Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- A.O. Smith Corp (AOS, Financial) delivered record quarterly sales of $1 billion and an EPS of $1.6, a 5% increase from 2023 adjusted EPS.
- North American water heater and boiler sales increased by 10% due to higher volumes and pricing actions.
- India achieved double-digit growth for the 10th consecutive quarter, driven by strong performance in e-commerce, retail, and commercial end-markets.
- A.O. Smith Corp (AOS) signed an agreement to acquire Pureit, a leading water purification business in South Asia, which will double their market penetration in the region.
- The company received several awards in 2024, including being named one of the world's most ethical companies by Ethisphere and receiving the Energy Star Sustained Excellence Partner of the Year award from the EPA for the sixth year in a row.
Negative Points
- Segment margin in North America decreased by 180 basis points year over year, primarily due to higher steel costs and higher selling expenses.
- Rest of the World segment sales were flat compared to last year, with unfavorable currency translation impacting results.
- China's market for core products remains challenged, with pricing and promotion pressures particularly in the mid-price sector.
- Free cash flow decreased to $119 million during the first half of 2024, primarily due to higher inventory and accounts receivable balances.
- The company experienced some softness in orders in July, attributed to normal seasonality and a pre-buy ahead of price increases.
Q & A Highlights
Q: How should we think about the margin cadence in both North America and Rest of the World in the back half of the year?
A: (Charles Lauber, CFO) The third quarter will be a bit challenged due to a pre-buy in North America and some volume headwinds. However, Q4 should look similar to Q2. In China, we expect some volume challenges in Q3 but anticipate a stronger Q4. Overall, margins will follow these volume trends.
Q: Can you comment on the channel inventory picture in China and the price competition in the mid-price point category?
A: (Kevin Wheeler, CEO) Inventories are within the expected four- to six-week range. The market is very competitive, with consumer demand weaker than before, leading to more promotional activities. Despite this, our team has managed well, growing 2% in local currency in a challenging market.
Q: Can you provide insights into the profitability and growth rate of the recently acquired Pureit business?
A: (Kevin Wheeler, CEO) Pureit is a solid brand that complements our existing India business. It has a strong presence in e-commerce and retail. Financially, it is similar to our India business with low to mid-single-digit profitability and has seen very good growth, similar to our 15%+ growth in India.
Q: What is the impact of the tankless water heater launch on China sales this year, and will it create a challenging segment comp when production shifts to North America next year?
A: (Kevin Wheeler, CEO) The launch has been well received, meeting our expectations. Moving production to Juárez, Mexico, in 2025 will eliminate tariffs and reduce logistics costs, positively impacting margins.
Q: How difficult is it to maintain the Rest of the World margin guidance of 10% given the price pressures in China?
A: (Kevin Wheeler, CEO) It's challenging, but our team is managing well by balancing price, promotion, and cost. We have taken cost actions to make our structure more variable and are confident in maintaining our margin guidance.
Q: What are you seeing for heat pump water heaters, and what are your expectations for the rest of the year and into next year?
A: (Kevin Wheeler, CEO) Heat pump water heaters are growing well, particularly in states like New York and California. We forecast 25% to 30% growth over the next several years, with Q2 growth exceeding that range.
Q: How are your distributors responding to the new tankless water heater product?
A: (Kevin Wheeler, CEO) Distributors appreciate having the option to buy from us. While not all will drop their current suppliers, we expect many to add our competitive gas-tankless product line, leveraging our long-term relationships.
Q: Why is there no change in the North American segment margin guidance despite expected volume weakness in Q3?
A: (Kevin Wheeler, CEO) We still believe 25% is achievable. While Q3 will be challenging due to volume headwinds, we expect a return to stronger volumes in Q4, along with some relief in steel costs.
Q: Can you discuss the increased selling expense in North America and how it compares year-over-year excluding the gas tankless rollout?
A: (Kevin Wheeler, CEO) Selling expenses are largely variable, tracking closely with volumes. The tankless product launch has driven some additional costs, but these are necessary to ensure a successful market entry.
Q: What is driving the growth in the boiler business, and how sustainable is it?
A: (Kevin Wheeler, CEO) Growth is mainly driven by the commercial segment and the transition to high-efficiency models. New products like the crest boiler with Hellcat Technology are performing well, and we expect this momentum to continue.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
