SMITH A O CORP Q3 FY2024 earnings call

• Third quarter sales and earnings decreased due to weaker consumer demand in China and North America water heater demand. - Increased dividend by 6% for the 32nd consecutive year. - On track to close Pureit by the end of 2024. - Commenced expansion projects in 2024, including grand opening of Juárez facility for gas tankless water heaters, added heat pump capacity, and progress on commercial product development center. - North America segment had higher boiler and water treatment sales but lower water heating volumes. - Rest of the world segment saw lower sales of core products but India sales increased.

North America segment: Third quarter sales were $703 million, a 1% decline compared with 2023. Earnings were $163 million, down 4%, with segment margin 23.1%. Rest of the world segment: Sales of $210 million decreased 10% compared to last year. Earnings were $14 million, with segment margin 6.5%. China third party sales declined 17% in local currency. North America water heater sales decreased 4%, while North America boiler and water treatment businesses had double-digit growth. India sales increased 12% in local currency.

• Reaffirmed 2024 EPS outlook of $3.70 to $3.85 per share. - Sales expected to be flat to 2023. - Lowered 2024 China third party sales guidance to a decrease of 6%-8% local currency. - Revised North America residential water heater and commercial water heater industry volume projections. - Boiler sales growth guidance revised to ~8%. - North America water treatment sales growth guidance unchanged at 8%-10%. - Projected North America segment margin ~24.5% and rest of the World third party segment margin ~8%.

• Consumer demand softness in China persisting. - Market competition and pricing pressure. - Impact of supply chain and material cost fluctuations. - Potential impact of economic conditions on end market demand. - Uncertainty regarding the size and timing of China stimulus programs' impact on business.

Q: Focusing on North America residential water heater segment, how did the industry volumes and share play out?

A: Kevin explained about price increase leading to lead time issues and inventory imbalance, but share is good despite lumpiness. Chuck added about industry outlook shift from flat being floor to ceiling.

Q: Thoughts on China business strategically and long-term?

A: Kevin said A.O. Smith sees upside in China long-term despite current tough period, with government stimulus programs potentially positive but size unknown.

Q: Impact of tankless water heater factory switch on segments?

A: Kevin said there will be a headwind into 2025, with most weight in fourth quarter going into next year, but volume benefit for rest of world.

Q: Sellout dynamics and steel cost trend?

A: Kevin said sellout varies by market but feedback is market slowing but flat, Chuck added proactive replacement survey shows stability. Kevin mentioned steel costs relatively flat with some timing and lag effects.

Q: China sales flip in third quarter vs first half?

A: Kevin attributed to consumer confidence hit by property market decline and employment challenges. Chuck added anniversary of kitchen product launch with no benefit quarter-over-quarter.

Q: Lead times and China stimulus impact?

A: Kevin explained lead times extended due to price increase and are now back to normal. Chuck added historical China stimulus programs and recent specific program being early stages.

Q: China market trends in premium vs mid-tier?

A: Kevin said whole market down, but premium position protected. Chuck added selective promotions and strong brand.

Q: Free cash flow decline details?

A: Kevin said inventory increase (including tankless) and lower customer deposits in China are the main moving pieces.