A O Smith Corp (AOS) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the AO Smith Corporation third-quarter 2014 earnings call. At this time, all participants are in listen-only mode.

(Operator Instructions)

As a reminder discomfort call is being recorded.

I'd now like to introduce your host for today's conference, Patricia Ackerman, Vice President, Investor Relations and Treasurer. Please go ahead.

Thank you, Kate.

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

Before we begin with Ajita's remarks, I would like to remind you that, some of the comments that will be made for 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.

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

Prior year results are provided 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, and good morning, ladies and gentlemen.

Our strong performance in the third quarter was driven by solid growth and profitability across all our major businesses. Here are a few highlights.

Our organic growth drove sales 8.5% higher to $582 million. China sales were up 16% with gas tankless and water treatment products growing faster than the business as a whole. Our adjusted earnings of $0.59 per share were 9% higher than the $0.54 per share recorded last year, and were primarily driven by higher sales which more than offset $6 million in incremental ERP expenses.

We continue to allocate a portion of our capital to returning cash to shareholders. We repurchased approximately 1.8 million shares for $87 million this year through September 30. We increased our dividend by 20% or more for the third consecutive year in early 2014. We are on track to return approximately $160 million to shareholders this year.

In August, we successfully completed our first ERP go-live milestone. I commend our team for their laser focus on a successful outcome. The remaining go-live events are planned to occur in 2015.

John will now describe our results in more detail.

Thank you, Ajita.

Sales for the third quarter of $582 million were 8.5% higher than the previous year, driven by higher sales of water heaters and boilers in the US, and water heaters and water treatment products in China. Adjusting earnings of $53.5 million improved 6% from 2013.

Adjusted earnings in 2014 excluded after-tax nonoperating pension costs of $2.9 million. Adjusted earnings in 2013 excluded after-tax nonoperating pension costs of $3.2 million, and after-tax restructuring and impairment expenses of $1 million. Adjusted earnings of $0.59 per share improved 9%, compared with $0.54 per share last year.

The effective income tax rate associated with third-quarter adjusted earnings in 2014 was 27.9%, compared with 25.7% for the same period last year. The rate last year benefited from several non-recurring items.

Consistent with previous disclosure, we expect the effective income tax rate for 2014 adjusted earnings will be between 28% and 29% with the GAAP effective income tax rate almost 1 percentage point lower. A reconciliation from GAAP EPS to adjusted EPS is included at the end of this presentation and covers the previously discussed adjustments.

Sales in our North America segment of $392.4 million increased 6% over last year, driven by higher volumes of US residential water heaters and commercial boilers and a price increase in May. The rest of world segment sales of $198.5 million increased 13% compared with last year. Sales in China increased 16%, driven by increased demand for water heaters and water treatment products and higher customer inventory levels in advance of the fall holiday.

North America adjusted operating earnings of $56.3 million were 1% lower than last year, and adjusted operating margins of 14.3% was lower as well. The favorable impact from higher volumes and prices in the US were offset by higher steel costs and an incremental $6 million in planned ERP implementation costs. Rest of world operating earnings of $30 million improved 12% compared with last year, driven primarily by higher sales. Operating margin of 15.1% declined slightly from one year ago as a result of higher selling and advertising costs as a percent of sales in China.

Our adjusted corporate expenses were $10.6 million, a decline from the prior year, primarily due to higher expenses related to management incentive programs in 2013. Cash provided by operations of $164 million through September 2014 was lower than $188 million provided last year. Higher earnings were more than offset by higher outlays for working capital in the 2014 period. We are expecting operating cash flow for the full year 2014 to be between $225 million and $235 million.

Our liquidity position and balance sheet remain strong. Our debt-to-capital ratio was 16% at the end of September 2014. We have sizable cash balances totaling nearly $525 million located offshore, and our net cash position was almost $270 million, both as of September 2014.

During the first nine months of 2014, we repurchased approximately 1.8 million shares of common stock for a total of $87 million under a 10b5-1 automatic trading plan. Considering the additional 1.5 million shares authorized in April by our Board, we had approximately 840,000 shares remaining on our existing repurchase authority at the end of September.

Depending on factors such as stock price, working capital requirements, and alternative investment opportunities, we expect to repurchase approximately 490,000 shares of the remaining authorized shares in 2014, spending approximately $110 million in the full year. As a result of the share repurchase activity, we expect to end the year with approximately $275 million in net cash.

This morning we announced an increase to our adjusted earnings guidance of $2.37 to $2.41 per share. The midpoint of our adjusted EPS guidance represents a 16% increase in after-tax earnings compared with our 2013 results.

Nonoperating pension costs are expected to be $0.14 per share in 2014, slightly above the $0.13 per share in 2013. Recall that our pension plan will sunset on December 31, 2014, for almost all beneficiaries. We expect this to result in a considerable reduction to our pension costs for 2015 and beyond.

Our GAAP EPS guidance for 2014 is $2.23 to $2.27 per share.

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

Thank you, John.

As John mentioned, the midpoint of our updated 2014 guidance implies growth of 16% in adjusted earnings per share over last year. Our outlook for 2014 includes the following assumptions.

First, we continue to see strong profitable growth in China, and we expect over 17% growth in the region in 2014. Second, we expect Lochinvar branded sales to grow approximately 10% in 2014, well ahead of GDP growth in the US, as our Lochinvar brand is expected to continue to benefit from the transition from lower efficiency non-condensing boilers to high-efficiency condensing boilers.

We are encouraged by the acceptance in the market of the newer higher-efficiency products in the Lochinvar portfolio. Specifically, we are seeing the CREST boiler being increasingly specified in projects. Additionally, we have received very positive feedback from the market associated with our recently announced FTXL boiler, which was launched late in the third quarter.

Third, we are cautiously optimistic about the developing recovery in US housing and the strength in demand for commercial water heaters, driven by replacement and retrofit activity. Fourth, we successfully implemented a mid single-digit price increase for wholesale water heaters in May related to higher steel prices and the inflation of other costs.

Fifth, as we have discussed in the past, 2014 will be negatively impacted by approximately $10 million of incremental ERP implementation expense. The fourth quarter will be impacted by $3 million to $4 million of incremental cost, and this is in line with our past guidance.

I would like to dive into our growth model in a little more detail; first China. As many of you know, we are a consumer product business in China. We have three growth drivers underpinning this business which give us confidence to project an annual growth rate of two times GDP for the foreseeable future.

First is overall market growth. CMM, which is a retail channel research firm that we have quoted many times in the past, predicts water heater market growth rates to be 7% in China this year. With continued urbanization, growth in the middle class, and the developing replacement and upgrade market, we expect strong market growth to continue for quite some time.

The second growth driver is market share gains and increases in average price. We have a strong market position by value in the electric wall-hung category. Our position in gas tankless, while a leader, is less than 20% by value, and we see opportunity to continue to gain more share with our well accepted super quiet models.

Increases in average price are also part of this growth driver. Our commitment to engineering resources will continue to result in new products with features and benefits in which consumers see value, and for which they are willing to pay an incrementally higher price.

The third growth driver is fast-growing ancillary product categories, the most significant example of which is water treatment. AO Smith branded water treatment grew $25 million in 2013, which added 5 percentage points of growth to our overall China business in 2013.

This year we expect water treatment to grow to almost $90 million, with the AO Smith branded portion totaling approximately $70 million. CMM projects point of use water treatment products in China to grow 40% per year over the next five years.

Combining these three growth drivers gives us high confidence that we will continue to grow at 2 times China's GDP rate into the future. Certainly China is part of our strong organic growth profile, but it's not the whole story. As demonstrated by achieving year-over-year organic growth of 7% or more for the last eight quarters, we believe our organic profitable growth profile of 8% per year for the foreseeable future differentiates AO Smith from its peers.

A solid and expanding replacement demand and minimal exposure to Europe underpins the faster growing pieces of our business. These are: a 15% growth expectation for China, which is 30% of our business; a 10% growth expectation for Lochinvar branded products, which is 12% of our business; and the remaining 58% of the business, which is almost exclusively North America water heaters, is reasonably expected to grow at 4%. The weighted average of these three pieces comes to 8%, and we are comfortable with this organic growth projection for the foreseeable future.

Our acquisition strategy has not changed. We remain focused on water heating and water treating companies around the world, as well as leveraging our brand and distribution channel in China. The acquisition landscape continues to be competitive as sustained price appreciation in equity markets overall and higher leverage allowed by banks in their loans to private equity firms drives sellers' expectations higher.

Our teams are energetic and engaged. Our capital deployment strategies continue to support a combination of investments for organic growth, acquisition, share repurchase, and dividend.

You have seen this slide before. We show this only as a reminder that we will continue to be a financially disciplined acquirer of companies in our stated corporate strategy.

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

(Operator Instructions)

Our first question comes from the line of Matt Summerville with KeyBanc. Your line is open.

Hi, just a couple of questions, first can you talk a little bit about the inventory situation that you called out with respect to China? It sounds like things maybe got a little built up here over the last couple of months, and is that more of a normal factor? Is this something unexpected, I guess, is what I'm trying to understand.

I think, Matt, as you go into the fall holiday it's not unusual for our customers to build up some inventory. I think it happened last year's third quarter, and this year it was a little bit more of a pickup than last year's third quarter. I don't think it's anything significantly out of the ordinary.

Can you just revisit, and I apologize if you said this in your prepared remarks, is my last question, in terms of commercial water heater market volume, what you expect for 2014? What's embedded in your guidance, and then similarly for residential in North America?

Sure. When we look at 2014 commercial, it's been relatively strong year-to-date. The third quarter we're thinking was pretty flat to up maybe a little bit. We're estimating the fourth quarter will be flat with the prior year which gets you to 164,000 to 165,000 units. Resi is pretty much tracking where we said at the beginning of the year. We were estimating 9 million units. We haven't come off that, and as you know that's up 4%, 5% from the prior year.

Great, thank you.

Our next question comes from the line of Scott Graham with Jefferies. Your line is open.

Hi, good morning. I don't want to read anything into this, because I don't think that there is anything to be read into it, but the China full-year sales guide presupposes a fourth quarter of up 12%. I'm just wondering, particularly off of the answer to the previous question, is there anything we should be reading into that? Or is that to some of that inventory order change, or the change in dynamic of orders for the fourth quarter, verses that third quarter built?

Yes, I think it could be impacted by a little bit of the inventory build. We certainly would expect the fourth quarter to be up double digits. Quarterly growth can be lumpy due to a variety of reasons. It's including promotional activity, inventory levels and previous years comparisons. We're still very comfortable projecting two times GDP going forward, and we think fourth quarter will be double digits.

Okay, thank you. John, I think it was you who said last quarter that the Company was looking to freeze the cash balance and use the excess, the overage of free cash flow more for share repurchases. Certainly, we have seen a pickup in share repurchases this year, but now you're talking about cash balance that has actually declined for the first time in a while in the third quarter and will decline again in the fourth quarter. Again, I'm just trying to read the tea leaves here. Are we now --

I wouldn't read anything into it. Scott, what we've said is we were going to try to keep our net cash balance for the year relatively constant with the prior year. Last year was $290 million. We would expect this year it will be $275 million to $280 million. I would read anything into it. That resulted though in us buying back $110 million or so of stock, and so that was really the focus, to keep the net cash balance relatively stable. We can only estimate it so close.

Right, and I get that. I guess my question is by extension of that, John, are we saying that the pace of 2014 share repurchases is, in the absence of acquisitions, what we should see after 2014?

We haven't said what we're going to do after 2014, but we did say in 2014 we wanted to keep that net balance, net cash balance, about constant. And that we still think acquisitions are potentially the best value added opportunity for shareholders. Until we get that acquisition, we were comfortable proceeding in 2014 the way we did. As we look at our plan, and come out in the first quarter, in January of next year, we'll evaluate where we are from 2015 at that time.

Thank you. Last question, more for you Ajita, as you can see I really have no questions operationally. The question I have is more about acquisitions to finish off John's point. Is there anything you could tell us to give us some type of temperature check on where this process is? It's been a long time coming. We understand asset prices are higher, private equity, a little bit looser with the cash, but it's been some time. Is the temperature hotter now than it was in the second quarter or the first part of the year, and if so, why? Could you give us some type of breadcrumb here on how hot the water is on the M&A side?

Like I said in the past, the activity level is high. If I look at the last few months, it's been as high as it has been in the past. The timing of this is very difficult to judge, obviously, in the market. Companies come in the market, and we don't control that timing. We do also target companies, and it depends on how those conversations go, so it's very difficult to predict that, as you know.

But from our perspective and our strategy, nothing has changed. We are looking for the right type of acquisition, and we've laid out the criteria that we have. We are being very disciplined about sticking to that criteria. As John said, we believe long term, the best value that we could bring our shareholders is making the right acquisition.

Right. You have shared with us on that though that you have walked away from situations, be it for price or for extended due diligence reasons. I guess I'm wondering, again, looking for these breadcrumbs, Ajita, just wondering if we are closer to the altar on anything now, than we were at the beginning of the year.

Scott, you know I can't comment on that.

I was hoping you could. Other companies do, in fact. I know you guys do keep it a little bit closer to the vest, but that's all I had. I was just hoping for a little bit more on this because it's been, as you know, more than three years running.

Understand.

Thank you.

Our next question comes from the line of Noah Kaye with Northland Capital. Your line is open.

Thank you. Ajita and John, congratulations on another strong quarter. [I'd like to focus] on China, that 16% growth, you've given some good granularity. I'm looking for a little more detail on how to think about where the growth is taking place. Can you break it down that little bit in terms of the mix in water heaters of replacements, versus new housing demands. And then also touch on, as you have in the past, the online versus the retail mix?

I'll say our online continues to be very strong. Last year it was $15 million for the full year. We originally estimated it would double, but by the end of the third quarter we were over $30 million, so we expect that to run pretty close to $40 million for the year. That continues to do very well.

The replacement versus new housing, I can only give you anecdotal, based on our survey. Our people would say the replacement is picking up. Where they would've used a number of 35% or so of the market one or two years ago, they're now saying it's approaching 50% specifically in the tier 1 cities. That's anecdotal. That's our survey data. As you know, there isn't good AHRI and housing completing data like there is in the US, where we can be more specific and confident in that replacement/new ratio, so that's about the best I can do.

Sure, I understand. Margin in China and rest of world, we're again really strong. You've guided I think previously to a much lower EBIT rate for the year. Is there a reason, I think for the fourth quarter, to expect some meaningful additional expenses in China and the rest of the world that would bring you back down? Are we continuing to track above that as you look for the fourth quarter?

The third quarter to be honest, the margins did surprise us a little bit. We have said SG&A would be up from the second quarter, and it was. It was up the couple points we talked about. However, gross margin because of some mix, etc, was also up. We weren't anticipating the gross margin mix positive that happened.

When we look at the fourth quarter, SG&A will continue to be up. It is traditionally. We talked about it last meeting, about advertising being up in the second half of the year, and we expect that to continue.

We do also as we look at India from a sales standpoint some things have come up. India was tracking a little bit behind last year, and then we mutually agreed to wind down our co-branding relationship with our largest distributor in India in the third quarter due some channel conflict issues.

Absent those sales, we're expected to be up 20% this year, but unfortunately we're going to be down about $4 million with that customer mostly in the fourth quarter. That'll have some effect on margins, but again we still think we'll be up rest of world year-over-year. Fourth quarter year over year margins will be up. India is taking a little bit of a detour. We talked about it long-term, we still think it's a good place to be. We think we'll be able to replace those sales as we go forward, and the core business is still seeing some growth.

Great, thank you so much. I'll jump back.

Our next question comes from the line of William Bremer with Maxim Group. Your line is open.

Good morning. Nice quarter. Let's go into Lochinvar. Can we get a sense on their revenue growth this quarter? I know you're guiding for 10% for the year, but can you help us get a little bit more granular in terms of their operating margin, and going into the winter season now more specifically on their aftermarket?

As you know, as we get into the third and fourth quarter their aftermarket does pick up. We would expect that to be the case again. It might be monotonous but they were up about 10% again this quarter. They continue to do everything that they said they'll do. Their margins are very comparable to last year, even when they have higher engineering and selling, so they continue to perform very well. For the year, we expect them to be up about 10% with comparable margins. Again given that they've put a lot in engineering this year and a lot in selling, I think they're doing extremely well.

Can you talk about specifically their expansion plans? Not just here domestically but potentially internationally?

We've talked about some new products. The FTXL will come out late in the third quarter. We expected to be well received, good electronics. It will be more efficient than the competition in that space. They have some other product line extensions planned for next year that we think will also be beneficial.

China, I think we talked about in the last meeting. The condensing is moving slower, maybe than what we're anticipating. We think there's some potential opportunities as we develop products for maybe the non-condensing in China. That's going to take most of next year to develop those products, but we're still optimistic, I'd say, on China long term for the boiler business. But probably the condensing is going to take a little longer than we originally expected.

Okay, and then let's go into India little bit. Can we discuss what your strategy is now going forward? Are you starting to think about bringing in the water treatment portion to this? What's the strategy going forward for India at this point?

I think, Bill, the strategy has not changed at all. This relationship that we had with this customer, we expected at some point that we'd go our different ways because of some of the channel conflict that was built in. It came a little faster than we anticipated, but that's built into our longer-term plan.

Without that customer, we'll still grow at 16% to 20% in India this year. The economy we feel is improving. The economy has been slow, but it is improving. The longer-term strategy in terms of building our brand, building it with water heaters, and then expanding it into water treatment has not changed.

Okay, Ajita, thank you.

Our next question comes from the line of Samuel Eisner with Goldman Sachs. Your line is open.

Thanks very much, and good morning, everyone. Just going back to some of the comments that John was making before on the rest of world profitability, it sounded as though that gross margin was a bit better than you expected, you said, because of mix and then etc. I'm just wondering if you could expand on really what is driving the profitability in rest of world? If you could you even call out what the profitability in water treatment was, that'd be very helpful.

Water treatment, I guess all I can really say about water treatment on an annual basis is last year we lost about $3 million in water treatment. We have talked about it, $2 million or so profit this year, and everything we're seeing, that's still on track. I think that's relatively equally spread across the four quarters, so there's nothing unusual there.

I'm not sure, the rest -- it truly really was a mix in China. China had an extremely good quarter, better than we would've said we would've projected because of that gross margin improvement, and that was truly mix. Some of the customers carry higher margins, and those had higher sales in the quarter.

Then if you look at your guidance for the year, I believe that implies around $0.60 in the fourth quarter. You just reported $0.59 quarter. Should we be thinking about your business as essentially flat on a sequential basis? Is it accelerating? Was it slowing throughout the course of the quarter? I wanted help to understand what that's really implying for the fourth quarter.

You're right; the midpoint is $0.60, and that's a 15% increase over last year, so that's a positive. As we look at the businesses, we look at as I mentioned, that we expect commercial to be relatively flat year-over-year. We don't expect to get benefit from that. We do expect Lochinvar to continue to be up. That will be beneficial.

Then as I said China, we expect to be up double digits, but we could have some margin changes there because we're not expecting the repeat of the gross margin improvement. We are committing to doing additional SG&A.

As we've talked about, India's profit will be down because of when I said we lost about $4 million with that customer, as you can understand, since the fourth quarter is where 60% of our sales are much of that loss will be apples and apples to the fourth quarter of last year. We've said India's going to lose $5 million. It will probably lose a little bit over $5 million with this adjustment.

I think I go back to it Ajita's statement. When you look at our organic growth of 8%, we're comfortable with that going forward, and on a quarter-to-quarter basis you can have some ins and outs. We're certainly comfortable. We have a growing business which will add growing profitability.

Also when you compare it to last year it's about a 15% improvement over last year's fourth quarter.

Understood. If you just look over the course of the quarter, if I just looked at July, August, September, did you see any deviation in the rate of growth, either in rest of world, or within the US for your business? I'm just trying to understand if effectively things are accelerating or decelerating, or basically staying flat throughout the course of the current quarter that you just reported.

It's always dangerous to look month-to-month, but I'll say that the resi and the commercial are relatively strong in September. Again, I'd be careful going too much with that because it can vary month-to-month, but it was clearly stronger in China. I think which just continues to be consistently that increase, so I wouldn't say I saw anything slowing down.

I would just reinforce that it's so difficult to see it month by month because if you look at the AHRI data for July and August it was relatively flat to up a little bit. Based in our September, we expect September to be high, but again overall the quarter is pretty good.

Great. Thanks the much. I'll hop in queue.

Our next question comes from the line of Charlie Brady with BMO Capital Markets. Your line is open.

Thanks. Good morning. Can we talk about on the price increase that you had in May, are you now recovering the steel costs? Have you seen any continued escalation in the material costs?

As you're aware, steel costs are up, as well as inflation was up for things like health care, etc. That's really what drove the price increase, and that was the factor for it. In steel prices, as you know, have stayed high and even increased over the year as things have gone on. It is what it is. Steel has stayed up there.

Right. Is it fair to say then it's a little bit more about the margin headwind, or does another price increase come through it some point this year?

We can't talk about future price increases for sure. Clearly, steel was up pretty dramatically, especially when you look at last year to this year, it was up pretty dramatically. The CRU numbers are out there that it was up significantly.

Okay. Thanks. I'm assuming there's no change to your expectation for housing starts in the US, given that your resi unit volume's about the same?

Right. We're still at that million or so in completions, I think about 900,000 or so, really no changes in our assumptions there. As I said, the resi volumes are much tracking where we thought they'd be.

We've been pretty consistent with that right from the being of the year.

Just one more for me then on China, can you give us some granularity on the growth rate you're seeing in the tier 1, tier 2 cities versus some of the smaller tier 3, tier 4? Is there a large bifurcation of the growth rates between those tiered cities?

I guess I'd say tier 2 continues to grow, and become over 40% of our sales. We're just right now, I would say, and Ajita, you may know better than I do, looking at penetrating tier 3 and tier 4, and certainly as we go our into the future, that's an area we're going to focus on. I don't think we're significantly out there right now. We're still in that 6,000- 16,500 plus distribution outlets in total.

I think some of the smaller cities are also being penetrated by the online sales.

Certainly as you look, we do look as part of our growth going forward, I think tier 3 and tier 4 cities will play a part in that, without a doubt.

Thanks.

Our next question comes from the line of David Rose with Wedbush Security. Your line is open.

Good morning. Since most of my high level questions have been answered, I do have a couple others. One is, is if you could break out the inventory a little bit for us in terms of where you think it might be more concerning for you in China, in terms of the price point? Is it tier 1 or tier 2? Were do you think you may be most inflated, and why?

Then, if you could, on that just also provide us a little bit more color on the consumable piece for the water treatment business? I know it's relatively small but maybe if there's a little bit of update on that. Thank you.

I'll take the last one first. I don't think there's anything really new in the consumable. We're probably looking at $2 million to $3 million. I think I might've said $3 million to $4 million last quarter, but I had an incorrect number. It's probably closer to $2 million to $3 million. We do think as we've talked about, we've try to do some things. Our recent release in July makes all the filters proprietary. Now, I use that term little bit loosely because you have to be able to enforce it; but we certainly think in the future that consumables will play a bigger part. We're doing everything we can to try to maintain that proprietary filters in our systems. That's clearly something we look at.

As we go forward, we think it will become a bigger part of our business, and as we go through our planning phase we might have a better feel for that. As we've talked about there's four or five filters in our old system, and they have to be replaced at different timelines.

Number two, the inventory, and again I don't want it overemphasize the inventory. With the holidays, you would normally have a buildup in the third quarter. It was a little bit more than last year. It could have a minor effect on the fourth quarter, but again, we still expect growth in the fourth quarter to be up double digits; and really nothing distinct about that inventory growth. It's with our major customers which you would expect.

Okay, and then one more if I may, can India be breakeven next year? If so, what does it take for you to be breakeven?

I'll take a shot. We said it will lose $5 million this year. We certainly have every intention, and we think we will improve the profitability of the water heaters next year. We talked about last year we were doing some vertical integration, bringing more of it in-house. We expect to have that done towards the end of this year, so we'll see some improvement.

I'm not sure given the loss of this customer that we can get all the way to breakeven, but we certainly anticipate we're going to have improvement in the water heater business next year. I think the wild card will be water treatment. We're evaluating how we roll that out, and clearly when you have a new rollout like that, that has expenses associated with it. I think we'll be in a better position to talk about India when we do our year-end release.

Okay, great. Thank you.

I'm not showing any further questions at this time. I'd like to turn the call back over to management for closing remarks.

Okay. Thank you very much for your attention to our Company this morning, and you all have a great day. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a good day.