A. O. Smith Corporation
CEO : Mr. Kevin J. Wheeler
Quarterly earnings growth(YoY,%)
| Period | Revenue | Operating Income | EPS | Release Date |
|---|---|---|---|---|
| 2023 Q2 | -0.5% YoY | 22.1% | 30.0% | 2023-07-27 |
Charles Lauber says,
North America Segment
- Second quarter sales of $722 million, a 3% decline from the same period last year.
- Decrease primarily driven by higher commercial and residential water heater volumes offset by lower boiler sales and pricing.
- Lower volumes contributed to approximately 1/2 of the organic growth decline.
- Adjusted segment earnings of $194 million, a 19% increase compared to Q2 2022.
- Adjusted operating margin of 26.9%, a 510 basis points improvement from Q2 2022.
- Higher segment earnings and operating margin due to lower steel costs and higher volumes of commercial and residential water heaters partially offset by lower boiler volumes.
Rest of World Segment
- Second quarter sales of $244 million, a 6% increase year-over-year and 12% on a constant currency basis.
- Currency translation unfavorably impacted segment sales by approximately $14 million.
- Sales increase driven by higher consumer demand and favorable mix in China, particularly for residential and commercial water treatment products.
- India sales grew 15% in local currency in Q2 compared to last year.
- Segment earnings of $28 million, a 56% increase compared to 2022.
- Segment operating margin of 11.6%, a 370 basis points increase from Q2 2022, primarily due to higher volumes of water treatment products and positive mix.
Free Cash Flow and Capital Allocation
- Generated free cash flow of $236 million in the first half of 2023, higher than the first half of 2022.
- Cash balance totaled $410 million at the end of June, with a net cash position of $204 million.
- Leverage ratio of 9.8% as measured by total debt to total capital.
- Board approved next quarterly dividend of $0.30 per share.
- Repurchased approximately 1,075,000 shares of common stock in the first half of 2023 for a total of $70 million.
- Committed to repurchasing $300 million of shares for the full year of 2023.
Organic Growth and Strategic Acquisitions
- Opportunities for organic growth driven by innovation and new product development.
- Technology leadership and culture of innovation position the company to capitalize on decarbonization and sustainability mega trends.
- Strong balance sheet allows for pursuit of strategic acquisitions in addition to organic growth.
2023 Earnings Guidance and Outlook
- Increased 2023 adjusted EPS range of $3.45 and $3.60 per share, a 12% increase compared to 2022.
- Assumes relatively stable supply chain with limited disruption.
- North America full year margin guidance increased to a range of between 24% and 24.25%.
- Steel costs in the second half of the year expected to be approximately 20% higher than the first half.
- Rest of the World margin guidance of approximately 10% remains unchanged.
- Expected free cash flow of between $550 million and $600 million.
- CapEx between $70 million and $75 million.
- Corporate and other expenses estimated to be approximately $55 million.
- Effective tax rate estimated to be approximately 24%.
- Expected repurchase of approximately $300 million of shares.
- Anticipated average outstanding diluted shares of 151 million at the end of 2023.
Kevin Wheeler says,
Record adjusted EPS of $1.01
- Second quarter results driven by strong performance in operating segment
- Margin expansion in North America segment due to favorable price cost relationship and robust demand for commercial and residential water heaters
- Rest of World segment delivered improved performance despite headwinds in economy and currency exchange in China
- China and India both saw sales growth of 15% in local currency
North America water heater sales
- Decreased 2% in Q2 2023 due to lower pricing, offset by higher volumes
- Residential water heater demand remained resilient
- Commercial water heater business showed year-over-year improvement
North America boiler sales
- Declined 13% in Q2 2023 compared to tough comp last year
- Lower volumes offset benefits from pricing
- Elevated channel inventory levels of residential and light commercial boilers due to warmer-than-normal winter
- Demand for custom commercial high-efficiency condensing boilers remained steady
North America water treatment sales
- Down 2% in Q2 2023 compared to tough comp in 2022
- Pricing and strong e-commerce sales offset by lower sales in specialty wholesale and dealer channels
- Margins improved in North America water treatment business
China sales
- Sales increased 15% in local currency compared to Q2 2022, which was impacted by COVID-19-related shutdowns
- Improved demand for residential and commercial water treatment products
- Strong sales of water treatment consumables
- Favorable mix in water treatment and electric water heater product categories
Microplastics in drinking water
- Nearly 9 out of 10 Americans have concerns about microplastics
- North America water treatment products filter enough water to potentially eliminate over 1 billion single-use plastic bottles per year
- Countertop and undersink water filters are now certified to remove up to 99.6% of microplastics and over 70 other contaminants
- Company committed to identifying and becoming certified to remove harmful contaminants
Q & A sessions,
2023 sales projection and assumptions
- Revised projection: flat to up 2% compared to 2022
- Residential water heater demand resilient in H1, projecting flat to up 2% industry volumes in 2023
- Commercial electric water heater demand strong in H1, raising guidance for mid-teens volume increase in 2023
- Sales in China expected to grow 3% to 5% in local currency, assuming 5% devaluation of Chinese currency in 2023
- Outlook for boiler business down high single digits compared to last year
North America water treatment sales growth
- Outlook unchanged at 5% to 7% growth for 2023
Performance highlights
- Q2 2023 North America adjusted operating margin of 26.9%, driven by improved price-cost relationship
- China business performed well in Q2 with 15% sales growth and operating margins over 12%
- India sales projected to grow 15% compared to last year
Market factors
- U.S. Department of Energy proposal to raise energy efficiency standards for residential water heaters targeted for 2029
- Continued dialogue with DOE and industry participants to offer guidance from market leadership perspective
Water heater market outlook
- Residential water heater market expected to normalize with 1.5% to 2% CAGR
- Commercial water heater market stabilizing and returning to normal volume levels
- Positive growth in North America water treatment business despite tough comps
Water treatment market outlook
- Softness in various parts of the market but positive growth overall
- Deal or specialty business expected to rebound in the back half of the year
- Continued growth opportunities due to increasing water quality concerns
No bad stock 