AOS
#(multiple speakers)
I will take a stab, and you were just there, <UNK>, so you can probably say.
I don't think we have seen ---+ the data we look at where units sold over $400, we are still maintaining our share there.
I think it is certainly very competitive in the lower end, and I will say the middle tier, but I think we still have very, very large market share in the high end and we haven't really seen any change in that.
No, and <UNK> is right.
I was there last week, in both Vietnam and in China, and the teams are excited and very upbeat about next year and where we are headed, the new products that are coming out.
And so, we feel pretty good about what our guidance for China.
Yes, I think it assumes the price increases we talked about.
Now, a couple things.
We also said on the last call that because of some project work, et cetera, you don't necessarily get all the pricing at that time and we said some of that would carry over into the first quarter, if you will.
But, yes, for the most part, that does assume that.
The biggest impact, as we talked about earlier, is SAP is going to add $5 million to $6 million in the fourth quarter compared to the third quarter and $7 million compared to the prior year.
So that is certainly having an effect on fourth-quarter margins that we don't think going forward we have that impact.
And then the stronger commercial, which was unusual for the third quarter, has ---+ stronger commercial is what it did.
But again, that was due to the pre-buy.
Yes, that's one way to look at it.
But I guess if you talk about a 20% as your starting point and you adjust for SAP, you are over 21%, and then you adjust for a leveling off of that ---+ of commercial, you get back to that starting-point range that I talked about earlier, that 21.5% to 22%.
Clearly, steel is having an impact on the margins, without a doubt.
We did have a price increase, but we didn't necessarily cover margin with that.
I think the quarterly market share was pretty similar, up a little bit from the previous quarter, so, again, we are forecasting what the industry is going to be.
So residential is holding pretty well for us.
We did introduce that product in the 55 to 90.
We have gained some share in that, but I'll also tell you we are not back to where our overall commercial margin ---+ I mean, market share is, but we have made progress on that.
I will try to answer all of those.
The specific issue in Milwaukee was not a driver for the acquisition, but clearly the fact that there are lead issues around the country, like Flint and many other cities, was clearly an indicator for us, among a lot of other things, that there is a water treatment opportunity in the US.
And we have world-leading products that take care of all of these types of pollutants, especially world-leading reverse osmosis products.
So we clearly see the opportunity to bring that technology to the US.
Aquasana was a great acquisition and a vehicle to get those products into consumers' hands, and using a channel that we really don't have a lot of expertise in, which we expect to grow in the future, obviously in terms of digital reach into every home.
The specific instance in Milwaukee, we are working with the local government and the United Way and other agencies, especially since we live here, to get the product out and help as much as possible.
That's not going to be necessarily transformational for Aquasana, but it really has a terrific impact in promoting the name and getting the name out there as being a leader in the solutions for some of the problems that we have in many of our cities.
So long term, that's absolutely going to help.
I think it is going to be a combination.
I think cities will get involved and fund some of this.
It is hard to tell, but the city of Milwaukee is getting involved.
Again, I think the big opportunity is not only getting the product out there, but getting our brand name out there in terms of being a leader in this category.
Aquasana is a start.
We would certainly be interested in appropriately adding to that platform.
And that's an ongoing ---+ and that's clearly on strategy, the way we have described our strategy.
I think it's combination of two things.
Traditionally, our fourth quarter in China is our strongest quarter from a sales standpoint.
We think that will continue.
And, yes, I would think that our advertising as a percent of sales will probably be a lower percentage than what it was in the third quarter because of those two events we talked about.
So I think both of those help in effect get the margin ---+ having a relatively strong margin in the fourth quarter.
We have not talked about or ---+ we're in our planning phase.
<UNK> and I have talked at length.
Certainly, it is our objective to grow north ---+ rest-of-world margins, and you do that with a combination of things.
You leverage the advertising spend and the SG&A in China.
Number two, you turn a couple of the businesses that right now we are incubating, like air purification.
That is going to lose probably $5 million this year.
We move that towards breakeven as we get higher sales levels.
We're also incubating the commercial water treatment business, where we will lose $3 million or $4 million this year.
So I think those are ways to grow margin, and then we talked about we need to get India on a path of improved earnings.
So, we haven't come out with an estimate, but certainly those are some of the things we are looking at.
And also, just add to that, when you talk about these incubating businesses in China, like air purification and commercial water treatment, et cetera, we usually have what I call a can-see plan, which is a multiyear plan that says here is how we're going to get ---+ here are the specific projects and here is how we're going to get our gross margins to the level that then we need for it to start contributing to the bottom line.
So it isn't ---+ it is more than we hope it will get there.
There is very specific things we know we have to do and are executing to get those margins up there, just like we did in water purification.
We are.
I will take a shot, and, <UNK>, you can jump in.
Again, there isn't any real good data, but we have reasonable data in terms of our own warranty cards and things being returned, where people tell us where we ask the question as to was this a replacement or not.
And in the largest cities, we think the replacement is around 50%, and in the smaller cities, probably 30% to 35%.
That's the kind of range that we are seeing, from the somewhat limited data set that we have.
(multiple speakers) about comfort level from the standpoint, <UNK>, that when we talk about the market, the water heater market growing at 7%, we think that's going to contribute to that.
And also, what we also see is that since A.
O.
Smith is at the top of the food chain as a high-end brand, it is an aspirational brand.
So when people replace lower-end product, very often they upgrade to the higher-end brands, which is our brand.
We did expand our distribution, but I really ---+ we don't have a good way of really measuring that.
We've tried to do same-store sales, but we have had difficulty because we are continually opening stores and we are continually closing stores that are inefficient, et cetera.
I would tell you the majority of it is the growth in the market and that that certainly has been a contributor.
Thank you for joining us today.
Please take note that we will participate in several conferences during the fourth quarter ---+ Goldman Sachs in Boston on November 2; Baird in Chicago on November 8; and Northcoast in New York City on November 10.
Have a wonderful day.
