Logo of jester cap with thought bubble.

Image source: The Motley Fool.

AO Smith Corp  (NYSE:AOS)
Q3 2018 Earnings Conference Call
Oct. 30, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning Ladies and gentlemen and welcome to the A. O. Smith Corporation Third Quarter 2018 Earnings Call. (Operator Instructions). As a reminder this conference is being recorded.

I'd now like to turn the conference over to your host Patricia Ackerman, Vice President of Investor Relations and Treasurer. Please go ahead.

Patricia Ackerman -- Vice President, Investor Relations and Treasurer

Thank you Adam. Good morning, Ladies and gentlemen, and thank you for joining us on our 2018 third quarter results conference call. With me participating in the call are: Ajita Rajendra, Executive Chairman; Kevin Wheeler, Chief Executive Officer; and John Kita, Chief Financial Officer.

Before we begin with Kevin's remarks, I would like to remind you that some of the comments that will be made during this conference call including answers to your questions will constitute forward-looking statements. These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks include among others, matters that we have described in this morning's press release. Also as the courtesy to others in the question queue please limit yourself to one question and one follow-up per turn. If you have multiple questions, please rejoin the queue.

I will now turn the call over to Kevin, who will begin our prepared remarks on slide three.

Kevin J. Wheeler -- President and Chief Executive Officer

Thank you, Pat, and good morning, ladies and gentlemen. Here are a few comments about our third quarter. We achieved sales of $754 million, net earnings of $0.61 per share or 13% higher than our earnings per share in 2017. We continue to review our capital allocation and dedicated portion of our cash to return to shareholders. We repurchased 1.7 million shares for approximately $106 million in the first nine months of the year. We plan to continue buying back our shares at a previously stated $135 million annual pace using a 10b5-1 plan. We expect to opportunistically buy back up to $65 million worth of shares in the open market in 2018. We announced a 22% increase to our dividend in October. This is a second increase this year. The five year compounded annual growth rate of our dividend is about 30%.

We repatriated nearly $300 million during the first nine months of 2018 using the proceeds to repurchase our shares and paydown floating rate debt. Our A.O. Smith-branded water management products are now in 1700 Lowe stores nationwide. John will now describe our results in more detail beginning with slide four.

John J. Kita -- Executive Vice President and Chief Financial Officer

Sales for the third quarter of $754 million were 1% higher than the same quarter in 2017. Net earnings in the third quarter of $105 million increased 12% from the third quarter in 2017. Third quarter earnings per share of $0.61 increased 13% compared with the same quarter in 2017. Sales in our North America segment of $487 million were flat compared with the third quarter of 2017. Pricing actions in 2018 on water heaters and boilers related to higher steel and freight cost were more than offset by lower water heater volumes.

North America water treatment sales comprised of Aquasana, Hague and our recently launched water treatment products at Lowe's incrementally added $9 million to our North America segment sales. Rest of World segment sales of $274 million increased 1% compared with the same quarter in 2017. Sales -- China sales growth was 2.5% in local currency. Higher sales water treatment products and air purifiers in China were partially offset by decline in electric water heaters compared with prior year. Currency translation reduced sales by approximately $6 million compared with the third quarter 2017.

On slide six, North America segment earnings of $106 million were 4% lower than segment earnings in the same quarter in 2017. The unfavorable impact from lower sales of water heaters and higher steel and freight cost were partially offset by pricing actions. Spending associate with the launch of water treatment products at Lowe's amounted to approximately $2 million. As a result of these factors North America segment margin of 21.7% was lower than last year. Rest of World earnings of $39 million increased barely 16% compared with third quarter of 2017, primarily as a result of lower expenses associated with employee incentive programs and smaller losses in India. As a result third quarter segment margin of 14.3% was significantly higher than one year ago.

Our corporate expenses were higher than last year as a result of several miscellaneous items. Our effective income tax rate in the third quarter of 2018 was 20.5% the rate was more than the 28.8% experienced during the third quarter last year, primarily due to lower federal income taxes related to tax reforms. The lower effective income tax rate benefited third quarter 2018 earnings by $0.06 per share. Cash provided by operations during the first nine months of 2018 was $289 million compared with $150 million provided during the same period in 2017. Higher earnings and a smaller investment and working capital were the primary drivers of higher cash flow compared with last year.

Our liquidity position and balance sheet remains strong. Our debt-to-capital ratio was 10% at the end of the third quarter. We have cash balances totaling $618 million located offshore and our net cash position was approximately $425 million at the end of September. During the first nine months of the year, we repurchased approximately 1.7 million shares of common stock for a total of $106 million. Approximately 3.2 million shares remained on the existing Board authorization at the end of September. Primarily as a result of lower U.S. and China water heater sales than previously forecasted, we reduced our 2018 adjusted EPS guidance by approximately $0.02 per share for the range between $2.57 and $2.60 per share. The midpoint of our adjusted EPS guidance represents a 19% increase in EPS compared with our adjusted 2017 results. Our EPS guidance excludes $0.03 per share of plant closing cost.

Please turn to slide nine for several 2018 assumptions. We expect our cash flow from operations in 2018 to be approximately $475 million, which is significantly higher than the $326 million generated in 2017. We expect higher earnings and lower outlays for working capital this year. Our 2018 capital spending plans are approximately $85 million. Our depreciation and amortization expense is expected to be approximately $75 million in 2018. Our corporate and other expenses are expected to be approximately $48 million in 2018, slightly higher than the $47 million in 2017, partially due to higher projected spending at our Corporate Technology Center. Our effective income tax rate is expected to be approximately 21% in 2018, lower than the previous year due to U.S. tax reforms. We expect to repurchase our shares in the amount of approximately $135 million in 2018 under a 10b5-1 plan and to supplement our 10b5-1 plan with opportunistic share repurchase up to $65 million. We expect our average diluted outstanding shares in 2018 will be approximately $172.5 million.

Kevin Wheeler will summarize our guidance, the business assumptions for the remainder of 2018 and our growth strategy beginning in September, on slide 10.

Kevin J. Wheeler -- President and Chief Executive Officer

Okay thank you John. Our outlook for 2018 includes the following assumptions: We project U.S. residential water heaters industry volumes will increase 250,000 to 300,000 units in 2018. This assumption is lower than our July forecast. Based on our shipments in September, we believe the industry will be down approximately 100,000 units in the second half of the year. This assumption includes tankless units. Similarly, we revised our forecast for U.S. commercial water heaters volumes based on year-to-date shipments and a difficult fourth quarter comparison, we now forecast a 5% decline in volumes.

As a result of significantly higher steel prices and inflation, freight and other costs, we announced a price increase effective in early June, which averaged approximately 10% on the majority of our U.S. water heater products. Given recent significant depreciation of the China currency, we now project the full year translation benefit of approximately $23 million compared with sales in 2017, which is $10 million lower than our July forecast. The translation benefit to earnings is approximately $3 million for the year. Our projection assumes that China currency would appreciate slightly from current levels during the fourth quarter of 2018 resulting in a translation detriment of approximately $12 million of sales and $2 million to earnings in the fourth quarter compared with rates in 2017. We expect the losses in India to decline from $7.5 million loss in 2017 to approximately $5 million in 2018.

For the full year, we expect sales in China in local currency to grow approximately 3%. Sales continue to be negatively impacted by slowdown in housing sales, which we believe is primarily driven by slowdown in the China economy, increasing consumer anxiety surrounding international trade issues. We launched our water treatment product portfolio in over 1700 Lowe's stores last month. The launch was mixed. We fulfilled a 100% of water filtration systems and replacements filters on time. However, we had issues as we attempted to double the manufacturing capacity of our water softener plant simultaneously with ramping up volumes to order [ph] our new customers. We project $14 million of sales to Lowe's in 2018.

Please advance to slide 11. We project revenue growth would be approximately 7% in U.S. dollar terms for the year. The midpoint of our revised EPS guidance range is 90% higher than last year. We expect North America adjusted segment margin for the year to be approximately 22.5%. We project weaker performance in the Rest of World segment primarily as readout of our lower China growth forecast. For the full year, we expect Rest of World margins to be approximately 13%.

We're in the middle of our 2019 planning process. Preliminary, we project 2019 China sales growth in local currency to be 3% compared with 2018, as inventory levels remain elevated into next year with slower housing growth. Given the depreciation of the China currency, we expect a $50 million headwind to sales and over $7 million to earnings if the currency rate stays where it is. Combine that China projections with a full year price for North America water heaters, a full year Lowe's water treatment business and the remaining businesses growing similarly to the recent past, we project organic growth in 2019 of 5.5% to 7% in local currency and 4% to 5.5 % in U.S. dollar terms. We plan to update this revenue guidance on our January 2019 conference call. We continue to have confidence in our business model in China for the long term.

The investments we have made in our premium brand, broad distribution and innovative products over the past 20 years has resulted in a reputation for reliability and safety and driven significant growth. We are proud of the profitability and high return on assets we have achieved in China. When the housing market recovers and consumer confidence returns, we believe once again we will grow double digits. In the meantime we are taking appropriate steps to protect our profitability and we'll continue to bring innovative products to market. The fundamentals of our global business model market leadership 85% replacement market in U.S. water heaters and boilers; strong cash flow in organic growth, coupled with the optionality of our balance sheet bodes well for us to successfully navigate through and thrive in these volatile times. That concludes our prepared remarks and we are open for your questions.

Questions and Answers:

Operator

(Operator Instructions). And your first question comes from Doug Clark of Goldman Sachs. Dough your line is open.

Douglas Clark -- Goldman Sachs -- Analyst

Hey guys. Good morning and thanks for taking my question. My first one, just looking at China, lower growth for this year then also kind of lower growth again for next year. I'm curious and you didn't really mention just competitively and even this morning competitor actually had a fairly nice kind of year-over-year growth in water heaters. So I'm wondering if there is anything competitively that you think has changed recently? And then also if you could comment on just how inventory levels sit today? It sounds like that might be a little bit of headwind heading into next year as well? Thanks.

John J. Kita -- Executive Vice President and Chief Financial Officer

I'll start Kevin. Our market share has been basically held steady year-to-date -- so in the water heater business. And so we saw the industry declining actually some in the third quarter. So I'm not sure, which competitor you're talking about, but our market share has held steady for the year-to-date. Inventories are up about the same percent from second to third quarter as they were last year from second quarter to third quarter. That's not unusual because we're entering our highest selling season, which is the fourth quarter. I will tell you though inventory levels are still elevated as we talk, and we'll kind of evaluate as the fourth quarter happens with respect to the online selling holidays et cetera.

Douglas Clark -- Goldman Sachs -- Analyst

Okay great. And then my follow up. I'm just curious on the traction with the formaldehyde products that I believe you launched in 3Q in Rest of World?

Kevin J. Wheeler -- President and Chief Executive Officer

The new products were received very well by the Chinese consumer, going about 40% growth rate. They have done very well during the summer months and during the winter months the (inaudible) formaldehyde will decline a bit. So we will see sales drop in Q4. But overall the products were received well. We believe formaldehyde has a benefit to the consumer and we look forward to next year as we get into the summer months and in growing that particular business with our Chinese consumer.

Douglas Clark -- Goldman Sachs -- Analyst

Great. Thanks a lot.

Operator

And your next question comes from Matt Summerville of D.A. Davidson. Matt your line is open.

Matt Summerville -- D.A. Davidson -- Analyst

Thanks. Couple of questions. Can you just provide a little more granularity around China in the third quarter? What did the water heater business actually do on a year-over-year basis water treatment? And then I just want to understand was the air purification business overall up 40% year-over-year? I want to make sure you have that number correctly, John if you can go through that?

John J. Kita -- Executive Vice President and Chief Financial Officer

Yes. Air purification was up 40%. It's up a very low level. So I think it was up about $3 million. And as Kevin said it was really formaldehyde sales, which quite frankly we saw decline a little bit as we got in the last month because you're getting out of the summer months. But air purification was up about $3 million. Water treatment, we said was up over 20%. Then you have the two negatives with the currency of $6 million and then electric water heaters were down and that's how you ended up flat.

Matt Summerville -- D.A. Davidson -- Analyst

Got it. And then I guess relative to the inventory position you guys described coming out of second quarter in China, have you made any progress to date in drawing down those inventories or do you sort of need to wait for the online season to really kick in, in the back part of the year before you're able to do that?

Kevin J. Wheeler -- President and Chief Executive Officer

Yeah, I'll tell you our days on hand were down in the third quarter. However, it's really not a great measurement considering that volatility, we use 90-day forward forecast and we have some seasonality that could be misleading. So what -- we're using a variety of inventory measures by customer by product category by percentage increase offline online. And so -- overall inventories are elevated. We look for a stronger fourth quarter and will continue to evaluate our sales through the busy season, singles day and other promotions 12-12 [ph]. And will determine if necessary -- if we need to take additional actions on promotions or any kind of bundling activity.

Matt Summerville -- D.A. Davidson -- Analyst

Thank you.

Operator

Your next question comes from Jeff Hammond of KeyBanc Capital Markets. Jeff, your line is open.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Hey, good morning guys. Thanks for the color on '19. Just -- maybe just sitting on the comment about China and the lower growth rate in the '19, but confidence back to double-digit. Just as you think about that 15% long-term growth rate and some of the maturity on water heaters growth in that market, how are you thinking about kind of potentially revising that long-term growth rate?

Kevin J. Wheeler -- President and Chief Executive Officer

Well, I'll tell you the long term, we firmly believe that the U.S. and China economies are intertwined and that the trade issues and soforth that we're facing today and some of the slowdowns in the economy will get resolved. There is certainly a growing middle-class that will continue. Right now, they're saving money rather than spending due to some of the uncertainty. But going forward, we expect to -- for the economy to grow certainly double digits as we go forward as the consumer confidence comes back. And as far as bringing (inaudible) is part of the business --

John J. Kita -- Executive Vice President and Chief Financial Officer

Yeah, I think Jeff when we modeled, we've done some modeling out. And basically we think China can back to low double-digit once the economy recovers and housing starts growing. And when you look at that weighted average model there, you end up with about a 7% growth going forward. We just felt that's not appropriate to pull that out at this point because we are entering a period here where housing has been down. Now as Kevin said China and the U.S. need each other. We've talked to a lot of consultants, I mean, there is a possibility this thing gets resolved at the G20. If it doesn't, I think the thought process is sometime early to mid-next year it does get resolved. And so we certainly think as Kevin said you have a growing middle-class. You have the urbanization going on. You have household formation. And right now the consumer is saving, we've got that from some of our banks because their confidence is down. But we do think going forward certainly a 7% or so once we get through this hiccup if you will, it's achievable -- total company.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Okay.

Kevin J. Wheeler -- President and Chief Executive Officer

And I would just add, again our premium brand, our broad distribution, the innovation that we bring to market as the economy turns around, we feel good that we can leverage those going forward into the future.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Okay. And then just help me with the 4Q bridge. I think year-to-date you're up 6.6%, you're saying 7% growth for the year. Maybe I'm confused with some of the moving pieces on currency. But how should we think about 4Q core growth rate in North America and China?

John J. Kita -- Executive Vice President and Chief Financial Officer

Well, so North America, we would tell you, we're forecasting the industry to be up over 150,000 sequentially. So, we didn't really talk about residential, but in our mind what happened is July and August were kind of proceeding as we expected. And then quite frankly September was down quite a bit. And so we think the quarter was down close to 125,000 units. Now, when we look at October, we look at our order rate, we look at our shipments, sequentially we're getting back to where we thought we would be. So, we are forecasting the fourth quarter to be up about 50,000 to 75,000 over the prior year, but up 150 to 175 over the third quarter.

So I think that will certainly see help on both commercial and residential as we move to third quarter to fourth quarter. Quite frankly on China, we are forecasting it to be relatively flat up a little bit year-over-year, but that's in the fourth quarter, that's really driven by the fact that you may recall last year's fourth quarter was up 25% almost from the prior year. So we have a very difficult comp there. So then water treatment continues to grow in the quarter. In Lochinvar, we think will be sequentially relatively flat, but that's a good fourth quarter for us. So I hope that helped?

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Yeah that's perfect. And then just last one on the inventory destocking. I mean it seems like you're not going to make a whole lot of progress this year de stocking. When do you think that destocking -- as you model it out when do you think that destocking or what are you assuming when that destocking is kind of out of the way?

Kevin J. Wheeler -- President and Chief Executive Officer

I mean that primary will be driven by the economy and its recovery. So as we look at it right now we are continuing to drive some inventories down, use the promotions that we talked about in Q4 and again as economy returns, where that is, we're not 100% sure, but that'll be the primary driver for us to drive some of our inventories down.

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Okay, thanks guys.

Operator

And your next question comes from Scott Graham of BMO Capital Markets. Scott, your line is now open.

Scott Graham -- BMO Capital Markets -- Analyst

Hi, good morning. I just want to make sure I understood one of your statements there John. Is this the official day when you as a company take down your 8% organic goal to 7%? Is that what you're saying?

John J. Kita -- Executive Vice President and Chief Financial Officer

I mean Scott, what I said is we did some modeling and if China goes at 10%, which we certainly is do -- what we certainly think is doable, then the growth model is 7%. And quite frankly from where we are we think that's a reasonable objective. Obviously, and you've talked about it in past, you have large numbers, we now have a $1.1 billion business, so growing at 15% becomes difficult. And so I would tell you as we look forward once the China economy recovers we think that 7% is achievable.

Scott Graham -- BMO Capital Markets -- Analyst

Right. But then I think you also -- that's very helpful John. Thank you. I think then I also heard you say that in these sort of more turbulent times, be it some things going on in the U.S. which I want to ask you about as well as China that your organic guidance for this year is kind of what you expect during that period? Is that I'm not sure --

John J. Kita -- Executive Vice President and Chief Financial Officer

I'm not sure the question. So this year what we've said is 7% and I think when we look at next year organically in local currency, we're saying our best estimate by the way its preliminary is 5.5% to 7%. And then imputed in there is China growing at about 3%. And what we would think happens is China starts growing a little bit more as the year goes on next year as some of these trade issues become addressed. I will tell you we were all in China two weeks ago and you don't have to do anything, but pick up the paper and turn on the TV to see that there are discussions about the trade. And the consumer confidence levels we see are down, but again if you look at China's 1.2 billion people it's got a growing middle class and they say they're saving now instead of spending that will return. So, as we look into next year, China is not as much as the model, but North America is more as we have the price increase, we have additional Lowe's and we think boilers continue to grow at 10%.

Scott Graham -- BMO Capital Markets -- Analyst

Yup, got you. On North America, what I want to maybe triangulate toward is some type of an idea on the volumes. It looks to be as if when we consider the pricing realizations that you're getting that the organic volumes were in North America in total were sort of close to down low-single-digit. And if that assumption is correct particularly on -- frankly both sides, the water heater side which is just as a replacement oriented in commercial as it is and residential, why would we see in number that weak this quarter? Was there destocking in North America?

Kevin J. Wheeler -- President and Chief Executive Officer

I would tell you that, when we look at Q2 it was very strong. And then as we get into Q3 as we talked about it was much weaker and what it indicated to us that there was a larger pre-buy than we anticipated. So in Q3 we had an adjustment there. We were probably a bit too optimistic, but again we had a really poor September. We see October coming up and rebounding very well. And I would tell you I've been in this industry for about 30 years and there is always a difficulty in predicting how a price increase is going to be implemented and how it's going to be executed and what's the balance between the quarters. And this proved out to be very similar, but as you look at it going forward into Q4, we think that adjustment has been made. We look for solid growth in Q4. And any of the gap, I think we can attribute to a larger pre-buy than we initially thought.

John J. Kita -- Executive Vice President and Chief Financial Officer

I think the other thing Scott is we still are forecasting the industry to be up 250,000 to 300,000. And you're working with completions that are probably up 50k. So I mean, we're still having a strong industry for the year. When you talk about replacement being up 200,000, completion being up 50,000 plus because we're saying 250,000 to 300,000, so we have -- as Kevin said we're probably a little optimistic as we saw the first couple of quarters, but these volumes can fluctuate quarter-to-quarter.

Scott Graham -- BMO Capital Markets -- Analyst

Understood. Thanks.

Operator

Your next question comes from Charley Brady of SunTrust Robinson Humphrey. Charley, your line is open.

Charley Brady -- SunTrust Robinson Humphrey -- Analyst

Good morning guys and Pat.

John J. Kita -- Executive Vice President and Chief Financial Officer

Good morning.

Kevin J. Wheeler -- President and Chief Executive Officer

Good morning.

Charley Brady -- SunTrust Robinson Humphrey -- Analyst

I just -- on China, on the margin in Q3 any comments on lower employee incentive. I see on the guidance you got for 2019. Can you give us a sense, I mean, permanently take some cost out of there? Because you obviously your expansion rate has probably slowed or is this sort of kind of -- one-off aberration in Q3 that the margin really popped up there?

John J. Kita -- Executive Vice President and Chief Financial Officer

So the way Charley, what we looked at is, China was fairly optimistic at the midyear point that they were going to be able to meet their objectives, which would've called for bonus somewhat similar to the prior year. But as we got through the quarter -- through the third quarter, it became obvious that they were not going to, so there was some adjustment down of the accruals that they had made in the third quarter. I think you have to look at it kind of year-to-date, the kind of look at the margins et cetera because there was some benefit in the third quarter because of what we had booked in the first and second quarter.

Charley Brady -- SunTrust Robinson Humphrey -- Analyst

Can you quantify what that reversal would've been? I guess -- I'm trying to get at what a normalized -- given the volume rate in Q3 in China, what a normalized margin would have been for Rest of World?

John J. Kita -- Executive Vice President and Chief Financial Officer

Yeah, it was close to a $5 million reversal of the accrual if you will. So, where we stand now at the end of the third quarter is where you should be, which is two-third -- three quarters of what you expect to pay.

Charley Brady -- SunTrust Robinson Humphrey -- Analyst

Got it. Thanks very much. And I guess on the -- if you look through the U.S. market in water treatment, you've rolled out in the Lowe's. You commented there was some disruption there as you try to ramp up capacity. Can you just expand upon that a little bit and were -- have sales been pushed from 3Q into 4Q or even into 2019?

Kevin J. Wheeler -- President and Chief Executive Officer

The disruption that we talked about was -- we had to double our capacity at our Hague facility in Columbus. For the most part the equipment came in, everything was going according to plan, but we did have some labor issues up there, so we were unable to really produce the quantity that we needed for Lowe's. We are expected to be back on track back where, we're close to on track now. And you're looking at as I mentioned in the remarks that we'll sell about $14 million to Lowe's, which we anticipated $14 million to $15 million. So there'll be no disruption there. But as one that -- it just took a little bit longer for us to ramp up and to get the inventories to stores and into the distribution centers.

Charley Brady -- SunTrust Robinson Humphrey -- Analyst

Thanks for that. And then just continuing on the water trap, that's an area, in terms of M&A perspective, you've made a few acquisitions in there. You're kind of to building up platform. You got the Lowe's distribution -- I mean, can you just talk about kind of opportunity you see -- additional opportunities you see in the water market in North America to make that a bigger piece of North America?

Kevin J. Wheeler -- President and Chief Executive Officer

On the water treatment side I think we've demonstrated that there are opportunities as we've entered this particular business segment. If you look back several years, we didn't even have a water treatment business and through acquisitions in China and then recently with the acquisition of Aquasana and Hague we've been building that portfolio. It certainly widens our lens for the ability to look for acquisitions that will complement the other parts of the business. So the answer is, is it, our lens is wider? Absolutely. Are we continuing to look for opportunities that complement our business and also enhance our capabilities? The answer is yes. And we'll continue to look for those and we'll -- again we have to look for the right business, the right return and the right fit for our company, but certainly there are opportunities out there for our business to expand in water treatment much is required additional companies going forward.

Charley Brady -- SunTrust Robinson Humphrey -- Analyst

Thank you.

Operator

Your next question comes from Michael Halloran of Baird. Michael, your line is open.

Michael Halloran -- Baird -- Analyst

Good morning everyone.

John J. Kita -- Executive Vice President and Chief Financial Officer

Good morning.

Michael Halloran -- Baird -- Analyst

So just one for me, back to the Rest of World margin questions. I certainly understand the dynamic around incentive comp. But as you look forward to next year and you guys see a lower growth rate, how does that impact your variable spending thought process? Because obviously a lot of the margin, lack of margin leverage in that segment has come from the magnitude of growth opportunities, promotional opportunities and all those things to drive the top line growth. Does that calculus change at all as you move into next year at a slower growth rate?

John J. Kita -- Executive Vice President and Chief Financial Officer

I mean, certainly, Mike we're -- for example we're putting in a higher increase right now from an SG&A standpoint primarily. We're accelerating the closure of -- our store closures, the nonproductive stores. And yes, we are very -- going to take a very hard look at our direct selling and our advertising budgets as we go into next year to right size that until the market recovers, which we expect it well.

Michael Halloran -- Baird -- Analyst

Thanks. I really appreciate it.

Operator

And your next question comes from David MacGregor of Longbow Research. David, your line is open.

David MacGregor -- Longbow Research -- Analyst

Thank you, gentlemen. Good morning everyone.

John J. Kita -- Executive Vice President and Chief Financial Officer

Good morning.

David MacGregor -- Longbow Research -- Analyst

I'm just wondering, you may have covered this, I may have just missed it. But within the China water heaters, did you talk about units versus ASPs?

John J. Kita -- Executive Vice President and Chief Financial Officer

I think they're pretty similar, Pat, right?

Patricia Ackerman -- Vice President, Investor Relations and Treasurer

Yes.

John J. Kita -- Executive Vice President and Chief Financial Officer

Yes, the decline is pretty similar. Yes.

David MacGregor -- Longbow Research -- Analyst

Okay. And then you talked a few points here in the call this morning about just the weaker consumer -- weaker sentiment, weaker consumer confidence over there. I mean I guess I'm not all that familiar with the Chinese consumer. But it seems like in America when that happens, the consumer typically trades down. So are you seeing them trade down over there? And if that's the case I'm just wondering does that bring you more in conflict with sort of mid-price point product from a competitive standpoint? Does this sort of mandate or require you to kind of extend your line structure down market and just adjust for that?

Kevin J. Wheeler -- President and Chief Executive Officer

Well I'd say we're not necessarily seeing trade down, but I don't think you nice early see that trade up that you had been seeing. We've talked about on previous calls that especially on the (inaudible) line market, we're bringing, I'll call them some mid-priced products that are more in the sweet spot. I mean what happened is, if you think of the -- I'll call it RMB 3,000 to RMB 5,000, we were in that spot for some of our category and then we raised prices a year ago and moved out of that category. So now we're bringing back some products to tap the high-end of that market, which we think will help us from the sales next year. But I would say we've haven't seen trading down, but I think as you said if consumer confidence wanes, you probably don't see them trading up. I think what we're really seeing is they're saving rather than spending at this point.

David MacGregor -- Longbow Research -- Analyst

Right. My second question, just -- if the 8% is now 7% and kind of the growth across the them all or maybe slowing here a little bit. As you think about kind of the next platform for growth and it certainly sounds like there's a lot of potential in water treatment. Congratulations by the way on the progress with the listings of Lowe's, but if you start looking at tankless water heaters a little differently now and start think about maybe making your commitment to that category?

Kevin J. Wheeler -- President and Chief Executive Officer

Tankless today in the U. S. represents about 8% of the total market. And I would tell you that we have made a commitment to the tankless category and new products and bringing them out both with (inaudible) commercial and so forth. So, the way we look at it -- we're in the hot water business. And so we provide hot water solutions to our various customers in various channels and tankless is a component of it, which is growing. And tank is also a component of it and again trying to provide the best solution for that consumer is our goal, not so much guiding toward one technology or the other. So overall we'll continue to invest in tankless technology and bring new products out, that we need to compete as well as on the tank side of the business. So for us again, I would go -- it's more of a solving a consumer's hot water issue rather than it is more from a tankless perspective because we look at both of those as products that we need to have to be competitive in the market long term.

David MacGregor -- Longbow Research -- Analyst

Thank you very much.

Operator

And your final question comes from Alvaro Lacayo of Gabelli. Alvaro, your line is open.

Alvaro Lacayo -- Gabelli & Company -- Analyst

Good morning. Just two questions. One, the small question, I didn't quite hear what the growth rate for the quarter was for Lochinvar and separately for boilers? And then secondly, bigger picture, I wanted to hear some updated thoughts on how you guys are seeing the replacement cycle in residential water heaters in the U.S. and sort of how you're seeing it and how it's incorporated -- and what level was incorporated in the long-term growth rate that you guys are seeing, whether it be 7% or 8% or how are you guys you seeing it shape up?

John J. Kita -- Executive Vice President and Chief Financial Officer

So Lochinvar for the quarter was a little bit of mix bag there. Condensing boilers did very well. They were up about 7% to 8%. Their non-condensing boilers were down year-over-year about $3 million and that maps directly to their China distributor, whose sales were down $3 million compared to last year's third quarter and we believe that was driven by tariffs. And then when you look at the residential water heater, I mean the water heater portion of the business that was also down. So they were up almost 2%, but we look at the full year, we look at the whole product portfolio, Lochinvar, we expect them to be up over 9% for the year.

The second question was kind of how do we look at the water heater going forward? We've done a fair amount of modeling of water heater. I assume what you're really talking about is the drop in the industry from 2007 to 2011. We've done a lot of modeling work and gotten some replacement data and as we've talked in the past, the replacement is about 14 to 14.5 years, but it's a very elongated bell curve. It goes from five, all the way up to plus 20. In fact over half of them are replaced in over 15 years. So, when we incorporate that and then you look at -- so it's going to be spread over a wide period of time and when you incorporate the housing stock, which is about 120 million houses and we're talking about a industry of 9.5 million units, we think that will be very muted effect. And BRG has some estimate of the water heater industry through 2021 and I think those estimates are 3 plus percent. So in that when we're talk about the 7%, we think that 4% growth is very reasonable.

Alvaro Lacayo -- Gabelli & Company -- Analyst

Thank you.

Operator

And that concludes our Q&A session for today. I'll now turn the call back over to Ms. Ackerman.

Patricia Ackerman -- Vice President, Investor Relations and Treasurer

Thank you very much for joining us today and have a good day.

Operator

And this does conclude today's conference call. You may now disconnect.

Duration: 42 minutes

Call participants:

Patricia Ackerman -- Vice President, Investor Relations and Treasurer

Kevin J. Wheeler -- President and Chief Executive Officer

John J. Kita -- Executive Vice President and Chief Financial Officer

Douglas Clark -- Goldman Sachs -- Analyst

Matt Summerville -- D.A. Davidson -- Analyst

Jeffrey Hammond -- KeyBanc Capital Markets -- Analyst

Scott Graham -- BMO Capital Markets -- Analyst

Charley Brady -- SunTrust Robinson Humphrey -- Analyst

Michael Halloran -- Baird -- Analyst

David MacGregor -- Longbow Research -- Analyst

Alvaro Lacayo -- Gabelli & Company -- Analyst

More AOS analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.