think with COVID and so forth. But Organically, all our businesses are well positioned. Next to Susan Maklari from Goldman Sachs. Your line is now open. Good morning, everybody. Good morning. Hi. My first question is, you mentioned that you have seen some destocking in the Q1. But I guess, can you give Some more color on where you think inventories are in the channel. I know that you kind of you came into the Q4 with some excess inventory you came into this year with it. Do you think that With the weather in Texas and everything that went on in the Q1 that that's basically been depleted. And do you think that this pull forward is in a sense them just trying to get Back to normal or are they looking to actually carry a bit more inventory maybe than they would have prior to the past year? Yes. I mean From our perspective and some of the disruptions that Kevin talked about due to the weather, we do believe that we've seen some our customers' inventories coming down We're trying to get production out as best we can and satisfy customer needs, but there's been some stress in that area. So for the quarter, we do believe our customer's Inventories have decreased when you look at where we started the year. We would expect that to normalize as we go forward for The remainder of the year and we bring down lead times. So we kind of expect more normalization to inventory levels as we exit the year. And that kind of plays into the guidance of where we talked about our full year outlook for residential. Yes. And our teams are really focused on making sure that As we're going through these kind of challenging times when it comes to material shortages and so forth that we're actually producing products Orders that customers actually need and we're not just building inventory. So the positive side of this I would like to leave with is that our customers do have stock. We are taking care of their customers and we're working very closely to make sure that continues over the next quarter or so as we work through this backlog. Okay, that's helpful. And then on the commercial side, I know that you mentioned that you're clearly catching up on Your customers are catching up on some of the delays and things that were postponed from last year. Are you also seeing that there's any level Of increased new construction or projects that are really kind of starting to break ground that are coming through and kind of helping some of that backlog as well? We're seeing and we mentioned in the remarks, we are seeing coating activity remain Fairly good. And again, it's similar to last quarter, we commented that the projects aren't maybe as large, But they're still active. So the combination of kind of the pent up demand that we're filling today And a nice backlog that we have and then this coating activity, which could come in at the end of this year, but will probably carry over to 20 22. So it's been a on the commercial side of the business, the higher end, the kind of the boiler lock in from our side, It's bounced back a bit more than we anticipated. Next is David MacGregor from And the Rest of the World segment, China for certain. When we look back on the margins that you would generate in the Rest of the world business for a long, long time before things became problematic in China, it was kind of a 13% margin. And I'm just wondering, if we step back here for a second And talk longer term, how you're thinking about the potential for margin generation in China? What do we go back to 13% numbers? I know there's been a transition to a higher concentration of medium price point versus premium price point, but I think you'd indicated on prior calls that you felt like the margins were relatively equivalent. And so I guess I'm just trying to get a sense of what's the potential on ROW margins? Is there upside based on various initiatives you've undertaken along the way? Help us think longer term about the potential there. Yes. So we framed our rest of the world margins this year in that 7% to 8%. And what we saw last year in the 4th quarter is we were at the double digit Margin percentage, we get a little bit of volume. And so right now, That is kind of where our target is in the upcoming timeframe, not this year. But as we look at That's certainly doable in the current environment where we've got a heavier amount of mid priced products than we historically have. We haven't seen the strength in the trading up on the high end of the market. Even though Kevin had noted in his remarks We've seen some positive trends in that area. It's not at the same level as what we had in the past. And those margins, while we on a percentage basis are Similar. They are lower than the high end of the market. So we do get some pressure on that. So when we think about kind of the transition That the business has taken a bit on store count efficiency, the SG and A initiatives that we've done. We have taken cost out of the business to grow a bit back into higher margins. We need a little bit more volume. We'd also like to see some trading up outside of the categories. Water treatment has been a pretty good category for us, but we'd like to see more trading up. Housing coming back would help us to get some of the volume back up and just consumer confidence in the trading up. So We need a little bit of help in that category to get back to higher margins than what we're experiencing today, but those are some of the areas that we're watching very closely. And if I could just clarify on that because I do have a second question, but it sounds like what I'm hearing you say is that it's dependent upon volume and mix up. And but if just for the sake of sort of putting together some longer term construct here, if you were to get the volume you needed, The volume moved back up to a much higher level of operating rate, and you were to get a little bit of strength on the premium side of this in both water heaters and water treatment. Is there a structural reason why you can't get back to 13%? Has something changed there? Or if Based on some reasonable assumptions, not getting ridiculous, but is 15% still an achievable goal? No, there's not a structural change there. But to your I'd say the largest driver of that is seeing the market move further into the trading up high end of the piece of the market than what it is Right. But yes, structurally, there's no reason that we can't get back there with some of the other factors, volume, Higher end of the market trading up along with some of the restructuring we've done. Okay. My second question is with regard to tankless product in the United States. And can you just talk about category growth, what you're seeing there and your share? And I guess, what would you need to see to Commit more capital to that category in the North American market? Well, I mean, I would start out with the back half of the question. We already invest in capital And it's part of our offering. I've mentioned many times, we're in the hot water business. And so we're clearly what we're looking for is the best solution At times tankless is the best and at times the tank is. When you look at the business today, we talked a bit about Texas, so tankless has been up a bit and it's interesting because in Texas, it's a warmer climate And a lot of the tankless were installed outdoors. And that's fine when you because there's And electrical part of things were to freeze that prevent the unit from freezing. But we saw an uptick in Texas because not only did we have Cold weather, but we had no electricity as well. And so tankless for us was up in the quarter. And it was just driven by a one time weather related item that can happen. But overall, I mean, I don't want to leave tankless is still part of our long term strategy. It's part of our residential product offering. And just like any other products that we have, heat pumps and regular electrics and so forth. And so we're committed to it and over time we believe we'll continue to carve out the appropriate share in that product category. Next question is from Ryan Connors from Boenning and Scattergood. Your line is now open. Talk about competitive dynamics a little bit. And Obviously, everyone's supply chain is unique and been a crazy year on the manufacturing front. And so sometimes these situations Create the opportunity for some market share shifts and we have seen that in some other industrial sectors. So how do you think you're coping relative to your peers Through all these supply chain issues and, are there opportunities to pick up market share, outgrow the market, Given some of the things going on? Yes. I would tell you from a excluding the weather that I mentioned that impacted our plants, I think we're coping very well With the supply chain and we're certainly getting our fair share of the raw materials and so forth. So overall, I think we're doing well. We have a terrific operations and supply chain group and we have terrific suppliers that They're working through their own capacity constraints as they're ramping up or repairing some of the things that were impacted down in the Gulf region. So I think we're doing well. That's why as we get into Q2 and Q3, we get back to a normalized level. Our factories don't have a week out of production. So overall, and then I would tell you from my perspective, anytime you have any type of disruption, It's who executes the best and there are some opportunities there and those will have to play out over the next maybe Q1 and part of Q3. Okay. And then my other one just is on kind of tax policy and some of the changes being proposed. I know none of it's concrete yet, But specific to this proposal of kind of going after foreign corporate earnings, have you looked at that in any detail? And any idea or color on how that might or might not impact your rest of world business in China in particular? Yes, I mean, it's still being formed, of course, but we have taken a high level look at that. We don't believe that that's going to impact us in a significant way. Clearly, if the corporate tax rate goes up from 21% to 28% or somewhere in between, that has a much larger impact. Next is Nathan Jones from Stifel. Your line is now open. There's also proposed changes in here for increasing the capital gains tax. Are you seeing that potentially motivate some more sellers for properties that you might be interested in domestically? Well, when there's uncertainty in tax rate and capital gains, I imagine that does get some private owners to think a little bit about when the right timing might be to exit. The mosaic of what's happening in M and A is kind of made up of multiple things and that certainly could be a driver. Okay. And then I just had one around pricing. If you need a replacement water heater, residential water heater, you're going to buy 1 and The production demand is obviously pretty strong here. So I think the unit demand is pretty good. You guys have been through these inflationary cycles before, maybe not quite to this extent. Do you typically see customers trade down in price point to offset that inflation? Or does that not have an impact on the way customers are looking What they're buying in terms of water heater? Yes, I would take that. The vast majority, there's not a Quite frankly, a lot of trading up within the U. S. Residential water heater business. And so normally speaking, that's just the way it is. And so we don't see much changes. The only thing I would tell you that you might see during this time is On our heat pumps or our high end products, those might be impacted a bit, but it's relatively small Yes, impact to us when we go through these kind of inflationary times. Because quite frankly, as you just said, when you're out of hot water, you're going to replace it and Availability is the number one driver for a consumer. Great. Thanks for taking my questions. Thank you. Next is Kevin Hocevar from Northcoast Research. Your line is now open. Good morning, everybody. A nice start to the year there. In terms of coming back to price and the price cost relationship, it sounds like expectations are pricing will phase in or it should be fully implemented. At that point, it will be fully offsetting the inflationary pressures with the pricing actions you've announced Or might you need more in order to do that? Well, I mean, We've announced 3 price increases. And each time we've announced a price increase, we've seen costs go up after that. So we're it's hard to predict Where costs will go? Our forecast for the year assumes the costs are kind of where they are right now, particularly on the steel side. So We'll have to see how the year plays out. When we get to the Q4, when we think about kind of that price cost, I mean, On our assumption and what we've announced and based on what our costs are projected out to be, we get to the point where we're covering cost, But we do expect some pressure on margin. Yes. Okay. And you guys have done a really good job managing SG and A here in the Quarter and really for the last several quarters. And if I look back in recent history, it seems like the Q1 typically has the highest SG and A spend as a percent of sales for the year. So curious if you expect that Dynamic to remain here in 2021 where the Q1 is the highest SG and A is the highest percent of sales or Would there be any reason that would be different this year? Yes. I would not say that this year, we would But SG and A to be at the highest percent of sales. I think as I was looking at it for the quarter, particularly in China, we had a pretty good SG G and A quarter, we were watching our cost very closely in China with lower volume. Not a lot of travel in the Q1 this year compared to last year. We'll have See how that plays out for the rest of the year. But I wouldn't say that the quarter is going to play out much different than the back Three quarters from a percentage of sales. Next is Damian Karas from UBS. Your line is now open. Hey, guys. Just a couple of quick follow ups here. Sorry if I missed this, but did you mention how much Tankless was up in the quarter and I'm curious how many units you're expecting to push this year for tankless? No, we did not mention either one. So no, we haven't mentioned either one and That data doesn't get published actually, TANCOIS data doesn't get published at all and we just not we haven't really addressed that from That specific product category. Yes, it was a strong quarter, but we haven't quantified it. It was certainly up for us. Okay, fair enough. And then just wanted to ask you about buybacks. So obviously your guidance Is a little bit better than when you where you came into the year with the potential for a little bit more improvement in resi water heaters as well, depending Just curious if there's any chance you might buy back more than the $400,000,000 that you had, you're currently saying for the year? At this point, we're going to stay at the $400,000,000 I mean, we'll see how the year plays out. We really Focusing on not growing our cash position and reserving the opportunity to deploy that cash in other productive ways. As we stand today, we're going to stay with that $400,000,000 Okay, great. Appreciate all the color. All right, thanks. No further questions at this time. I turn the call back over to Ms. Patricia Ackerman. Thank you all for joining us today. We plan to participate in 7 virtual conferences in the second quarter: Oppenheimer on May 1 on May 4 North Coast on May 11 Golden on May 13 William Blair on June 1 KeyBanc on June 2 UBS on June 9 and Stifel on June 10. Have a great day. Bye bye. This concludes today's conference call. Thank you for participating. You may now