A. O. Smith Corporation (AOS) Earnings Call Transcript & Summary

2023 Investor Day. A big welcome to everyone who is joining us in person as well as those joining via the webcast. The A. O. Smith senior leadership team and I are really excited to share with all of you today an in-depth review of our company strategy, long-term objectives, growth drivers and financial outlook. For those of you that don't know me, I'm Helen Gerholt, Vice President of Investor Relations and Financial Planning Analysis. I've been with A.O. Smith for 21 years in various roles in corporate accounting and finance, all based in Milwaukee. My most recent role prior to be going into Investor Relations was Corporate Controller. So moving on to the forward-looking statements. Don't worry, I won't read that whole paragraph to you. But just wanted to offer up a friendly reminder that some of our comments and answers during the event today will be forward-looking statements that are subject to risks and uncertainties that could cause actual results to be materially different from those anticipated in our presentation today. So we'll take a look at today's agenda. As you can see, we'll kick off the afternoon with Kevin Wheeler, our Chairman and Chief Executive Officer. Kevin will share how A.O. Smith is innovating for the long term. Next up will be Dave Warren, President of the largest piece of our company, North America Water Heating. Dave will be followed by one of our newer leaders, Steve O'Brien, President of our Lochinvar Business. And then running out the North America segment is Sam Karge, President of North America Water Treatment. After the break, we'll introduce you to our rest of world leaders, Jack Qiu, President of A.O. Smith China; and Parag Kulkarni, President of A.O. Smith India. And then Chuck Lauber, our Chief Financial Officer, will share more details on our financial priorities and targets. We also have 2 additional team members joining us in the room today, Bob Heideman, Chief Technology Officer; and Holly Haseley, Director of Corporate Communications. As you can see from the agenda, we've got 2 question-and-answer sessions. We ask that you hold all of your questions until those 2 allotted times. The slides that you see here today as well as a copy of the webcast will be on our website at the conclusion of the event. You can access them at investor.aosmith.com. And with that, I'll turn the mic over to Kevin to begin our presentation.

Well, thank you, Helen. Welcome, everybody, and thanks for joining us today. I'm going -- for those of you who don't know me, I'm going to give you a very brief background on me. I've been with A.O. Smith for 29 years in various roles and duties both domestic and internationally. And I've been very fortunate to be the CEO for the past 5 years. Our team here, our executive team and our business leaders are excited to spend time with you this afternoon, and we'll share our strategic plan, company goals and business initiatives. I'm going to provide you a very high level and then our business leaders are going to come up here and give you all the details. So for us, it starts with our vision and strategy. A.O. Smith is a pure play water technology company that we primarily heat and treat water. Our goal always is to raise the industries that we participate in to higher levels through innovation, superior quality and market-leading services. We always start out our strategy with delivering profitable growth. And then we execute on those 7 strategic pillars that you see underneath that to make that happen. But one thing -- in our businesses, we'll demonstrate all of those 7, but the one thing that I do want to spend a little bit of time with you is what is living our values mean to A.O. Smith. And what it means to us is doing business with honesty and integrity, it's having mutual respect for the people that we work with. It's doing the right thing always. So our reputation matters, whether we're dealing with our employees, we're dealing with our customers, suppliers, you name it, investing community and so forth. What we do and say and how we do it is at core with A.O. Smith. Key messages today that you will get from our team is, firstly, I would tell you that innovation is in our company's DNA. It's been constant since our company was founded in 1974. And I would tell you, it's been our primary growth driver and it is today. Some of the things we're going to share with you, I'm going to share with you is our innovation infrastructure. Why are we good at what we do on the innovation side? We'll review our resources and capabilities. And then throughout the presentation, we're going to talk about some of our new products. I'm going to share a little bit just to give you a little taste of what you're going to hear about. Today, we're going to talk about the launch of our new designed by ourselves North America gas tankless product range. We're going to show you how we're expanding our residential heat pump line to serve more solutions out in the market. And we're also going to talk about the launch of our first commercial air-to-water heat pump by Lochinvar. Along with some other products, we're going to talk about how leveraging technology in our products. What does that mean? You're going to hear about the CATALYST CYCLONE program. Cyclone is our largest high-efficient market share product we have today. And the Catalyst is going to allow our distributors to have a limited product line in their inventory, be able to configure it in about a very few minutes using an iPad. And Dave will talk about that. We're also going to talk quite a bit about China AI link. And what that does is it's very simple. We're building an ecosystem of connected products to make consumers lives better and easier. When you look at mega trends in our business, there's 3 that I think are going to benefit A. O. Smith. One is decarbonization if it's right in our sweet spot of high efficiency. The other is just the focus on quality water. Everyone in this room needs clean water, and that's across the world. And the ongoing urbanization that we'll see in our emerging markets. Each one of those megatrends is going to raise significantly the total available market of our products in the businesses where we -- in the markets that we do business in. North America replacement. A lot have you been following us. We talk about that on a pretty regular basis. The resiliency of our water heater and our boiler replacement demand has been tested many, many times, been tested through the Great Recession, through economic disruptions and recently through the pandemic. One thing is clear that consumers and businesses will not go without hot water. And I would add on to this that it's still early, but it's becoming a meaningful part of our business. In the North America water treatment side, there's a consumable business that's growing in North America, China and India every day. And emerging markets, that's primarily China and India for us. In China, where we've spent 25 years building our brand. And in India, we spent a decade or more building our brand there. We are a premium brand, known for innovation, quality and service. And we'll talk about leveraging our balance sheet. We're going to continue. You'll see that throughout the presentation how we're investing in ourselves. And of course, M&A is always top of mind for us. A. O. Smith at a glance, I'm going to let you read most of that, but the -- when you step back, we're primarily a North America-based company with some really nice markets growing. What's important is that we have leading product lines there. But I would tell you, the takeaway is our product lines have scale and they have depth to them. And we provide solutions across a spectrum of applications. And you see the brands down there, all those brands are respected brands and multichannels that we participate in. And what they allow us to do, they allow us to extract value from every channel that we participate in. And on the right there, I just want to point out our 26 manufacturing facilities. When you step back here, they provide us the capacity and the flexibility to serve our customers regardless of the business environment that we may encounter. Geographic view. We have 2 operating segments. And I think when I look at the key takeaways here is every one of these business segments has a really broad and diverse customer channel. And we have a nice mix of residential and commercial. And for the most part, we're market leaders in every one of our product categories. So when I look at the upside for us, we have upside geographic, market and product categories as we continue to take our business to the other parts of the world. I did spend a little time already on the global trends. And again, if I look at decarbonization and the quality of water, I think the key takeaway for us is we already have the products. We already have the solutions today. And so we'll continue to fine-tune those, but in reality, we're ready for any type of change in regulatory that comes our way. From a technology side, you're going to hear quite a bit about how we're using digital tools to engage our customers on a very high level and to make us as a company to do business easier. In each one of our presentations from our businesses, you'll see sprinkled in [indiscernible]. And then we talked a little bit about global urbanization. It's been a catalyst for growth for us. It will be a catalyst for growth into the future. You look down there and we have sustainable competitive advantages. And you'll hear today -- you already heard me about technology expertise, innovation, continuous improvement, leadership, the omnichannel and so forth. But I would want to spend a little bit of time on our customer base and our supply chain. In all of our businesses, we have some of the premier customers in every one of our industries. And we continue to grow with them their consolidators and they tend to grow faster than the market. And our supply chain and our suppliers' long-term relationships there as well that helped us through the pandemic and positioned us really well to come out of that with every one of our customers intact. The key and you'll hear it from us, we -- these are all long-term relationships. This took us decades to build, and we continue to have them in place today. And the key part is our customers can count on us. We are not -- A.O. Smith is not a transactional company. We don't look at anything about just getting an order. It's about building a relationship, providing value and generating growth and profitability for not only us but also for our customers. So our customers can count on us, and they saw that once again during the pandemic. The other one is, and you'll hear that today, we -- our business strategy is in country, for country. We don't use any country as a low-cost producer, and we don't have a lot of expats. What we do is we believe in local management that get up every day in the market, know the culture, our experts in their industries, in their markets to drive growth and innovation for our company. And we believe that's a competitive advantage. Having those people in the market helps us innovate and they can identify what the consumer in their particular remarks really want for a solution. This is a slide you'll see from every one of our presenters, and it's -- what it's going to tell you is how we innovate, how we're going to expand and how we're going to execute. One of the things you'll see is the alignment between all of our businesses that ties back to the strategy that I told you, the vision that you've seen and how the businesses worked together to grow A.O. Smith profitably. Talk quite a bit about leading through innovation. We're going to spend a little bit of time here. What is our R&D structure? And it's it really comes down to we start out at the very top. We're always looking for new and disruptive technologies coming to market. Even if we don't know where they may fit or how they would impact us, we spend time working with them, having our teams look at them, working with our businesses to make sure that they understand the impact and how we would prioritize some of those so that we can be successful. We also then look at our processes. Our A.O. Smith new product development process is standard across all of our businesses. It's a systematic way that we use to bring a product from concept to market with the highest possibility of success. This leads to every one of our businesses to a 3-year product plan that we know where we're going and why we're going there. And that product plan is updated every year. Then again, the R&D, the people we put in the labs, the skill sets that we have, I'll talk a bit more about those. But for us, what it starts, starts at our Corporate Technology Center. A.O. Smith has had a Corporate Technology Center I think back to the 1950s. This is a separate, supported by our corporation, not aligned with -- it doesn't come out of our businesses P&Ls. This is our newest facility that you see there that we opened in 2018. The reason we did that is over the past 20 years, our company has transformed into a water technology company. And our old facility was built for the old A.O. Smith. Those who follow us, we made car frames, electric motors, grain silos, things that don't have a lot to do with water. And so what we did is we built this facility, made sure we designed it, had the right capabilities, equipment and so forth for today's A. O. Smith. And you can see the competencies on the right there. We have deep competencies in all of those. Whether it be from sensors and electronics, which you see in our products today, some analytics that we're using to make sure that we can model things in an appropriate way in different technologies, but core people with deep competencies and all 8 of those, which apply to all of our businesses. When you look at CTC also, this team, they work on things that we don't know how to do. There are 3-, 5-, 7-year type outlooks to make sure that we understand these processes and how they're going to impact as we go forward. They work on a lot of things and they come through with a few. But those few are really meaningful for us, and it doesn't burden the business to have to do, not what they have to do today, but also what we have to do tomorrow. So we're very happy to have that facility. I think some of you have been there. It's absolutely world-class. And to support all that, is our infrastructure. We stepped back and we have over 900-plus engineers and technicians that get up every day and they work on what's going to keep us more competitive, how are we going to move to the next level of our markets, and ensure that A. O. Smith continues to be competitive and outpace our competition on a regular basis. Each of the businesses that will come up here today have their own R&D centers, their own people, their own capabilities, their own resources. And they are for new products, no doubt. But we also work on adjacencies. And by the way, we work on cost reductions as well in those facilities to make sure that not only are we just having new products, but that we're looking at materials and ways of doing business that keep us cost competitive for the long term. And we're excited to announce investing in ourselves, we are -- we've broken ground in Tennessee. We're building a new North America commercial water heater R&D center. It will be completed sometime in 2025. The whole idea behind that is, one, again, upgrading the capabilities, upgrading the equipment, but also located in it with our Lochinvar group, our boiler group. So we have the ability to leverage all of our knowledge and experience in one facility that can work together to drive and communicate how we can make better products going forward, how we can stay ahead of the competition. Industry leadership talked about market leadership, talked about a number of things of innovation. But also, what's really important to us and we spend a lot of time is in our industry. We are very active members and participants in all of our industry associations. We spend a lot of time with our government, whether it be EPA or DOE, spend time with NGOs and other agencies. And increasingly more we spend time at the state and local levels to make sure that we are understanding what's going on in that what we want to be and we are, we want to be a trusted resource for all of these agencies to come to and be an industry partner. And the idea behind that is so that -- when they make decisions that affect our lives, we've had a chance to make sure that we make the best decisions for our industry, but also for the countries that we do business in. These are resilient business model. On the left there, there is a water heater business. We've talked about how we're a leader there, market share, a number of things on the left. But I do -- what I want to do is I want to spend a little bit of time talking about the ones in the middle. When we look at expanding our organic growth in China where we're very, very committed. Despite the geopolitical side of the business, the tensions and the economics that are currently -- that we're having to work through, we're fully committed to our China market. And the reason we are -- one, it's the second largest economy in the world. Its GDP is going to grow twice as fast as a global GDP. The urbanization that was installed a little bit will continue. We've benefited from that in the last 20 years. And the middle class is absolutely going to continue to grow. So you put that all together and we just feel it's a market that makes long-term sense for a company that invested 25 years into it. And importantly, those factors are, you've watched us over the last few years, we've demonstrated that we can navigate this market both in good and bad times. And Jack, will be up here. He will talk about. We've had to do some restructuring, how we go to market with our premium brand and new products but they all look towards long-term growth. And as for India, my opinion, India is just in this economic stride. We are -- it's going to be if not the or one of the fastest-growing economies for next decade or so plus. The trend of urbanization in the middle class is there. albeit it's at a very much in its infancy today, and it's going to continue to grow, but it's a great foundation for long-term growth. And Parag and team have had -- we've had a nice run there. We're starting to build some momentum. That 10 years of investment is starting to pay off. And we really look for that momentum to continue and for us to be able to scale that business quite a bit faster than we have in the past. And then global water treatment. When I look at it, this is A. O. Smith's first technology that we can take anywhere on the globe that we want to. Our technology of RO, carbon, UV applies everywhere in the world. So as I sit back here and look at it, we have a nice growth story. You'll hear about it from China, from India and from our North America water treatment group. It's fertile ground for us for geographic expansion, and it's fertile ground for M&A. And as I mentioned, we are a water technology company. But we -- to remind you, we're also a world-class manufacturer. And we have one of the best operations teams that has a strong record of execution. So you look across that bottom there in the supply chain, yes, we all work through the pandemic. But some of you may not know, we are vertically integrated in North America water heating very deep. And we're also taking that technology and becoming more vertically integrated in our North America water treatment business as well. We work with some of the best suppliers. We are one of the companies that are open to new technologies, new materials, new ways of doing business. And we continue to invest in automation, AI type of activities to make sure that we can improve quality, reliability, but also drive productivity in our factors as we go forward. Talked about the 26 locations that we have. Quality, for us, quality is everything. Without quality, we don't -- we're not successful. So an example that I give what does quality mean to us, and I'll use water heaters as an example, residential water heaters. We want to sell it to a consumer. We want them to use it for 14 or 15 years very happily, hot water. And then we want to do it again. I wish it wasn't 14 or 15 years, but we make a quality product. But at the end, that's our goal. The reason for that is installers don't have time. You want to do it right the first time. You want consumers to be happy through the whole time of that process. And at the end, you want to do that again. And the way you get to do that again is by actually executing really well on your quality side. And what we also do is the A. O. Smith operating system is what brings us all together. It drives continuous improvement in our organization. It's a systematic way of all our employees, getting them engaged and they're all problem solvers of our organization. We started on this journey about 5 years ago with Dave Warren of North America Water Heater, and Dave is going to share some of those details with you when he gets up here. ESG is embedded in our strategy. And you can see the things that we track. These are only some of them, by the way, but certainly greenhouse gases are really important for us to make sure that we're paying attention to. Health and safety has always been a priority for us. Again, good place to work. Having that diversity of thought in our organization is really important. But I would tell you, more importantly, is ESG is also in our company's guiding principles. And what are those? Our guiding principles is a booklet. It's about a 30-something page booklet that we give to every employee that tells them how A.O. Smith and its employees are going to behave. And we hold ourselves accountable to it every day. And this is a team that gets a job done. If you look at that, there's a group of tenured and new people, but that are highly confident and work all together and complement each other very, very well. And as an organization, we have another 12,000 employees that support them as we go forward. We understand our industries. We have deep understanding of them. And it's what kind of separates us from the rest of the organization, [indiscernible] our competition. And if I had to describe this group right here and you'll meet a few of them in just a few minutes, I would tell you that they're highly competitive, and we like to win. Very simple. And our Board is the same way. We have another nice mix of tenured and new board members. We've been exceptionally intentional about how we bring new board members on, what skilled matrix that we look for to make sure that they complement today's AO Smith and that they can provide the strategic counsel and oversight that we need as an organization. And then when it's all done, we're going to -- each business unit is going to have a similar slide that they're going to give to you and present their growth profile and their margin profile. And then we're going to roll that up and it's going to come to the long-term value creation of A. O. Smith. And Chuck will take you through that. He'll bring it all together, he'll summarize it to our financial priorities and goals. So this team is excited with where A.O. Smith is today, but I think we're in a much better position for tomorrow. So with that, that gives you the overview of where we're at, and now we're going to get into some of those details. And to start those details, I'd like to -- he's already been introduced, but I'd like to bring up Dave Warren, President of North America Water Heater. All right, Dave. Take it away.

All right. Can you hear me now? Thanks, Kevin, and good afternoon to everybody that's here today. It's really great to see you all. I think we had some conversation earlier that some of you started following us during COVID and finally, we get to be in person. So really, it's great to see you all, and it's great to everybody online that's listening today also. Hey, before I get started, I thought it'd be a good idea to provide a little bit of background on myself. I started out 34 years ago with A.O. Smith as an inside sales coordinator. Back then, the water heater business was only about $300 million. A lot of growth has taken place since that time. Over the years, I've held various sales positions in the U.S. in both the wholesale and the retail side of our business, spent 4 years living overseas managing the A.O. Smith European operation and then was given a great opportunity to manage and lead our International Business, which, at that time, consisted of Europe, Turkey, our export business and our greenfield operation in India. For the past 6 years, my job has been to work with really a great team to build on a strong foundation to ensure that we maintain our leadership position while improving profitable growth. I'm very, very proud of what the team has accomplished, and I'm excited to share some of those accomplishments with you here today. During the presentation, I'm going to spend a little bit of time expanding on what you see on this slide. Key messages that convey why A.O. Smith is a great investment. Market leader, for over 149 years A.O. Smith has proven that one key element to success is the importance of having strong relationships with like-minded customers. Customers that have the desire and the capability to invest in profitable growth. We believe that we have some of the best customers in the industry today. Strong and stable. We operate in a market that's very stable, as Kevin had indicated, supported by a large housing stock. The economic cycles and new construction only play a small role in our overall profitability. As Kevin indicated, we have proven that we can be successful regardless of the volatility in the new construction market. A clear strategy, we have a proven high-level strategy that has worked for many, many years. We continue to focus on the customer and our people. However, we always strive to improve to meet the needs of the ever-changing market. Industry-leading solutions, I'm really excited to be here today to share some of the new innovative compelling products and services that will provide a high level of confidence that our strategy is actually working. And finally, we will share some information on pending regulatory changes that will provide opportunities for significant profitable growth beyond 2028. On the next 4 slides, I want to spend some time grounding us all on the current state of the North America Water Heater Business and on the industry. And then thereafter, we'll spend some time on strategy in industry-leading solutions. North America Water Heating has enjoyed phenomenal growth over the past 3 years, driven primarily by price inflation, but to some degree, by an improved mix to more efficient products. While the business today is 80% residential, we clearly don't underestimate the importance of commercial leadership, which helps to improve our overall profitability and it also differentiates the A.O. Smith value proposition from our competitors. The strength in both residential and commercial allows A. O. Smith to be a preferred choice for wholesale distributors across North America. You will also note on this slide that the business is very well balanced between wholesale and retail channels. This is a challenging balance to maintain and quite unique to A.O. Smith. It's a balance that offers stability and is beneficial as customers continue to expand beyond their traditional routes to market. A.O. Smith, as Kevin had mentioned, offers multiple market-leading brands which provides our team the opportunity to better manage risk of oversaturation in any channel or market. On this slide, you see a small but important representation of the market-leading products we produce every day in our facilities across the U.S. and Canada. The products offer range from opening price point solutions to higher price point feature-rich solutions from standard efficiency products to very highly efficient solutions, which reduce carbon emissions. We are a full line water heater solutions provider, providing north of 10,000 SKUs to our customers every year. Even though all competitors offer a full range, A. O. Smith believes it's important to be able to provide the SKUs required by our customers. Our customers need products to meet various price points. Our customers need products to meet local codes that vary across the country. And our customers need products that fit into the available space, which varies from installation to installation across North America. On this slide, you'll also see a map. The stars on the map highlight the 5,000 distribution points of our premium customers in Canada and the U.S. End user product availability in every market is key to our success. Taking a cold shower at home or in a hotel is not a pleasant experience, it's not one that you'd want to repeat. Having the end-to-end infrastructure in place to meet the end users' needs, is extremely important and our premium customers are a key contributor to our success. Let's now talk a little bit more about the industry. This chart shows the residential industry unit shipments over the past 15 years. An estimate between the units supplied to replace existing water heaters and units shipped to support new construction. Units for the new construction range year-over-year from 15% to 20% of the total shipments while the larger replacement market can be tied to the ever-expanding and aging housing stock in North America, which now stands at an estimated 161 million housing units. This slide also highlights the market leadership A. O. Smith enjoys in this category. While A. O. Smith was negatively impacted to a larger degree than our customers during 2022 due to destocking, I can tell you that our share is now improving as industry inventories have normalized now in 2023. Let's take a quick look at the North America commercial market. The commercial industry shipments have been relatively flat over the past 15 years. However, this slide also shows the trend towards higher price point condensing solutions which greatly benefits A.O. Smith as our share is much stronger in condensing than noncondensing commercial products. Through September of 2023, commercial gas industry shipments have been relatively flat while A.O. Smith shipments are up mid-single digits. The share overview on the slide clearly highlights our market leadership position. Leadership that has been maintained for many, many years, driven by a continuous flow of innovative products valued by engineering firms and contractors across the country and driven by a highly skilled and technical sales organization and distributors that understand the importance of local inventory. Let's now move from kind of the current state, and let's talk a little bit more about strategy. Executing a clear strategy. In the innovate and expand section of this slide, I have listed a few of the product categories and services that have been a focus for our business. The focus on product has been to develop innovative compelling products in growth segments. When it comes to services, we are focused on customer-facing innovative process improvement with the help of technology to reduce customer effort, to improve customer satisfaction while reducing our cost to serve. In the area of execution, we have been engaged with industry associations, federal, state and local governments as a trusted resource, as Kevin had mentioned, to work towards industry regulations aligned with carbon reduction goals. We have also spent a good amount of time and money on improving the A.O. Smith operating system to drive more effective approach to strategy deployment and operational process improvement. In the coming slides, I'm going to spend some more time, provide some more details on pending regulatory changes, new product development, service platforms and an update on the A.O. Smith operating system, all which helped to further differentiate A. O. Smith from others in the market today. As I mentioned, A. O. Smith is fully supportive and engaged with various regulatory bodies to ensure the industry takes pragmatic steps to implement change while ensuring end users have viable product choices as collectively, we all try to reduce our carbon footprint. On this slide, we have provided a summary of 2 recent Department of Energy announcements. One, a commercial final rule that will require all manufacturers to produce only condensing products as of October 2026. The other, a residential notice of proposed rulemaking, which have passed will impact the types of residential water heaters manufacturers are able to produce in 2029. Highlighted on this slide are the innovative products we currently offer that meet the proposed regulatory requirements. I've also highlighted the industry impact, which suggests a major industry shift in mix in the coming years. The commercial rule is certain and it will all have a positive impact on top line growth. However, growth will be somewhat muted as a lower price point electric product may be the product of choice due to venting challenges associated with moving from a standard efficient gas product to a condensing gas solution. On the other hand, the residential regulation is still being reviewed. It is likely that the proposed rule will change from input from manufacturers, energy advocates and impacted industries. The final rule is scheduled to be published in April of 2024. And having said that, there is no question demand for more energy-efficient products will increase in the coming years. It's more a matter of the pace of the change than whether or not change will happen. Now let's shift to review some really exciting A. O. Smith products that we'll be launching in the coming months. Today, I am extremely excited to announce that A. O. Smith will be launching a new line of gas tankless products developed by our U.S. and China engineering teams. The first product family shown on the far left, which will be launched in Q1 of 2024 will consist of 3 premium condensing models. The product line will be easier to install, provide superior performance and offer customers the option to add X3 technology. A patent-protected technology that centers around an integrated scale prevention filter jointly developed by North America water heating and North America water treatment. Applying the filter will eliminate the risk of premature product failure and will eliminate the need for annual maintenance associated with standard tankless product installations saving the customer hundreds of dollars per year. I think this is a pretty big deal. With 2 additional product families being released later in 2024, we are confident A. O. Smith will become a leading player in the growing gas tankless category. While we are pleased with the progress made to date, we are also extremely excited to announce that A. O. Smith will be opening a new North America manufacturing facility dedicated to the production of gas tankless products in 2025. A.O. Smith now is all in, on developing, manufacturing and selling gas tankless products in North America. Since 2010, the new residential heat pump industry demand has grown from a few thousand units per year to 141,000 units in 2022. North America water heating has taken and will continue to take a measured approach, investing in heat pump technology and adding production capacity as needed to meet demand. At the bottom of this slide, you see the expansion of our product offering. With the addition of the new Voltex Max, which will be launched in the coming months, we will have a complete good, better, best product offering. The Voltex Max offers all the features found on the Vertex AL listed on the slide. However, the new Vertex Max will be capable to deliver up to 40% more hot water with the addition of an integrated smart valve. The valve allows the customer to heat water in the tank to a higher temperature. The high-temperature water then flows through the smart valve, which automatically adjusts the outlet temperature to the set point desired at the faucet or shower. While the category is relatively small today, it is growing at 25% per year, driven by new building codes and incentives. We are in front of the curve. We are preparing for significant growth between now and 2029. We are not only investing in residential, but we're also investing to further strengthen our commercial leadership position, as Kevin indicated earlier. The current A. O. Smith cyclone product enjoys approximately 60% market share of the condensing tank-type market. With the market shift towards condensing, A.O. Smith is raising the bar with the introduction of the Catalyst program. There are 2 customer benefits of the program, incremental sales. A.O. Smith distributors will greatly increase their odds of having the right product to capture incremental sales. The new cyclone catalyst series will provide customers the opportunity to purchase 3 core models that they can convert to 10 BTU specific models in either natural or LP gas. The customer can convert the core models using a tablet to program the unit via near-field communication technology. All in all, the process will take approximately 5 minutes. The second benefit is a reduction in inventory carrying costs. The catalyst technology allows A.O. Smith to deploy a 2-step placing model. At the time of purchase, the distributor pays 30% below standard cost. We become whole when the distributor receives a second invoice for the purchase of a digital key that is required to finalize the conversion and make the unit operational. As I had said, customers having the right product at the right time is an important component to being successful in any local market. This program is the catalyst to making this happen. I believe it's a game changer. Let's now move from these product announcements, which are sure to have a big impact in the market, to review some very exciting services now available through A.O. Smith. It's important to note that these services will discuss our new platforms, platforms that we'll be able to expand on to provide further customer benefits. I think we can all agree that not much good came from the pandemic. I can think of only one benefit, and that's the adoption of the QR code by young and old alike. With more of the population aware of QR codes and the purpose of the code, we have been able to utilize a newly-implemented product information management tool to connect with the unique QR code placed on our water heaters for more than 12 years. Now the customers and contractors can receive information standing in front of a newly purchased water heater or on a unit purchased years ago by simply scanning the QR code to get information specific to the model in their home or place a business. Now there's no longer a need to mail and warranty registrations to call -- to replace the lost product manual, to call A. O. Smith for a service number or a call for troubleshooting assistance. Again, all of this can be accomplished by scanning the QR code. And while these benefits are extremely exciting, we'll be adding additional capabilities in the future to further strengthen the platform. The second initiative that you see on this slide was focused on improving first-time call resolution for those that still feel the need to contact A. O. Smith directly. With the virtual remote assistance, our technicians can push out a link to the customer, which allows the tech to use the customer's cell phone as a camera, having the capability to see the installation and the ability to coach the contractor on troubleshooting has greatly improved first-time call resolution, all while capturing this information within Salesforce if required at a later date. Both initiatives on this slide improve customer satisfaction while reducing our cost to serve. We also recently launched a new mobile responsive website utilizing Salesforce Commerce Cloud as the platform. The platform receives information from the new product information management tool that I mentioned on the previous slide. The tool pushes information to the site, eliminating manual work. improving internal efficiencies while delivering timely and accurate updates. The site has been designed to enhance self-service functionality and it's been streamlined to better assist the customer in the product selection process. With the input of the customer ZIP code and water requirements, the expert water heater selection tool can factor in local incoming water temperatures and local energy rates. It will also provide information on federal, state and/or utility rebates available in the area, so the customer could now make the best choice to meet their specific needs. Once a product is selected, assistance is provided by the site to find a local loyal contractor who is familiar with installing the type of products selected. This step not only elevates customer confidence, it provides leads to over 40,000 contractors that participate in the A. O. Smith Contractor Rewards Program, a win-win, both for our end customers and for our contractors. In 2024, we will expand these new capabilities to additional branded websites. As noted earlier in the presentation, regulatory change will likely move our sales organization and the customer base to selling and installing new technologies. We believe customers will gravitate to the manufacturer that can offer best-in-class training and support. On this slide, we have highlighted the investment made to expand capabilities to do just that. For those customers who recognize every minute out of the market reduces revenue, we have created the A.O. Smith University site, which offers multiple online training videos and certification modules that are available 24/7. For those that don't want to travel, but would like to have a live interaction with an instructor, we offer live training events from our state-of-the-art studio in Ashland City. And for those that require hands-on training, we have live fire training schools in Ashland City throughout the year. All in all, the investment allows A.O. Smith to provide superior support to outside sales, distributors and contractors, support that's going to be critical as the industry transitions to new technology. Let's now shift to a short, but important overview of the A.O. Smith operating system. The A.O. Smith operating system, the deliverables that you have seen from A. O. Smith in the past and the exciting deliverables that we have shared with you today can be tied directly to the A.O. Smith operating system. Yes, many companies have an operating system, and you may ask what makes the A. O. Smith operating system different. Our philosophy starts with customer needs and then shifts to the approach to meet those needs. It's the approach we have take -- that we take that differentiates our operating system from other operating systems. Our system is based on lean principles that focuses on people-based development rather than a tools only based or a kaizen-only approach. These types of approaches typically involve just a few people in an organization, tasked to make quick improvements to reach cost-cutting goals. Sustainability is an afterthought, if thought of at all. While the A. O. Smith people-based approach may take longer to deploy throughout the organization, it will provide ongoing benefits, it becomes part of our culture. The goal is to have employees throughout the business capable of following standard methodology to problem solving. Training has been developed for various groups in the organization. We have been training leadership and middle-level managers on lean principles, speed of trust, catch ball, A3 problem solving and problem-solving coaching using the training to improve various processes such as strategy deployment, the new product development process and the sales inventory operation planning process. In our factories, we have partnered with Toyota Systems Support Center, a consulting arm of Toyota to create model lines within our facilities. -- learning labs in our facilities that allow us to focus on developing a culture that surfaces problems and then uses standard tools like the 8-step problem-solving flow chart to solve the problem. It focuses on ensuring the right supervisory structure is in place to support problem-solving efforts and activities. We have been pleased with the progress to date and we are confident that lean journey we are on will provide many additional benefits in the coming years. I thought it might also be important to highlight the strength of the A.O. Smith manufacturing footprint. Highlighted on this slide are the 13 manufacturing and distribution locations across North America. These facilities range from 54,000 to 1.2 million square feet. Today, the 3 U.S. residential facilities produce products based on a standard product platform, enhancing our ability to use all available capacity. The footprint that we have today, the capacity and the capabilities give our customers a sense of security when it comes to supply, which they all realized during the pandemic. And it also allows the business the opportunity to better manage production costs by balancing demand across all 3 facilities. There is further opportunity to improve the utilization in the coming years, and this will be a priority as the sites prepare for the upcoming regulatory changes. We have confidence in achieving the 4% to 5% growth rate on average over the course of the next 5 years. As I presented, the residential industry has grown from approximately 1.5% over the past 15 years, and we would expect this growth rate to continue, a small adding -- allowing, excuse me, a small ad for inflation and a better mix towards higher price point products, incentivized by the federal state and local utilities across the country for both residential and commercial products, gets us even closer to the targeted growth rate. In addition to the improved mix and small inflation, we believe that we're in a great position to gain share with the launch of our gas tankless product, the CYCLONE CATALYST program and the new heat pump offering alongside the digital investments to reduce customer effort. The team is excited about what they have accomplished in the past couple of years, and they're excited about the future and they are confident in our ability to reach the 4% to 5% growth target. In summary, we are a market leader because of our innovation. We're a market leader because of long-term relationships that we have with our premium customers. We operate in a stable marketplace, really driven by the housing stock, the aging housing stock that we see in North America and the fact that in North America, nobody will go without hot water. We do believe we have a clear strategy, a strategy that will provide us success in the future, focusing on improving the A.O. Smith operating system, improving our processes, delivering new innovative products and solutions. And finally, with the regulatory environment that's expected to change in the coming years, we believe there's top line and bottom line opportunities for growth. So bringing it all together, we believe that North America water heating is on the right track to build on a strong foundation to maintain our leadership and drive profitable growth. So that's it for the North America water heater presentation. At this time, I'd like to bring up Steve O'Brien, President of Lochinvar to give you an update on the Lochinvar business. Thank you.

Thanks, Dave. Nice job. Good afternoon, everyone. My name is Steve O'Brien. I'm President of the Lochinvar business. And I've been in this role for just over 2 years. I started with A. O. Smith over 26 years ago though as a sales engineer in the electric motor business, back when A. O. Smith had electrical products company. And I grew through that organization. I was VP of Marketing and Product Management. And ultimately, when we divested the business in 2011, I was a Senior VP and General Manager, and I went along with the divestiture to Regal Rexnord. I stayed there for about 3 years and led the integration of the Motor business into Regal. And then in 2015, I had the opportunity to join Mitsubishi Electric to lead their heat-pump heating and air conditioning business in the United States. And so I did that for a few years, up until about 2.5 years ago when I was presented with the opportunity by Kevin and A.O. Smith to come back to the company I love and lead Lochinvar to the next generation of success. So I'm really happy to be here with all of you today and happy to present to you how Lochinvar is going to continue to build brand equity in the U.S. and Canada. So the first thing I want to share is that the Lochinvar brand is a premium brand within the A.O. Smith portfolio built on a foundation of highly efficient products, complemented by channel excellence and offering superior service to all of our customers. The business has long been focused on high-efficiency boilers and water heaters with a superb value proposition to lead and capitalize on the secular shift toward more efficient water heating systems. These products are driven through the industry by cultivating strong relationships throughout the channel and backed up with high standards of service and support before, during and after installation. To provide optimal solutions to a variety of applications, Lochinvar has also developed customized package capabilities, combining boilers water heaters, pumps, tanks and controls into engineered systems shipped directly to our customers' job sites. This combination of energy efficiency with best-in-class channel presence, and service will put Lochinvar in a position to drive consistent 5% to 7% growth over the next several years. The core product line in the Lochinvar brand are boilers. Boilers are the key piece of equipment in a hydronic heating system for commercial and residential buildings. Boilers heat water, and then that water is transferred into the occupied space where the heat is either released radiantly or through the use of fan coil systems. Lochinvar pioneered the adoption of high-efficiency condensing boilers for hydronic applications many years ago and now has one of the broadest commercial and residential boiler lines in the industry. There's been a multiyear shift to higher efficient systems and being an early adopter has led to above-market growth rates for many years with about 5% CAGR over the last 5 years. About 3/4 of the boiler business is for commercial applications such as apartment buildings, government and military buildings, hospitals, schools and airports where high volumes of hydronic heat can provide superior comfort and efficiency. Lochinvar has developed a premium network of independent manufacturers' representatives who typically focus on designing and supplying all components needed for hydronic heating systems and sell direct to installers or through wholesalers for bundling of products throughout the channel. There continues to be a strong demand as well in the replacement channel due to the desire to replace less efficient boilers with premium condensing systems. The full portfolio of product includes condensing and non-condensing boilers, water heaters, storage tanks, pool heaters and package systems mostly as extensions of the boiler technology to complement hydronic heating systems with hot water consumptions in commercial buildings and homes and also in swimming pools. This diverse product line is focused on boilers, commercial water heaters and tanks that are utilized in hydronic and water heating systems, and these categories combined make up about 80% of the overall business. From the early 2000s, the shift to condensing technology has been steady, now representing about 2/3 of the commercial boiler market. Condensing boilers are more efficient because they reuse the exhaust vapor and extract and convert additional heat energy to be used in the system. Lochinvar has led this shift. And as of 2023, over 90% of Lochinvar boiler and commercial water heater sales are now focused in this high efficient category. Condensing boilers and water heaters typically provide efficiencies of greater than 90% which is well above the Department of Energy minimum standards. These systems have been adopted due to the payback and the desire to operate more efficiently. The DOE, as Dave mentioned, is set to raise the minimum efficiency of commercial combustion water heaters to 94% and 95% in 2026, likely to raise the minimum for residential boilers to 95% in 2027 and commercial boiler standards are expected to follow later in the decade. Lochinvar is extremely well positioned to capitalize on this shift as the brand is known throughout the industry as a leader in this technology. The value proposition of condensing boilers typically includes significantly reduced operating costs compared to a current or an alternate system, often with a payback that makes the premium attractive. In this example, which would be a typical installation for a medium-sized apartment complex or office building, the installation cost for 4 commercial condensing boilers would be about $400,000 installed. And when compared to a much less efficient existing boiler system, the annual energy savings could be up to $144,000 per year, achieving a payback on this investment of less than 3 years. These savings can be even greater when upgrading even older systems or in areas where natural gas is even more expensive. And also, this payback could be very similar in a residential condensing boiler system. Lochinvar has been winning in the commercial hydronic market by continually increasing the condensing boiler value proposition to owners, specifying engineers and building managers. Lochinvar launched the commercial condensing 1 million to 6 million BTU CREST boiler system about a decade ago, and it is now the highest volume product platform in the portfolio. To stay ahead of the competition, Lochinvar is continually adding high-value features like the one shown here, the CREST Hellcat Combustion Technology, which continually monitors operating conditions such as barometric pressure and outdoor temperature and adjust the fuel to air ratio for optimal performance and best efficiency. This feature also provides the opportunity to not have to go back to the boiler system to make adjustments during seasonal changes. Our strategy for the brand is clear. We'll continue to add innovative features for high-efficiency residential and commercial condensing boilers and combi boilers, while also developing all the electric heat pumps as supplements or alternatives to boilers and water heaters to expand the business into areas where electric solutions are either desired or required. We'll continue to execute this strategy by providing superior training and industry engagement in our factory and our training facility as well as in the field while ensuring we have optimal channels to market in every region of the United States and Canada. Expanding on the product breadth of our high-efficiency boiler product lines, the commercial boiler line is comprised of 3 main product categories. The water tube technology, cost-effective technology [night,] the premium fire-tube FTXL and CREST product lines. All 3 of these product platforms have stainless steel heat exchangers for longer life with sustainable benefits that reduce life cycle costs, operate up to 98% efficient which is 23% over the DOE minimum, and they have industry-leading controls such as the proprietary smart touch, user interface and Conexus wireless control. The residential line is comprised of Noble boilers and Noble combination water heater boiler systems commonly referred to as combis and the night product line, which has a broader output range in floor-standing and wall-mount options. The residential boilers also operate at efficiency levels well above DOE minimums and have stainless steel heat exchangers as well as easy-to-use system controls. Lochinvar's combustion boilers and water heaters provide high efficiency with lower carbon emissions, enhancing the overall value proposition. In order to capitalize on the trend to fully decarbonize with all the electric solutions, Lochinvar has recently developed an all-electric, zero-emission commercial heat pump water heater product line called Veritus to capitalize on this decarbonization trend. This air source heat pump transfers heat energy from outdoors into the stored water and has a coefficient of performance of 4.6, which means it operates at 460% efficiency in transferring that heat energy from outdoors into the water. The system uses R-454B Refrigerant which is a low global warming potential refrigerant and it's modular, meaning individual units can be paired together to address a variety of performance needs. We're also expanding this product line in 2024 with the launch of Water Source, which uses outdoor bodies of water to heat -- to transfer heat energy from the outdoors into the water. And we're also developing a cold climate version, which can operate as an air source product in nearly any climate. These air source heat pumps will utilize cutting-edge variable speed compressors with electronic controls to accomplish this performance. One of the fastest-growing parts of the Lochinvar business is the engineered prefab package systems that utilize Lochinvar's boilers, water heaters, tanks and controls, preassembled, plumbed and mounted on skids in our Lebanon, Tennessee factory and shipped directly to job sites. We make these engineered solutions for space heating as well as water heating, and these systems can be tailored to a variety of needs even combining combustion equipment and electric equipment for reduced carbon emissions with optimal performance. These packaged systems are popular in healthcare facilities, car washes, aquatic centers and amusement parks because these types of facilities typically require large amounts of hot water and they desire fast and easy installation with minimal on-site labor. Lochinvar utilizes our extensive application, expertise to tailor these engineered solutions, offering expedited and effective construction completions from a single source. The growth rate in this category over the last few years has been 10% to 12% and we expect this trend to continue or even accelerate with the adoption of heat pump systems. As a matter of fact, here is a recent package system designed and sold by the Lochinvar team. This property is a 53-acre theme park that holds over 3 million gallons of water and 1.7 million guests per year are expected. In the first phase of construction, there were 4, 6 million BTU cross boilers with a heating output of 24 million BTU with a central control panel and tenant stainless steel piping for high output and long-lasting performance. This system was preassembled in our factory including all the stainless steel piping, the control panel and the wiring and shipped directly to the theme park. This plug-and-play system allowed the park to get up and running with hot water on time with no delays. In order to ensure the Lochinvar value proposition is effectively communicated and the systems we manufacture are designed and installed with a very high level of confidence. Lochinvar has invested in innovative channel, training and education. These programs include factory training on all of our product lines in our Lebanon, Tennessee factory where we utilize our state-of-the-art university-style Electro Hall and our hands-on lab behind the scenes. It also includes online and in-person specifying engineer classes and field programs with tailored content for all of our channel partners. We typically conduct over 85 classes per year, reaching about 1,500 new and existing customers. Much of the training we do is targeted at providing specifying engineers the ability to confidently design systems that have above-average value for building owners, making Lochinvar the provider of choice. The key to success with commercial projects is to have your brand as the basis of design from the engineering firm that creates the specification. When you're a brand and your product are specified as the basis of design by specifying engineer and you have market-leading performance and advanced features, it is highly likely you'll win the project with less competition. This chart shows the Lochinvar basis of design rate along with 4 of our commercial condensing boiler competitors and as you can see, our specification share is over 30% and growing in the last few years. This is a focused area for all of our well-trained field reps and results in higher win rates at higher margin in the channel. Lochinvar's commercial boilers and water heaters are typically supplied by independent manufacturers' representatives who focus on hydronic heating and water heating applications. In most cases throughout the country, these reps have Lochinvar as their #1 or #2 brand on their line card, typically complemented by a major pump product line. Our partner agreements typically require a dedicated business development personnel, trained application and technical support teams in the field and inventory available in the territory for fast turnaround of replacement demand. The country is well covered with this strategy and the reps shown here are known as industry experts in these territories. As a matter of fact, these reps together generate about 80% of commercial specifications for Lochinvar product throughout the U.S. and Canada. We intend to continue to grow the business at 5% to 7% for the next several years by capitalizing on the accelerated trend toward energy efficiency, leading the innovation of all electric heat pumps and continuing to expand the package system business with a wide variety of capabilities. We will preserve and expand margins due to industry-leading innovation, supported by premium services and the adoption of the A.O. Smith operating system that Dave just outlined for improved operating efficiencies. So in conclusion, the key takeaways for the Lochinvar brand are that we have built a foundation of success around premium energy-efficient products. We will grow by capturing share as this trend accelerates throughout the industry, we cultivate meaningful rep engineer and contractor relationships, so the brand is a provider of choice. We provide industry-leading support and service, and we can bring it all together with customized package systems for maximum value. We believe this product support and service strategy will lead to mid-single-digit growth for the next several years. Thank you. That concludes the Lochinvar presentation. Now I'll turn it over to Sam Karge, President of North America Water Treatment.

Good afternoon, everybody. As Steve said, my name is Sam Karge. I'm the President of the North America Water Treatment Group here at A.O. Smith, like my colleagues across A.O. Smith, I've been in the water treatment industry for nearly 28 years and in a number of different companies within the water treatment space and in 2018, when Kevin invited me to come join A.O. Smith to start putting together the up-and-coming North America Water Treatment Group is a real honor and a real pleasure to be able to join the company here. So I'm really excited to take you through exactly what we're doing here in water treatment. So I'm going to go through in depth our product and strategy. But in a nutshell, A.O. Smith water treatment in North America is only really about a 7-year-old business. We weren't in water treatment here in the U.S. and in North America before 2016. So really building out a strategy from the ground up and what I like about it is we based it in 2 fundamental areas with a lot of room to scale. Number one, we're really building it on our innovative product and technology spectrum. Then you go and you build that together with a very strong market opportunity, a highly fragmented market and going to that market through a really interesting set of channels, which I'm going to talk about in a couple of pages here as well. And then going through and vertically integrating the business and then scaling that business up with a number of acquisitions that we've made to date, but really integrating those businesses and then building a foundation for a number of acquisitions going forward. So our business has been growing over the last handful of years, about 13% a year, so double digits. Our business is really made up of 2 primary product categories, as you can see, water softening and water filtration. Water filtration provides us a great baseline business for a reoccurring revenue stream, which I'll talk about in a few minutes, but also the baseline water softener business is really an appliance business -- there's a nice capital sale, but then also keeps us connected to the channel. As you can see, there's a number of different ways that we go to market, which I'll go into depth. But fundamentally, we've been able to capitalize on the business and become a significant part of this industry just in a very short period of time. Our entire growth philosophy is based on one really good foundation. The water treatment industry in North America is barely penetrated. Unlike water heating, where just about everybody has got a water heater in their home, less than half of the United States homes have any sort of water treatment equipment. And if you take out refrigerator filters, which is the 29% blue bar, it's barely 1/4 of home. So less than -- right about 1 in 4 homes has any sort of what I'm going to call, deliberate water treatment system in there. So we think there's a lot of opportunity for baseline growth. If you look at our overall industry at a very high level, we've been growing about 4% or 5% CAGR over the last decade. That accelerated nicely during the pandemic with all the health awareness. But overall, we think that the market will continue to grow at least that 4% to 5%. And the main driver for that is really all around consumer awareness. The more the consumers realize the need for water treatment in the home, the more likely they are to buy it. And what's driving that consumer awareness is a number of different things. Things like the aging U.S. infrastructure, PFAS and lead, which you've all heard about, all of these things are really going to drive consumer awareness, all of which hopefully will drive that adoption rate on the far left up at a much higher level. I could see over the next decade, where that goes from 25% to 30%, 40% and eventually 50% penetration as an industry. So I'm very excited about the opportunity for what the industry has. So building our strategy on top of that baseline market opportunity is really important here. So first of all, our strategy is really built on 3 primary pillars. Number 1 is product leadership through innovation and technology. I'll go into what I mean about that in a couple of minutes, but on top of that, building out a very strong and concise channel strategy to get to the consumers. Since there is such low penetration, it's hard sometimes to get to the consumer and we've got a pretty good program for how we're getting to it. And then once we've built that channel opportunity, we're really focused on how do we execute and how do we make sure that we make profitable growth for A.O.Smith to become a good growth engine for this company going forward? So if you look, I said technology and innovation was an important part of our differentiation to the industry. There's a lot of great companies in water treatment that make good products. We've taken the stand however, at A.O. Smith, we're going to lead with technology and innovation first. So I'm going to start on the right-hand side of the page to start with. So there are dozen different technologies that water treatment uses. But we believe there are 4 or 5 core technologies that are going to represent the future of what -- where the industry is going. Things like PFAS and lead and micro plastics those items -- those contaminants in the water, these are the technologies that are really going to go and differentiate that. And ultimately, reverse osmosis. You heard Kevin mention it earlier, you're going to hear both Jack and Parag talk about it when they talk about China and India. We believe at A. O. Smith that reverse osmosis is that kind of be all end all product that's going to be really influential in driving the technology forward. I'd like to kind of call it a final barrier technology, something that consumers can put in their home, they take just got everything out of the water. It's going to get a drink, I'm talking fast here. So if you take a look, our product category is built into kind of 3 product categories. The first is what we call point of entry. These are devices that are at the entry of the home where nearly every drop of water that enters that home gets either filtered or conditioned as it goes into it. Whole home filtration is really where we think as A. O. Smith, a lot of the technologies are going. Whole home carbon filtration, reverse osmosis, things like that is really the future of that. That represents about 60% of our revenue today. Then you get to point of use technology, which is water treatment equipment that only really touches that little bit of water that you actually consume. For every 100 gallons of water that is produced in the United States by the municipalities, less than 1% or about 1 gallon out of 100 is actually consumed by people. Most of it gets irrigated or flushed down the toilet or whatever, we actually have technology that resist that 1% to a very, very high level. And then the last category, a real small in force is what we call the non-installed category. This is things like the water bottle that I carry around with me everywhere. We've got a lot of consumers out there who love the water treatment equipment in their home, but they can't take it with them everywhere they go. When they go on trips and things like that, having technology that allows them to bring great water filtration products with them is very important as well. As we said earlier, technology is important, but innovation is really what differentiates us. You heard Kevin mention earlier, we've got hundreds of engineers and technicians in China, India and here in the United States working on the next generation of innovative products for the industry. And when we talk about innovation, we're really focused on what I'd like to call differentiated products that are the best in category. So all of our products here in the United States are certified by what we call the National Sanitation Foundation or NSF. That is the body that goes and certifies our products and says that the product does what it's going to do. They also list the number of contaminants that are reduced or removed by the different filtration. And in nearly every category, our product is the top of the line in terms of removing the most contaminants possible. In addition to that, a lot of the innovation we talk about is about how do we do it as efficiently as possible. So start up in the top left there, our sidestream reverse osmosis technology. I said earlier that our role is the [indiscernible] technology, one of the dirty little secrets about it is it actually wastes a lot of water. Most RO systems in the market today dump actually 4 or 5 gallons of water down the drain to produce 1 gallon of drinking water. It's not a really good efficiency factor. We've actually developed through our team over in China, in AO Smith China, a technology that flips set up side down, meaning we actually produce 4 gallons of water -- of good water for 1 gallon of wastewater. So almost flip that completely on there. We are one of the few technologies in the world that can provide this and have that super high efficiency. That's a great example of existing technology in a very innovative and efficient way. We also have our Claryum water filter. This is a carbon water filter that is really a baseline technology. We came out with this product was part of our Aquasana line back in 2014. And we continue to add new capabilities to that carbon every single year. And in our Corporate Technology Center recently came up with a variation on that takes microplastics and PFAS out of the water. We were the first company to get certified by NSF for both reduction of PFAS as well as micro -- actually, microplastics very recently. If you go down to the bottom left there, a couple of technologies that we've had for a long time, but we continue to innovate on top of that technology. We are very good at A.O. Smith in problem water solutions. Water that's really stinky or has a lot of [indiscernible] in it, we're able to use different technologies and innovation that takes multiple technologies and is able to provide great quality water. And then when it comes to water softening, water softening has been around for almost 100 years, but there is still innovation possible, particularly in terms of the efficiency of it. Our water softeners today, particularly with our WaterMax, use less salt to regenerate and less water to regenerate than anyone else on the market and were certified by NSF to those very, very high standard levels. So we're really focused on great technology and innovation. As I said, our technology and innovation is the first step, but getting to the consumer is a very important part. We are an underpenetrated industry. So getting to the consumer is kind of tricky at times. We did some research back in 2019 and again in 2021 where we talk to actually thousands of consumers out in the water treatment market. And one of the things that we learned is consumers don't know a lot about water, the chemistry of it kind of scares them a little bit, but they know that the water they have isn't good. So how do we get that message to consumers and how do we get them to buy our products. There are what we consider based on that research, 5 core channels that consumers want to get products through. And this is what our research told us. Going through those kind of top to bottom. The very first one is our first entry back in 2016, our direct-to-consumer channel. So the Aquasana brand that we market is a consumer direct business that sells directly online and on the phone to consumers. It allows us to get directly to them. And actually, on a daily basis, we're talking to thousands of consumers about water treatment and the product out there. That's given us a lot of feedback to drive our overall strategy. The next one is kind of its sister channel, marketplace is online, AKA Amazon. Basically, this is the fastest-growing channel in water treatment right now. It's the smallest channel, but the fastest growing, and we believe that this is a big opportunity, not only for A.O. Smith, but the industry going forward. The largest channel is the water quality dealer channel. This is one that's been around for the longest as well. It's nearly half the market in terms of dollars sold. And as you can see in the top right there, it's about 48% of the market. This is where a dedicated water treatment professional comes in, diagnoses the water for the consumer, but through a water test creates the right solution that actually installs it and then maintain it going forward. What we found out from a lot of consumers is they are scared of the chemistry that's out there when it comes to water. So they like having a professional help them get the right solution. The next one that we're all familiar with is big box retail. A. O. Smith has a strong partnership with a number of the retailers, but Lowes especially. And this is a very important channel overall for getting to the market. And then the last one, not unlike our water heating group, is wholesale. As I said, there are a number of consumers that need the product installed. So buying it from that plumbing channel through a wholesaler is a very important part and a very important way of getting to the market. So as we've got those number of channels, getting the right message and the right product line to the consumer is very important. So when it comes to the direct-to-consumer business, our Aquasana business, it's all about innovation. We are in charge of actually generating the consumer demand. We don't have wholesale distributors. We don't have channel partners. We're selling directly to the consumer. So this is a constantly evolving space. You may have heard Aquasana commercials out there on SiriusXM or on Fox News or things like that. We spend a lot of time changing our message over the last couple of years to make sure we're getting to the consumers. Since the pandemic, our way of getting consumers has evolved quite a bit. And a big part of what we're trying to do is when you are in all 5 of those channels, the concept of omnichannel marketing is very important. We generate a lot of sales leads from consumers through our Aquasana channel. But being able to take the ones that we can't close online and moving them to one of our dealers is an important part of our future overall. As you look into our dealer network, we have over 400 professional dealers selling our products under a number of different brands. And the key thing we have found is that to help them grow, it's about training, not unlike our water heating and our boiling group, training them how to talk to consumers but also how to install the right product at the right place at the right time. And then last but not least, our retail channel. When we are -- when a consumer walks into a big box retail store, they see a number of different types of water softeners and water filters, it's hard for them to know what they need. We have spent a lot of time and effort building a very comprehensive packaging solution to help the consumer get to the right product. But much like in our water heater group, we use QR codes or they can scan the QR code and actually take them to an app to help them find the right product. And we also use online virtual assistance tools much like the water heater group to help guide consumers to the right type of product. These differentiators really have been an important part of how do we differentiate from the rest of the market. So after having built the business for the last 7 years, we've been able to build a good scale when it comes to our dealer network, our online consumer network. But as we've kind of discovered, water treatment is local. Water treatment in California is not the same as it is in Florida, is not the same as it is here in Illinois. And you need to have local water expertise through your dealers and your channel to market. So as we look at how do we build scale for our business, it's about building out geographically. So kind of focusing on the opportunity where we have good representation. So right now, we are very strong in the Midwest and in the Northeast. We don't have a lot of dealers and we don't have a lot of presence out west. So as we look at the opportunity for mergers and acquisitions, we're definitely looking west. The other area that's very important for us is commercial and industrial. You'll hear Jack Qiu talk about China and the commercial water treatment business that they've built there. Likewise, in the United States, we believe through our research that the commercial water space is nearly 2x the size of the residential water space. So that is an area of focus for us going forward when we look at acquisitions and the opportunity to grow. So now that we've built a good channel, we've got innovative products. For the most part, our operating aspects of how we build our product is primarily that of an assembler. So we've started to, over the last couple of years, focus on vertical integration of our components and actually becoming a core vertically integrated manufacturer of our products. So things like our carbon filters we brought in-house, our reverse osmosis membranes we brought in-house and the assembly of that equipment we're actually making in our own factories going forward. The other part of it is supply chain linked. Believe it or not, water treatment products have a very long supply chain. Take a basic carbon filter. It starts out as a tree growing in Sri Lanka, making coconut. That actually has to travel across the ocean a couple of times to make a carbon filter. So we've been working on processes to shorten that, so it's not traveling as far and taking us from that 25-week supply chain down to maybe a 10- or 12-week supply chain. It takes a great amount of cost out of it. It also makes us be able to control our quality and everything else much more efficiently going forward. So as you look at our growth profile. You heard Kevin talk about earlier A. O. Smith North America water treatment being one of the focused growth areas for this. And we've put together a plan to grow to be over $500 million over the next 5 years. And how are we going to do that? Number 1 is the market and we feel will continue to grow 3%, 4%, 5% a year and we will organically grow at least 2x to 3x that over the next handful of years. Take on top of that, 5% bolt-on acquisitions, whether it be geographic or commercial so that will drive us to be mid-teens growth over the next 5 years. That takes us at a top line level to nearly $500 million. So we will become a significant part of the overall A.O. Smith portfolio. In addition to that, using our vertical integration and our ability to get price and our ability to drive best-in-class service, we think that we can drive at least 100 basis points of margin improvement every single year which will take us again, our operating margins into the mid-teens as well. So really nice growth plan we've put together for top line growth but also a healthy bottom line growth overall as we build the business. So as we wrap up, we're very excited about the opportunity for this to be a great growth opportunity within A.O. Smith, really built on top of a strong differentiated and innovative product portfolio, our unique 5-channel strategy to the market, along with our brand awareness, being able to take brands like A.O. Smith and Aquasana all the way down to the consumer and talk to them and then using our vertical integration program to make us much more growth on the profit side of things. And then geographic expansion, both as we move west as well as in the commercial space, really will drive us to be a $500 million business overall. So with that, I'm going to hand it over to Helen, I think, for our Q&A session.

Okay. That's our North America business in a lot of detail. And so I'm going to ask the team to come back up here on stage. We're going to take about 20 minutes and we answer a few questions for you. And so Helen will be walking around with the mic. And once you guys sit in the middle, be business leaders and Chuck and I will be here for support.

Thanks for all the information this afternoon. I'm Sue Maklari from [Technical Difficulty]. Can you talk a little bit about [indiscernible] electric side? And maybe why [indiscernible]?

Okay. I'm going to give you the high level, and we get David give you the details. Listen, what we've always looked at takes as a product that's going to be part of our portfolio long term. And we've had a joint venture for quite a long time with a very good company. But what we saw several years ago is that, quite frankly, if we were going to be a leader and it'd be meaningful that we had to take steps beyond what we're doing today. And we value our relationships with our joint venture, but we had to take that step. So about 3 years ago or so, we made that decision. This is a $50 million investment for us. And -- but it was all centered around listen, A.O. Smith is leader and everything we do. We just talk about innovation is everything that drives us. This was a gap and through 15 years of making the product in China, quite frankly, make gas tankless there. And what we've learned over the last several years in North America, it was time for A. O. Smith to take that next step. And we put a specialized team to do that. And over the last 3 years, they've generated a great product line that's competitive with anybody in the world. And more importantly, Sam talked a little bit about the supply chain. We're going to have that supply chain come out of war as Mexico. So it's going to be on the ground for us, not leaving that long supply chain to deal with. So we have the flexibility. We talked about capacity and flexibility. So we're excited about -- that's the long-term strategy why we are, where we are. It was the one gap in our product line that we needed to close, and we are, and we'll start that the start of this upcoming year. I'm going to let Dave give you just some particular about it. And let her know we're already in the electric business, by the way.

Yes. So when you take a look at the gas tankless industry, it has grown from a very small market, so up about 1 million units a year at this point in time. Prior to the pandemic, it was growing at about 12.5% was the CAGR. Post the pandemic, I think the industry is down a little bit this year, maybe 10%, simple supply chain issues, inventory getting balanced out. But we do think it will continue to grow on into the future. And so it's really about 10% of the total industry. If you look at an industry around 10 million units and on the gas side, it's about 20 million. So it's really important for us to get into the space. As Kevin mentioned, we've got a lot of experience in China with gas tankless, but it was extremely important for us coming in on our own to have a differentiated product. And we're really excited about the product that's been developed a very unique heat exchanger on our premium product and having that X3 technology. When you look at scale formation and the heat exchanger is really the depth of gas tankless products. And it's the biggest knock against gas tankless product. So again, the timing was right to come in with a very unique value proposition because we do have some players in the space that are fairly well entrenched that we're going to have to push to the side and we're confident we're going to be able to do that with the size of A.O. Smith on the wholesale channel, what we do with all of our partners and then finally having a product that's really differentiated, we're quite excited. On the electric tankless side, we did get into electric tankless a while back through a small acquisition. We do bring to product whole home, tankless electric products. You can find those being sold through wholesale and also through our retail partners. We will be bringing to market a point-of-use product this coming year, which we're really excited about. Tankless electric point of use is typically looked at as a kind of a thrillway product. It's installed. You get a little scale formation on the element, it fails, you take it out, you put a new one in. We're going to come out with a point of use electric product. That really holds up to our quality standards, and we think it's going to change the market. Point of use is typically more sold in commercial at airports and in the labs there and the like. And whereas whole home is typically more sold through the residential side. So we're in that space. We got some exciting things coming there also.

Maybe you should have the electric tankless one stay as a throwaway items as Kevin's complaining that they last too long. I guess a question on the guidance from '24 to '28, the 150 basis points of North America margin expansions on the 24% exit rate rather than the 25% full year. So maybe just a little bit more color on that to start with and then I've got a follow-up on water treatment.

The lights and -- can you hear me now? Yes, in North America margin expansion. So we're looking to expand margins. As you know, we've made quite a step up in the last year. So we're kind of looking to exit the fourth quarter at about 24%. When you look out -- go out to 5 years, you've got a couple of dynamics. You've got margin expansion in the North America water heating part of the business. We've got a little bit of margin expansion, a little smaller scale, but on the North America water treatment business. And as the water treatment business grows, there's a little bit of headwind against North America margins. So there's a bit of headwind against it in total. But through the operating programs through all the things that we typically do on the working down costs, you saw cost reductions across all the businesses, we would expect to add a little bit of margin. There's one more thing. So through that period, I just want to kind of highlight that when we come out with some of the more high-efficient products, particularly on the commercial side, we're assuming right now kind of where those end up and what the bar raises on energy efficiency. But the percentage is going to be roughly the same in operating or contribution margin, but the dollars themselves should be larger because it's a higher efficiency, larger selling price on the -- particularly on the commercial side.

Maybe one on water treatment. You talked about 4% to 5% market growth for that and 10% to 12% market growth for you guys just to talk about the specific initiatives that you think can drive double the market growth.

Water treatment? Do you want that water treatment?

Yes. So the biggest initiative is really driven around the filtration EPA standards. We believe with the PFAS standard and the lead standard that's going to make the penetration of filtration in homes grow at a very good market level. And we believe that our technology being higher than what else is out there that we should be able to capitalize on that tailwind that's driving us forward.

David McGregor with Longbow Research. A couple of questions. First of all, on the water heaters, the 4% to 5% growth through 2028, what do you assume for market share gains? I know market share is in that particular category or historically been pretty steady. Are you assuming that you're able to pick something up there? And then I guess, I don't know if you want to address this now or maybe in the presentation later in the day, but is there a China or India opportunity for commercial boilers for Lochinvar and then finally, for water treatment, is an evolving distribution mix a headwind or a tailwind.

Let's talk about China this afternoon. Maybe yes. So certainly, China, you'll hear them going forward. We're selling heat pumps. We're selling commercials and so forth.

So on the water heater side of the business, as we had indicated, there's normal growth that we see, right, with the housing stock that's out there, the aging housing stock, CAGR is about 1.5%. We historically have seen a little bit of inflation as we move forward. But with some of the incentives and regulatory programs, we definitely think there's going to be a mix shift. As Chuck alluded to, that mix shift is typically a higher price point solution. And then as we shared with you some of the compelling products and services that we're bringing to market, we do feel that there is going to be some share gain opportunity and that we gain share by bringing innovative solutions, right, innovative products and innovative services to drive that share growth. And so the team is pretty confident that we'll be able to pick up some share as we move forward.

Particularly on gas tankless.

Gas tankless $100 million over the next few years on top line growth, right? So we'll definitely see some improvement in gas tankless space.

And then on the top line growth on the commercial regulatory changes expected in 2026. It could go a number of ways, they've mentioned that it could go to a tankless product. But -- the way we estimate it now, we would expect top line growth just for that regulatory change to do to higher selling price and be a top line driver of about $150 million. So between tankless and that commercial regulation, I think at the later part of 2026, 2 meaningful catalysts for growth now.

I missed that question. What was the question?

It was the evolving nature of the channel I think for us, it's a strong tailwind. Participating in each of the 5 core channels is important for us because [Technical Difficulty] federal regulations come out, especially for PFAS. We don't know which channel that's going to favor because they haven't actually released that data yet. There's a good chance our professional channel, namely our dealer channel is going to be very successful and being able to capitalize on that federal regulation coming out in the next year or so. So we're leaning heavily into our expansion around the professional dealer channel right now.

And maybe just comment and use water heaters as kind of a catalyst to what you said over the years, and Dave has been around a while. Big Box was going to take out the small retail. All these things were going to happen and there actually is a place in the market for all these channels. There's different customers for a big box. There's different customers for professional farmer. There's different customers for -- a hardware store. And what I like about what we're doing in water treatment there is truly different customers for every one of those channels. And that's not going to change over time, maybe longer term, it might when it becomes part of everybody's everyday life. But right now, having that younger person is just going to start out with a bottle and then graduating up to somebody who's going to have a whole house. That's going to take time. It's going to be involved. And being in that position, I think, is a real asset for our company.

Saree Boroditsky from Jefferies. So your outlook was out to 2028, but you did highlight a large regulatory change on the residential side in 2029. I think last time you had a big change in 2015, you increased prices by 20%, you had a step change in margins. So I know it's a long way out, but -- any kind of color on what you would expect from the 2029 regulatory change.

Yes. Let's -- we'll talk a little bit about the pricing, kind of the gap that we see. So on a standard residential electric product today, sold at retail is about $500, $600. And we jump to an equivalent heat pump, you're looking at about $1,900, okay? So a pretty significant jump that we see between the 2 technologies. I would say right now with the DOE has put out, there is a notice of performance rule making. There's still a lot that needs to go in, a lot of sausage-making that's going to take place before we have that final rule. And until we have that final rule in April of 2024, we really don't have a clear vision on the transition from the current technology to heat pump technology. We do think it's going to be fairly significant. But we really need to see the final rule to really understand and project the growth that we'll see going forward.

Directionally, we see it as positive, though, similar dynamics to the last one.

And related to that so if you look at the presentation here, and it's a lot of investment on the water heater side and tankless, heat-pump including the efficiency level on the tank side. So there's a twofold question. I have one, your previous comments there made it seem like you think the industry will be pushing more towards the heat pump side of things when the regulatory filing that gets finalized. Is that how you see the mix going? Or is it going to be a little bit more balanced depending on the product category, the needs of the customer, whatever. And the follow-up is, and maybe I'm stealing say later, Chuck, how do you think about the CapEx needs for that over the next few years here? Because it feels like that's a lot of capital dollars that are needed -- high return, but a lot of capital dollars.

Yes. Good questions. So at the end of the day, we really don't have a lot of clarity as far as where that mix will shift towards all right? What we do see is we see a lot of states out there that are pushing to ban natural gas in a variety of different ways. In California, there's a proposal that will bring the NOx submissions on gas down to 0. If that happens, gas products will no longer be available and that's talked about in 2027, it's going to go keep pump. So in California, they're really pushing towards heat pump. Other areas of the country, there's still very supportive gas technologies, and you'll see some of the higher efficient standard tank-type gas products and tankless gas products doing well in those markets, okay? So it's really kind of a mixed bag at this point in time. And again, when we get further clarity in 2024, I think we'll be able to forecast a little bit better going forward. So it does vary across the country.

Gas products have moved to higher efficiency. Electric products will likely go to heat pumps and then there will be some exchange for regulation before that time.

Yes. The CapEx has a comment here because I think it's really important. Gas is going to be around for long time. And so you talked a lot about residential, but Steve also at Lochinvar talked about the commercial that is going to impact on our North America water heater side. There's just footprints that don't work. So having the combination you can talk about it when you start putting 4 million, 6 million BTUs, I mean that's some power there, and you say, let's make that heat pump. That's a whole different animal. So it's going to be a combination of solutions we think going forward.

Yes, we do. I mean there are parts of the country where -- they're adopting building performance standards as an alternative and building performance standards typically require a lower carbon emission over a period of time, whether it's year by year, over the next 5 years, over the next 10 years, and we think very often the best way to reduce carbon emissions over time is going to be with hybrid systems with ones that have heat pump capability or all electric combined with gas for the optimal performance and carbon footprint reduction. And with the products that we're developing, including the Veritus heat pump, I showed for the Lochinvar business, which will be branded A. O. Smith & State as well. So we'll be selling that across the portfolio. We think that's going to be a really nice addition as a direct heat pump for water heating and as a boiler supplementary placement and in a hybrid system.

I think I'd like to add to that and just say, Kevin had indicated we've been around for a long time, 34 years. We haven't seen this much proposed change in the 34 years we've been in the industry but I'd tell you what, there's no better place to be than A.O. Smith as the industry is making this change because of the strength of the organization and because of our resources and because of our R&D and our capabilities to make that transition. So we feel pretty good about that.

And water heating side, we've got the products. So it kind of leads me into the CapEx question is we've got the products. Some of what Kevin quoted on tankless investment is behind us because it's R&D over the last handful of years, we're really plowed into some money and making sure we got that accomplished. I'm going to talk in my presentation about $85 million of incremental investment. It's going to cover our R&D center in Lebanon, it's going to cover tankless manufacturing that we've just began to break ground in Juarez. And it's going to cover investment in our McBee facility for commercial production because we know the product is going to move into the cyclone that David presented. And we need a little bit more capacity on the Cyclone product. So in total, that's about $85 million incremental investment that we'd see over '24 and '25. So there'll probably be a little bit taken out of our normal $75 million to $80 million, but that will be a little bit more investment. We feel good about the investments in all those categories.

Just back on tankless [indiscernible] how big that market is on dollar basis. And just as you think about share gain, [indiscernible], is it really distribution partners kind of [indiscernible] product? Do you think a product [indiscernible] gap?

Yes, that is a very good question. Typically, we don't compete on price. We like to separate ourselves with innovation. And we do feel very confident that the product that we're bringing to market is differentiated enough that will entice some of our solid customers that, quite frankly, had moved away reluctantly to additional manufacturers because we went up to speed with the technology within that space. So with the differentiation that we have and with the customer base we have, we feel fairly confident we're going to be able to take some share in the market. So the market, as I indicated, is about 1 million units per year. Average sale price is anywhere $850 when you look at a mix between condensing and noncondensing that's out there in the market today. So it's pretty sizable. And it's a space that we needed to play in.

Thanks for a lot of the information and particularly some of the aspirational goals. I have questions about 2 of them. One of them is the 1.5x to 2x net leverage. As a company, you've been operating in a net cash position for over a decade. Your share repurchases, guidance on that page. It does not look like a lot. It doesn't sound like the capital investment is going to be getting as 2x leverage. I understand that acquisitions is always the first course. But getting to that level, what is the commitment there? Or has there just been a significant improvement in visibility in the M&A market on more treatment assets? And then I have a follow-up.

Yes. We've sized kind of the capital allocation. You saw it wasn't closing the gap on that 1.5x to 2x. We still feel good about acquisitions. We still feel we should reserve ourselves the ability to make a significant or multiple acquisitions, and we still are down that path and active -- so you're right, it's been a while since we've been under levered. We're going to continue to watch it. The market for acquisitions, I'd say the process side where you see processes right now, it's probably slowed a little bit. That's not necessarily our target. Our target is private companies looking to sell and has kind of demonstrated that in the handful of transactions we've done recently. So -- and I realize I'm the way they're adjusting it. But we still feel good about the acquisition. At what point would we pull a different lever on buyback or something. We're just not pay to that point yet, but we certainly do understand we're under-levered.

That's a sea change difference from where we've been right. So...

I don't know if it's a sea change difference. I think what I'm trying -- what we're trying to outline on the chart on leverage is -- and I'll comment about it in my section, but we are looking at large and small acquisitions. And for those of you who don't know us well, and I think we're just constantly going to be at a net cash position, that's really not our intent. It is our intent to lever up, and I wanted to give some comfort level that not going to go crazy. We're not going to look at overlevering and get ourselves into a position and particularly in this environment where we're overlevered. But try to give some parameters on where we would go for leverage and how we're -- how we manage that.

The only other one is on the Rest of World margin. So 400 basis points over essentially a 4- to 5-year period there. Why would it take so long? Is it the mix now with the more upper middle price point? What is stopping you from getting there faster?

Yes. Jack will talk a bit about what's and kind of how we look at the target for margin expansion, you get us kind of back to where we were at our peak $1.1 billion and maybe 14% to 15% operating margins. The economy in China today, it's a tough environment. And so part of that is we're going to need some help on the economy getting back to some housing starts and a little bit more consumer confidence before we see that trajectory take off. So some of that hesitation, Scott, is just kind of the -- when does the economy in China kind of get back to a little more robust growth on housing, a little more consumer confidence where consumers are reaching up for a premium product and seeing some of those dynamics give us a little bit of help like we enjoyed prior to about 2018.

Okay. I think if you have any more questions, we're going to have another question-and-answer period at the end. So sorry because there's a candy card and other things we have to eat okay. So why don't we take -- we're going to -- maybe take 15 minutes. Let's go to drink, grab some snacks, and we'll come back in about a quarter to the hour, if that's okay. All right. Thank you. [Break]

Second half of our program today. As you can see on the agenda, Jack Qiu, President of our A.O. Smith China business is up next and he'll talk about capturing growth opportunities in China.

So good afternoon, ladies and gentlemen. I'm Jack Qiu, the President of A. O. Smith China. First, I would like to provide you a little bit about my background. I've been with A.O. Smith for 20 years. I joined A. O . Smith in 2003 as a Deputy General Manager of Product Engineering, leading new product and engineering organization development. Then I am promoted to run our gas water heating business unit for over 10 years. I have in my current role since 2020 right after COVID outbreak. It's my pleasure today to share with you our strategies as well as the great progress we have made through past few years. We not only improve our cost structure resulting in a serious quarters with 10% operating profit but also continue to invest in new products and technology to drive our performance. Under today's challenged economic environment, we are very pleased with the elegance of our business and the foundation that will be built to drive growth for the future. To begin with, I would like to highlight some key messages. A. O. Smith is a leader and a premium brand with our core business with water heating and water treatment. Within that core, we continue to see growth in the prepared market and a solid recurring revenue from our water filter business. We have built and invested in a balanced gold market channel strategy through A.O. Smith splendid branded spec stores, third-party retail stores and e-commerce. The balanced go-to-market strategy along with the growth in recurring revenue streams has built resilience into our business model. In addition to product innovation, we have focused on providing a priming customer experience through the development of digital tools for selling and service. We are also expanding our business through adjacent kitchen appliances by leverage our brand and our innovative connectivity. With the opportunity for growth in commercial market in both water treatment and water heating. Moving forward, we will continue to leverage our established strong brand equity and the balanced channel to drive profit growth. We're looking for a 5% to 6% combined average growth rate through 2028. China at a glance -- while on a financial performance perspective, after a period of challenging years, we are positioned for growth. As the COVID outbreak in 2020, we challenged our cost base through organizational restructuring, inventory management and productive improvement. In 2023, we project growth of 3% to 5% in local currency year-on-year, and the EBIT rate will be over 10%. Our water heating business and water treatment business accounted for 47% and 39% of our sales, respectively, 6% of water heater sales are replacement and 20% to 25% of water treatment cells or replacement filters. As I noted earlier, our go-to-market strategy is channel-based with 41% of sales going through A. O. Smith exclusive spec stores, 35% through third-party retail stores and 24% through e-commerce. A.O. Smith exclusive spec store distribution network is a true differentiator by combining sales and service and in fact, we're controlling the whole customer experience. The network is a foundation to provide a premium customer experience inclusive of products sold through the third-party retail and e-commerce. In recent years, we have executed a dual brand strategy in China. The A.O. Smith brand is aimed towards a middle efferent classes and sold through all channels with consistent pricing. The Chanitex brand is defined as a member of A.O. Smith family targeting younger generation of first-time buyers, meaningful online at a competitive cost position. We also have introduced AI Link, a unique IoT application, which meets the smart home scenario and is better for bundled sales. So in fact, AI Link has become a brand of system integration and A.O. Smith well positioned for the smart home. This slide provides you with some ideas for our balanced channel strategy. For off-line retail sales, we have about 9,600 point of sales across the country with 4,500 physical stores in Tier 1 to 3 cities. 1,800 of them are A.O. Smith spec stores, which contributed about 56% of our off-line sales. The other 2,700 primarily consisting of key accounting stores [indiscernible] and other regional top stores contributing 35% of off-line sales. We also have approximately 5,100 outlets in Tier 4 to Tier 6 cities, which accounted for 9% of our off-line sales. A.O. Smith spec stores plays an important role in our off-line sales. They are operated by our [indiscernible] distributors and able to integrate presales and off-sales to deliver a premium experience. We have a good partnership with [indiscernible] and the top regional retail stores, which is important for the expansion of our new categories. And our major online platforms are jd.com and tmall.com, those big players in China. Online exposure is crucial to our brand and we leverage the e-commerce activity to attract -- attractive traffic and deliver in-store visit to upsell premium products. We also have a project sales of about $35 million revenue, many folks on the high-end luxury properties, you can see us some good names over there, [indiscernible] . So investment in China, we have operated and grow in China for over a period of 25 years. We have 3 facilities, which help our manufacturing and R&D capabilities all based in the [indiscernible]. Our business model is in China, for China. From day 1, we have focused on quoting excellence and compromise safety standards and social responsibilities. We have over 470 engineers in China, very passionate and capable. Our success in China is founded on a deep understanding of Chinese customer needs and R&D capability to launch innovative products to lead the market. In rest in the years, in addition to the product innovation, we have also leveraged digital tools and automation to empower the team and improve operational efficiency. So this page outlines areas within our strategy. We believe our growth and margin expansion will be driven by the execution of initiatives, which are surrounded by innovation. Innovation within the products themselves, innovation connecting various product offerings and innovation enabled exceptional service capability and provide premium customer experience. We remain focused on our [indiscernible] product of water heating and water treatment. And we have added the new kitchen appliance, which provided for growth under penetrated market categories and also protect our core business through the bundled sales. Our do brand strategy protect our premium positioning and allows a great engagement in e-commerce. We also see opportunities in the commercial water treatment and water heating market. So I will talk about in the Commercial Products sector. This page shows our commitment -- our core products continue to receive the investment to lead the market with innovation that is key to maintaining our premium position in China. A.O. Smith has been leading the water heating market with many innovative products. Here, you can see a lot of good stuff, right? And dual tank slim design, super quiet and zero cold water for tankless. And rest in the years, we introduced a new electric water heaters with a slim design, good looking and more hot water supply. And we launched soft water integrated gas water heaters, and uncombi boiler is better fit for the Chinese department for softer water application before the very limited space for installation. So when we integrate the softer water with our water heaters, that is a very unique solution for the market. In relation what treatment, we continue to promote a large water flow rates and harder water purification. Recent, we add the IoT connectivity to most of our water purifier models, which measure the water consumption and therefore, provide accurate data to ensure what features are changed based on actual use of filter water. In addition, consumers are also providing information at the TDS level. TDS, the total dissolved solid, is a key parameter of water quality and is well known to many Chinese consumers through the media education. In Q3 this year, we launched a unique dual function water purifier. It has 2 outlets, one provides a treated water up to 5 liters per minute for washing dishes and vegetables and another outlet provides pure water for drinking and cooking. So that's also make our water purifier essential device multifunctional to serve the whole house instead of one point. So let's talk about the new categories, kitchen product. I will spend a little bit more time on this slide since I'm thinking most of you will be very interested in this new stuff. We enter into the Range Hood and Cook Top market in 2019. It was tough to grow in a mature market along with the COVID impact. But we are very proud of our Range Hood products since we developed a very unique [indiscernible] design. There is no noise of fan assembly is designed to be installed away from the cooking operations zone and concealed above ceiling of kitchen. So our Range Hood is able to run at a higher speed, get rid of cooking films completely while maintaining a pleasant quiet environment. This year, we introduced 2 exciting kitchen appliance, Steam Oven and Dish Washer. Both markets are underpenetrated with a good potential for growth. I think both category should be lower than 5% penetration. So we have always driven our premium brands through innovation and solve customer needs and better than our competitors. So our Dish Washer have a unique bowl rotation technology, which provides a clear effect, which outperformed traditional dishwashing ability, particularly in Chinese style cookie. We even display our products with superclean features in the stores with a transparent phone cover. So the people can see the actual operation, admiring how factory, the strong hot-water flushing, the deep bowls with the bowls themselves automatically rotating. For Steam Oven, we have been better designed for China cuisine. In China, the consumers just love to cook with steam. But before there were a lot of complaints that steam amount is not enough for handling the thick cuts of meat or a larger fish. The machine run out of water quickly with a small tank to create steam. Our solution is to adopt a dual generator system with abundant 3-dimensional steam for better cooking and to supply endless purified water by connecting the steam oven with our water purifier. In fact, we design all our kitchen categories with ability to connect to each other. For example, our Dish Washer could be connected to water purifier as A.O. Smith bond offering. In this way, consumers are able to achieve spot is clean effect with purified water into the digital water directly and be free of maintenance, no longer need to refuel softening agent. In addition, the potential consumers can easily find the quality difference of our products versus others. We first applied [indiscernible] steel material for the tank, also called the inner chamber of Steam Oven and Dish Washer are providing strong corrosion resistance and better hedging conditions. With the new kitchen products, we initiated a program to promote bundled sales, providing all sorts of product combination, you can see from the bottom, including our core products. The bundle sales are key trend in China is very important for the offline stores, efficacy improvement and its close help to reach the target consumers at early stages of home declaration. One of our unique bundled sales is for safety. Our Range Hood, Cook Tops and a Gas Tankless are installed in the kitchen can be linked together to create a safe teaching concept with sensors monitoring the gas leak, the seal, and the smoke in the kitchen on a real-time basis. It's also monitored to cook top fire status and it can provide a warning if somebody forgets to turn it off. So our new kitchen category bundled with our core products are being well received in the market this year. So in China, like the smart electric cars, the IoT-driven scenario-based smart home solutions become a clear trend. I'm pleased that we have made early strategic and forward-looking investment around smart home. We have launched AI-LiNK HVAC system in 2021, heating ventilation and air conditioning, providing high-end customers with one-stop shopping and intelligent solution, covering space heating and air conditioning and fresh air. We have adopted advanced Power Long Career Technology to reduce on-site wiring and enhance reliability of connection of wireless equipment. Belling controls and mechanics, we're able to achieve operating convenience and deliver highly integrated comfort and energy saving solution. And this year, we upgraded our HVAC system with a better AO-quality controls. In 5 aspects, temperature, humidity, air freshness, room cleanness and quietness, and a high-style display of air quality is very attractive to the high-end customers. Like this room, we don't know how exactly the air looks like. So if you do have a digital display of the key parameters, is making you feel better and cherish the air cleaning system. So what we forecast an annual sales of $100 million for our HVAC business by 2028. So here, I will give you an overview of our integrated system of a good water for smart homes and how A. O. Smith will own the kitchen. Our AI-LiNK technology is a foundation. Its unique design is to create a safe local network system, since consumers are getting more concern about information security and privacy. Our system is equipped with a Power Line carrier plus Wi-Fi dual-mode networking and the Smart Home Box can store all necessary data inside people's houses. So all the data don't need to go into the cloud. So people don't worry about those -- the leakage of the information. And this way and creating a very unique system to ensure reliability and information security. So our strategy is to expand our core water business around kitchen appliance under the AI-LiNK framework. We forecast our kitchen appliance category, range hood, cooktops, steam oven and dishwasher. The total sales would grow to $100 million in 5 years. Now we are talking about the Commercial products. We're seeing Commercial product as a catalyst for growth, too, because we have a premium brand in China. So that's also applied to our Commercial segment. A commercial water treatment business contributed 7% of our total sales today, and we are leading in this growing market, and our products are designed, based on application scenarios. So we have a product for manufactured facilities, offices, hospitals, campus and public areas like airports and shopping malls. So if you went to China, you can see A. O. Smith commercial water purifier everywhere. It's really enhanced our image greatly. And we're also offering a diversified solutions, such as not only in the hot water, but also chilled water, sparkling water and variety of coffee. So that's new. And we see commercial water treatment products through local dealers in over 110 cities now, develop high-quality dealers and landmark project have proved to be very important in expanding our Commercial business. We're expecting annual growth of 10% to 12% for commercial treatment -- water treatment. For commercial water heating, with China's transition from low efficient gas boiler to heat pump, the gas boiler industry show a downward trend actually, it's like a 30% decrease last year and also 30% decrease this year. So our commercial water heating business contributed 4% of our total sales today. And our focus is on high-efficient products of heat pumps and condensing boilers. We have introduced a small commercial IoT system also called AI-LiNK, same name. Which intelligently link a gas boiler and Air Source Heat Pump to provide optimized, reliable and energy saver solution, which is well received in the commercial renovation market. This slide shows a clear picture of our strategy -- of our dual brand and AI-LiNK. So you can see our Chanitex mission is to go after a large portion of the market online and possibly down to Tier 4 to Tier 6 city in the future. Because we cannot open the stores over there with efficiency concerns. That's why I think maybe we go along with online down to the Tier 4 to Tier 6 as the most efficient way. And this change has transitioned, and we have adopt uniform A. O. Smith brand pricing across online and off-line to protect our business. This change of transitioning Chanitex brand to online is to really protect offline sales from conflict. Since the price of the Chanitex brand models as more flexible from competing. AI-LiNK has elevated our brand as a system solution provider and make us a key player in the smart home arena with our unique dual module setting of wired PLC, power line carrier plus, wireless, Wi-Fi. AI-LiNK has become an open platform to allow other brand devices to be connected. A. O. Smith service and customer experience has earned widespread recognition in China. In the past couple of years, we continue to improve it by developing various digital tools. We help salespeople improve the efficiency of communication with customers. We also empower the service technicians with a timely guidance on installation and maintenance through backstage supporting system. We built original material center and established a digital visibility to components in stock with 3 color coating. Today, we have over 7 million customers online, over 6,000 dedicated service technicians, representing A. O. Smith. Besides regular customer care center, we also have a unique online system called President Hotline, which has been in place for 2 years, allowing the top management to receive feedback directly from end users, by opening promising timely and responsible feedback to each customer. In 2022, we received 4.2 million service calls and online 100,000 messages through the President Hotline, and we're very happy to see 98% of the message from the end users are positive, they want to thanks to our excellent service. Another key project, A. O. Smith Industry College, it was established 2021 as a training space to support our AI-LiNK Strategy. So far, we have correlate 400 highly skilled technicians capable of mechanics, electric and on-site networking. We also provide training courses for many salespeople to help them to better understanding, the bundle offering and the system. Our unique service system, pattern controlling the whole experience for extensive training, that's why we feel very comfortable entering the new product categories. Regarding the brand building, we continue to invest both A. O. Smith and Chanitex brand through social media, such as the Red and TikTok, they're cooperating with influencers on live-streaming and creating high-quality content. In China today, the online and off-line are really merged, we display A. O. Smith brand, high-end models online. It may directly create online sales, but it also rode the traffic and generate sales leads to the off-line stores. If the sale is fulfilled, but offline stores with a lead from online, the sales records and the positive comments can be also seen online to help to get more leads. So year-to-date, we have established the presence of over 800 A. O. Smith stores online, either national [ JD Material ] and [indiscernible], Red Star Macalline and Easyhome are also promoting the O2O approach with their brand digital reach and extensive offline footprint to improve operational efficiency. We built a strong collaboration with those channels and established stores on the online platform as well. So today, we will see the headwinds in China in decline. Real estate, low consumer confidence -- put money in the bank, don't want to spend in short time and a very fragmented channels also asking the competition is fierce, but we believe A. O. Smith is prepared and well positioned for these challenges. And we'll respond with clear strategies. We'll keep driving our core business, new kitchen categories, HVAC and commercial business and it will continue to enhance premium brand through AI-LiNK and best-in-class service. We believe with all these initiatives we are on the path of $1.1 billion revenue in 2028 with a 5% to 6% revenue growth each year. And we expect our margin to improve from 11%, maybe 10% from 15% in 5 years. To sum up, I hope that I will be able to provide you with a clear insight into where we have invested within our product as investing in creating enhanced customer experience through digital tools. We'll continue to keep our leadership in the core business, maintaining our market share with a balanced omnichannel strategy and will expand our kitchen appliance and the Commercial business and HVAC, a leverage into our in-country market presence. A.O. Smith's capability is better than most appliance manufacturing in China, since we have built a powerful ecosystem. We have over 20 million of units sold in China, and we are monitoring every unit installed and controlling the whole customer experience with our distributors and service agents. This is our real differentiator for competition, will ensure high quality of service and enable us to expand our service capability to new categories like Kitchen Products and complex HVAC system. Those are all very challenging field, is not easy for any of our appliance manufacturer. Premium products plus premium service, I'm confident that executing on these clear strategies will further enhance the resilience of our business model and ensure our profit growth. In the past few years, we have faced various challenges, gone through intense market swings, but I'm very happy to witness the continuous pursuit of excellence with the team, reshaped organization, a greatly reduced inventory, expanded to a new category, a step into the HVAC Smart Home business and improve the bottom line every year. And now back to 10%. So in short, we have emerged even stronger and nimbler and this is all based on deep understanding of the local market and be able to respond with speed. We all have full confidence in the future of A. O. Smith China. It's also report -- good report that A. O. Smith has been named 2022, China Most Sociable Responsible Employee top 10 and first time elected as the China's Best Employer for female employees top 10. So we have earned an outstanding reputation as a good place to work, where they treat its employees with dignity and respect and that's business with honest and integrity. Thank you very much. I think that's all for the China operation. So next, I will invite Parag, our office leader in India to show his passion.

Thank you, Jack. Good afternoon, everyone, and welcome to India. And let me share with you how A. O. Smith is expanding its presence in India. By way of introduction, I'm Parag Kulkarni. I'm the Senior Vice President, International and President of India Business. I joined A. O. Smith early 2015, as the Managing Director for India business. And it has been a very, very enriching journey so far for me, working alongside a very highly capable, committed and driven India team. In short, it's been a ride of a lifetime so far for me. Prior to A. O. Smith, I worked with Swedish multinational firms, SKF Bearings and Atlas Copco. And after that, for almost 22 years with one of India's most trusted, reputed and admired companies, Wipro, running their lighting and office furniture business. Outside of work, I am a marathon runner, a wildlife photographer and a blogger. So let me take you through India business and what is it for us to share about India. So A. O. Smith is a very premium brand and well recognized in India with a very strong product portfolio. And when I say premium brand, we are a very consumer-facing brand. So in India, a water heating product is fitted in the bathrooms and the consumer knows what he or she is buying for the house. And they are very much engaged with the brand in the decision-making process. Same is the case for water treatment. Which is, of course, even more informed and involved category. So I must say that, a general A. O. Smith consumer remembers what they have used in the house and the brand has a terrific connect. And I thought, I must share with you, that I just met Damian some time back, and he was saying that he had an India colleague who had just come back and were saying that, he saw a lot of A. O. Smith all over whenever he traveled. And that's what I hear whenever I go into various forums, being a member of a lot of CXO programs or chambers of commerce and all. If I introduce myself, I am from A. O. Smith, a lot of people come up and say, "Hey, I'm using your product." So that's a difference. I mean A. O. Smith appeals to the sensitivity of the urban, young, upper middle class and middle class, which is expanding terrifically. And that's the opportunity that India presents. So being one of the fastest growing economy in the world, apart from that, great demographic dividend of about 1 billion population under 35 years of age, average age of India is 29, as India grows fast at about 6%, the per capita grows up and the middle class is expanding terrifically. All of which is fantastic for a brand like A. O. Smith. And what the projections are, is that India is going to be one of the youngest nations right up to 2070. So there's a lot of human capital over there. So we are in a great shape at this point of time, to really ride this boom. India also for A. O. Smith India, the team has a lot of local expertise and awareness and understanding of what the consumer wants, how and what the behavior is, and all of that helps in terms of innovating continuously and launching new products and services to our consumers, which has led us to drive a very profitable and sustainable growth and going ahead as well, that's what is going to help us. We have also tried to expand our footprint because the growth of India is very much bottom-up. So what I mean by that it's no longer a top 7, 8 city, metro city driven kind of a country in terms of GDP. India's growth is bottom-up and it's expanding terrifically. So there are 52 cities in the country with 1 million-plus population, and there is an equal opportunity in all these places. So which means that A. O. Smith really has to be present closer to the customer, and that's what we have been doing, in terms of driving our expansions. Which means that we are very comfortable and confident that going ahead, we will grow at industry-leading rates at 15% to 20% CAGR right through 2028. So let me give you a snapshot of what we have achieved in the past few years and where is this confidence coming from? So 2022, very, very important year for A. O. Smith India. Coming on the back of 2021, which was a terrific year. We still grew at 4x the industry growth rate in 2022, which is terrific in terms of performance. But look at the 5-year track record, we have been a CAGR of 13%, and this is despite 2 years or 1.5 years getting lost on COVID. So there's a lot of -- I mean, positive energy within the A. O. Smith India team to drive the business ahead. I must share over here with you that, we started off as a water heating company, when we got into the country. And late 2015 to 2016, we expanded ourselves or diversified ourselves into water treatment category. So till then, 100% of our business was water heater. But today, despite getting into an industry, which is a water treatment, which is I must say, a very competitive field in India with very, very good established competition. Very tough to find a place for yourself to create a niche for yourself, in that we have been able to create a premium niche for ourselves. And today, 70% of our sales come through water heaters and 30% come from water treatment which is a good balance, so we are no longer a risk with only one business category or one product category. We have a good spread of water heaters and water treatment in our portfolio. I'd also like to share that our strength, of course, when we started was distribution and off-line, which has been very, very good. And today, 68% of our revenue comes from offline. But last 4, 5 years, we have invested and grown our presence on the e-commerce platform and online platforms. So close to 20% plus of our revenue comes from there. And we have created a very strong premium niche commercial business for ourselves. 12% of our revenue comes from there. So that's how A. O. Smith is in India. But let me talk you to what India is and what opportunity it presents. So India is a #5 economy in the world today. At around $3.5 trillion, likely to be a $5 trillion economy by 2026. And in fact, the recent S&P projections, which came in about 10 days back, project India to be a top 3 economy by 2030. At this point of time, we have just overtaken U.K. a few months back to be a top 5 economy. By 2030, we should be overtaking Germany and Japan, to be among the top 3 economies in the world. So this is terrific. A lot of FDI investments are happening in the country. I must also share some statistics, out of the $3.5 trillion, the first trillion dollar took 67 years. I mean, India had independence in 1947. The first trillion dollar took that much. The second trillion dollar came in 8 years. The third trillion dollar came in 5 years. So the speed is really up and India is really in a great position at this point of time. And in talking about FDI, since our independence of 1947, close to about $950 billion were invested in India, out of which $532 billion came in the last 90 months. So that's the speed at which India is growing at this point of time. And last 8 years, year after year, the FDI investment has been breaking the previous year's mark. So that's the speed at which the things are changing. So net of all, it's a great position. Today, even startups are really driving a lot of growth in India. And we have among the top 3 nations in the world in terms of unicorns, and a lot of changes happening. So government of India is investing a lot into infrastructure, be it roads, sports, airports, et cetera, and driving a lot of urbanization. One more statistics over here that, I mean, 30 Indians are migrating from village to town every minute. So which means that urbanization is really happening all over. And I'm talking again that India's growth is bottom up. It is expanding in all the cities, 52 cities are 1 million-plus population, so there is tremendous opportunity, which is happening. There is a saying that India will create a U.S., U.K. in a very short period of time. That much is the urbanization, which is happening. So there's a lot of opportunities over there. So which means for a company like A. O. Smith, which is a premium product, innovation, expansion of market, being present in e-commerce platforms and broad distribution network, gets us in a great position to ride this wave of India becoming a fast-changing nation. So, A. O. Smith is a very strong brand with terrific distribution strength, broad distribution strength, just some statistics around it. We are now over -- having over 300 distributors and really reaching out to 13,000 retailers. And when I talk about retail, there's a lot of mom-and-pop stores in the country, so which is a lot of effort to get into and permeate and reach over there. So that's been our strength. But the biggest strength of A. O. Smith, because of a premium brand is also in the big box large format or modern retail, what we call it, where we have 20 chains and we have represented in 800 outlets. So over there, the real premium customer steps in and our brand really addresses and talks to them and there's a great opportunity which happens. On the Commercial front, we have really expanded our presence, and we have now 50 Commercial dealers, covering the large spectrum of the country, and we are well represented on e-commerce platforms of Amazon and Flipkart. Flipkart is a Walmart entity in India. So that's how we are well positioned. And like everyone over here in this room, A. O. Smith has a very clear strategy in India, and it's simple, well-understood strategy among all the people of A. O. Smith India. And what is that, innovate and expand. So innovation is our core. We are all the time looking at new products, new technologies, to ride in and bring in for our water heater and water treatment business, and we are creating demand, as we expand and generate new products. On the brand front, we are really addressing that, and I will touch upon it in the slides ahead. And in terms of execution, we are really providing a best-in-class consumer experience. Again, some slides ahead will talk about it, and we have a process-based approach in the country and a platform-based model in terms of new product introductions. So water heater is the core of our business in India, residential water heaters, and we have innovated continuously to raise the bar in the market. In fact, I must share with you that raise the bar is the anthem of A. O. Smith India. In fact, I'm not a great singer, but I mean most of the times in our factory on people's ring tones on their phones or even, when you walk in or in your car, people are playing that song, raise the bar A. O. Smith, raise the bar A.O. Smith, so that kind of thing, yes. So it's very much part of our culture and DNA. We are a young team. I'm the oldest guy in the team. We are a very young team, less than 30 years in terms of average age. So this team is driven around innovating and really launching technologically advanced products, which deliver great value for the customers, be it on energy efficiency, longer life or faster hitting. Some of those things which we feel the consumer really values. So technologically, A. O. Smith provides great solutions, but what I'm going to talk about, and that's something which is core to A. O. Smith, What differentiates us as a consumer brand and as a brand of A. O. Smith facing Indian customers is that we pride ourselves on also providing design base -- I mean, a modern styled, aesthetically appealing, really minimalistic style products, which the consumer loves to have and bring it to their house. So most of our products talk to the consumer. In the sense, when you go into a shop and you see A. O. Smith product, the product is designed in a way. It appeals to a consumer [ senses ], and it tells the consumer, "Hey, come and talk to me, feel me, touch me, take me home." That's the way we have designed and constructed the product in terms of aesthetic styling, appeal, et cetera, et cetera. I must share over here, how are we able to roll out such wonderful, beautiful products all the time because we have an India-focused, India-based R&D team of 30 engineers, which are working round the clock to roll out products for India. So deep understanding of the Indian market, plus a team which is working continuously and they and a lot of our external design firms roll out these products, leading us to get 30% of our revenues all the time because of new products. So not just water heaters, but even on water treatment, which is an even more advanced and highly sought-after product among the urban Indian middle class. So we are creating new trends, and that's how we are generating demand. So one of the such trends that we created is the hot water product. So at different points of time, our teams, which is a marketing team, R&D team or even independent research, talk to consumers. And some of their stated and unstated needs get communicated to us. So we heard during our different interactions at different points of time with the customer. Some people said, "I have aging parents in home." Someone said, "I have a pregnant wife at home." Some others said, "I have young kids and I have to take care of their throat." Some others said, "I and my husband are very health conscious. We want to start our day with a hot glass of water or a warm glass of water or a green tea." So all of them put together led to a creation of a hot RO-water product purifier. And that got launched in 2015, leading further to launching that range in the UV category, further leading to launching a more sustainable. I think Sam talked about how A. O. Smith has innovated at all times and RO products lead to water wastage, but we are one of the companies which pride ourselves on highest recovery. So we say that we are among the highest recovery water purifiers in the country. So A, B, C, D, E, a slew of product launches over a period of time and the new trend created. So hot is the new healthy in India. And all of that leads to, again, 30% of our sales coming because of new products. So we are creating demand by understanding and creating new trends in the industry. So we talked about the hot water. Here is another trend. So as India is urbanizing, as per capita goes up as it's getting up on the affluent chain, the Indian household wants to have a better life. Water purifiers in India are generally wall hung units. So not a good sight, if you walk into a kitchen that suddenly you have a modern kitchen and there is a water-purifier wall hung. So there is a need to create modern, minimalistic design, which mergers, go into the background. And in came under the counter water purifier. So A. O. Smith innovated and launched a lot of new products in that platform. And today, 3x of our sales have grown in that category. Same is the case with UV product purifiers. We -- I mean there are a lot of customers. So in India, the water quality among the -- in the cities has improved significantly. Unlike a lot of places where normally the water quality goes down. So there's a better water quality available, leading to a lot of people saying, "I will buy a UV product." But then in that, no premium product available. So A. O. Smith innovated and brought new modern style UV product purifiers with a lot of consumer interface kind of appliance electronically and digitally operated products, and that's what has led to creation of new trends. And we are continuously investing and nurturing in these trends and grow the business continues. So that's what is there. Building a brand. So over here, I must say that wherever the consumer is, A. O. Smith is. What do I mean by that? The normal and regular watering holes, be it Instagram, Facebook, WhatsApp, I mean Google, Amazon platforms, et cetera, A. O. Smith digital outreach is over there. In terms of product and not just product. We are just not advertising on products. We, as a company, and Kevin talked about it and everyone talked about, we being sensitive to the global environment, sustainability drives us. So be it the earth day, we are present in terms of sending a message across, no product advertisement, but connecting with the consumer or be it a Mother's Day or be it the Father's Day. So there's a lot of emotion. Indians are generally very emotional people. So you have an emotional connect also with the brand. At the same time, we need to be there, when the festival time is happening. Right now, it's a festival time in India. Next week, Monday is the biggest festival of India, which is Diwali, which is the Christmas of India. So in which case, we need to have offers for the consumers to get excited. So print, we are still a print hungry nation. We still consume a lot of print. So we have -- we are present over there. Or at the same time on Amazon platform, where a consumer is about to make a decision, we influence that by being over there. And likewise, I mean, brand building is something which is continuous. Our brand is also built through third-party accreditations and certification. So our A. O. Smith consumer is very happy that A. O. Smith water heater for 5 years in a row has been rated as the most trusted brand and which is terrific. So that's what the consumer feels good about, and that's how the brand appeal goes up. In the same time, as new certifications come up, A. O. Smith was leading among the largest players for getting that certification from government of India. And on an e-commerce platform like Amazon, we have possibly among the highest rated within our category, in terms of ratings and reviews. Leading the consumer to develop more trust, more appeal for our brand. And our Net Promoter Score is continuously going up. So that drives us to being present where the consumer is. And we have expanded our distribution footprint significantly over the last few years. We started with about 100 distributors in, say, 2016, today, we have 300-plus distributors, covering large footprint in terms of retail outlets. And I must share over here that how have we been able to appeal. So with the distributor, it's not a relationship, which is just a commercial transactional relationship. A distributor is an extended part of A. O. Smith family. We have one family, one unit. And that's what the distributors firmly believes because of a program called Sankalp, which is one of its most unique kind of a distributor-oriented program. Every year, we conduct one annual event, where the Chairman CEO, like last year, Kevin, was over there, present, and we have something called as a Hall of Fame, which means for the full year running, not just on performance on sales, but on various parameters in terms of educating the customers, in terms of premiumization of product offerings, various things and best payment, et cetera, et cetera. We reward the distributors. Today, the distributors want to be on the stage receiving this award from the Chairman and CEO of the company, getting acknowledgment in their public forum and peer group, and that drives a certain behavior. And they are very, very committed to working alongside. So although within the industry days, we present only us, but they also sell various other products. Our aim was that they treat A. O. Smith as their #1 principle, and that's what this program has been able to drive, and that's what is helping A. O. Smith a lot. Coming to Commercial. Again, we were among the first to bring in heat pump offerings in the India market and premium customers, aware corporates, we're very much happy to have energy-efficient, sustainable products for their requirements, be it hotels, health care facilities, education institutions, premium condominiums, et cetera, et cetera, or even high net worth individuals for their villas and all. So Commercial business has been growing at a fast clip, as we continue to invest in that business. One of the best things, which I'm very, very proud of to share with you, is the brand is not built by just innovating and getting the best product at the highest end, the most premium technology, but leaving the customer high and dry. A. O. Smith India has invested in possibly one of the best, I mean, served customer experience, not just for the industry. We do not really benchmark ourselves with the industry. But we want to be among the best wherever consumer experiences that. And our service is really raising the bar continuously. We have invested in technology for -- to enable the consumer to touch base with us any time in the day or night. And we provide 1,200 technician plus over 14,000 ZIP codes, 365 days a year, all the time and try to solve the consumer issue, if at all, within the same day. And that's what the service stands for. And that premiumization of service is building the brand of A. O. Smith in India in a very, very strong manner. What does that mean to the business? Water treatment provides us an opportunity to have annuity business of annual maintenance contract, whether consumables and other things. So you can see in the graph below how our business in terms of AMCs is growing. It's a very profitable way of growing the business. What is there for the consumer? Peace of mind. So I think every consumer values that, and that's what is helping us terrifically. Now let me share with you a simple one of the platform-based approaches that has been working for A. O. Smith in a very, very good way, much like an automobile industry, where you create a heart and then you package a chassis differently for different products and rollout. So A. O. Smith also has a very platform-based approach. What does that mean is that based on various value propositions and customer touch points. And even India, as a geographical nation has a requirement, which is a little different in different geographies, we are able to do that through this platform-based approach and launch a product time after time, time after time. What does it mean to the retailers. To a retailer, whenever a consumer walks in, a retailer wants the consumer to buy and go. He doesn't want a solution to come from somewhere else. So -- and a customer is always looking at the latest offering. He goes to the retailer and say, "What is the latest?" So the retailer is very happy that A. O. Smith is launching every time and again, new products. So they say, "Okay, this is the product that is the latest. Please buy it." What is there for A. O. Smith, I think we are able to launch new products with minimum tooling investments. At the same time, also use inventories and cut down on our operational cost. So net of it all, through a lot of these initiatives through innovative products, launch of and expansion of these in the market through commercial expansion, e-commerce expansion and great customer experience. We feel -- and very confident about delivering industry-leading 15% to 20% CAGR through 2028. We will maintain our margin profiles and invest into our business to grow our presence in India. So let me summarize over here. A. O. Smith stands for premium brand positioning, a great brand connect with the consumers. India is one of the most happening places. I gave you a lot of examples for that. A. O. Smith India understands and has local market expertise, and we are innovating fast and we are expanding fast to reach out to all the consumers in the market. And we are very confident of delivering 15% to 20%, I mean, market-leading growth right through 2023. Thanks a lot. I'll hand over to Chuck now.

Thanks Parag. I'm not going to sing during my presentation, just assuring everybody. All right. So good afternoon, everybody. I'm Chuck Lauber, I've been with the company 24 years going on. And prior to that, I was with E&Y, in number of leadership role with A. O. Smith and been in my current role as CFO for the past 4 years. Very pleased to review with you, how each of the individual business presentation come together to form a compelling financial profile. When you look back at our performance over the past decade, we have a proven track record of delivering revenue growth, earnings growth and creating value. We have an industry-leading free cash flow conversion rate of 100% over the past 5 years. In a moment, I'll review with you our capital allocation priorities. In addition, I'll review a few near-term incremental growth-oriented investments, we will be making, to further enhance our leadership position, particularly in the North America water heating market. We have a strong balance sheet and therefore, in a position to deploy capital into M&A. Acquisitions are a priority, and we remain active in seeking the right acquisition for A. O. Smith in a disciplined fashion. We believe we have a clear strategy for growth and value creation going forward. As you look at our financial performance over the past 10 years, we have a strong proven track record of growth and earnings expansion. Our key performance drivers have been positioned into two categories: those on the bottom left of the slide are historical drivers, and those on the bottom right are catalysts that position us for future financial performance. It's important, I touch on the historical drivers as I want to emphasize that those drivers all remain in place, as a solid foundation to build from, including regulatory changes for water heating, as you heard from Dave Warren. We've grown our top line and margin profile in North America business. We've invested in and introduced innovative products across all of our geographies. We've invested in digital platforms. Some of which are already improved our premium positioning and others that are just recently deployed and have a long runway. And underlying these drivers, we have a strong replacement model in North America. And growing replacement business in China. The replacement cycle provides a backstop against downward pressure in times of a challenging economy, as well as provides an upsell opportunity, when the replacement cycle comes around. We are positioned for future performance. You just heard from the business leaders in their specific strategies to grow both top line sales, as well as continue on a path to margin expansion. To highlight just a few, in North America, the launch of a premier gas tankless water heating offering, where we expect to gain share within the category. We expect to continue to capitalize on the tailwind momentum provided by a decarbonization mega trend, that supports growth in high-efficiency gas water heating and boiler product along with electric heat pump technology. Each improving the financial profile of our mix. We see a clear path to continuing North America water treatment, top line growth and margin profile, through executing the integration of the acquisitions we have made so far and enhanced growth through the future acquisitions driving scale and margin improvement. Our initial acquisition was made in 2016, and today, through acquisition and organic growth, the business is around $230 million in 2023. We see a path over the next 5 years through organic growth and acquisition, to $500 million with margin expansion. The 2026 regulatory change for commercial water heating is right around the corner, and we are well positioned with our leading Cyclone product platform that is now configurable into various models from 3 core models. Catalysts, the updated Cyclone differentiates us in the market and positions our customers to win. With the most compelling value proposition in commercial high-efficiency water heating. The proposed 2029 regulatory changes on the residential side of water heating, while still in the proposal state, are expected to provide a top line and margin growth opportunity. In China, we believe we are positioned for top line and margin growth. We have restructured the business, rationalized our store footprint and invested in developing and introducing new products, along with AI-LiNK connectivity. In addition, you just heard, we have a very long positive outlook for India. Executing our business strategies, along with capital allocation priorities, lines us up to deliver on our key financial objectives. Our confidence in achieving our objectives is not only based on the strategy that you heard today, but also the way we are structured and focused. Our businesses are intentionally structured to deliver in the markets they serve. As we talked about throughout the presentation, in serving our geographic markets we're customer-focused and locally led. Our localized, in-country leadership and management teams, know the local markets they serve and can drive performance based on premium in-country, go-to-market strategy, supported by in-country manufacturing. We believe this structure is critically important to a premium positioning in each market and creates a superior customer experience. In addition, each country is supported by the global functional teams, driving common standards when possible and building off the standard platforms. This support aligns with providing speed, quality and flexibility to serve each market using global best practices. Operational excellence has long been embedded in our businesses. The A. O. Smith operating system was introduced a number of years ago as the next step in A. O. Smith continuous journey -- improvement journey. Dave Warren spoke about how the North America water heating business has used A. O. Smith operating system to drive sustainable improvement. During the pandemic, our operational excellence foundation served us well through all aspects of a challenging COVID environment. And we look forward to a long runway of foundational and continuous improvement programs surrounding our A. O. Smith operating system, creating a sustainable culture shift to provide process improvement over a period of time. Our free cash flow target is 100% of net earnings, and we have achieved that over the past 5 years. The recurring revenue portion of our business and the replacement side helped build resiliency into that model. We have relatively low capital intensity even with incremental investments over the next few years. We have a strong working capital position through active management, with some incremental improvement in inventory investment from where we are today. Our free cash flow supports our capital allocation priorities and funds the right investments for the long term. Turning to a discussion of our capital allocation philosophy that focuses on strategic investments and returning capital to shareholders. We are currently in a net cash position. And while we have deployed capital in each of the 4 categories noted in this chart, we remain undersized in our acquisition deployment. We continue to believe that capital deployment for the right acquisition would create long-term value, and we have continued to reserve firepower to be in a position when that opportunity arises. We remain focused on acquisitions and have over the past 2 years, looked at both large and smaller acquisitions. We do, however, remain a disciplined M&A acquirer. And while we would stretch our debt-to-EBITDA ratio above our target range of 1.5 to 2x, we would do so when we see a clear path to working back into that zone. We have a strong balance sheet along with a solid predictable free cash flow. Together, we have the firepower in support of strategic investments as well as return capital to shareholders. We're in a great financial position in today's environment to pursue strategic M&A. Our highest expected rate of return and opportunity to expand our market leadership in each of our businesses and geographies is to invest in ourselves. In planning our capital, our target is to dedicate approximately 60% to maintenance projects and 40% within the category of growth and operational excellence. Over the next 2 years, incremental to that target investment mix, we will invest in a number of key growth initiatives. Innovation initiatives that total approximately $85 million. Earlier this year, we announced the $30 million investment in our commercial R&D facility in Lebanon, Tennessee that Kevin talked about. The facility will be an expansion of our current Lebanon operations adding offices, lab space and testing facilities. This expansion allows for the consolidation of our commercial engineering teams some of which are currently located in Lebanon, along with those located in McBee, South Carolina. The consolidation will leverage the team's capabilities, collaboration and efficiencies, all in a state-of-the-art commercial engineering water heating and boiler R&D center. We have 2 expansion projects launched -- beginning to be launched in Juarez, Mexico, both within the property we occupy today. The first project supports North America production of our newly launched gas tankless. A new building will be constructed on the property to manufacture our newly launched tankless product in North America. Our initial launch in China leverages our footprint and capabilities already in place, where we have manufactured gas tankless for the China market for over 15 years. While manufacturing in China provides the right footprint to launch production, it's not cost-effective longer term with tariffs and transportation adding to that cost. 2024 will require an incremental investment in our bottom line and support the launch and import cost of tankless product. Initiating our production in Juarez is key to eliminating the 25% tariff and improving logistical efficiencies. Also in Juarez, we are expanding our residential heat pump capacity to meet the increasing demand of growth in residential electric heat pump in the near term, not inclusive of what we would see in a proposal in 2029. The fourth key incremental growth project expands our commercial water heating production capacity for our high-efficiency cyclone product. As a result of the pending -- the -- yes, pending and will be launched 2026 regulatory change for commercial water heaters. While eliminating certain less efficient commercial models we sell today, this change is expected to expand our cyclone demand, already a leader in the commercial water heating space. We continue to invest around $90 million globally in R&D and product development. Finally, we continue to invest globally in our operational excellence and channel expansion. We consider to continue to pursue strategic acquisitions that fit within our strategy as well as those that meet our financial criteria. We seek to remain within water and expand our core as well as consider water themed adjacent platforms. Potential acquisitions that expand into total -- expand our total addressable market, either through market synergies within our current footprint or as a platform for future bolt-on acquisitions are of particular interest. Also, as a component of our forward view on emerging technologies and capabilities, in addition to our R&D investments previously mentioned, we consider acquisitions or joint ventures as a jump start to developing those capabilities and technologies internally. We also continue to remain disciplined in our financial criteria review. We keep our pre-acquisition financial profile with regard to growth rate and our highly attractive margin profile in front of us as we review acquisitions and because we believe our return on invested capital was a differentiator, our financial investment criteria also focuses on projection of return on invested capital by year 3 of ownership in excess of the weighted average cost of capital. It's a priority for us to continue to pay a dividend. We have raised -- continue to pay an attractive dividend. We have a 30-year plus track record of an annual increase in our dividend, and we are committed to continuing that practice. We benchmark our dividend yield compared to our peer group and are committed to remain a leader within our peers. In addition, share repurchase has been a consistent ingredient within our capital allocation strategy. Since 2014, we have reduced our diluted share position by approximately 17%. Going forward, we expect that share repurchase will be an active component of our philosophy in returning capital to shareholders. We have a great foundation to build from and a strategy to deliver growth in the range of 5% to 6% in the 2024 through 2028 time frame. The North America water heating business has a number of catalysts, including 2 key growth drivers. Our newly launched gas tankless project -- products are projected to add an incremental growth of $100 million by 2026. And the commercial water heating regulatory change in late 2026 is projected on a product shift assumption to provide top line growth on a full year run rate of over $150 million. In addition, we've invested in innovative products, innovation beyond products to deliver on a premium customer experience in each of our markets. Our free cash flow will continue to feed the investments we need to continue to grow. In addition, we have a base of replacement business, which provides resiliency when the economy may be weaker or challenged. As you look at this slide, it demonstrates that our strategy for growth is not based on 1 or even 2 actions. It's based on a number of strategies across each of our key markets. It's based on historical experience in these markets and investments we have made in ourselves and continue to make. In addition to the strategies we have in place and the investments we have made, we believe that the decarbonization mega trends, driving energy efficiency in water heating and space heating and the aging infrastructure and water delivery provide long-term tailwinds in water heating, boilers and water treatment. Our water treatment business through organic growth and acquisition growth is on a path to grow to $500 million with a priority to improve operating margins to mid-teens over the next 5 years. Based on our 2023 outlook for China and the environment within the economy in China has been over the past couple of years, we believe we are poised to grow from the current position. Our assumption to achieve our objectives over the next 5 years assumes a return to a more healthy economy in China and a more confident consumer to trade up to premium product. Our balanced channel approach in China and the way we go to market, new product introductions, giving our portfolio more breadth, which enhances the effectiveness of the bundling programs that Jack talked about and connectivity through AI-LiNK are all growth drivers. Those investments, along with the growing replacement business of water heating and water filter consumables make China more resilient even in a challenged economy. With regard to India, while small today in relation to our total business, we believe India has great potential for long-term growth within our -- with brand strength, new product introductions and channel expansion. And beyond 5-year profile far to the right, we expect the proposed residential water heating regulatory changes projected to begin in 2029 provide a positive financial catalyst to the growth of the water heating business in North America. Looking forward over the next 5 years, 2024 to 2028, our value creation objectives and goals, we would expect to grow top line in the range of 5% to 6%. Our EPS in the range -- grow EPS in the range of 7% to 9% with North America margin expansion of 150 basis points from our expected exit rate of 2023. The Rest of the World margin expansion of 400 basis points and a continued capital allocation program towards share repurchase in line with the $300 million target we have for 2023. 100% free cash flow rate and as we deploy capital through acquisitions, target a range of about 1.5 to 2x debt-to-EBITDA ratio. ROIC is an important metric for us, and we believe that our high ROIC differentiates us from our other investment opportunities and maintaining a high ROIC remains a focus for us. So to wrap up, we have a track record of delivering top line earnings growth. As a proven foundation with a number of key growth drivers over the next 5 years, driven by regulatory change and the launch of our tankless product as well as product launches across all of our businesses, we have an industry-leading free cash flow rate of about 100%, a balanced capital allocation approach and a strong balance sheet in support of investing in our capital allocation strategy as well as acquisitions. After hearing from the businesses and the investments we've made in both our products and innovation beyond products, we hope we've been able to communicate a clear strategy for growth and value creation. I'll now turn it over to Kevin with some closing comments before some Q&A.

All right. Thank you, Chuck. Let me just wrap things up first. We have the leadership team. I hope you've seen that today. You can have a great strategy, even have all these execution plans, but you don't have the right people in the right spots, you don't get them done. I hope you've seen that throughout we have great leadership, and we have the ability to execute, and everything that we told you up here. Why A. O. Smith? This is my initial slide, but I'll be much more condensed. I hope you believe that innovation is live and well in A. O. Smith. We have the products, we have the digital capabilities, we have the infrastructure, the R&D infrastructure to maintain this for the long term. Chuck did a nice job summarizing the megatrends. Each of those megatrends that we've talked to about decarbonization, water and urbanization are tailwinds. They're not a yearly tailwind, they are many years of tailwind. I would argue anybody in this room here? Can you find a more resilient replacement market in water heaters and boilers, it'd be difficult to find. And it continues to grow, as we talked about in China with 60% [indiscernible] and India is going to happen to be the same way. When it comes to our emerging markets, outside of North America, where would you rather be? You have growth opportunities in China and in India that are going to exceed the global GDP for the long term. And we are in a great position to take care of that and execute there. And Chuck just laid out a pretty good way of how we deploy our capital and cash flows and so forth in our business. We're strong financially. We'll continue to be strong financially because you know why we're a leader and we're disciplined as an organization. So if you look at our business, I would argue that we have many competitive advantages. We have staying power for the long term. Now I would also tell you that A. O. Smith is not easily duplicated. It takes years to build the infrastructure that we have, the customer relationships, just the technology that we have in our organization. And I will tell you, it takes years to build the culture that we have, not only how we do business, but how we go about to win in the market. So we're in great shape from a company standpoint. And I want to end on a really fun note. We get to turn 150 years old next year. Not many people get to do that. And it's a tremendous milestone for our company. The legacy of people have been there. Of course, the ones here that get the -- gets you to celebrate, which is going to be pretty a lot of fun. But when you look at that, we're incredibly proud of that, and we'll continue, and we're going to celebrate by the way, everywhere in the world. We're going to have a good time. But I want to step back a little bit and this is just from my perspective. When you turn 150 years, what does that mean? What does that underlying? And I would tell you that what it means is, in those 150 years, A. O. Smith has been tested for decades. We've been successful decades. We are a resilient company that can perform through all business cycles. We demonstrated that. And the last one I'll tell you is we're a nimble company. We are willing to make bold transformational changes when needed. That's why we're standing in front of you today as a water technology company and not making car frames and electric motors. But I would tell you, most importantly, when it comes about it, there's one constant and you've heard it today over and over and you're going to hear it one more time. One constant from our company is our wavering commitment to innovation. Innovation has been the key driver for our success for the first 150 years. And I think it's in a pretty darn good position to be a great growth driver for the next phase of our organization. So with that, I want to thank you for putting up 4 hours of A. O. Smith. But hopefully, meeting our team, getting an update on where we're at, looking where the business is going, look at the technology we have, look at the megatrends that are happening, you'll see why A. O. Smith is a compelling value and it can be an investment going into the future. So with that, thank you very much for your time. And then I'm going to ask for our business leaders to come back up on stage, and we'll open up for another Q&A for about 20 minutes or so. Thank you. And by the way, there is a song called Raise the Bar A. O. Smith. And how do I know that? Because Chuck and I saying it, okay, at the [indiscernible], not very good by the way. So is there any questions before we wrap up? And Helen will take it from here. And don't forget our friends that we left behind, okay? All right.

Damian Karas from UBS. Chuck, maybe you could just elaborate on how much capacity we're talking on the expansion for heat pumps and tankless in North America. And just thinking about demand, to the point Kevin just made, this market is largely replacement driven. I think to the tune of like 8 or 9 out of every 10 units sold. So are you expecting tankless heat pump, right, all this long-term growth opportunities still mostly be new construction for now? Or has that decision framework changed much in the contractor replacement side of things?

I'll let Dave take the second part of that. I'll say for capacity-wise and correct me if I'm wrong here. So we're starting in China on building the tankless product. What we're building in Juarez should take us through 2026 or so. We'll be looking at whether we need to expand. We always have the China as a backup manufacturing facility if it grows faster than that. But it's for the first phase, and it should take us through the first handful of years. Heat pump has been growing at...

25%, 30% per year. [indiscernible] Yes, 25% to 30% per year. So initially, there's a lot of incentive programs out there, building codes that are changing to drive heat pump into new construction. But there's also a lot of incentives for the replacement side of the business. One of the heat pumps that we had up there in our Good, Better, Best portfolio was 120-volt heat pump. The reason we came out with that is so people that have gas product that may not have the ability to connect and just plug that into the wall. So it's nice for a conversion, right, of an existing product. So I think we'll start seeing more and more replacement going towards heat pump in certain markets where it's been highly incentivized.

And then just a question on China. So given all the inflation that we've had in recent years globally, what is the price differential at this point between the kind of the 3 brand categories that you laid out? Is there much margin difference amongst them. And then just more broadly thinking about the 400 basis points of expansion that you're targeting for rest of the world, is that largely a matter of just scaling the business?

Yes. I would say a large part of the expansion, I'll let Jack talk a little bit about price points. It's scaling the business. We were at $1.1 billion, kind of dropped below that, but scaling the business and then having a larger portion of the market move into the premium sector. Today, we kind of measure the premium sector as RMB 3,000 for electric product and then RMB 5,000 for water treatment and for gas tankless. So above that is what we classify as premium. That's kind of been in the range of 50% to 60% of our sales now prior to when the premium market was a little higher, it had been higher than that. So some of that also would be getting back into the premium sector of the market. Price differentials, Jack, any commentary around kind of your China [ techs ] brand, strategy and protecting premium brand. I know certainly, premium brand is what I just defined and China [ techs ] kind of falls at the high end of the mid part of the market, protecting that premium brand.

In the past few years, the booming online sales really give us some headache because normally in order to compete online, you see a similar feature models at the online price versus offline is like 20% lower as easily people believe that it's a more efficient channel. So that's created a lot of conflict for A. O. Smith's online/off-line. That's the reason why we need a second brand competing online and protect our [indiscernible] for the -- actually, we provide a consistent online/off-line price for A. O. Smith, which enable us to play in the premium category. Yes.

Yes. It's really -- this was Jack's team that really changed the dynamic of the channel conflict. We had A. O. Smith on both and they were kind of [indiscernible], it was problematic. And -- but if we're online or we're off-line, no matter where we're at, we're on the premium side of the market. So even on the online, which is a very tiny channel, we're still in the mid- to upper range of that product category, and it's an important one that will grow. But to take away that channel conflict and be able to have brands positioned specifically for certain customers, and we still try A. O. Smith back to [indiscernible] has made a huge difference in how we can go to market and how we can take now go to the AI-LiNK and still get that premium price position that we've really treasured now for 25 years.

And I was just going to add that Jack really described well why we want to be online with the A. O. Smith brand so that it can be driven in an omnichannel to a store and have somebody upsell. When you got a promoter at the store that can actually walk through the features and benefits.

Andy Kaplowitz, Citi Group. I wanted to ask Jack or Kevin, just a follow-up question on China. Like when I look at the presentation today, I want to understand out a little bit is the CAGR over the last 5 years in China, it's a little lower than everywhere else. So I mean, obviously, 2020 was a headwind. But you've talked today about compelling strategy of coming out with new products. But I feel like you've kind of talked about new products for a while in China. So how is this new product suite different and going to really raise the sort of growth profile of China versus the past, would you say?

I think we are having very good innovation, and we have a very strong brand in China. So actually, if we extend other category, people welcome the thing A. O. Smith should be good at in this particular category. But the challenge for us is we are focused on the water heating and water purification, and within this difficult time, we -- it's difficult for every brand to improve the efficiency and get a meaningful growth. That's why we start to think about some adjacent category. But we did not just simply introduce some new categories. We introduced very innovative products with also with this AI-LiNK, they really enhance our premium brand because it's [indiscernible] how much scenario based, some out of home concept. So with those new categories with our premium brand, with innovation with all our people over there, I'm pretty confident to achieving those targets even with this very tough situation. But like Chuck just mentioned, maybe we still need help from the economy.

That's what I was going to mention. The [indiscernible] wasn't that great 2019, by the way. And so we just came off an inventory adjustment there. And we took the right steps to stabilize our inventory, get the right positioning and so forth and then 2020 comes and we're back in the pandemic. And if you remember, back in the pandemic, we had a really bad quarter. We lost millions of dollars that's what caused us to restructure and become a bit more variable on our cost. And then we just haven't had any help from the economy. And so I look at the way what Jackson and his team is to be growing the business even if it's 3% to 5% local currency and still posting double-digit returns in the economy that not many companies are doing that. And so I would say that the products has helped us make sure that we can still grow a bit. I would tell you that once we get a little help from the economy, some of these mature with our range hoods and the other types of kitchen appliances and combine that with that property development market kind of moves up a little bit, it may take a couple of years. But to have the infrastructure we have now and the cost structure gives me great comfort when that moves in the right direction because we've been able to do pretty well in a very challenging economy.

And I wanted to follow up actually on your earlier presentation, Dave. Like you -- we have asked questions on the earnings call about sort of proactive water heater replacement. Like -- how long do you think it is before we declare it as a definitive trend in a sense? And...

Yes, that's a great question. What do you think...

Right now? No. And so -- but if we do, is that in your guidance? Or is that not in your guidance when you're talking about sort of the 4% to 5% growth?

Yes. I don't necessarily think that's in the guidance at this point in time. I think we get there with just standard industry growth inflation, the mix and the market share gains going forward. It's really pretty tough. I know that on the call, the earnings call, Kevin talked about maybe a shift taking place. I think it's too early to tell at this point in time. There's various factors that go into that. The housing stock is getting older out there. And so there's more water heaters maybe being proactively replaced that are 14 years old. So there's a lot of variables. I think it's going to take a little bit more time for us to figure out if this is actually the new normal for us, whereas proactive historically has been around 25% of the total replacement market. It's a little too early to tell yet.

It is moving in the right direction.

Yes. Yes. We're pleased.

Thank you for all coming out and talking to us, it makes a good picture. And just -- and sorry if this question comes a bit blunt. But just on the kitchen appliances business in China, I just want to delve into the rationale behind that because Kevin, you talked earlier about refocusing the business from years gone by into just water-related products, and this feels like a bit of a departure from that. I'm just trying to work out how it sort of centers in on innovation in water-related products you've developed over time and really the rationale behind it. So I don't know if it's because we feel that the water business is slowing in China, and this will offset it or if it's sort of trying to bring more product into that AI-LiNK suite of products to try and drive that or really what the rationale is because it feels like a departure of sort of innovation and process that A. O. Smith has really developed. Yes, if I can leave it at that.

Okay. I don't think it's a departure. And certainly, I would tell you that we've actually been looking at dishwasher for 8 years. And so I'll tell you that we don't move that quickly. But our core business is still very strong. But one of the things -- and this is true for A. O. Smith and I think it's A. O. Smith India, and it's also going to be true for A. O. Smith -- excuse me, -- A. O. Smith China and A. O. Smith India. We do have a consumer brand there. And so that changes to some degree how we can lever and look at the businesses and so forth because our brand does translate to consumers. We're a trusted brand. We're known for premium and high quality. So over the years, we've dabbled in it. We were in water heaters and then we bought a water treatment company. And in a very short time, that business went from 0 to $300 million, and part of it was the product, but also was part of the brand. And so we've always looked at the kitchen and in the bathroom as opportunities at the right time. And for us, it wasn't a -- hey, we're not selling enough, let's go and get another category. It was one that we looked at and plan to move there in the right way. And by the way, we're not manufacturing all this, okay? So you know that, we own the design and the IP behind it. But we can tap into these markets and use our brand and our distribution. And I'll let Jack talk about this, but having high productivity efficiencies in our store and having our exclusive dealers the ability to sell is important and our products do translate well when it's in the kitchen or when it's at the bathroom.

Yes, the training in China embrace the smart home. So it's not only us, everybody is trying to expand the category. That's why you have a whole lot of cheap products. That's why I want A. O. Smith to get into this new category. We got to be very careful. We have to release a very innovative product that meet our names, that's critical. And we're talking about this as a key scenario, our tankless, our [indiscernible] or in the kitchen, the dishwasher, steam oven, so it is a nice bundle. Actually, it also help a lot in the efficiency improvement, talking about our exclusive stores. And so I said that's -- with AI-LiNK, that's very unique before bundled sales you just go for more discount, right? You've got more [indiscernible] lower price. But for A. O. Smith, we're able to maintain our price with AI-LiNK because we're not talking about they just bundle for lower price. We bundle because we've got one interface connecting all these good products to create new values to the end users. So it's really -- we can stick to our traditional core business, but we're going to adapt to the environment. We see the trend and respond with the strategy. And so far, so well. Thank you.

Yes. And I would just add one more step. You might see some of that departure, you call, we don't consider a departure, but certainly, we might see that in India because the channels and how they line up are very similar. And we're not ready to do that, but it's something that we'll continue to look at and leveraging that brand and bringing more people and consumers into our kind of bucket of the market, I think, is a good thing for A. O Smith if it's done in the right way.

Scott Graham, Seaport Research. Two questions, One on Lochinvar, one on water treatment. What is going to -- what do you see happening as the year comes to a close on Lochinvar that kind of jumps that into growth next year off of what's been a weak this year? And then on water treatment, it looks like, obviously, you're very well diversified by channel in North America and dealer is half of the market. Is that where your acquisitions are going to be focused to get you in there?

Do you want to put in Lochinvar first?

Sure. So the Lochinvar boiler business this year is based a little bit of destocking. So we've been going through that throughout the course of the year. We expect to rebound next year. We think inventories are about normal. And so we expect volumes to rebound next year. And then our growth catalysts for the future are what we talked about. That shift to condensing is going to continue. And that's a growth catalyst for us. And then the shift to [indiscernible] with heat pumps is going to be another step up.

And I'll jump in on the water treatment side. You got it right on the number. Our last 3 acquisitions have been exactly in the dealer space. We hope that our channel looks like the Rest of the Market when all is said and done that dealers make up a good approaching half of our overall business.

Yes. I would tell you, if you look at -- as Sam pointed out, we have the water treatment side. And then we have the water softening side, okay? And water softeners look a lot like water heaters, they're really big, and they're hard to transport. And -- but they don't have the same scale of 10 million water heaters. It's much less than that. So being strategically located closer to the market is one of our tenants as far as growth in that dealer segment. We want to be able to not take an order and go on [indiscernible] all the way to California, but at time it shows up there, it may not be one piece. However, if we have strategic locations where we can not only ship it very quickly, but within that 2-day time frame, one, your lead times are down, which increases your sales and your freight costs are down, which increases your margins. So we're not going to be in every state, but we're going to be strategically located throughout the country to be able to get that 1-, 2-, 3-day service that I'm talking about.

I wanted to follow up on the new product introductions in China. Can you talk a bit about who your competition is in those new product categories? And how concentrated are some of those players in there? How hard is it for you to kind of break into that and gain some real ground.

I've been with some strong competitors in China, a local brand, very strong and have many product offerings, also have very strong stores and channels. So I think A. O. Smith is a little bit different because we play in the premium segment. So actually, this new category gives us more strength for competing. And -- but I still think the smart home concept still new for China. So we're talking about a single product, water heaters, water purification, definitely we're talking about reliability, we're talking about the features. But right now, we want to go into this smart-home scenario, how we link these products to create new values, for example, what I'm talking about is today that water purifier connect to our dishwashers will actually, we also have some that we call [indiscernible] connected to our range hoods. So actually, there's a new and competing, not only for A. O. Smith but also for our competitors. So you all go back to innovation. So before you like a play a violin or a piano, but right now your orchestra. So you [indiscernible] our engineers are so inspired uses their technology and strength to think about how to develop a better system solution for China. That is -- I think China has been very aggressive in this direction, and I'm very happy our engineers embrace these challenges.

Yes. I would just add on to that. Our competitors are Chinese, okay? We've been competing against them for 25 years, and we'll continue to compete against them through all the things that Jack was talking about. So -- and what I really like about the 2 new categories, and they're new, and we'll see where they go. They're emerging categories. okay? They're not ones that we're trying to come in where there's 85%, 90% penetration. We're going to have to take market share. That's a very difficult way to do business. And that's why we like being a leading market share because it's hard to come in there and do that. But those couple of categories, and Jack mentioned in his presentation, the penetration may be 5%. And so it's an open category. If you have some good technology, and you can combine it with A. O. Smith and the bundling side of it, we're not going to try to be the biggest in any of those categories, but we're going to try to be the biggest in the premium side of those categories.

I just want to ask Parag a question and just in the context of you're going to be like the fast-growing business at AOS like -- and your margins are a little bit lower. Like how do you get -- you talked about 3% to 5%, like what's the potential longer term of that end market? Can you get the margins up? And then like can India start to look like China long term? I don't want to get too excited. We only talking about 5 years.

What do you think?

Well, I think I will share it outside of yours. Every Indian aspires and feels the China. But I think the China opportunity and India opportunity are different. Let's understand that India is growing, and there's a lot of steam in India to grow and drive high GDP growth rates and for various factors I just mentioned. As affluence increases and as middle class increases, a premium brand like A. O. Smith is well positioned to really grow the business. 15% to 20% is where we aspire. I'm sure GDP growth rate will crack 6% and grow 8% and beyond going ahead as the investments in infrastructure and all that comes through enables us to potentially also do even better. Coming to your margin part, I'm sure we will do better, but what I showed on the slide is that we are going to keep our margin profile the same and invest that to grow our business. So we will do a self-funding of our business. to put behind marketing programs and grow the business more aggressively in the next few years because being a consumer-facing brand, there's a lot of investment required to create brand awareness. We are well positioned, but we have 50-plus towns providing opportunities. So the brand has to invest to grow. Post which, of course, we will be able to grow our margins even better ahead. I hope that answers.

Yes, you answered it perfectly. The bottom line is I like to see us scale India more and self-fund it. It doesn't mean we go backwards and so forth, but being able to increase that top line, move it to $100 million over time and build that scale will make a big difference long term. And again, I look at India as a long-term play. It's not going to grow like China, but it's going to grow like China eventually as we go forward. And it may take a few more years. And so Parag and I have talked about this with Chuck and team and we want to scale the business and invest back into it. I think it's more important over the next 3 to 5 years to do that and get that top line to the right area. And so you can support the infrastructure we have for that long-term growth in India.

And just one follow-up for Sam. Like a lot of the companies I covered talk about sort of moving aggressively into commercial water treatment. So are there targets out there [indiscernible] water treatments.

Yes. No, good question. We actually have a substantial -- not huge, but a substantial commercial business already through our water rides and our master water businesses like that. There are a pipeline of dozens of potential regional and national commercial players out there that we're looking at and it's definitely an opportunity to grow through acquisitions over the next couple of years.

We just have to find the right person who is ready to sell. And one of the things we're going to -- and Chuck mentioned is, hey, listen, we'll go through processes and things of that nature. But we spent a lot of time. We talked about that we're more of a relationship company and so forth. We spent a lot of time. Most of our acquisitions have been private where we've spent years cultivating that, making sure that if they're looking for a home, we're the right home for them. And we're doing a lot of that and have been doing a lot of that for the last several years with many of the targets that we feel would fit good with A. O. Smith, both on the residential and commercial side, and it would just be a matter of time before those maybe come to fruition.

I guess I just wanted to explore that $90 million R&D number with you a little bit further. And how you come up with that number? And why is that the right number? Do you sum up your available opportunities and it comes to $90 million? Or you're budgeting $90 million, you go down to a marginal efficiency of investment kind of analysis. And if we see you flex that up, do you just run into organizational and market constraints to sort of limit your incremental returns? Or I'm just trying to get a sense of why that's the right number?

Yes. I would tell you, no, we never give anybody a budget, okay? But we do make organizations present a viable plan. I mean that's our shareholders' money. So that $90 million, it may be $85 million, maybe a little bit more. But in my -- I tell you, 29 years at A. O. Smith, I've never seen us pass on the right investment. And so the $90 million is a number that fits us today. It could go higher or lower in the future. It's to support all the programs that you've seen up here and it supports all our businesses. We make sure that each of our business -- none of them are starved for investment, okay, because of that then the biggest one day would win all the investment, okay? But in reality, we make sure that we are investing in good projects, and this team up here makes the pitches for them. And if they make sense, we invest in them. We may not always take every one of them, but it seems to be a right number for us today. Chuck, anything...

Yes, I was just going to say, a large base of that is what Kevin talked about before is kind of that corporate base of R&D center looking 5 years out. Businesses don't [indiscernible] fund that eventually, but they don't contribute to that in a meaningful way on an annual basis, it's just a funding that is always looking to invest in technology, processes, new innovation, what's the next disruptive technology. And that's a decent size of that $90 million. $90 million is kind of rounded, probably we're a little heavier than that when we were developing tankless products. We got a lot of projects on the table and get you heard a little bit about heat pumps and Stifel brands side of the world. So we continue to invest in heat pump too. So it's around that number. It could go higher if we see the need.

[indiscernible] is this going to fit our $90 million, but it's going to come in, and it's a good project, and we want to do it. So we're not worried about whether it's $90 million or $92 million. It's a good project that we need to fund.

Okay. Well, again, thank you very much for your time and for your interest in our company. We're excited where we're at. Hopefully, you leave here with a positive -- a couple of takeaways that you didn't know, I hope, and ones that maybe cleared up some of the questions you had about our long-term future. We're going to be around for a long time. We're going to be a market leader, and we're going to continue to grow at this pace and the items that we showed you, we have a clear path to executing them. So thanks again, and have a great evening and be safe out there. Okay. Thank you.