A. O. Smith Corporation (AOS) 2024 Q2 Earnings Call Summary
July 23, 2024 
A. O. Smith Corporation (AOS)
| Market Cap | 0.38T |
|---|---|
| Beta | |
| P/E | 43.94571752178209 |
| EPS | 20.282294846095283 |
| Dividend | 0 |
| Dividend Yield | 0.00% |
Optimistic Highlights
- Record Quarterly Sales and EPS: A.O. Smith reported record quarterly sales of $1 billion and EPS of $1.06, marking a 5% increase over the previous year's adjusted EPS.
- Growth Across Key Markets: North American water heater and boiler sales increased by 10%, China third-party sales grew by 2% in local currency, and India achieved double-digit growth for the 10th consecutive quarter.
- Successful Product Launches: The company began shipping its internally developed and manufactured gas tankless products, receiving positive market acceptance.
- Strategic Acquisition: Announced the acquisition of Pureit, a leading water purification business in South Asia, expected to double market penetration in the region.
- Awards and Recognitions: Received several honors, including being named one of the world's most ethical companies and receiving the 2024 ENERGY STAR Sustained Excellence Partner of the Year Award.
Pessimistic Highlights
- Market Challenges in China: Despite growth, the company noted pricing and promotion pressures in the mid-price sector of the Chinese market, with consumer demand remaining weak.
- Increased Selling Expenses: Higher selling expenses were reported to support growth initiatives, including the launch of gas-tankless products, impacting margins.
- Steel Cost Fluctuations: While steel costs have shown some softening, they were significantly higher in Q2 compared to the previous year, affecting profitability.
Company Outlook
- 2024 EPS Outlook Narrowed: The EPS outlook for 2024 has been narrowed to a range of $3.95 to $4.10 per share, with the midpoint unchanged, representing a 6% increase over the previous year's adjusted EPS.
- Growth Projections: Sales are expected to grow 3% to 5% compared to 2023, with specific growth forecasts for U.S. residential industry unit volumes, China third-party sales, and boiler sales.
- Margin Expectations: North America segment margin is projected to be approximately 25%, with Rest of World third-party segment margin around 10%.
Q & A Highlights
Q: Can you discuss the margin cadence in both North America and Rest of the World in the back half of the year? (Matt Summerville, D.A. Davidson)
A: Q3 will be challenged by volume headwinds, with Q4 expected to return to levels similar to Q2. China is expected to have a strong Q4, with some weakness in Q3. (Chuck Lauber)
Q: What's the profitability and growth rate of the Pureit business? (Jeff Hammond, KeyBanc Capital Markets)
A: Pureit's financial profile is similar to A.O. Smith's India business, with low to mid-single-digit profitability and similar growth rates. (Chuck Lauber)
Q: How should we think about the working capital build in the first half? (Susan Maklari, Goldman Sachs)
A: The increase in working capital is due to timing, with expectations to recover it in the second half. (Chuck Lauber)
Q: Can you elaborate on the increased selling expense in North America? (David MacGregor, Longbow Research)
A: The increase is largely variable, tracking closely with volumes and driven by initiatives within the launch of tankless products. (Kevin Wheeler and Chuck Lauber)
Q: What are you seeing with heat pump water heaters and expectations through the rest of the year? (Damian Karas, UBS)
A: The category continues to grow, especially in states promoting it, with growth rates above 25% to 30%. (Kevin Wheeler)