Good day, and thank you for standing by. Welcome to the A. O. Smith Third Quarter 2021 Earnings Call Conference. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Patricia Ackerman. Thank you, and please go ahead.

Thank you, Angeline. Good morning, and welcome to the A. O. Smith third quarter conference call. I'm Pat Ackerman, Senior Vice President, Investor Relations, Corporate Responsibility and Sustainability and Treasurer. Joining me today are Kevin Wheeler, Chairman and Chief Executive Officer; and Chuck Lauber, Chief Financial Officer. A friendly reminder that some of our comments and answers during this conference call will be forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include matters that we have described in this morning's press release, among others. We will be using slides as we move through today's call. You can access them on our website at investor.aosmith.com. I will now turn the call over to Kevin to begin our prepared remarks. Please turn to the next slide.

Thank you, Pat, and good morning, everyone. Thank you for joining us today. I'd like to start today's call with a quick snapshot of A. O. Smith. We're a global leader in applying innovation and energy-efficient solutions to water heating and treating products that we manufacture and market worldwide with annual sales of approximately $3 billion. In market-leading brands, our products including water heaters, boilers and water treatment systems manufactured in 22 facilities across the globe. North America is our largest and most profitable market, followed by China, which accounts for 25% of sales. Turning to our quarterly results. We are pleased with our performance in the third quarter. Our team delivered a record-setting quarter in a turbulent macro environment. Demand for water heaters in North America remains very strong. Our Rest of World segment performed well in the quarter led by China, delivering operating margins of approximately 10%. Costs continue to increase sequentially, and in response, we have taken appropriate pricing actions. We continue to successfully navigate the supply chain and transportation issues facing most companies and have improved our delivery performance since the first quarter. We acquired Giant the water heater manufacturer in Canada, growing our market share in North America and welcoming a talented group of employees to the A.O. Smith family. And finally, based on our strong performance and continued demand, we're raising our full year outlook for sales and earnings. Our global A.O. Smith team delivered record third quarter EPS of $0.82, a 26% increase that was driven in part by a record 20% increase in sales compared with the third quarter of 2020. Demand for our products is robust, particularly in North America, resulting in record quarterly sales and operating earnings. We achieved this strong performance as a result of continued solid execution, despite the challenging environment of component shortages, logistical bottlenecks and material and transportation cost inflation. I want to take this opportunity to thank my fellow A.O. Smith employees for their dedication and ingenuity as we work to overcome these challenges to meet strong market demand and deliver for our customers. North America water heater sales grew 24%, benefiting from both pricing actions and strong demand. Commercial unit industry demand increased by more than 10% due to the resumption of new construction and replacement in the hospitality end market. Residential water heater unit demand also increased in the quarter. In addition, sequential improvements to our product delivery performance enabled us to improve our share position, which was temporarily lagging in our expectations earlier this year. Our North America boiler sales grew 7%, driven by new construction and replacement demand as well as new products. We ended September with a record backlog, largely composed of commercial condensing boilers and October continues to generate strong order rates for these market-leading energy-efficient boilers. We believe green building incentives and favorable return on investment outcomes contributed to strong demand for our condensing boilers. As natural gas prices increase, the return on investment for highly efficient products becomes more compelling, and we are well positioned to capture share. North America water treatment sales grew 8% in the third quarter. Our water quality dealers performed particularly well. We believe our dealers have been outperforming the market and gaining market share. In China, sales increased 12% in local currency. Each of our major product categories grew year-over-year, including electric and gas tankless water heaters and residential and commercial water treatment products, along with replacement filters. We estimate that replacement demand for our water heaters in China is about 50% of our units sold. Our newer categories, including A.O. Smith branded commercial water treatment as well as Range Hoods and Cook Tops continue to gain traction. As a result, we project that combined sales of these products will top $50 million this year. I will now turn the call over to Chuck, who will provide more details on our third quarter.

Thank you, Kevin, and good morning, everyone. We delivered record third quarter sales of $915 million, up 20% year-over-year, driven by continued strong demand and inflation-related pricing actions. These higher volumes led to third quarter net earnings of $132 million or $0.82 per share, which is a 25% increase compared with net earnings of $105 million or $0.65 per share in 2020. Sales in the North America segment rose to $658 million, a 21% increase compared to the third quarter of 2020. Pricing actions largely on water heaters represented approximately 80% of the increase. Higher volumes in water heaters and boilers were driven by strong replacement and new construction demand. The higher volumes of water treatment products added to segment growth also. North America segment earnings of $152 million increased 14% compared with the third quarter of 2020. The earnings benefit of inflation-related price increases and higher volumes was offset somewhat by higher material and freight costs. Pricing actions led to rapidly rising steel costs, which resulted in a lower segment operating margin of 23.1% compared with the previous year. Rest of the World segment sales of $263 million increased 19% year-over-year, approximately 60% of which was due to volume increases. Currency translation of China sales favorably impacted sales by approximately $14 million. Growth in each of our product categories in China contributed to local currency growth of 12% in the quarter, impacted largely by channel inventory changes, which remained at levels similar to the beginning of the year. Our products with higher selling prices, particularly our super-quiet gas tankless water heaters and water treatment products that deliver hot and ambient filtered water, contributed to sales gains. India sales grew 38% in the quarter as the economy began to regain its footing after the COVID-19 delta variant wave subsided in that region. Rest of the World earnings of $27 million increased 60% from the third quarter of 2020. In China, higher volumes were partially offset by employee incentive costs and higher advertising as well as an absence of social insurance waivers, which were received in 2020. Segment operating margin improved to 10% compared with the third quarter of 2020, primarily as a result of improved operating leverage from higher volumes. We generated strong free cash flow of $332 million during the first 9 months, 13% higher than during the same period in 2020, partially impacted by a larger investment in working capital to support demand levels. Free cash flow conversion was 95%, slightly below our historical performance of a 100%. Our cash balance totaled $685 million at the end of September, and our net cash position was $579 million. Our leverage ratio was 5.3% as measured by total debt to total capital at the end of September. Our free cash flow and solid balance sheet enables us to focus on capital allocation priorities and return cash to shareholders. Earlier this month, our Board approved an 8% increase in our quarterly dividend, which is now $0.28 per share. This marks the 30th consecutive year of dividend increases and is consistent with our capital deployment strategy to return value to shareholders through sustained and increasing dividends. Year-to-date through September 30, we repurchased approximately 3.2 million shares of common stock for a total of $212 million and have the ability to repurchase 5.4 million shares more on our current authorization. We took a pause in our measured stock repurchase pace in the third quarter as we entered the blackout period due to the acquisition of Giant. We plan to resume our repurchase program in early November, targeting $400 million for total share repurchase in 2021. In addition to returning capital to shareholders, we continue to target strategic acquisitions with a focus on water heating and water treatment assets that we believe can return our cost of capital in 3 years. Giant is a great example. The purchase price of $192 million represents a multiple of approximately 9.5x projected 2023 adjusted EBITDA, and the acquisition returns our cost of capital in the second full year, this is inclusive of the present value of an expected tax benefit of approximately $6.5 million that will be realized by treating the transaction as a purchase of assets for tax purposes and projected operating synergies of approximately $5 million achieved over a 2-year period. We expect no impact to fourth quarter EPS due to customary purchase accounting adjustments and one-time transaction expenses. Purchase accounting headwinds are expected to run into the first quarter of 2022, as a result of Giant's conservative practice of carrying high levels of inventory, which are valued as of the acquisition date by marking the value to market. Giant's practice of carrying safety stock has served them well, especially during the current challenges within the supply chain and rapidly rising costs. We continue to finalize our purchase accounting and currently project the acquisition will add between $0.06 to $0.08 per share in 2022. Please turn to our updated full year 2021 outlook. We are now projecting full year sales to increase between 20% and 21% year-over-year. Based on this updated forecast and improved profitability, we are increasing our EPS range to between $2.86 and $2.90 per share. The mid-point of that range represents an increase of 5% compared with our previous guidance. We expect cash flow from operations for the year to be between $550 million and $575 million compared with $560 million in 2020. For the year, CapEx should be between $70 million and $75 million, and we expect to generate strong free cash flow of approximately $490 million with an over 100% conversion rate. We continue to experience inflation across our supply chain, particularly steel and logistics. Steel indices have increased 100% since the beginning of the year. We announced a fifth price increase on water heaters to be effective November 15 at a rate of up to 8.5%. These 2021 price increases are projected to have a cumulative effect on water heating prices of approximately 50% when fully effective in late December of this year. Based on that, we are raising the lower end of our North America segment margin guidance to between 22.75% and 23% and an improvement from our previous outlook. And Rest of the World segment margins to be approximately 8%, which is unchanged. Our updated outlook is based on key assumptions, including inflation-related price increases compounding to approximately 50% for water heaters as we exit 2021. Mid- to high single-digit inflation-related price increases in the remainder of our global portfolio. Strong demand in backlog in North America for all of our water heating product categories, driven by growth in replacement demand and new construction spending, along with the price increase announcements in our water heater and boiler end markets. No material changes in the current macro environment. As for other housekeeping assumptions, corporate and other expenses are expected to be approximately $50 million, similar to 2020. Our effective tax rate is estimated to be approximately 22%. Important to note, our effective tax rate of 20.9% in the third quarter was lower than the prior year as it was favorably impacted by approximately $4 million or $0.03 per share, relating to amending previously filed tax return along with the change in our geographic earnings mix.

I will now turn the call back to Kevin, who will provide more color on our top line growth outlook for 2021, which is on Slide 15. Our revenue outlook for 2021 includes the following assumptions: we increased our U.S. residential tank water heater industry volume forecast and project unit volumes to grow 6% from last year; we expect continued strength in replacement demand, partially driven by an increase in proactive replacement along with growth in new home construction; we see improvement in the growth trend and increased our commercial industry water heater volume projections to approximately 10% growth this year as pandemic-impacted businesses have continued to reopen and new construction and replacement installations come back online. China performance has shown consistency in the past 4 quarters. We are on track with our strategy to continue to expand distribution to smaller Tier 4, 5 and 6 cities in China. Consumer trends show increased demand for higher-priced products across all our categories, driven by differentiated new products that we have launched in the last 12 to 24 months. We expect year-over-year increase in local currency sales between 20% and 22% in China. We assume China currency rates will remain at current levels, adding approximately $54 million and $4 million to sales and profits over the prior year, respectively. After currency impact, the majority of the projected sales growth is driven by a reduction in channel inventory levels in 2020. Power shortages in China have been sporadic. To date, we have had minimal disruptions to our operations, managing through shortages by reducing energy use and nonproduction-related activities and supplementing power with generators on an as-need basis. Boilers sales grew 17% this year through September 2021. We are encouraged by the stability of our record backlog and expect 13% growth in boilers for the full year. We project 12% growth in full year sales for our North America water treatment products. This is slightly lower than our July outlook of 13.5% due to deceleration of growth in online and retail sales. However, we believe sales growth for our point of use and point of entry water treatment systems will continue to be driven by consumer demand for safe drinking water and reduce single-use plastic bottles. We estimate 2021 market growth of around 7%. Thanks to the tremendous effort by our procurement and operation teams, our supply chain is stabilizing. Our manufacturing lead times remained consistent since mid-year. Through our focus and determination, we believe we will close out the year on a high note and continue strong into 2022. We remain confident in our ability to capitalize on opportunities as we continue to execute our strategy. That concludes our prepared remarks, and we are now available for your questions.

Our first question comes from Matt Summerville of D.A. Davidson. Your line is now open.

Thanks. A couple of questions. Just given everything going on with the multiple price increases that have been put in place this year and the one upcoming. What's your impression as to the picture around channel inventories here in the U.S. in the water heater business in light of that? And similarly, it looked like China inventory levels may be on the rise again. So maybe just a little bit of context on that as well.

Okay. The first question with regards to our channel inventory, say, in North America. Our dealers indicate that they're a bit low and that our customers are lower than where they want to be based on the demand that we're seeing in the market. As regards to China, I'll have Chuck comment on that.

Hey, good morning, Matt. So the China inventory levels are really in a good spot. Their commentary around inventory levels are really a reflection of what happened in 2020. And what happened in 2020 is, we really got ourselves in the channel and our customers in a much better positioned for inventories. So they have been reduced to a low level at the end of last year and remained at a very good level throughout this year, so we're pleased with where we're at with channel inventories. All our commentary was really looking at some of the growth over the last year was that we took care of those issues last year or at least the channel cleaned itself up last year.

Got it. And then just as my follow-up, with respect to China and the 20% to 22% constant currency growth you're looking for there, can you delineate where you see water heaters versus water treatment around that number? And then how we should be thinking about the long-term trajectory going forward in China as we remove some of the lumpiness we've had in the last couple of years? Thank you.

Yes. I mean we've seen some headwinds on consumer demand on the water heating side. We're very pleased with how the water treatment side has grown. For the quarter, water treatment was up approximately 20%. When we look at water treatment, we're including our commercial business, which Kevin mentioned earlier. We're including our consumables in our residential business. And our outlook for the year for water treatment in China is around $300 million, just over $300 million. So that's a roughly 20% growth over last year. So we're really pleased with how water treatment is doing in China. Kevin mentioned the Range Hood of commercial water heating, which is a component of water treatment. There's a bit of headwind on the water heating side. We saw it in the market demand and we think we're doing a little bit better than the market in consumer demand. We've got some new products in the marketplace. I mentioned the gas tankless super-quiet, and we're expecting for the full year to be up in that 12% in organic growth.

And just a little bit more color on that. We'll continue to introduce our innovative products in the wall-hung electric side of the business with added features for the consumer. And Chuck just mentioned is super-quiet, but we also just introduced a super-quiet with an integrated water softener, which is a very high-end product that not only provides the hot water, but also the soft water to premium consumers. So we're pleased with where we're at in the market. Chuck mentioned we're outperforming it, but we're more pleased that we're in the innovation side, where we're introducing new and innovative products that the Chinese consumers are willing to pay a premium for.

Our next question comes from the line of Jeff Hammond of KeyBanc. Your line is now open.

So regarding the price increases, they've been happening quite quickly. I'm trying to understand what you expect the price to be in your 4Q guidance. Also, considering the recent announcements, what do you anticipate the carryover pricing will be in 2022?

Yes. So the way we look at it is our last price increase effective November 15 is probably not really going to impact the fourth quarter. It would probably come into effect at the end of December as we roll into 2022. So of that cumulative of 50%, you’ve got to back off that last price increase. As we roll it into next year, we're going to reserve what is going to carry over until we get a bit closer to next year; a little bit of ground to cover in the fourth quarter.

Okay. And then just on, I guess, historically, you kind of keep price in wholesale and material price formulas in the DIY side. But just given the magnitude of the increases here should commodities ultimately roll over steel 30%, 40%, how do you think the same or differently about giving back price? Thanks.

Yes, we have not yet seen costs decrease. As we proceed, our goal is to stay competitive in the market and with our customers. This commitment, along with the value of our products, sales organization, and technology, is essential. If or when costs begin to stabilize or decrease, we will reassess at that time. However, I want to emphasize that A. O. Smith will continue to be competitive across all channels and uphold the value we have provided over the past several decades.

Our next question comes from the line of Mike Halloran of Baird. Your line is now open.

Thank you, good morning, everyone. So first, let's start on North America here. I've seen the demand trends have been really good on the water heating side of the business. Maybe could you help with 2 things. One, kind of parse out how you think the trajectory plays out here? Obviously, the growth has been above normal trend line for a little bit now. How do you feel about the dynamics moving forward just from a volume perspective on the residential side? And on the commercial side, how are you feeling about the recovery cadence as we sit here?

Well, our residential business, as we get into the fourth quarter, the market has been up about 8%. We forecasted about 6%. So it was a very strong fourth quarter of last year. If you look at our commercial business, it continues to exceed our expectations. Again, as the economy continues to open up, which is providing more and more opportunity, there's been some pent-up demand over the last year. And now as this opportunity opens up, again, we're well positioned. We're a leader in the commercial category. So we look at commercial being in a good position in Q4. Residential may be tailing off a little bit. And then as we enter 2022, we'll have to reserve that judgment until we get a few more months under our belt and some more visibility into the market.

Sounds good. And then a follow-up on China. Could you just remind us what your expectations are for a percent of profitability for China cumulatively? But maybe more importantly, give some context on how you think the demand cadence plays out here? Obviously, good 3Q performance from a volume side, guidance implies some slower trends in the fourth quarter, but I think you feel pretty good about where your share is in the fourth quarter and the inventory levels. So maybe you could just help with those factors as we move into the fourth quarter here.

Yes, sure, Mike. So in China, we're kind of looking at the fourth quarter sequentially to be up from the third quarter. Fourth quarter is typically our strongest quarter. So we do expect it to tick up a bit, but not as strong as last year. Last year, we kind of view as there was some pent-up demand, some really strong online sales and a rather strong quarter for year-over-year comps. So probably less than last year. We're kind of seeing it as somewhere in between. So we expect it to tick up from Q3, not quite as strong as last year. We're pleased with our share. I think we've said in the past, it's difficult to measure, but we're very pleased with our specialty stores and our distributors' performance in the marketplace, which is really hard to capture on an industry-wide basis.

Our next question comes from the line of Damian Karas of UBS. Your line is now open.

Hi, good morning, everyone. My first question is on your guidance and in particular, just looking at margins. It seems to suggest a notable step down in the fourth quarter. Would you maybe be able to talk about the moving pieces there for the 2 segment margins? I mean from a price cost standpoint, it looks like you actually had price to offset the cost inflation in the third quarter and things came in a little bit better than I think most had anticipated. So could you just talk about the margin cadence here in the fourth quarter going forward?

Sure. So I mentioned a little earlier, our price increase effective November 15 really won't help us in the fourth quarter. We would expect that to start coming into the financials at the end of the year, beginning of next year. But what we're seeing is, the impact of the significantly higher steel costs that's been ramping up through the year. So when we look at our steel costs for Q4, sequentially, it will be up from Q3, and steel costs are about 2.5 to 3 times more than what we were paying last year at that point in time in the fourth quarter. So it's a pretty significant ramp. So what we're seeing on the margin, I guess, headwind in Q4 in North America is just those costs hitting us faster than some of the price increases become effective.

Got it. And my second question is on the China business. Could you maybe comment on what your current strategy is there with respect to store build-outs and your marketing spend? I'd be curious to hear how you're thinking about all that with everything going on in the property development space.

Well, let me just talk about China from a strategic standpoint. I mean that's a 20-plus year investment for us, and we're building a strong brand, strong distribution, a terrific record for innovation. That strategy remains intact, and we'll continue to execute on that. As we mentioned in the past, we're continuing to invest in lower-tier cities. On the store fronts, we're continuing to monitor the productivity of our Tier 1, Tier 2 stores. We think we're there. We've adjusted maybe 100 to 150 and exited this last year. And then we're really building out our Tier 4 through 6 Tier cities. This year, we're up about 3,000 stores and want to qualify that a bit. It's not the same type of store as you would see in Tier 1, Tier 2, but they're mainly counters. But having 3,000 counters in an area that has grown and expanding is proving to be very beneficial for our top line and long-term success in China. So overall, the commitment in China hasn't changed. Our investment in our brand continues, and we will continue to focus on innovation; our investment in R&D continues to move forward. So again, some minor adjustments, moving into some other tier cities, making some adjustments in our current portfolio of stores. All on track. All we've been doing for the last 12 to 18 months. So strategically, we're still heading down the same path we have. I do want to come back to property development. And just to remind everybody, we really have no direct exposure in that particular segment. We could hit some, I would say, short-term headwinds as they work through some restructuring there, but also approximately 18 million new homes are required in China every year. That's quite an opportunity for us still regardless of what's happening in the property development market. So still a lot of opportunity in China regardless of some of the restructuring they'll have to do in their property sector.

Our next question comes from the line of Nathan Jones of Stifel. Your line is now open.

Good morning, everyone. I appreciate the breakdown of revenue and operating income for this quarter. You've mentioned that with the upcoming price increase in November, prices for water heaters will rise by 50%. The third quarter reflects a 17-point price increase for the entire North American segment. Could you provide more details on the average price increase for the entire North American portfolio compared to just the heater price increases?

No, it's a challenging figure to break down. Typically, we discuss the announced price increases related to the residential and commercial water heating areas. Most of our other business categories outside of water heating are in the single to mid-upper single-digit range, making them substantially smaller than the water heating segment.

That makes sense. I think earlier in the year, some productivity challenges along with the tax rates affected operations, resulting in delays in customer deliveries. Have you caught up with those now, or are you still working on it?

I want to highlight that we faced significant challenges in Q1 due to adverse weather conditions that affected our production. We previously discussed our lagging performance in Q2, but we expected a recovery as we moved into the second half of 2021. As we entered and exited Q3, our residential share aligned well with our typical performance during that period last year. We anticipate this trend will continue into Q4 and improve into 2022. We have regained our share position in Q3, although we still need to address some backlogs and ongoing supply chain challenges that we manage daily. Overall, I am pleased with our status as we finished Q3 in terms of production and backlog, and I expect further improvement as we progress through the latter part of Q4.

Our next question comes from the line of Ryan Connors of Boenning Scattergood. Your line is now open.

Great, thanks for taking my question. I wanted to talk about another side of the inflation story, which is labor costs. Obviously, there's been lots of news flow around unions and strikes, and you're not a union shop, per se, but your people read the papers and their living costs are going up too. So can you just talk about that dynamic and that news flow? And how that's impacting your labor costs, your discussions and your internally around employee compensation as it relates to the inflation situation? And what kind of impact that could or could not have as we get into '22 on margins?

Let me start by discussing labor shortages. All businesses are facing this challenge, and we're no exception, but it doesn't compare to the issues within the supply chain. We are still working through that. One thing that becomes clear during crises is the strong culture we have in our company. Our long-term employees make a significant difference in tough times; they're stepping up and doing the right things. There is some sporadic labor inflation, but we are managing it on a case-by-case basis. We've implemented programs that include signing bonuses in select factories, but this isn't a widespread approach, and it's mainly occurring in the U.S. Overall, I believe we're in a solid position. We'll continue to assess the situation regularly, and from a factory production perspective, we are well-prepared for Q4 and committed to improving our delivery to customers. We will tackle any inflationary pressures as they arise, just as we have in previous years.

Okay. And then my follow-up to that would be applying the same question to your channel partners. I mean is there any cases where some of your distributors and wholesalers and so forth, are having their own kind of labor issues and that's causing a roll-up effect for you? Or do your partners have it under control pretty well?

I want to point out that we don't have conclusive information on that. However, based on the feedback we've received, it seems that everyone in the U.S. is facing some form of labor challenges. This isn't affecting our ability to ship products to distribution centers. As you may have noticed, lead times for various labor and installations have increased, but this isn't specific to our industry or our customers.

Our next question comes from the line of Susan Maklari of Goldman Sachs. Your line is now open.

My first question is around mix shift. As you think about the 50% cumulative price increase on tank and that kind of narrows that range between tank and say, tankless or some other alternatives. Are you seeing that volumes are increasingly shifting that way? Or anything around the demand shifts as we think about pricing relative to the value?

I would tell you, we compete in all segments. So we supply hot water. And so if you look at the tank product has moved up, but we haven't seen really any shift. If you look across our product categories, whether they are gas, electric tank or tankless or even in our commercial side of the business and heat pumps, not a big mix shift right now at all. I think people view water heaters as a pretty good value. It's a product that lasts 15 years and that’s used every day, multiple times a day. So as of right now, we've seen no real mix shift towards anything that would be related to any of the pricing that we've implemented throughout the last year or so.

Okay. That's helpful. As a follow-up, looking ahead to 2022, are there any thoughts regarding competition or how you view the dynamics around pricing and the normalization of inventories that could impact new entrants or competition?

Yes. I mean we're not quite ready to talk about '22. We're going to defer that until we get to our January call. I would say, from a competition perspective, we don’t necessarily see any significant shifts. And the demand part is really hard to read out with the price increases, and it's just a little difficult for us to take a look at a view into 2022 yet.

Yes. I would just maybe comment. We look at our competition on a pretty regular basis, and we gather market intelligence. But our primary focus is on our customer and taking care of our customers, growing their business, using our leading product lines of residential and commercial water heaters, our relationships with the engineering spec community. So while we pay attention to competition, we really focus on ourselves to make sure we're providing the value add to grow our customers' profits.

Our next question comes from the line of David MacGregor of Longbow Research. Your line is now open.

Hey, good morning, everyone. Congratulations on a great quarter. Strong results.

Thank you.

You mentioned how strong the commercial sector is currently, so I'd like to explore that further. Can you provide the comparable figure for pricing in the commercial business in relation to the 50% cumulative pricing benefit you've mentioned for residential? Additionally, could you elaborate on the supply channel constraints and how they might impact the commercial segment differently than in the residential sector? It would be helpful to hear more about the commercial business. Thank you.

Yes. I mean the announced price increases that we mentioned on water heating product, the residential and commercial, they're roughly similar on that announced cumulative price increase. Not the same in the boiler mix, but on the water heating piece that we publicly announced it's in that range. Regarding supply chain, we're having similar challenges as any other company, and that's constantly changing. But what I'll tell you is what we're doing, and I think that's more important. We're certainly working closely with our suppliers. We're upping our safety stocks when we can, adding new suppliers, certifying alternatives, prepayment to ensure that we have a consistent supply chain. So to directly answer your question, our view today, we don't see any major disruptions whether it's on a residential front or on our commercial part of the business or on our boilers. We will continue to move forward as we've had, and we'll continue to work with our suppliers to ensure that we can deliver to our customers in a timely fashion.

Yes, I mean that's truly exceptional. Good for you. My second question was really on the water treatment business. I know in the past, you've targeted 100 basis points a year margin progression. So obviously, this is a very extraordinary year, but what are your expectations for 2021? And any early thoughts on 2022 in terms of water treatment profitability? That would be appreciated.

Yes, in 2021, we are facing the same cost challenges in this sector as we do elsewhere. We have implemented some pricing strategies, but achieving the typical margin increase of 100 basis points will be difficult this year. We are currently around a 10% operating margin, which we are satisfied with. We are positioning ourselves for next year by continuing with our growth initiatives and exploring all channels for growth while looking for cost reductions. As we establish a stronger base in this business, we plan to leverage that for further growth. Our outlook for year-over-year expansion remains unchanged, although we anticipate some challenges as we close out 2021. We hope to be in a more favorable situation for 2022.

Our last question comes from the line of Saree Boroditsky of Jefferies. Your line is now open.

Thanks for taking my question. So you talked about not having direct exposure to the property development market in China, which I understand, but I think this would impact kind of consumer sentiment. Could you just provide more color on what you saw from an underlying demand perspective through the quarter? And did you see any weakness later in the quarter, given some of the headwinds?

Well, I think we mentioned, the sale of the quarter was down. Certainly, that has to do with some consumer sentiment. So again, when we look at this as more of a temporary headwind, short-term. We'll see how the property market works its way out of where it’s at today and how the Chinese government gets involved. But I guess I'll comment that even within this consumer sentiment that's down a little bit, we have seen our consumers still pay up for premium products. And in the quarter, we had all 3 of our core product categories have a spike trade up, and that's on water heaters, both tankless and electric as well as water treatment. So my view is there is still opportunity regardless of how the market is performing at a point in time. But there is clearly a short-term headwind that we'll have to work through, and hopefully the products we have and how we bring new innovations to market will help us overcome most of those.

Great. Thank you. And then just given the strong sales growth you saw in India, maybe just talk about the margin profile on that business today? And how are you expecting it to trend over time?

We were very pleased with the results, especially considering the challenges posed by the severe COVID second wave in India. Emerging from that in Q3 with a 38% sales growth, our team has outperformed the market twice in both key product categories. Our new products are gaining traction, and we are expanding our market presence. We are satisfied with our margin expansion, having significantly reduced our losses during this tough year. We will discuss this in more detail as we conclude the year, but our margin profile has improved. Volume is important for us, even though it's a smaller business, as it provides significant operating leverage as we grow. Currently, we are in our busiest season, which accounts for about one-third of our business over the next three months, and our execution is solid. We are very pleased with our current position and optimistic about where we will end the year. As we move forward, we do need some improvement from the economy and a reduction in COVID issues in that region.

Thank you all for joining us today. Let me conclude by reminding you that our global A. O. Smith team delivered record sales and earnings in the third quarter of 2021. We remain optimistic about results in the quarters to come based on robust demand for our products as well as strong execution of our strategy, despite an environment challenged by component shortages, logistical bottlenecks and inflation in both materials and transportation costs. We look forward to updating you on our progress in the quarters to come. Also, please mark your calendars to join our presentations at 2 virtual conferences next month: Robert W. Baird on November 9 and UBS on November 17. In the meantime, enjoy the rest of your day.

This concludes today's conference call. Thank you for participating. You may now disconnect.