• North America Segment Sales: $703 million, a 1% decline compared with 2023.
• North America Segment Earnings: $163 million, decreased 4% compared with 2023.
• North America Segment Margin: 23.1%, a decrease of 80 basis points year over year.
• Rest of the World Segment Sales: $210 million, decreased 10% compared to last year.
• Rest of the World Segment Earnings: $14 million, with a segment margin of 6.5% in 2024.
• Free Cash Flow: $283 million during the first nine months of 2024.
• Cash Balance: $256 million at the end of September.
• Net Cash Position: $136 million.
• Leverage Ratio: 5.9% as measured by total debt.
• Dividend Increase: 6% increase to $0.34 per share.
• Share Repurchase: Approximately 2.9 million shares for $237 million in the first nine months of 2024.
• 2024 EPS Outlook: Expected range of $3.70 to $3.85 per share.
• Capital Expenditures: Expected between $105 million and $115 million for the year.
• Operating Cash Flow: Expected to be $525 million for the year.
• Free Cash Flow Guidance: Approximately $415 million for the year.
• Effective Tax Rate: Estimated to be approximately 24%.
• Outstanding Diluted Shares: 147 million at the end of 2024.

• Warning! GuruFocus has detected 3 Warning Sign with AOS.

Release Date: October 22, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• A.O. Smith Corp (NYSE:AOS) reported double-digit growth in North America's water treatment and boiler businesses, with sales increasing by 15% and 16% respectively.
• The company increased its dividend by 6% in October, marking the 32nd consecutive year of annual dividend increases.
• A.O. Smith Corp (NYSE:AOS) is on track to close the acquisition of Pure from Unilever by the end of 2024, which aligns with its strategy to enhance its water treatment product portfolio in South Asia.
• The company celebrated the grand opening of a new facility in North America for manufacturing gas tankless water heaters, with production expected to begin in early 2025.
• A.O. Smith Corp (NYSE:AOS) maintained a strong balance sheet with a net cash position of $136 million and a leverage ratio of 5.9%.

Negative Points

• Third-quarter sales and earnings decreased compared to the previous year, with a 17% decline in China and a 4% decrease in North American water heater sales.
• The company faced increased pricing and promotional pressure in China, particularly in the mid-price sector of the market.
• A.O. Smith Corp (NYSE:AOS) experienced softer-than-expected orders in its North American water heater business, attributed to reduced lead times and softening end-market demand.
• The Rest of the World segment saw a 10% decrease in sales, driven by lower sales of core water heater and water treatment products in China.
• Free cash flow decreased to $283 million during the first nine months of 2024, primarily due to higher inventory balances and lower customer deposits in China.

Q & A Highlights

Q: Can you explain the performance of the residential water heater segment and the expected reversal in the fourth quarter? A: Kevin J. Wheeler, CEO, explained that the price increase in the second quarter led to more orders than anticipated, which increased lead times and caused some ERP systems to generate more orders. This led to an inventory imbalance. The company is now working through this with customers, and while there is some market softness, they expect improvement in the fourth quarter.

Q: How is the March price increase holding up in North America given the deflation in steel prices? A: Kevin J. Wheeler, CEO, stated that the price increase was executed as planned, and while the market is competitive, they are where they expected to be in terms of volume and pricing. The goal is to keep customers competitive, and they feel well-positioned heading into the fourth quarter.

Q: What is the strategic outlook for the China business given its recent performance? A: Kevin J. Wheeler, CEO, emphasized the long-term importance of China as a market, despite current challenges. He noted that China is the second-largest economy and has significant potential due to urbanization and a growing middle class. The company remains committed to the market, expecting eventual upside despite current difficulties.

Q: How should we think about the China business in 2025 in light of the stimulus programs? A: Kevin J. Wheeler, CEO, mentioned that while the stimulus programs are a positive development, it's too early to predict their impact. The company is assessing the situation and remains optimistic about its brand and market position, but acknowledges the need for more information on the stimulus size and impact.

Q: Can you discuss the shift from gas to electric in the North America Commercial business and your capacity to address this trend? A: Kevin J. Wheeler, CEO, confirmed that they are comfortable with their capacity and market position in both electric and gas segments. The company is well-prepared to address the market trend towards electric, having a strong share in both categories.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.