A O Smith : Autumn 2020 Analyst Presentation

Autumn 2020 Analyst Presentation

Forward Looking Statements

This presentation contains statements that we believe are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of words such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe," "continue," " forecast," "guidance" or words of similar meaning. All forward- looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this presentation. Important factors that could cause actual results to differ materially from these expectations include, among other things, the following: negative impacts to our businesses, including demand for our products, particularly commercial products, operations and workforce dislocation and disruption, supply chain disruption and liquidity as a result of the severity and duration of the COVID-19 pandemic; a failure to recover or further weakening of the Chinese economy and/or a failure to recover or further decline in the growth rate of consumer spending or housing sales in China; negative impact to our businesses from international tariffs and trade disputes; a failure to recover or further weakening in the high efficiency boiler market segment in the U.S.; significant volatility in raw material availability and prices; our inability to implement or maintain pricing actions; potential weakening in U.S. residential or commercial construction or instability in our replacement markets; foreign currency fluctuations; inability to successfully integrate or achieve our strategic objectives resulting from acquisitions; competitive pressures on our businesses; the impact of potential information technology or data security breaches; changes in government regulations or regulatory requirements; and adverse developments in general economic, political and business conditions in the key regions of the world. Forward-looking statements included in this presentation are made only as of the date of this presentation, and the company is under no obligation to update these statements to reflect subsequent events or circumstances. All subsequent written and oral forward- looking statements attributed to the company, or persons acting on its behalf, are qualified entirely by these cautionary statements. This presentation contains certain non-GAAP financial measures as that term is defined by the SEC. Non-GAAP financial measures are generally identified by "Adjusted" (Adj.) or "Non-GAAP."

2

Who We Are

GLOBAL

MANUFACTURER

of residential and commercial water heaters, boilers and water treatment products

$3.0B Annual Sales

15,100 Employees

23 Manufacturing Facilities

3

Compelling Investment Thesis

Market leader	Stable/growing U.S.	Strength of premium
	replacement market;	brand, distribution,
	operating leverage	manufacturing and
	from incremental new	innovation provide
	construction and	clear market
	replacement	advantage in China

5 year adjusted EPS CAGR through 2019 = 12.7%

5 year dividend CAGR through 2019 = 24.5%

5 year cumulative cash returned to shareholders from dividends and shares repurchased = $1.4 billion

Strong balance sheet and cash flow to support future growth, share repurchase and acquisitions

4

We Have Organic Revenue Growth Drivers Across our Portfolio

Product Lines / Geographies

North America

North America

Boilers

Water

China

India/

Water Heaters

Treatment

International

•

Innovative

•

Innovative

•

Best innovative

•

Product

•

Market

energy efficient

energy efficient

products in

Innovation

expansion and

products

products

marketplace

•

Channel

penetration

•

Service

•

Best in class

•

Direct-to-

expansion in Tier

•

E-commerce

leadership

education and

consumer &

3 and 4 cities

•

Brand-building

training

E-commerce

•

Best in class

•

Brand leveraging

marketing

leadership

virtual training

•

Service

efforts

•

E-commerce

leadership

•

Leverage retail

•

Innovative,

and wholesale

•

New product

•

Customer-centric

green products

opportunities

categories

product

development

•

Expand dealer

focus

presence

•

Drive

commercial

specifications

Vision

To be a leading

provider of innovative and energy-efficient products used to heat, treat and conserve water, providing value to our residential and commercial customers

5

Corporate Snapshot
Segment Revenue		Products
		• Water Heaters	• Water Treatment
		• Boilers
	Full Year	Brands
	2019
	North America
	69%
	Rest of World
	31%
North America	ROW
			6

Leading Market Share in the U.S. Water Heater Market Segment1

Residential Market

2019 market share data (AHRI + tankless)

40%
30%
20%
10%
0%	ith	Rh	B	df	d Whit	Oth
A O S
						Other

Commercial Market2

2019 market share data (AHRI)

60%
50%
40%
30%
20%
10%
0%	Rheem	Bradford White	Other
A O Smith
			Other

1 AOS actual shipments and AOS estimates of competitors' shipments	7
2 Commercial water heater segment as defined by AHRI, total 2019 commercial units as reported by AHRI = 239,000 units

Comprehensive Residential and Commercial
Water Heaters Product Offering
Residential
		ProLine® 50-Gallon
	Gas Tankless Water	Electric Water
Hybrid Electric Heat	Heater with X3™	Heater
Technology
Pump Water Heater
		ProLine® Master
		50-Gallon Gas
		Water Heater
Commercial
Cyclone® Mxi		Commercial Heat
		Pump Water Heater
		8

Industry Leading Partners in both the U.S.

Residential Water Heater Channels

INDUSTRY

Wholesale Channel

Retail Channel

Large Regional
Distributors	WHOLESALE CHANNEL
A. O. Smith Customers	54% of the market
	RETAIL CHANNEL
	~46% of the market

9

Stable Replacement Volumes to Temper Downcycles with Upside New Construction Optionality

U. S. Residential Water Heaters1

Thousands of units

PEAK HOUSING

10,000 2.1M

8,000

6,000

4,000

2,000

0
2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019

New Construction

Replacement

1 Includes tankless	10

Industry-Leading Energy Efficient

Cyclone Condensing Commercial Water Heater

Up to 96% thermal	Connectivity	Represents
efficiency	built in	67% of AOS
dramatically lowers		commercial gas
operating costs		water heater
offering short		revenues
payback

11

U.S. Commercial Gas Market: Energy Efficient Units more than Doubled in Nine Years to 47% of Units Sold in 2019

Commercial Gas Industry Units

100,000

80,000

60,000

												<90% Efficiency
40,000
									2019			>90% Efficiency
20,000		2009							41,472 units
								(47% of total)
		19,000 units (29% of total)
-
2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019

Source: AHRI Industry Data

12

Industry trending to Higher Efficiency Condensing Boilers Drives Past and Future Growth

NA Boiler Volumes

100,000

90,000

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Condensing Commercial Boilers Non-Condensing Commercial Boilers

Source: 2006 to 2017: BRG Solutions; 2018-2019: AOS estimates

A. O. Smith Boiler Sales

10%

90%

Condensing		Non-Condensing

13

Comprehensive Boiler Product Offering
Commercial & Residential
	Residential Condensing Boilers	Residential Combi-boilers
(55mbh - 399mbh)
(Indoor Rated)
			(110mbh - 199mbh)
			(Indoor Rated)
Commercial Condensing Boilers	Commercial Non-Condensing Boilers	Commercial Cogeneration
		(500mbh - 5000mbh)
		(Indoor & Outdoor Rated)	XRGI 25
			Micro
			Combined Heat & Power
			• 163,000 BTU/hr
			• 24 kW of electricity
			• 49 DB(A)
(400mbh - 850mbh)	(750mbh - 6000mbh)
(Indoor Rated)	(Indoor & Outdoor Models available)
			14

Our Focused Technology is Reverse Osmosis, a Leading Technology to Provide Safe Drinking Water

Taste & Odor

Pore Size 5000 nm

Sediment

& Colloids

Pore Size 1000 nm

Bacterium

& Organics

Pore Size 50 nm

Heavy Metals &

Salts

Pore Size 0.2 nm

H2O

Activated Carbon

improves taste (removes chlorine), removes organic pollutants including PFAS

Micro-Filtration

removes sediment, particulates, and colloids

Ultra-Filtration

removes bacterium, large organics and other pollutants resulting from water transport

Reverse Osmosis

the ultimate filtration technology; removes nearly all substances, particularly most heavy metals prevalent in China and India water supplies

Safe Water

15

Evolution of AOS' Global Water Treatment Business
Revenue
$ in millions
Inorganic Revenue							35% CAGR over the last 10 years
Organic Revenue
										$458
									$397
								$322
							$250
						$134
				$69	$97
$20	$20	$35	$38
2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019
Acquired	Launched			Purchased MIM,		Launched	Purchased	Purchased	Launched AOS	Purchased
Chanitex	AOS branded			WT company in		AOS branded	Aquasana &	Hague	branded WT at	Water-Right
	WT in China			Turkey		WT in India	launched		Lowe's
							AOS branded
							WT in Vietnam
										16

Large Addressable Market in U.S.
Water Treatment
Addressable A. O. Smith Market: $2.3 B
	Water Treatment (Softeners)
32%	Water Filtration
68%
This Photoby Unknown Author is licensed under CC BY-NC-ND
Sources: A. O. Smith Primary Quantitative, Market Segmentation Research, April 2017
	17

Positioned to Grow Across all Water Treatment Channels
Channel Brand			Industry Water Treatment Channels
Our brands participate in all channels; most competitors operate in 1-2 of these channels
DIRECT TO	Aquasana		9%	5%
website or direct
CONSUMER
mail or telesales
E-COMMERCE	other e-commerce		14%
	market places	CONSUMER			48%
WATER	Dealer
QUALITY
DEALERS			24%
RETAIL
			Water Quality Dealers	Retail
WHOLESALE	Wholesaler or		Wholesale		DTC
	Contractor / Plumber		E-com
			$2.3 Billion Addressable Market
	Sources: A. O. Smith Primary Quantitative, Market Segmentation Research, April 2017; Water Quality Association 2017 Consumer Opinion Study
					18

Comprehensive Water Treatment Product Offering for the Entire Home
Point of Entry Products	Point of Use Products	Non-Installed Products
Whole Home			Clean Water
Filtration			Machine
	Whole Kitchen	Tankless RO
	Filtration	Systems
Whole Home			On-the-Go Filter
Softeners			Bottles
	Traditional RO	Under Sink
	Systems	Filtration
			19

AOS China Built On

Premium Brand

Extensive Distribution and Service Network

Innovative New Products and World

Class Manufacturing

Local Management Team and Organizational

Development

20

Growing Product Portfolio Developed in China for China
Electric & Gas Water Heaters	Water Treatment	Other Categories
Electric
Water		Air Purifier
Heaters
	Water
	Purifiers
		Range Hood
Gas Water
Heater
		21

China: Broad Distribution Channel
Percentage of Sales
					23%	21%	20%	17%	17%
	33%
36%	35%	35%	36%
					29%	30%	33%	32%	30%
10%							+9,000
22%
	26%	25%	25%
								23%	22%	retail counters in China
						26%	24%
					30%
54%	45%			31%						31	%
	38%	37%
						31%
						23%	23%	28%
					18%		of outlets in Tier 1 cities
		1%	3%	8%
2007	2010	2012	2013	2014	2015	2016	2017	2018	2019	69%
	E-Commerce		Suning/Guomei	AOS Specialty Stores		Regional Stores
			of outlets in Tier 2/3 cities
											22

China: Mega Trends Driving Growth

TRENDS

On-line shopping is growing in China

Middle and affluent classes are growing

Urbanization in China projected to drive 28%1 of all global growth!

A. O. SMITH

We are positioned to reach consumers using the internet

Our Market Leading Premium Consumer brand is positioned for the middle and affluent classes

A. O. Smith has manufacturing capacity and channel footprint to capitalize on continued household formation

1 Source: IMF 2019 to 2024, October 2019

23

China: Market Leader in Water Heating and Water Treatment

Water Heater Market Share

		A.O.Smith		Haier		Midea		Macro		Wanhe
		Rinnai		Noritz		Ariston		Sakura		Siemens

30%

25%

20%

15%

10%

5%

0% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Water Treatment Market Share

A. O. Smith		Midea		Qinyuan

Angel 3MHaier

50%

40%

30%

20%

10%

0%
2011	2012	2013	2014	2015	2016	2017	2018	2019

Leading residential brands measured in currency; Tier One Market: 2009 - 2018 CMM; 2019 FEB - CMM data sampling several thousand largest retail stores, December 2018

Data Source: 2012 - 2018 CMM; 2019 FEB retail

24

Thesis in India Similar to China

Attractive Growth Demographics

Leveraging Global Capabilities with Products Designed for the Indian Market

Building Brand & Expanding Our Distribution

Introducing New Product Categories with Water Treatment

Local Management

We are committed for the long-term opportunity

25

India:

2008 through 2019

A Class Cities

(pop >1.5 Mn) Distribution in

25 out of 25 cities

B Class Cities (pop .5 to 1.5 Mn) Distribution in

63 out of 68 cities

C Class Cities (pop .1 to.5 Mn) Distribution in

316 out of 400 cities

Ludhiana
		New Delhi
Jaipur	Agra
		Kanpur	Lucknow
		Bhopal	Patna
Ahmedabad	Indore
Surat			Kolkata
Mumbai
Pune		Hyderabad

Visakhapatnam

Bengaluru

Chennai

Coimbatore

Manufacturing

Location

Guwahati

National Retailers

Regional Retailers

26

Driving Financial Performance and Delivering Significant Growth
Sales Growth							Adjusted EBITDA1						Adjusted Earnings Per Share2
Sales in billions
$3.5					8% CAGR		$700					15% CAGR						21% CAGR
$3.0											Adjusted EBITDA						$2.5
									$600	2010	10.6% of Sales
											2019	18.7% of Sales
$2.5										$500										$2.0
$2.0										$400										$1.5
$1.5										$300
																				$1.0
$1.0										$200
$0.5										$100										$0.5
$0.0										$0										$0.0
2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019
			1 2010 through 2014 adjusted for non-operating pension costs and certain non-recurring items
			2 2010 through 2014 adjusted for non-operating pension costs and certain non-recurring items; 2017 adjusted for U.S. Tax Reform expense; 2018 adjusted for restructuring & impairment expenses	27

Cash Returned to Shareholders:
~$1.4B last Five Years
$ in millions
$500
$450					$436.9
$400
$350				$332.7
$300
$250		$219.4	$236
$200	$195.9
$150
$100
$50
$0
	2015	2016	2017	2018	2019
		Dividends	Share Repurchase
1 Subject to price, alternative investments and working capital requirements		2828

M&A Criteria and Focus

Accretive to	ROIC in excess of	Meet risk adjusted	Margin accretion
earnings in the	cost of capital by	IRR hurdle rates	with growth rates
first year	third year		higher than U.S.
			GDP

Geographic Growth	Expand / Grow the Core	Adjacencies
 High Growth Markets	New Products &		Water-themed
	New Technologies		platforms for growth
		Water Heating		Leverage channels
		Water Treatment		and brands

29

Compelling Investment Thesis

Market leader	Stable/growing U.S.	Strength of premium
	replacement market;	brand, distribution,
	operating leverage	manufacturing and
	from incremental new	innovation provide
	construction and	clear market
	replacement	advantage in China

5 year adjusted EPS CAGR through 2019 = 12.7%

5 year dividend CAGR through 2019 = 24.5%

5 year cumulative cash returned to shareholders from dividends and shares repurchased = $1.4 billion

Strong balance sheet and cash flow to support future growth, share repurchase and acquisitions

30

ESG Accomplishments

Products Conserve

Resources

98% Thermal Efficient

Cyclone Commercial Water Heater

1.6B cubic feet of natural gas saved1

100K tons of GHG avoided1

99% Thermal Efficient

Crest Commercial Boiler

2.0B cubic feet of natural gas saved1

120K tons of GHG avoided1

75% Water Conservation Ratio

RO Max Series Water Treatment System

1.3 B gallons of water conserved in China1

Operations Are Safe & Conserve Resources

President's Safety

Award

Established 1955

(predates OSHA)

Chairman's Green

Star Award

2009

ISO 14001 for environment

ISO 45001 for safety

We Are a Good Place to Work

Employee Engagement Score (Max 5)

5.0			87%		90%	100%
4.5		82%	83%
80%
4.0			4.00		4.00	80%
3.5	3.85	3.84	3.99
3.0						60%
2.5
2.0						40%
1.5
1.0						20%
0.5
0.0						0%
	2010	2012	2014	2016	2018

Participation Percentage (right axis)

	Ethics		Supervisor
	Integrity		Effectiveness
	Value Recognition		Innovation
			Customer Focus

Celebrating 146 years of innovation

CRS Report

1As reported in AOS 2018 CRS Report based on 2017 sales and data

31

•Q3 20 Results

32

Third Quarter Commentary

NA Water	US	NA	China	Minimal	Restructuring
Treatment	residential	commercial	consumer	operational	carryover
grows 19	water heater	water heater	demand	disruptions	from second
percent	demand	and boiler	slightly		quarter
	positive YOY	demand	positive YOY
		down 9 - 10
		percent

33

Third Quarter Results
$ in millions except per share data
	2020	2019	Change	% Change
Sales	$	760.0	$	728.2	$	31.8	4%
Net Earnings	$	105.4	$	87.3	$	18.1	21%
Severance and Restructuring
Expenses		1.3		-
Adjusted Earnings	$	106.7	$	87.3	$	19.4	22%
EPS	$	0.65	$	0.53	$	0.12	23%
Severance and Restructuring
Expenses		0.01		-
Adjusted EPS	$	0.66	$	0.53	$	0.13	25%
							34

Third Quarter Sales
$ in millions
	2020	2019	Change	% Change
North America	$ 544.0	$ 514.6	$	29.4	6%
Rest of World	221.4	220.3		1.1	flat
Intersegment	(5.4)	(6.7)		1.3
Total	$ 760.0	$ 728.2	$	31.8	4%
					35

Third Quarter Adjusted Earnings

$ in millions

		2020			2019		Change	% Change
Adjusted Segment Earnings
North America	$	133.6	$	121.6	$	12.0	10%
Rest of World		17.8		4.1				13.7	334%
Total Adjusted Earnings		151.4		125.7			25.7	20%
Corporate		(10.9)		(9.8)			(1.1)	-11%
Interest Expense		(1.6)		(3.1)			1.5	48%
Adjusted Pre-tax Earnings		138.9		112.8			26.1		23%
Adjusted Tax Provision		(32.2)		(25.5)			(6.7)
Adjusted Earnings	$	106.7	$	87.3	$	19.4	22%
Adjusted Segment Margin
North America		24.6%		23.6 %
Rest of World		8.0%		1.9 %

Note: North America adjusted segment earnings and ROW adjusted segment earnings exclude $0.5 million and $1.1 million, respectively, of pre-tax severance and restructuring expenses.

36

Strong Capital Position1
				Cash Flow from Operations
				$ in millions
$		%	$	$350	$330
	$325
330M	6.1		509M
	$300		$280
Cash provided	Debt to		Cash balance2
	$275
by operations	capital ratio		$250
				$225
				$200
$395M	~1.3M	$175
$150
$125
Net cash position	Stock repurchase;	$100
$75
	shares totaling ~$57M
	$50
				$25
				$0
1 as of September 30, 2020					2020	2019
2 includes cash, cash equivalents and marketable securities
						37

2020 EPS Guidance and Assumptions

($ in millions)	2020 Projections
Adjusted EPS	$1.95 to $1.98 per share
Operating Cash Flow	Approximately $400
Capital Expenditures	$50 - $55
Depreciation & Amortization	Approximately $80
Corporate/Other Expense	Approximately $50
Effective Adjusted Tax Rate	23 to 23.5 percent
Stock Repurchase	Approximately $57
Share Count - Diluted	Approximately 162.5 million

As of October 29, 2020

38

2020 Outlook

NA Water Heaters

China

NA Boilers

NA Water Treatment

India/ROW

Total

%	Q3 YOY
Revenue1	sales	Full Year Assumptions
58%	6.5%	U.S. residential water heater industry volumes up 4 percent; commercial
water heater industry volumes down approximately ten percent
25%	+1%	China local currency sales decline 18 to 19 percent; mid single digit
growth in Q4
7%	-7.5%	NA Boiler revenue declines of mid single digits
6%	+19%	Sales increase 22 to 24 percent (includes acquisition)
4%	-4%	India loss similar to 2019
100%	+4%
1 Q3 2020		As of October 29, 2020

39

2020 Outlook

• Revenue declines of 6 to 7 percent

• North America segment margin expected to be 23 to 23.5 percent

• Rest of World segment margin expected to be -1 to -2 percent

As of October 29, 2020

40

Adjusted Earnings and Adjusted EPS

(dollars in millions, except per share data)

The following is a reconciliation of net earnings and diluted EPS to adjusted earnings (non-GAAP) and adjusted EPS (non-GAAP):

Net Earnings (GAAP)

Severance and restructuring expenses, before tax Tax effect of severance and restructuring expenses

Adjusted Earnings

	Three Months Ended		Nine Months Ended
	September 30,				September 30,
2020	2019			2020		2019
$ 105.4	$		87.3	$	224.9		$ 278.7
1.6			-			7.7		-
	(0.3)			-			(1.4)	-
$ 106.7	$	87.3	$	231.2		$ 278.7

Diluted EPS (GAAP)	$	0.65	$ 0.53	$	1.38	$	1.66
Severance and restructuring expenses per diluted share, before tax		0.01	-			0.05		-
Tax effect of severance and restructuring expenses per diluted share		-			-			(0.01)		-
Adjusted EPS	$	0.66	$ 0.53		$	1.42	$	1.66

41

Adjusted Segment Earnings

(dollars in millions)

The following is a reconciliation reported segment earnings to adjusted segment earnings (non‐GAAP):

Segment Earnings (Losses) (GAAP)

Three Months Ended	Nine Months Ended
September 30,	September 30,
2020	2019	2020	2019

North America	$	133.1	$	121.6	$	365.6		$	360.5
Rest of World		16.7		4.1		(31.3)		38.8
Inter‐segment earnings elimination	$	‐	$	‐	$	(0.3)	$	(0.1)
Total Segment Earnings (GAAP)	149.8		125.7		334.0		399.2
Adjustments:	$	0.5	$	‐	$	2.7			$	‐
North America severance and restructuring expenses
Rest of World severance and restructuring expenses	$	1.1	$	‐	$	5.0			$	‐
Total Adjustments	1.6	‐		7.7			‐
Adjusted Segment Earnings (Losses)	$	133.6	$	121.6	$	368.3		$	360.5
North America
Rest of World		17.8		4.1		(26.3)		38.8
Inter‐segment earnings elimination	$	‐	$	‐	$	(0.3)	$	(0.1)
Adjusted Segment Earnings	151.4		125.7		341.7		399.2

42

2020 Adjusted EPS Guidance and 2019 EPS

The following is a reconciliation of diluted EPS to	2020
	Guidance	2019
adjusted EPS (non‐GAAP)( all items are net of tax):
Diluted EPS (GAAP)	$1.91 - 1.94	$ 2.22
Severance and restructuring expenses, per diluted share		0.04			‐
Adjusted EPS	$1.95 - 1.98	$ 2.22

43