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’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

[Operator Instructions] 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 3..

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 logistic 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 to keep our customers supply with water heating and water treatment products.

Boiler 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 boiler 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 in local water condition and 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 US 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.

But 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 1.

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 4..

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 5.

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 the virus 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 the pandemic.

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 a negative 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 7. 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 and 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 three million shares of common stock for a total of $198 million. Please turn to slide 8. 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 assumed $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 9.

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 US 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 production and replacement installations come back online. We believe the demand we saw in the last few months was partially driven by a 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 through 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 months to 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. Boiler sales grew 24% in the first half of 2021.

The comparison will be tougher in the back half of the year, and we expect boiler sales will grow by low double digits for the full year compared with last year. We project 13% to 14% full year sales growth in North America water treatment.

We believe the megatrends 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 1. 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.

And 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..

[Operator Instructions] Your first question comes from the line of Bryan Blair with Oppenheimer. .

Thanks. Good morning, everyone..

Good morning, Bryan..

The momentum in your boiler sales is very encouraging. You called out strong trends in the education vertical. I was wondering, if there's any concern about the sustainability of project activity there. 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. And again, as we mentioned the back half is a bit tougher comp, there's always challenges with COVID-19 and the variance out there, and of course, labor and so forth. But overall again, job activity has remained healthy.

Recent non-residential ABI data was positive in June up I think 57% from 50%. And our July had – we had a solid July. We don't see really anything becoming an issue. But again, in this environment, there's all those things that could pop up and be a bit spotty for us..

Yeah. I mean, I guess the only other thing I would add is that, it was an easy comp in Q2 last year and 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's the normal cadence of when we do that. And that helped a little bit on the volume..

Yeah. I appreciate the color there.

And to clarify, does the outlook for 13%, 14% North American water treatment growth include Master Water contribution?.

No, it's organic growth of 13% to 14%. We framed kind of the North America water treatment at around $200 million, I think before we were talking about approaching $200 million. So with the acquisition at the half year, it gets 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, footprint channel presence? You mentioned expanding into the Northeast, which is important. But any other color you can offer on strategic impact would be great..

Yes, I'll take the strategic impact. This is part of our strategy to improve our footprint across North America and build up 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 pallets for and get couple of palletable 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, delivering 24 hours of smaller clients and do them in an effective and productive way.

So 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 with Rosenblatt Securities..

Hey, good morning all. Nice quarter [ph]..

Good morning..

So I have 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 ranges 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% increase – price increase on the water heating side..

Okay. Thank you.

And then 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. So we have taken steps but it's not as formal as our residential that of commercial business.

But 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..

Yes. I mean let me just add a little color to the water heating side because that 40% is specific to water heating. And as you know steel is the major part of water heating cost for us. There's other costs including freight and filament and so forth but steel is the largest part.

So when we kind of look at the cadence of the cost through the year into the fourth quarter, we're going to be – and 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 2.5 to three times higher on just steel alone. So I just want to kind of 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. Thanks for taking my question..

Good morning..

So Q1 had weather issues in Ashland and Juárez on top of supply chain constraints, which limited North America water heater production and supply chain constraints lingering into Q2.

How much of production levels improved? And can you quantify the percent utilization within North America water heater production capacity during the quarter?.

No not specific. I would tell you that we had month-on-month improvement. And again we have terrific suppliers that are also working very hard to raise their capacity. And the important note is we believe that's going to carry on into Q3 and the Q4. So 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. And we've been a bit constrained with some of the supply chain issues that we talked about. And of course, there's port issues there's trucking issues that we're working through.

But the takeaway is that sequential improvement and that should carryover into the back half of the year..

Thank you. That's helpful. In 2020 the cadence of social insurance was heavy in Q2 and Q3, my understanding is that Q4 is normally the highest margin quarter for the Rest of World segment. And last year it was 11.2% margin with minimal impact from social insurance.

What are the potential factors that could keep margin down year-over-year?.

Yeah. This is Chuck. I mean, 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. So last year, we had a very strong fourth quarter. And 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.

And 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..

Good morning..

Hi..

So a pretty notable change in your view on the water heater shipments from down 2% 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?.

Well, I'll start with that. And Chuck can jump in. We don't move our forecast very often as 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. And quite frankly, the market's been -- continues to be stronger than we anticipated.

And new home construction continues to do very well. So as we were putting this all together and coming to the second half of the year those are -- there's been multiple changes that have changed our opinion for this year to move it up that 3%..

Yeah. We don't expect inventories to come down, based on the order rates that we've seen. When we looked at the full year outlook for the industry, I mean last year it was basically a record year on residential water heaters. And to be 3% up over a record year is pretty meaningful.

But when we kind of look at the first half of the year, and then look at the second half of the year historically, those volume percentages kind of break down 52% in the first half of the year 48% in the back half of the year. So 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. And when we looked at the full year we went back to kind of the normal cadence too. So we looked at that and said let's go back to that 52-48, thinking about what kind of demand we're seeing.

And again, with four price increases it's a little bit difficult to read out the total demand but being -- and decided to go up 3% with the assumption inventories would not decrease..

Okay, great. That makes sense.

And then, 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 the other competitors of yours have had to deal with? Maybe you could just talk about kind of at -- through your channels and at the regional level if there's 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. I would tell you right now A.O. Smith is lagging a bit not because we don't have the orders in-house and 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. And of course as we mentioned in the first quarter the Gulf freeze did not help. But when it's all said and done with no major changes in customers, and we'll get our fair share of orders that overtime this is probably all going to work itself out.

But right now A.O. 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 looks like? And how you're feeling about your inventory position there?.

Sure, sure. We feel very, very good about our inventory position there. We felt good about it a year ago and it significantly improved. It's at its lowest point in five years. And I would say that it's probably it's as fresh as it's been. So we're in a great inventory position in the channel in China. Let me help frame the sales growth for the quarter.

So we're up 26% in organic local currency. But if you take a look at that, last year we did have some headwind on channel inventories coming down. When we look at sellout and demand for this quarter, we're probably up about mid-single digits. We're right in that range. And it's across our whole portfolio of products. So we're pleased with the 26% growth.

You got to recall last year; China came out of the pandemic earlier than North America. It got gutted too and it came out of it a little sooner, but that was a quarter that was building from April May and June.

So mid-single digits up for the quarter and we kind of -- 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..

And then just sticking with China. Can you speak to -- I'm thinking about the pricing spectrum right and how things trended a few years ago, kind of, up in that high end then things trended more into the mid-price point range.

Where are you relative to the 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 of quarters. I would say what we've seen is a little bit of improvement in the higher end price on the gas tankless. And on electric heating and water treatment, it's roughly the same. So 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 side..

Your next question comes from the line of Saree Boroditsky with Jefferies..

Good morning..

Good morning..

You originally talked about some inventory coming out of the channel this year. Now with residential heaters expect to be up 3% you're no longer talking about that.

So 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. And so we've reached 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 is doing.

It's hard to look into 2022 when we're in July right now. So we'll look at it closer. We'll talk more as we get closer to the end of the year. But right now as we said demand is up and there's a lot of good momentum in new construction. And so that plays well for the balance of the year..

Got it. And so with higher North America volumes you, obviously, implemented a number of price increases, the margin expectations are a little bit lower.

So how are you thinking about matching price cost in the second half of the year? And then how are you thinking about margin improvement in 2022 just as some of these costs hopefully become less of a headwind?.

Yeah. I mean we -- since our first price increase was announced in November last year, we have just seen costs continue to rise. Every price increase that we have launched into the marketplace has been consistently followed by higher steel costs and higher costs.

So 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. So 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 kind of speculating I think on 2022 on what we're going to see on cost. Certainly, we've not seen these types of cost increases in the market. But 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 kind of 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.

And so 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?.

No. I would tell you our – the promotional channel 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. But 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 megatrend that we're seeing with water quality and the safety part that continues and it continued into the second quarter..

I mean water treatment has performed well. I mean it's 17% increase quarter-over-quarter. But I just want to remind us that last year it grew by 19%. So as a part of our business last year that actually grew in 2020 in Q2 and grew again this year. So pretty resilient still performing well. .

And how much just were on water treatment? How much of that growth would be attributed to expanded distribution as opposed to just greater pull?.

That's one I probably can't give you any specific. If you break down our business it has to do with we have direct-to-consumer with of course that's just an ongoing business. We have a marketplace. We've done a fairly nice job expanding our dealer network.

I can't give you specifics, but that area and we called it out in our remarks has grown substantially and doing a really nice job. It has a nice backlog. But I can't give you specifics about really the number of new dealers, but 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. .

Good morning, Nathan..

Good 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? And do you think the channel inventories end the year at an appropriate level or under or overstocked?.

Yes. 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. 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.

This will be -- 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 will 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. And then just a follow-up on India. You've said it doubled year-over-year. Obviously, India has had its issues with COVID.

Can you just give us a number relative to where it was in 2019?.

In 2019, I mean it's – gosh, I don't have that in front of us right now. I'd say I'm pretty confident it's higher than 2019. But I do want to frame it a bit because typically 35% to 40% of our sales are in Q4. But we're really pleased with how the team has performed for the quarter in a really tough environment. .

Yes, I would just want to add on to it. I mean, India was savaged by COVID. And our team did what they needed to do to protect our employees, but more importantly really developed 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. So we're 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.

And we're looking for the back half to get a bit better. And again as Chuck said that's where we get about 50% of our sales over the last four months. .

Your next question comes from the line of Susan Maklari with Goldman Sachs. .

Thank you. Good morning everyone..

Good morning, Susan..

My first question is around the boiler business. You guided -- or you held your guide of a low double-digit increase this year. And 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?.

Again, as we've talked about the back half is a more difficult comp. And as we look forward, we talked about bringing forward the early buy which was a record early buy for us from the third quarter. So there's a few items that are a headwind as we get into the second half of the year. So that's the primary reason behind it. Order bookings are good.

Still seems to be pretty healthy with regards to our quoting activity. But 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 in the second half of the year. .

Yes. The only thing I would add is I'm trying to think about kind of the benchmark for 2019. And I believe when you kind of look at 2019 we're up high single digits compared to 2019 which is confirming that number just to help kind of frame where we are because 2020 had quite a bit of disruption in Q2.

There's a lot of jobs that were closed and a lot of production that was disrupted. So I'm trying to help with the 2019 framing and that's roughly -- it's up about 6% in 2019. .

Okay. Okay. That's helpful. And 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 are a bit easier in the back half how should we be thinking about it?.

Well commercial water heater it's nice when you reopen the economy. And 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. And we're just seeing activity grow. We're seeing restaurants open up.

We're seeing people invest back in their business. So 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 kind of a normal replacement cycle and maintenance cycle. So that's where we raised our guidance up by 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 and thanks for taking my call up here. Follow-up here had gotten cut off in the middle of my next question for you. But I maybe just wanted to go back to the pricing guys. And I have tracked with August 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?.

I think it was approaching 10%. When you get all three together we've been kind of accumulating them as we go along. Pat will take a quick look here. But the first one was roughly that amount I believe..

Yes, Scott I'd tell you that's a long time ago. Well if you look back at it because we've been chasing these costs for a while. .

Okay. And so 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 sort of double digit. And the reason, I'm asking that is that the first two months of the quarter trade data is sort of up and over 20%.

Now that's only the first two months, but it would just seem like that should be a -- 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. And you look at the industry it's up through May 11% 12% total. Again quite a bit of that has been driven by price increases and those type of activities along with the new construction and so forth. So we have been lagging. And again, it's 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. But 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. But I wanted to make sure you understand where we were and where we're going.

And we don't see fundamentally anything changing with regards to our customers our market share as we finally get through this – these difficult times and finish up 2021..

And Scott just to follow up that first price increase was up to 9%. So pretty close to that 10 that I mentioned but up to nine is what we went out with..

And your final question comes from the line of Kevin Hocevar 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 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?.

Yes. 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. It's just a matter – and our customers are. Just a matter of – working like I said go back to working those nine hours, working that occasional Saturdays to close that gap.

And that's going to be all predicated on our supply chain, which again -- and I've talked to many of our key suppliers. They're all getting better at it. They're all coming online a bit more.

And 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. And then on the water heater side so if you -- if I back into the numbers it seems like water heater sales probably grew 25% 26% in that -- in the second quarter.

So wondering if you can just -- is that -- I don't think you historically give price volume or anything but is that mostly price or fairly split between price volume? And I think you guys made a comment that 40% pricing will be kind of once everything is going to affect in the fourth quarter that will be what pricing is.

So, does that mean we should be thinking water heater sales up 40% in the fourth quarter plus or minus whatever our volume expectation is?.

Yes. Well let me just go back to kind of the price volume portion of Q2. And we typically don't but I think it's very helpful in the environment that again that we give a little more data. So in Q2 when we kind of 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. So 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 mentioned that -- just for modeling purposes as we -- I think you had mentioned that when all four price increases are in effect it would be 40% cumulative.

So 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. .

Yes that's roughly right. I mean 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. .

Yes I would say that plus or minus though there's going to be some drag probably with that pricing in the fourth quarter. .

Okay. 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 3 next week and D.A. Davidson on September 22. Have a great day. .

This concludes today's conference call. You may now disconnect..