A O Smith Corp (AOS) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the A. O. Smith Corporation first-quarter 2014 earnings conference call.

(Operator instructions)

As a reminder, this call may be recorded.

I will now introduce your host for today's conference, Pat Ackerman, Vice President Investor Relations and Treasurer. You may begin.

Thank you, Ashley.

Good morning, ladies and gentlemen, and thank you for joining us on our first-quarter 2014 conference call. With me participating on the call are Ajita Rajendra, Chairman and Chief Executive Officer, and John Kita, Chief Financial Officer.

A note this morning to you all on the conference call is that the slide deck is viewer controlled. So you will have to advance the slides as we go along.

That's just a little hiccup we had this morning. So just be aware of that. That you will need to advance your own slides.

So the next slide, before we begin with Ajita's remarks, I would like to remind you that some of the comments that will be made during this conference call, include answers to your questions -- 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.

The next slide. In order to provide improved transparency into operating results of our business, we are providing non-GAAP measures, adjusted earnings, adjusted EPS and adjusted segment operating earnings that exclude certain items, as well as non-operating pension costs consisting of interest costs, expected return on plan assets, amortization of actuarial gains and losses and curtailment.

Prior year results are provide on a comparable basis. Reconciliations from GAAP measures to non-GAAP measures are provided in the appendix at the end of this presentation and also on our website.

Ajita, I will now turn the call over to you.

Thank you, Pat. I'm on slide 4 which says First Quarter Highlights.

2014 is off to a great start. We continue to see the benefits in our performance from the housing recovery in the US and our expanding consumer product business in China.

Here are a few highlights. Our organic growth drove sales 8% higher to a first-quarter record of $552 million. China sales growth of 25% exceeded our expectations, and growth was across the board with gas tankers, water treatment and renewable energy products growing faster than the business as a whole. Our adjusted earnings of $0.54 per share were 13% higher than the $0.48 per share recorded last year, primarily driven by higher sales.

We continue to allocate a portion of our capital to returning cash to our shareholders. During the quarter, we announced a 25% dividend increase and repurchased $21 million of stock. To allow us to continue to repurchase our shares, our board increased its authorization by 1.5 million shares in April.

John will now describe our results in more detail.

Thank you Ajita. Slide 5.

Sales for the first quarter of $552 million were 8% higher than the previous year, driven by higher volumes of water heaters in the US and China. Adjusted earnings of $49.7 million improved 11% from 2013.

Adjusted earnings in 2014 excluded after tax non-operating pension costs of $3 million. Adjusted earnings in 2013 excluded after tax non-operating pension costs of $3 million, an after tax gain of $6.8 million related to a settlement with a supplier, and an after tax restructuring and impairment expenses of $9.5 million.

On slide 6, adjusted earnings of $0.54 per share improved 13%, compared with $0.48 per share last year. The effective income tax rate of 28.8% associated with first-quarter adjusted earnings was approximately 1 percentage point lower than in the first quarter last year, providing a $0.01 per share benefit to first-quarter 2014 adjusted earnings per share.

Reconciliation from GAAP EPS to adjusted EPS is included at the end of this presentation and covers the previously discussed items. Slide 7.

Sales in our North America segment of $389 million increased 3% over last year, driven by higher sales of residential and commercial water heaters in the US, which were partially offset by lower Canadian water heater volumes and a weaker currency in Canada. The unfavorable sales impact from Canada amounted to approximately $5.5 million.

Rest of World segment sales of $173 million increased 25% compared with last year, driven by increased demand for water heaters and water treatment products in China, market acceptance of a newer, higher value water heating product in China and new store additions. After examining buying patterns by our top seven customers during the quarter compared with the prior year, we believe a change in inventory levels favorably impacted our sales in China by approximately $10 million.

On slide 8. North America adjusted operating earnings of $59 million were slightly below last year, and adjusted operating margin of 15.2% declined as well. A favorable impact from higher volumes in the US and savings associated with rationalization of our manufacturing footprint were offset by higher steel prices, lower volumes in Canada and a weaker Canadian dollar. As a result of higher steel prices, we announced a mid single-digit price increase in North America, which will be effective May 1.

Rest of World operating earnings of $25 million improved almost 40% compared with last year. The favorable impact from higher sales and improved mix of products in China was partially offset by sales-related increases in selling and advertising costs and higher expenses related to opening a second water heater plant in China in late 2013.

Operating margin was 14.5%, an improvement over last year, largely due to improved profitability in our China water treatment business. Our adjusted corporate expenses were $13 million, an increase from the prior year, primarily due to higher stock-based compensation costs related to shorter amortization periods.

On slide 9, cash provided by operations of $12 million in the first quarter 2014 was lower than the $34 million provided last year, as a result of higher outlays for working capital in the 2014 period. We are expecting operating cash flow for the full year 2014 to be between $240 million and $250 million.

Our liquidity position and balance sheet remain strong. Our debt to capital ratio was 15% at the end of March 2014. We have sizable cash balances located offshore and our net cash position was almost $250 million at the end of the first quarter this year.

During the quarter, we repurchased approximately 450,000 shares of common stock for a total of $21 million under a 10b5-1 automatic trading plan. Since the end of the first quarter, we have repurchased approximately 300,000 additional shares.

Considering the additional 1.5 million shares authorized in April by our board, we have approximately 1.9 million shares remaining on our existing repurchase authority to date. Depending on factors such as stock price, working capital requirements and alternative investment opportunities, we expect to repurchase a significant portion of the authorized shares in 2014.

Slide 10. This morning we increased our adjusted earnings guidance to $2.20 to $2.35 per share. The midpoint of our adjusted EPS guidance represents a 10% increase in after tax earnings, compared with our 2013 results.

Non-operating pension costs are expected to be $0.14 per share in 2014, slightly above the $0.13 per share in 2013. Recall that in 2015 our pension plan will sunset for almost all beneficiaries. We expect this to result in a considerable reduction to our pension costs for 2015.

Our GAAP EPS guidance is $2.06 to $2.21per share. Our adjusted EPS and our GAAP EPS guidance does not include the impact from future acquisitions.

I will now turn the call back to Ajita, who will summarize the assumptions in our 2014 outlook and reiterate our acquisition strategy.

Thanks John.

I'm on slide 11, which has a heading that says 2014 Outlook and 140-year Anniversary. As John mentioned, the midpoint of our updated 2014 guidance implies growth of 10% in adjusted earnings per share over last year.

Our outlook for 2014 includes the following assumptions. First, we continue to see strong growth in China. As many of you know, we operate as a consumer product business in that region and have invested significantly in innovation, safety, reliability and quality to sustain and enhance our position as the leading premium water heater brand.

The return on our investment in engineering and innovation, together with distribution expansion and market share growth, are the key drivers of our success in China. The macro environment too provides three important tail winds for our business.

First, our premium consumer products, with a highly recognizable brand, are in the sweet spot of the government's desire to grow the consumption part of China's economy. Second, China recently set a goal for the population to be 60% urban by 2020. This push for urbanization equates to 10 to 15 million people per year moving to the cities, many of whom may buy apartments and water heaters.

And third, wage inflation has been increasing recently, and this aids the expansion of discretionary income. Combining all of these factors gives us confidence that we will continue to at least grow at two times China's GDP rate.

Second assumption. We expect our Lochinvar brand to continue to benefit from the transition from lower efficiency non-condensing boilers to higher efficiency condensing boilers, and also from strong market acceptance of products, like our new Crest condensing boiler and the recently announced FTXL boiler. Both of these products are expected to be introduced in the second half of this year.

Lochinvar branded condensing boilers continue to offer compelling payback in the form of energy savings and we have built a reputation for innovation and outstanding product quality. As a result, we expect Lochinvar branded sales to grow at approximately 10% in 2014, well ahead of GDP growth in the US.

Third, we are cautiously optimistic about the developing recovery in US housing. After a very strong water heater industry growth in 2015, helped by improved levels of home completions and significant expansion of the replacement market, we expect residential water heater volumes in the US to be up to approximately 9 million units, including tankless, primarily due to an increase in new home construction this year.

We expect commercial water heater volumes will increase to approximately 162,000 units. Both of these industry estimates are improvements from the levels we originally forecast in our January guidance and reflect a stronger start to the industry this year.

Fourth, we announced a mid single-digit price increase for wholesale water heaters in North America, effective May 1. This price increase was anticipated as we saw steel prices climb steadily over the last several quarters.

And our fifth assumption, as we discussed in the past, 2014 will be negatively impacted by higher costs associated with the new factory in China and approximately $10 million of incremental European implementation expenses. In addition, we expect our adjusted effective tax rate for the year will be between 29% and 30% in 2014, higher than the 28.3% we saw in 2013.

I'm onto the next slide now, slide 12, which shows the A. O. Smith growth strategy. Our acquisition strategy has not changed. We remain focused on water heating and water-related technology companies around the world, as well as leveraging our brand, our brand equity and distribution channel in China.

Our target list continues to evolve. In the last 12 to 18 months, we walked away from several targets, primarily because of price. And new names have been added to our pipeline.

Our teams are energetic and very engaged in the process. We will continue to consider a combination of support for organic growth, acquisitions, share repurchase and dividends for capital deployment.

Slide 13, our investment criteria. You've seen this slide before, and we show this only as a reminder that we will continue to be financially disciplined, acquire our companies within our stated corporate strategy.

This concludes our prepared remarks and we open for your questions.

WIlliam Bremer, Maxim Group.

Good morning.

Good morning.

Nicely done. I love the consistency.

Thank you.

All right, let's first start off with Lochinvar. Can you give us a sense of how its contribute to the quarter? And more importantly, what did you see on the aftermarket there?

Well, it was an interesting quarter for Lochinvar. They were up about 7%. And we feel they were affected pretty significantly by the weather. The contractors we talked to said that they were basically so busy that they only had time to repair versus replace, which can take two to three days.

We saw that in our parts business. Our parts business was up almost 20% year-over-year and was actually as strong as the fourth quarter, which is very unusual for them from a parts standpoint. So they were affected by the weather.

We're still very comfortable that coming out, as Ajita talked about, two new products the last half of the year. We're incurring some engineering expenses to get those to market, but we're very excited about the products that we're bringing in. We're comfortable at this point that they can still achieve their 10% goal.

Okay John. Thank you. And can you give us an update on how you're considering rolling out the residential end to that abroad?

You're talking about Lochinvar in China?

Yes I am.

So I think there's not much of an update. We'll have the residential boiler there relatively soon. We're still running into some headwinds with respect to the commercial boiler and getting the approvals. We're looking at a couple of different strategies with respect to that right now.

We're still comfortable long term that the boiler business will be a good growth opportunity in China, but it's taking longer than expected. But we're looking at a couple different strategies with respect to commercial.

Let me jump in here too. Bill, this is Ajita. We are seeing some signs in China where the government is starting to talk about cutting back on coal consumption and increasing natural gas in the country. And all of those signs are very positive signs from the point of view of these types of very highly energy efficient products.

So again, as John said it's going a little slower than we'd like, but the long term prospects are right in line with our expectations.

Great. And then just a quick follow-up here. Can you give us an update on India? How that's progressing and what your strategy is throughout 2014?

You know, India is going well. You know right now the economy is kind of at a standstill and the depreciation of the rupee has hurt us, as we've said in the past. But if you look at what's happening with the business in local currency in India, it's right on track. We are increasing market share slowly. They are expanding our distribution and the business is growing.

We don't see it in dollars because the depreciation of the Indian rupee essentially almost offsets the other increase in volume that we are seeing. So we are happy with the business in local currency. We are not quite as happy when you translate it back to US dollars. But again the longer term trends are very positive. There is a lot of anticipation that after the election and once the issues with the election die down and there is a definite result, that the economy will pick up again.

Great. Thank you for the time.

Matt Summerville, KeyBanc.

Good morning guys. This is Joe on for Matt. Just first a couple of questions on the price increase. Is that May 1 price increase across the board in North America, both residential and commercial kind of similar mid single-digit range? And then a follow onto that.

Obviously steel costs have increased over the last few quarters. But I believe Caldwell was still below where it was the last time you raised prices in I think it was mid-2012. How confident are you that, that's going to stick? Are you the first mover here? Are you following kind of industry price increases? Or just maybe talk to the confidence level that you're going to see stickiness in that price increase.

The price -- we are pretty confident about the price increase. And I'm not sure about the steel data, we'll have to check on that. But my perception is that steel prices were in fact lower at that time, although I'm not sure about that, okay? We'll have to check on that.

But the indications from the marketplace are pretty good. There was not a lot of push back or very little push back from our distributors. And so we feel pretty good about the price increase sticking.

And just given the timing, I mean it's May 1. Since it's mid-quarter we shouldn't see -- you know, there was no pull forward into the first quarter. There shouldn't be any impact I wouldn't think on a quarterly basis?

Not in the first quarter, no. There was, there was almost, I shouldn't say almost. There was no buy in that we saw in the first quarter. And we'll see a little bit of impact in the second quarter but not much.

Yes. Okay. And then on the commercial side, commercial volumes -- you said commercial volumes were up in the quarter. That was against a pretty tough double-digit comp. I think there was a pre buy in California last year. You have increased your commercial industry outlook slightly it looks like. So are you seeing signs that non-res activity is starting to improve or what gives you -- how do you explain the commercial bump?

Yes. We see non-res activity starting to improve and feel pretty good about that. Which is why we bumped it up.

Okay.

It started out relatively slow. The AHI data shows January and February were pretty weak. But we saw a very strong arch, so that's what gave us the comfort level to raise it up some.

Okay. And then lastly, John you mentioned a $10 million inventory benefit in China. Was that -- did something drive that? Is that a pull-forward into the first quarter? Is it just your customers willing to have higher inventory levels because of the consumer demand they're seeing? Just a little more color around that please?

Part of it is the delta last year in the first quarter our major customers shipped out of inventory. So the inventory levels went down about $5 million. This year in the first quarter our customers built their inventory levels above $5 million. So that delta is about $10 million. We're not really uncomfortable with the inventory levels, it was just kind of a quarter-to-quarter comparison.

Right. The $5 million up and down month-by-month is not unusual, as John said. But you know we try to -- when we do have inventory data we try to look at it and make sure that we give you an accurate picture of what's going on.

Great that's very helpful. Thanks guys.

Scott Graham, Jefferies.

Hey, good morning.

Good morning.

Ajita, I just want to understand your market assumption for the US resi. Tankless, are you using 4% for tankless as a percent of the market? Or 5%?

It's approximately 4%.

400,000 units.

400,000 units.

400,000 units. So essentially you're lifting your assumption in North America non-tankless by about 1 point. Right?

Yes, By about 100,000 units.

Right. Okay, I just wanted to kind of get that math right. So you're up by a point, even though first January and February, which I think you alluded to as being weather affected, were up 5%?

Well yes. Yes. So on the residential side January and February were up 5%, okay? And we think that March was very similar. So we saw -- we think the first quarter industry is up about 5%. What I was alluding to earlier was commercial was down January, February but up significantly in March.

Well I guess I would have to believe that weather affected the January and February numbers in resi as well though, right?

Possibly. Again, we saw a fairly strong quarter as it was up we think about 5% for the industry.

Understood. But even with that 5% let's say it didn't affect -- you have 5% in the first quarter and your estimate is about, you're assuming 4% for the year?

Right.

That's right. That's about right.

Okay. Next question kind of related to China. And I don't think we've ever asked this question before. Could you guys separate out in total what your new distribution points impact on sales were versus the rest of the business? You follow me? Like versus the same store stuff?

That's very difficult to do. We really have not started -- we don't look at it this way. Because when distribution points change they're always things going on in terms of less efficient distribution points shutting down and new ones opening up. And so hopefully the mix is always getting a little better. And so because of all that change we don't really look at trying to separate it out in that manner.

Could you hazard a guess, at least? The reason I'm asking is that obviously your two largest customers there are more than half of the sales. So I was hoping maybe at least we can get one-third, two-thirds. And even if you --

I don't know if I can give you that, Scott. But our two largest customers are about 40% of our business.

40%? I'm sorry.

And why it gets really difficult is we're adding primarily distribution in tier 2, okay? We're closing -- and the phenomena we talked about at the end of I think it was 2012 continues. There's a significant amount of closures of new stores and opening of new stores with the net increase being -- the net being an increase.

So it's a real struggle to try to get even same store sales and some of that data. Clearly I'll tell you this, quarter-over-quarter I think new store additions helped us year-over-year. We have added a net just in the -- from the fourth quarter to third quarter we added probably a net of 150 to 200 stores. But again most of those are in tier 2, tier 3 cities. They don't have the same per volume throughput that the tier 1 stores would have.

And also I think the -- another thing that's impacting us is the growth in online sales, which doesn't really have a correlation to number of those. You know, online sales last year were around $16 million. And we hope that we'll double that this year. And we when we look at the first quarter, it's certainly on track to do that.

Okay. So let me ask the question maybe a little bit differently here. If we look at the sales growth number, we X out the inventory impact, your sales were still kind of 15%-plus up, right? I'm sorry. The inventory impact. What I'm trying to get at here is that off of my past calculations I have always assumed 5%-ish type of new distribution add to sales. Would it be fair to say that even if you don't want to get that granular, do you think that your same store sales are still outperforming China GDP?

I would say that same store sales are probably not outperforming.

I don't know that we have that now.

Yes, but it's a combination, as we've said, we're growing different ways. We have a higher average price, okay, year-over-year. And that's with new products we have and the change in mix. We have new distribution, we have ancillary product lines like water treatment, commercial, Combi growing much faster than the average.

Then we have the inventory build. So I think it's a pretty consistent story in that we continue to grow a lot of different ways and that's why we're comfortable saying that on average we're going to grow 15%.

I got you. That helps. Thank you. My other question is about the acquisition environment. I don't know if this means anything, but your corporate expenses were a little bit higher than what I was expecting. Was there an acceleration in due diligence work in the first quarter on M&A?

No. I think we talked about corporate in our last conference call. And we said traditionally our first quarter because of LTI grants and the way we have to amortize them much quicker because some of the executives are getting retirement eligible. I think we highlighted that the first quarter was going to be the highest corporate expense. We're still comfortable when we said at the end of the year [$0.49]. We think we can probably have corporate come in around [$0.48] or so.

Okay. So I guess the bottom line to that question would be really squarely for you, Ajita. Could you assess any type of probability that you'll get a deal done in 2014?

That's almost an impossible question to answer because like I said, we are looking, we are -- I'm happy with what we see in terms of the pipeline and potential. Like we've said that when we lay out our financial criteria the price that we are seeing becomes a concern, especially given today's interest rates and competition from P/Es, et cetera who are essentially looking at a slightly different map.

And we will continue to be a very disciplined acquirer and make sure that when we do make an acquisition that it would be where we see value creation and it adds value to our shareholders. So to be able to predict whether we are going to be -- whether we can do one or not, I wouldn't go there at this point.

I had to try. Thank you. (laughter)

Aditya Satghare, FBR.

Thank you, good morning all.

Good morning.

So two questions. First on the China market here. How should we think about your growth in China in the context of say overall water heater growth in China? And then if we think about the new factory in Nanjing how should we think about the utilization level of this factory as we go forward?

Why don't I jump in and then, John, maybe you should add some color to it. In looking at the water heater factory, obviously we've just started. We started our production a little after mid-year last year and it's building as the volume builds. So it's nowhere near in terms of being fully utilized and we didn't expect it to be. So from that perspective it's adding cost, as we've indicated. And that's in our guidance. It's in line with what we expected and what we are seeing.

And the teams are working on productivity, improvement and all the rest of the things to mitigate that as much as possible. Again all in line with our expectations and guidance from when we opened the factory. So not much change there. What was the first question?

The water heater market in general.

Oh, the water heater market in general. If you look month by month things go up and down, okay? But overall, Aditya, if you look at the last six months and our anticipation going forward is that we have gained market share and we continue to gain market share over the -- an extended period of time. Month by month things go up and down.

Usually in the first quarter we go down a little bit in market share because we pull back with spring festival, et cetera, we pull back a little bit on our promotions. And you've seen that in the past. But overall the trend has been a slower increase in market share. We expect that over time to flatten out. Because obviously you can't -- it's not an unlimited thing to go in terms of market share. Overall we expect that to flatten out.

One more question on China then. You mentioned three products which contributed strongly for China growth. You mentioned the gas products, the renewable product and I missed the third one. How should we think about your market share in some of these high-end accentuated products and maybe sort of broadly touched on what are some of the key factors, the key [differentiating] points customers are willing to pay for in terms of your products?

I think the best way to look at it, Aditya, is that we have -- our team there really spends a lot of time and money and effort understanding the consumer and consumer trends. And combining that with our product development capability and speed to market, we stay ahead. We have in the past and we continue to stay ahead of the trends in terms of where the market is moving. Come out with the products with the features and benefits and the cost to market with key features and benefits at the high-end that people are prepared to pay for. And so our portfolio and mix of products is always changing.

If you go back a few years our product line was essentially electric tank type water heaters. When we saw tankless as being a market we wanted to get into, we made a big push into tankless and we are now the leaders in tankless in China. And similarly we are growing in renewable energy products and also when we made the -- based on our strategy and getting into adjacencies to leverage our core competencies in China like our brand, like our channel and access to market, we went into water treatment for a number of reasons.

Again to expand our customer base and bring them high quality products that live up to our brand positioning, and also we wanted to get into a business that has a much faster replacement cycle from the point of view of replacement filter. Now we haven't seen the impact of that yet in water treatment. But we expect to see that soon.

So we are constantly changing our product line, our portfolio products to stay ahead of the market and market trends. That's a long answer I know, but that's the approach that we have in China and have been taking for some time now.

Last question for my side, coming back to the US here. If we tried to sort of strip the weather impact aside, is there anything in the US market or any change in customer buying patterns or mix which would suggest that consumers are replacing at a rate which is higher than what you have seen over the last couple of years?

I don't think so. I think what we are seeing is that there has been -- last year and this year in addition to new construction coming back, is there's been a pent-up demand for remodeling and the discretionary replacement component of residential water heaters and we see that coming back.

Thank you. That's all I had.

Ryan Connors, Janney Montgomery Scott.

Great. Thank you. First I just had a quick kind of housekeeping question and then a couple of bigger picture items. Just in terms of the buy back you mentioned that authorization's been upped in the press release there. Can you give us some color around what your assumptions are in terms of the buy back and share count within the guidance?

We're assuming for the year probably low 91 million shares outstanding. So 91 million to 91.5 million, somewhere in that range.

Okay. Great.

Average results then for the year.

Super. That's helpful. And then two other things from my end. Just first off you mentioned this FTXL boiler rollout for Lochinvar. Our understanding is that, that's a somewhat of a true step change in terms of applying that type of technology to a broader set of applications. So I'm curious how that rollout is proceeding and what the reception has been, both internally and among your distribution in terms of that particular product?

It's been very high. Internally certainly. I happened to have dinner with and speak to over 100 of our Lochinvar distributors and buy/sell reps, buy/sell reps really, last week. And the excitement level is very high. That's when they really saw the product, we introduced to it, in addition to actually they went in and had training, et cetera. And the excitement level is very high.

So there's a gap here in terms of fire-tube type boilers and what's in the market. So this goes from about 400,000 BTU to 850,000 BTU range. And bringing in, introducing fire-tube boilers of this quality with these types of controls, et cetera, into that space is seen as a very positive move in the marketplace.

Okay. And will that product's price --

They are just starting to ship, so we haven't really seen the impact of sell through yet. Third quarter we start to ship the product. So again, this is excitement level we are seeing. It's -- we haven't really seen numbers yet, though, impacting our numbers yet.

And is the intent to price that product at a premium, I would assume?

It will be in line with Lochinvar pricing which is you know, which is a premium priced product in the marketplace.

Okay. Great. And then just a final question from me. You mentioned, John, I think you mentioned a nice acceleration in commercial market in March. Does your data give you any insight into what particular niches of the market are picking up there?

No, we wish it did. But it does not.

Okay, fair enough. Thank you.

Charlie Brady, BMO Capital Markets.

Thanks. Good morning. Hey with respect to the China and the water treatment business. In your release you cited the margin and Rest of World as being largely attributable to better profitability on that business. Can you just speak a little bit -- are you seeing a growth trajectory in that water treatment that's picking up a little bit quicker than you expected? Or is it just a function of as we go forward in time the volumes get better or the profitability gets better there?

I think we're seeing volumes pick up nicely, especially in the A. O. Smith branded portion of it. I think was up almost 70% quarter-over-quarter. And so we've seen nice improvement in profitability mainly because of the volumes coming through, et cetera. We are in more store outlets, which means a little more SG&A, et cetera. But again the volume certainly helps.

And what we saw for the first time is really even after amortization of customer lists, et cetera, which is almost $3 million on an annual basis. We saw it was very slightly profitable, even after that. So compared to a year ago there was a fairly significant loss.

Okay. And then just on Rest of World, you previously commented that for the margin for the full year expected just under 13% EBIT margin, you still -- is that still kind of in line with your expectations or has that moved at all?

No, I think as part of raising our range we got a little more comfortable with that. And I think last year it was about 13.2% EBIT margin. And even with a full year of the new plant we think we can achieve those sorts of levels this year.

One more for me. When you talked about the M&A strategy, part of that comment, you talked about you walked away from some stuff and some stuff had been added to the acquisition pipeline. I guess just key on that particular comment. I don't know if that was just an offhanded comment, obviously things move in and out, but I'm wondering if that speaks to an expansion of the areas you're looking at? Or what would have driven adding companies to that potential pipeline that maybe weren't on that list before?

I think it's -- we really have not expanded what we are looking at in terms of water technology companies and companies and businesses that would leverage competencies in China. So from that perspective the lens has not really expanded.

But we discover new companies or potentials or find areas in which maybe there's value creation that we didn't see before. Or we may see potential with private companies that are not in the market but we started discussion. So it's a combination of all those things.

And I think that companies are coming up for sale that saleable. (multiple speakers)

Right. They have become more actionable. So it's -- it wasn't anything. It was perceptive for you to pick up that comment, but it wasn't anything unusual happening. It's the ongoing evolution as we are very actively looking for potential companies in this space.

Thanks very much.

David Rose, Wedbush.

Good morning gentlemen. I may be a little bit late on this because I was on another call. But I don't believe you mentioned it. If you could touch upon, and I know it's small, maybe your progress on India's water treatment business. And then secondly I had a question on ERP.

We talked about India a little earlier. The business in India itself is going -- we are happy with the business in India. We are expanding our market share slowly, we are expanding our points of distribution and the product is very well accepted in the marketplace. The Indian market is kind of stagnant right now, especially with the elections going on. There is a lot of anticipation that once the election is done that the market will pick up again.

When we translate our results back into US dollars the results are disappointing. Because a unit volume growth is essentially offset by the depreciation of the Indian rupee. So from that perspective the revenue and the profitability we see is disappointing.

I'm sorry Ajita. I actually I caught that part, but what I was asking is about the initiatives on the water treatment side. I'm sorry. Maybe I wasn't clear.

Oh, I'm sorry. Go ahead John.

I mean we talked about on the last call that we're going to enter the water treatment market. And I think the intent really is to do it on a pilot basis, test the product out in certain regions, so we did not -- we'll have a decent amount of advertising, et cetera, but it will be more on a pilot basis we believe this year with more of a larger rollout next year.

Okay. So we're still on track?

Yes. The water treatment market in India is about three times the size of the water heater market in India. And it's an established market with some strong players. And what we want to do is to make sure that we have the products that live up to the brand positioning and can go in and make a really good impression and compete in that space.

If we had to say -- are things on track, I would say we are slightly behind. But we anticipate that, that's an exciting opportunity for us just like in China to be able to leverage the infrastructure that we are building in the market.

Okay. That is helpful. Thank you.

Then on the ERP side the headwind last quarter, this quarter and as we think about it next year, have you been able to quantify the benefits better now that it's underway? Does that provide a tailwind, not just a lack of a headwind for you next year? Then on the CapEx side you've commented the impact on CapEx for 2014, does that all go away for 2015 or is there some carry on in 2015?

Well we should talk about -- we've talked about the fact that the expense is about $10 million incremental, i.e. about $15 million for the full year. The biggest portion of that expense ends up being in the last half of the year. We're right now in the testing phase and much of that costs, et cetera, gets capitalized. So we saw $1 million-plus expense hit in the first quarter. We'll probably see a couple million in the second quarter. But the majority of the impact from an expense standpoint will be the last half of the year.

We're pretty much right on track with what we thought it would be. The first rollout will be in August then we'll start rolling out next year the remaining sites. So we never anticipated that in 2015 there was going to be significant efficiency improvements again because the majority of the rollout happens in 2015. So we'll start seeing the benefits we think more in 2016.

Okay that's helpful. Thank you.

Thank you. I'm not showing any further questions in queue. I'd like to turn the call back over to Management for any further remarks.

Thank you all for joining us this morning to discuss our first quarter results. Happy Earth Day to all and enjoy the rest of your day. Thank you.

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