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Spring 2017 Analyst Presentation Forward Looking Statements

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Spring 2017 Analyst Presentation Forward Looking Statements Spring 2017 Analyst Presentation Forward Looking Statements This presentation contains statements that we believe are “forward‐looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward‐looking statements generally can be identified by the use of words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “continue,” “guidance” or words of similar meaning. All forward‐looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date ofthis presentation. Important factors that could cause actual results to differ materially from these expectations include, among other things, the following: a further slowdown in the growth rate of the Chinese economy or a decline in the growth rate of consumer spending in China; potential weakening in the high efficiency boiler market segment in the U. S.; significant volatility in raw material prices; our inability to implement or maintain pricing actions; potential weakening in U. S. residential or commercial construction or instability in our replacement markets; foreign currency fluctuations; inability to successfully integrate or achieve our strategic objectives resulting from future acquisitions; competitive pressures on our businesses; the impact of potential information technology or data security breaches; changes in government regulations or regulatory requirements; and adverse developments in general economic, political and business conditions in the key regions of the world. Forward‐looking statements included in this presentation are made only as of the date of this presentation, and the company is under no obligation to update these statements to reflect subsequent events or circumstances. All subsequent written and oral forward‐looking statements attributed to the company, or persons acting on its behalf, are qualified entirely by these cautionary statements. This presentation contains certain non‐GAAP financial measures as that term is defined by the SEC. Non‐ GAAP financial measures are generally identified by “Adjusted” (Adj.) or “Non‐GAAP” . 2 Investment Case . Manufacturer of residential and commercial water heaters, boilers and water treatment products . Market share leader in major businesses . Stable/growing North American replacement market; operating leverage as new construction recovers . Strong balance sheet and cash flow to support future growth & share repurchase . Strength of our premium brand, distribution, manufacturing and innovation provide clear market advantage in China . Organic growth of 8 percent (in local currency) for next several years 3 Sales & Adjusted Operating Margin* $3,000 20% Sales Adj EBIT Margin $2,500 15% $2,000 NOTE $1,500 10% 2010 through 2014 adjusted Sales in millions for non-operating pension $1,000 costs and certain non- recurring items 5% $500 $0 0% 2010 2011 2012 2013 2014 2015 2016 * excludes corporate expenses 4 Adjusted EBITDA Growth $600 Adjusted EBITDA $588 2010 10.6% of Sales $535 2017* 20.1% of Sales NOTE $500 $473 2010 through 2014 adjusted $400 $374 for non-operating pension $333 costs and certain non- recurring items $300 $270 $197 $200 $158 * Analyst consensus $100 As of April 27, 2017 $0 2010 2011 2012 2013 2014 2015 2016 2017* 5 Adjusted Earnings Per Share $2.25 $2.06 $1.85 NOTE $1.75 $1.58 2010 through 2014 $1.22 $1.25 $1.03 adjusted for non‐ operating pension costs $0.78 and certain non‐recurring $0.75 $0.54 $0.43 items $0.25 2010 2011 2012 2013 2014 2015 2016 2017 As of April 27, 2017 ‐$0.25 Guidance Mid‐point 6 Segment Revenue NA • Water heaters growing • Lochinvar growing at least 8% North America 65% Rest of World 35% ROW • China/India = 94% • Europe/Middle East = 6% 2016 full year 7 U.S. Water Heater Market Segment Residential Market 50% AHRI data + tankless: AOS actual shipments 40% and AOS estimates of competitors’ shipments 30% 20% 10% 2016 market share data 0% Other 8 U.S. Residential Water Heater Market Segment Wholesale Retail Retail Wholesale channel channel is is “~50%” of the “~50%” market of the Large Regional Distributors market A. O. Smith's 2016 – 8.7 mm Units Customers 9 Water Heaters ‐ Strong Replacement Sales Peak housing U. S. Residential Water Heaters starts: 2.1 million 10,000 8,000 New Construction 6,000 Replacement 4,000 thousands of units 2,000 Note: Includes tankless 0 10 U.S. Water Heater Market Segment Commercial Gas Market* 2016 market share data AHRI data: 60% AOS actual shipments and AOS estimate of competitors' 50% shipments 40% 30% 20% *Commercial gas water heater 10% segment as defined by AHRI, total 2016 commercial units as 0% reported by AHRI = 97,000 units Other 11 Energy Efficient Cyclone . Game changing energy efficient commercial product launched in 1997 and recently upgraded . Up to 96% thermal efficiency dramatically lowers operating costs offering short payback . Represents 47% of AOS commercial water heater revenues 12 U.S. Commercial Gas Market: Energy Efficient Units more than Doubled in Six Years to 45 percent of units sold in 2016 100,000 2016: 80,000 43,950 units >90% Efficiency 2009: (45% of total) 60,000 19,000 units <90% Efficiency 40,000 20,000 Commercial Units Gas Industry ‐ Source: AHRI Industry Data 2009 2010 2011 2012 2013 2014 2015 2016 13 Lochinvar End Markets Hydronic Space Heating 49% Parts/Other 9% Water Heating 42% 2/3 commercial end markets; 1/3 residential end markets 14 Trend to Higher Efficiency, Condensing Boilers – 43 percent of units sold in 2015 North American Commercial Boiler Volume (Units) 100,000 Actual Forecast 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Non‐Condensing Commercial Boilers Condensing Commercial Boilers 15 Source: BRG Building Solutions Lochinvar Branded Sales Dollars Condensing vs. Non‐Condensing* Condensing Non‐Condensing 8% 2 8% 2 0 0 0 1 92% 92% 4 Non‐Condensing Condensing 6 *Residential Boilers & Commercial Boilers 16 China now 33% of Sales & Growing 900 800 China 700 China sales have 600 grown 22% (CAGR) 500 over the last 10 years 400 US$ millions US$ 300 200 100 0 17 AOS China Built on: . Premium Brand . Extensive Distribution and Service Network Nanjing . Innovative New Products & World Class Manufacturing . Local Management Team and Organizational Development 18 Ten‐Year + Market Share Trend 30.00% A.O.Smith 25.00% Haier Midea 20.00% Macro Wanhe 15.00% Rinnai Market Share 10.00% Noritz Ariston 5.00% Sakura Siemens 0.00% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Leading residential brands measured in currency; Tier One Market: GFK - CMM data 19 sampling several thousand largest retail stores, December 2016 Market Share by Price Category Electric Market Share Gas Market Share Others Others 50.00% Siemens 80.00% Haier 45.00% Ariston Ariston Midea 70.00% 40.00% Wanhe Haier 60.00% Macro 35.00% A.O.Smith Sakura 30.00% 50.00% Noritz Rinnai 25.00% 40.00% A.O.Smith 20.00% 30.00% Value Market Share Value Market 15.00% Value Market Share Value Market 20.00% 10.00% 5.00% 10.00% 0.00% 0.00% ＞=400 300-400 200-300 ＜200 ＞=400 300-400 200-300 ＜200 Retail Price(USD) Retail Price(USD) 20 Data Source: CMM Retail Survey December 2016-150 Best Selling Models Broad Distribution Channel . Over 9,000 outlets in China . 30% of outlets in Tier 1 cities; 70% in Tier 2/3 cities 100% 23% 21% 36% 33% 35% 35% 36% 80% 29% 30% 60% 10% 22% 26% 25% 25% 40% 26% 30% 54% Percentage of Sales of Percentage 45% 37% 31% Regional Stores 20% 38% AOS Specialty Stores 18% 23% Suning/Guomei 1% 3% 8% 0% E-Commerce 21 2007 2010 2012 2013 2014 2015 2016 Product Line developed in China Residential & Gas & Electric CommercialHea Commercial t Pump Air Pressurized Purifier Solar Water Purifier Combi Wall‐hung Gas Boiler Electric Tankless 22 Professional Team of Local Management 23 Mega Trends ‐ China Significant growth in AOS target demographic A. O. Smith customer demographic continues to grow rapidly Growth of 10 times during this decade • 2010: 18 mm households • 2020: 180 mm households Source: McKinsey Insights China – April 2012 24 China Consumers Prefer Foreign Brands Lower: Annual income <$20,000 / year Higher: Annual income >= $20,000 / year 25 SOURCE: McKinsey Annual Chinese Consumer Survey (2012) A. O. Smith Branded Water Treatment Systems China Water Treatment Market . Leverage the A. O. Smith brand in our existing water heater channels – Over 6,500 retail stores . Reverse osmosis main focus . Product development focused at customer needs and technical improvements . Fast growing, highly fragmented market – Industry studies we have seen indicate over 30% CAGR during next five years Data: CMM 26 Different Water Treatment Technologies Pore Size Rust Removal Active Carbon - improves taste (for good 5000 nm Carbon incoming water areas as in the US and Europe) Pore Size Sediment & Colloids Micro-Filtration - removes sediment and colloids 1000 nm MF (can correct basic water pollution problem) Pore Size Ultra-Filtration - removes bacterium, large Bacterium & Organics 50 nm UF organics and other pollutants resulting from water transport) Pore Size Reverse Osmosis - the ultimate filtration Heavy Metals, Virus & Salts 0.2 nm RO technology; removes nearly all substances, particularly most heavy metals prevalent in China and India water supply 27 Reverse Osmosis Is Gaining Market Share CMM Water Treatment Market by Technology 100% 5.0% 4.0% 3.0% 8.4% 7.8% 2.7% 5.3% 5.3% 7.0% 7.7% 8.0% 5.9% 80% 20.7% 24.9% 31.4% 44.3% 60% 59.0% 72.4% 81.1% 40% 67.6% 64.1% 55.5% 20% 40.2% 27.0% 15.5% 10.0% 0% Data:CMM 2010 2011 2012 2013 2014 2015 2016 28 Ultra Filtration Reverse Osmomsis Carbon NanoFiltration Others Side Stream Membrane Technology .
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