Q3 2023 A O Smith Corp Earnings Call

October 26, 2023

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I would now like to hand, the call over to our first speaker for today, Helen Gert Holt. Your line is now open.

I would now like to hand, the call over to our first speaker for today, Helen Gert hoped your line is now open.

Good morning, and thank you everyone for your patience, while we dealt with our technical difficulties.

Good morning, and thank you everyone for your patience, while we built with our technical difficulties.

To our a O Smith's third quarter conference call I'm, Helen Gerhold, Vice President Investor Relations and financial planning and analysis.

To our a O Smith's third quarter conference call I'm, Helen Buerkle, Vice President Investor Relations and financial planning and analysis.

Joining me today are Kevin Wheeler, Chairman, and Chief Executive Officer, and Chuck Lauber, Chief Financial Officer.

In order to provide improved transparency into our operating results of our business. We provided non-GAAP measures free cash flow is defined as cash from operations less capital expenditures adjusted earnings adjusted earnings per share adjusted segment earnings and adjusted corporate expenses.

The impact of impairment charges non operating non cash pension income and expenses as well as legal judgment income and terminated acquisition related expenses.

[music].

We also provide total segment earnings.

Also provide total segment earnings reconciliation.

Reconciliations from GAAP measures to non-GAAP measures are provided in the appendix at the end of this presentation and on our website.

<unk> from GAAP measures to non-GAAP measures are provided in the appendix at the end of this presentation and on our website.

A friendly reminder, that some of our comments and answers. During this conference call will be forward looking statements that are subject to risks that could cause actual results to be materially different.

Those risks include matters that we described in this morning's press release among others.

These risks include matters that we described in this morning's press release among others.

Also as a courtesy to those in the question to please limit yourself to one question and one follow up per turn.

If you have multiple questions. Please rejoin the queue.

We will be using slides as we move through today's call you can access them on our website at Investor Day, a O Smith's dot Com I will now turn the call over to Kevin to begin our prepared remarks, please turn to the next slide.

Thank you Alwyn and good morning, everyone.

Thank you don't want and good morning, everyone I'm on slide four.

Im on slide four.

Viewed in few of our third quarter highlights.

A few of our third quarter highlights.

I'm very pleased with the execution of our team across all of our businesses to deliver a strong third quarter EPS of <unk> 90 <unk>.

The performance of our North America segment was particularly strong.

We saw resilient demand for our residential water heaters as well as year over year improvement in our operating margin.

Chinese new products drove year over year improvement as newly introduced kitchen appliance products were well received by the market.

Innovative new products combined with our strong brand drove growth. Despite a continued challenging economic backdrop.

India entered the year, introducing a number of new products in both the water heating and water treating categories and has delivered year to date sales growth of 17% in local currency.

India entered the year, introducing a number of new products in both the water heating and water treatment categories and has delivered year to date sales growth of 17% in local currency.

We also acquired water Tech a high quality, Arizona based water treatment company.

This acquisition aligns with our strategic growth aspirations to expand water treatment across the U S.

We welcomed water tech team to the <unk> family.

We welcomed water tech team to the Ao Smith family.

Please turn to slide five.

North America water heater sales increased 13% in the third quarter as a result of continued strength in residential water heater demand.

As you May recall sales in the third quarter of last year were negatively impacted by channel inventory destocking of residential water heaters, primarily in the wholesale channel.

Our North America boiler sales declined 18% in the third quarter against a difficult comp in 2022.

In the third quarter last year, we worked down our backlog after making significant production and supply chain improvements, we believe channel inventories are approaching normal levels.

Demand for our commercial high efficiency condensing boilers, particularly our hellcat, Chris boilers remained steady in the quarter.

North America water treatment sales increased 5% in the third quarter of 2023, primarily driven by pricing and E Commerce sales.

North America water treatment sales increased 5% in the third quarter of 2023.

Primarily driven by pricing and e-commerce sales this.

Quarter also benefited from pricing related margin improvement.

The quarter also benefited from pricing related margin improvement.

In China third quarter sales increased 9% local currency compared to the third quarter of 2022, primarily due to our newly introduced dishwasher and steam oven products.

In China third quarter sales increased 9% local currency compared to the third quarter of 2022, primarily due to our newly introduced dishwasher and steam oven products. This.

The quarter also benefited from higher commercial water treatment sales and positive mix.

I'm now on slide six.

We continue to introduce new innovative products and water filtration I'm.

I'm pleased to highlight the launch of our new smart flow reverse osmosis filtration system under both our Ao Smith and Aqua Sana brands.

The product takes up less space and features an easy filter replacement process.

Our smart flow technology features a multi stage filtration process that removes up to 99, 9% of 90 contaminants, including DFAST.

<unk> micro plastics and led.

It also features our innovative and exclusive sidestream reverse osmosis technology, making this one of the most water efficient systems in the market.

This is one example of our commitment to bringing innovative water heating and water treatment treating products to the global market.

On November 6th at our Investor day, each of our businesses will highlight new products that are driving results in the marketplace.

I'll now turn the call over to Chuck who will provide more details on our third quarter performance.

Thank you, Kevin and good morning, everyone I'm on slide seven.

Third quarter sales in our North America segment were $710 million, a 9% increase over the same period last year. The increase was primarily driven by higher residential water heater volumes that were partially offset by lower boiler volumes nor.

North America segment earnings of $170 million increased 28% compared with the adjusted segment earnings in the third quarter of 2022.

With America segment earnings of $170 million increased 28% compared with the adjusted segment earnings in the third quarter of 2022.

Operating margin was 23, 9% improved 350 basis points compared to adjusted segment operating margin in the third quarter of last year.

[music].

The higher segment earnings and operating margin were primarily due to higher residential water heater volumes and lower steel costs, partially offset by lower boiler volumes.

Segment pricing was relatively flat in the quarter compared to last year.

Moving on to slide eight the rest of the World segment sales of $233 million increased 1% year over year and 6% on a constant currency basis.

Moving on to slide eight rest of the World segment sales of $233 million increased 1% year over year and 6% on a constant currency basis.

Currency translation unfavorably impacted segment sales by approximately $11 million sale.

Currency translation unfavorably impacted segment sales by approximately $11 million sales of newly introduced kitchen appliance products higher commercial water treatment sales and a positive mix in China drove the sales increase in the quarter.

Sales of newly introduced kitchen appliance products higher commercial water treatment sales and a positive mix in China drove the sales increase in the quarter.

India sales grew 13% in local currency in the third quarter compared to last year.

Rest of the World segment earnings of $23 million increased 6% compared to segment earnings in the third quarter of 2020 to Sigma.

Rest of the World segment earnings of $23 million increased 6% compared to segment earnings in the third quarter of 2022.

Segment operating margin was nine 9% an increase of 40 basis points compared to the same period last year, primarily as a result of higher sales of new products and a positive mix.

Please turn to slide nine.

We generated free cash flow of $396 million in the first nine months of 2023 more than two times the free cash flow generated in the same period last year. This was largely due to higher earnings and lower working capital cash outlays, primarily related to lower inventory levels and lower in 2000.

Lower 2022 incentive payments paid in 2023.

22 incentive payments paid in 2023.

Our cash balance totaled $342 million at the end of September and our net cash position was 212 million our leverage ratio was six 4% as measured by total debt to total capital.

Our free cash flow and solid balance sheet to enable us to focus on capital allocation priorities and return of cash to shareholders earlier. This month, our board approved a 7% increase to our quarterly dividend to <unk> 32 per share.

We repurchased two 4 million shares of common stock in the first nine months of 2023 for a total of $161 million, we expect to repurchase $300 million of our shares for the full year 2023.

Let's now turn to slide 10.

In addition to returning capital to shareholders, we continue to see opportunities for organic growth through innovation and new product development across all of our product lines and geographies.

Strength of our balance sheet also allows us to pursue strategic acquisitions, along with organic growth.

Please turn to slide 11.

And our revised 2023 earnings guidance and outlook.

We have increased our 2023 outlook with an expected adjusted earnings per share range of $3 70 to $3 80 per share.

The midpoint of our adjusted earnings per share range represents an increase of 19% compared with 2020 to adjusted EPS.

Our outlook is based on a number of key assumptions, which include a stable supply chain with limited disruption.

We have increased our North America full year Martin margin guidance to be approximately 25% based on our full year outlook on volumes and price cost relationship.

We forecast that our Q4 material cost will be similar to our Q3 material costs.

Our rest of the world margin guidance of approximately 10% remains unchanged.

We expect to generate strong free cash flow of between $575 million and $600 million for.

We expect to generate strong free cash flow of between $575 million $600 million.

For the year Capex should be approximately $65 million.

Corporate and other expenses are expected to be approximately $60 million.

Our effective tax rate is estimated to be approximately 24%.

And with the expectation to repurchase approximately $300 million of shares of our stock the resulting average outstanding diluted shares is expected to be 151 million at the end of 2023.

And with the expectation to repurchase approximately $300 million of shares of our stock the resulting average outstanding diluted shares is expected to be $151 million at the end of 2023.

I'll now turn the call back over to Kevin who will provide more color on our key markets topline growth outlook in segment expectations for 2023, staying on slide 11, Kevin.

I'll now turn the call back over to Kevin who will provide more color on our key markets top line growth outlook in segment expectations for 2023, staying on slide 11, Kevin.

Thank you Chuck we have narrowed our 2023 sales outlook to grow approximately 2% compared to 2022.

Thank you Chuck we have narrowed our 2023 sales outlook to grow approximately 2% compared to 2022, which was the high end of our previous guidance.

Was the high end of our previous guidance.

Look includes the following assumptions.

Look includes the following assumptions Reggie.

Residential water heater orders remained strong through October.

Therefore, we project 2023 residential water heater industry volumes will increase approximately 4% compared to last year.

Before we project 2023 residential water heater industry volumes will increase approximately 4% compared to last year.

We continue to monitor proactive replacement, new housing completions, both of which remain favorable.

Demand for commercial electric water heaters greater than 55 gallon continue to be robust our guidance for commercial water heater industry volumes to increase mid teens compared to 2022 is unchanged.

We maintain our guidance that our sales in China will grow 3% to 5% local currency in 2023.

Our forecast assumes that the China Chinese currency will be value of approximately 6% in 2023 compared to 2022.

Our boiler business outlook of being down high single digits compared to last year is unchanged.

Our board of their business outlook of being down high single digits compared to last year is unchanged.

As a reminder, 2022 is a difficult comp we.

We entered last year with a large backlog, which we worked down and exited the year with a normalized backlog, partially contributing to our boiler business growth of 28% in 2022.

Our outlook for North America water treatment sales is to grow approximately five 7% for 2023 also has not changed we.

Our outlook for North America water treatment sales is to grow approximately five 7% for 2023 also has not changed.

We projected ourselves in India will grow 50% this year.

We projected our sales in India will grow 50% this year.

Please turn to slide 12.

Again, we're very pleased with our performance in the first nine months of 2023.

In North America residential commercial water heater demand remained strong through the third quarter. The year is lining up to have a normalized split of approximately 52% of volume in the first half of the year at 48% in the back half of the year.

In North America residential commercial water heater demand remained strong through the third quarter. The year's lining up to have a normalized split of approximately 52% of volume in the first half of the year and 48% in the back half of the year.

As we expected North America operating margin was down sequentially in the quarter, but remained strong relative to historical performance at 23, 9%.

As we expected North America operating margin was down sequentially in the quarter, but remains strong relative to historical performance at 23, 9%.

Even as we recognized higher steel cost in the quarter compared to the first half of the year.

Even as we recognized higher steel costs in the quarter compared to the first half of the year.

In China. The team continues to execute very well across our various product lines to a balanced go to market channel strategy.

New product introductions continued growth in commercial water treatment and positive mix led to a 10% operating margin in the quarter.

India continues to outperform the industry we.

We see great potential for our India business as it continues to to deliver growth through new product introductions and premium customer service.

Our focus remains on taking care of our customers as we continue to execute our key strategic objectives.

Our focus remains on taking care of our customers as we continue to execute our key strategic objectives to advance our position as a global water technology leader.

<unk>, our position as a global water technology leader.

With that we conclude our prepared remarks, and we're now available for your questions.

Thank you at this time, we will conduct a question and answer session.

Thank you at this time, we will conduct a question and answer session as a reminder.

As a reminder.

Press Star one on your telephone and wait for your name will be announced.

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To withdraw your question. Please press star one one again, please standby, while we compile the Q&A roster.

Our first question comes from the line of <unk> of.

Our first question comes from the line of the re <unk> of Jefferies. Your line is now open.

Of Jefferies. Your line is now open.

Hi, good morning, and congrats on the quarter.

Thank you.

Well thank you.

So again, a little bit more about North America residential water demand. It obviously came in much stronger than you initially anticipated at the start of the year, what's been the biggest surprise for you as you went from thinking volumes are going to be down.

5% to now up 4% and how does that set you up as we look into 2024.

I think two 5% to now up 4% and how does that set you up as we look into 2024.

Well I would tell you that and we've been talking about it each quarter. Our biggest surprise has been the proactive replacement side of the business.

We thought that would moderate as we came into 2023 and quite frankly, it's Steve. It's stayed strong and continues to be strong and we're very pleased with our number of completions has been positive as well. So you put those two together.

We thought that would moderate as we came into 2023 and quite frankly it stayed it stayed strong and continues to be strong.

And we're very pleased with our number of completions has been positive as well. So you put those those two together.

A surprise yeah.

But.

Along with having strong virtually replaced when you put the three together.

Along with having strong converged replaced when you put the three together.

It's been a good year for water heater demand and we see that continuing into the fourth quarter.

Yes.

And then maybe just staying on that similar type of question I would say North America, North American margins have been stronger than you expected and it looks like price cost has been better than what was that contribution in the quarter and is there anything else outside of higher volumes that we should think about with this year's margin performance and is it a good starting point as we.

And then maybe just staying on that similar type of question I would say North America.

With American margins have been stronger than you expected and it looks like price cost has been better than what was that contribution in the quarter.

Is there anything else outside of higher volumes that we should think about with this year's margin performance and is it a good starting point as we think about 2024.

Think about 2024.

Yes, I mean, when you look at our organic growth for the North America segment. This is Chuck by the way good morning.

The pricing contributed very little to the segment to segment growth.

Yes.

Pricing contributed very little to the segment to segment growth.

We had a little bit of incremental pricing.

Boiler and water treatment side.

Boiler and water treatment side, and a slight headwind on the water heating side, but.

Headwind on the water heating side, but.

Most of the organic growth in North America was contributed to volume.

Is there any onetime items in this year that we should think about or is just a good starting point for as we think about 'twenty 'twenty four.

Is there any one time items in this year that we should think about I was just a good starting point for as we think about 'twenty 'twenty four.

There is nothing significantly nothing.

No theres nothing significantly.

Nothing significant from a one time item.

We are pleased with how the quarter came out from a margin perspective.

Margins remained fairly resilient.

Well congratulation on the quarter and I'll leave it there. Thank you. Thank you. Thanks. Please.

Well congratulation on the quarter and I'll leave it there. Thanks.

Please standby for our next question.

Our next question comes from the line of Nathan Jones of Stifel. Your line is now open.

Good morning, everyone.

Good evening.

I just wanted to follow up on the proactive replacement side of the business.

Oh.

Just wanted to follow up on the proactive replacement side of the business.

If you can give any more color or any thoughts around.

Just say if you can give any more color or any thoughts around.

Why that continues to be strong I mean, I would've I know part of that is typically generated when you have sales of existing times.

Why that continues to be strong I mean, I would've I know part of that is typically generated when you have sales of existing homes.

Obviously higher interest rates the discourages the salary because he's behind that that business has continued to be really strong for you guys.

Obviously higher interest rates <unk> seen high but that business has continued to be really strong for you guys.

Do you think there is something that's structurally changed in that market would you still expect it to go back to a more normal mix or more traditional mix of the business just any more commentary you can give us on why you think that business is and continues to be so strong.

Well you outlined many of the reasons right now certainly people are staying at homes there is higher renovation.

People weren't moving so they are taking different actions.

There is some some anecdotal here that we just have to be careful with.

Really proactively placement has been trending up since about 2019.

Really proactive replacement has been trending up since about 2019.

And so we don't take one year as a trend but were in our <unk>.

Fourth year here and it Hasnt really changed and there is some anecdotal evidence.

Fourth year here and it Hasnt really changed and there's some anecdotal evidence.

There is some generational impact here.

And so where do you look at a maybe a baby boomer with weight to our brakes, maybe the younger generation Gen Z and millennials.

And indicate that they do a bit more proactive work than there.

And indicate that they do a bit more proactive work than their predecessors, but.

Their predecessors, but.

I would take that with a with a grain of salt right now, but it's one trend that we've launched now for.

I would take that with a with a grain of salt right now, but it's one trend that we've launched now for <unk>.

44 <unk>.

<unk> 44 for a number of months and it hasnt changed and it continues to be strong.

A number of months and it hasnt changed and it continues to be strong.

So you put that together is there a generational impact there maybe but we will continue to monitor it but right now as held up surprisingly well now for 416 straight quarters.

So you put that together is there a generational impact there maybe but we will continue to monitor it but right now it's held up surprisingly well now.

For 16 straight quarters.

That would be a nice tailwind if it's a structural change to the industry.

I guess, maybe I would tell you, we think that as well, but we're not ready to say that but again, it's something we watch and the data that we use we have been doing this for a decade plus so it's been a good guidepost for us long term, but again, we will see how it plays out but right now we see the coax.

I guess, maybe I would tell you, we think that as well, but we're not ready to say that but again, it's something we watch and the data that we use we have been doing this for a decade plus so it's been a good guidepost for us long term, but again, we'll see how it plays out but right now we see the pro.

Decided it holding up pretty well.

That's good news I guess second question on.

That's good news I have a second.

Second question on <unk>.

I guess your cost inputs.

You guys had guided to see sequentially lower margins in the second half than the first half and despite the outperformance you still are getting a bit lower margins in the second half than the first half with higher priced steel costs.

Rolling through the P&L in the second half, we would say pretty significant declines in steel costs over the last six odd months before the last week.

Rolling through the P&L in the second half, we did say pretty significant declines in steel costs over the last six odd months before the last week.

Should we expect to see.

Start rolling through the P&L in the first half of 'twenty four.

Should get some nice benefit.

Get to not benefit.

From a price cost standpoint in the first half of 'twenty four.

Yes. This is Chuck.

It rolls in as a benefit.

And a detriment of that goes the other way, but on about a three to four months lag so the.

In a detriment of that goes the other way, but on about a three to four months lag so the.

The references that you had is the prices on the index is still indexes that kind of retreated a bit soft in the last handful of weeks.

The references that you had is the prices on the index is still indexes have kind of retreated a bit soft in the last handful of weeks.

Should kind of come in.

<unk> three to four months, so I would say exiting the year and early into next year is when we would see that benefit.

Great. Thanks for taking my questions.

Thank you please standby for our next question.

Our next question comes from the line of Bryan Blair of Oppenheimer. Your line is now open.

Thank you good morning, everyone solid quarter.

Hey, Bryan Thanks.

To help us think about.

And rest of World segment profitability and your potential there how does the contribution margin on your new China offerings.

Compared to segment average and what's the.

Run rate margin in India, and how does your team thinking about operating leverage there.

Yes, the new products.

By the way, we're pleased with how they've been received initially.

The way, we're pleased with how they've been received initially.

Right now, we're working pretty heavily on promotions and advertising and I think I mentioned on the last call the back half of the year, we'd be likely spending more on advertising and promotions as we get into the back half to make sure. We're driving sales. So the incremental margins on the new products are not high they are lower than the.

Average at this point.

We look forward to improving that over time, but it does blend well with the other core core products that we have and as a bundle and we are going to talk a little bit more about kind of our strategy when we get to our investor day on the six but as a bundle it works very well into our kitchen appliance portfolio matched with core products.

We look forward to improving that over time, but it does blend well with the other core core products that we have and as a bundle and we're going to talk a little bit more about kind of our strategy when we get to our investor day on the six but as a bundle it works very well into our kitchen appliance portfolio matched with core products.

To sell more than one product at one time.

All makes sense.

Alright.

Any.

A quick color you'd offer on your M&A pipeline.

Executing some bolt ons that are.

Pretty down the middle in terms of your water treatment strategy.

And an interesting year with.

Macro uncertainty in the rate environment.

Can you just that overall mosaic I'm just curious how your deal funnel has progressed and how your team is thinking about action ability over the near term.

Our funnel remains active I would say we've seen a lot.

Yes, I mean, our funnel remains active I would say we've seen a lot.

Yes Les.

Less less processes.

Less less processes processes, I would say has slowed a bit for what's in front of us but.

Processes I would say has slowed a bit for what's in front of us but.

Just a reminder that our.

Just a reminder.

Our target.

Our target is not new.

This early to go through a process, but to identify private companies that are not in a process and bring them into the <unk> Smith family, It's similar to what we've done.

This early to go through a process, but to identify private companies that are not in a process and bring them into the <unk> Smith family is similar to what we've done.

Most of the water treatment acquisitions.

The last handful of years and we're pleased to bring water tech in in this quarter.

So it is active less processes, we remain optimistic and we continue to kind of work that target audience.

So it's active less processes, we remain optimistic and we continue to kind of work that target audience.

Understood. Thanks again.

Thank you please standby for our next question.

Yeah.

Our next question comes from the line of Susan Macquarie of Goldman Sachs. Your line is now open.

Thank you good morning, everyone.

Good morning.

To start with I'm not sure if maybe it's our line, but I think you broke up a little bit when you were talking about the previous question on raw materials, and how we should be thinking about steel over the next coming quarters can you, maybe perhaps go back and reiterate some of those key point for us.

I will do that apologies for breaking up that is part of the issue is we seem to be having with the phone. This morning.

I'm trying to speak quite loud and hopefully it's coming through at this point yes.

Very clear right now so I am clear on great great great.

Very clear right now so I'm clear on the great great great.

Nathan asked about kind of the cadence of our cost and the fact that steel was low in the first part of the year kind of ramped up and then we've seen it recede and then now in the last handful of weeks a little more leveling off to a couple of weeks that have gone up a couple of dollars. So.

Yes, Nathan and ask about kind of the cadence of our cost and the fact that steel was low in the first part of the year kind of ramped up and then we've seen it recede and then now in the last handful of weeks a little more leveling off to a couple of weeks that have gone up a couple of dollars. So.

I was just saying that theres really.

I was just saying that there's really.

Three to four month lag in when we see those cost based on tracking the index.

Most of the back half of the year and we kind of knew that on our last time, we did the earnings call.

Is baked in for cost, but as we exited perhaps the end of December and early next year.

We would be seeing the benefit of some of those costs that have come down.

It would be seeing the benefit of some of those costs that have come down.

Okay. That's very helpful. Thank you and then.

Coming up on the conversation earlier as well on thinking of proactive replacement versus.

So the more non discretionary pieces of there can you give us a bit more color, perhaps on how you're defining one versus the other and as you're thinking about that that potential structural shift that's coming through any thoughts on what portion of the volumes today or the demand today is really sort of coming from that.

So the more non discretionary pieces of there can you give us a bit more color, perhaps on how you're defining one versus the other and as youre thinking about that that potential structural shift that's coming through any thoughts on what portion of the volumes today or the demand today is really sort of coming from that.

<unk> replacement relative to the.

I'm, just sort of non discretionary side of it.

Well, let me just start with.

If it's proactive it means the unit is working.

And functioning normally so someone taking action.

When it's not required from an emergency basis, an emergency that thats a replacement market when the user is either leasing or not working so that they wake up that day and thats, an emergency but anything past that proactive is really making a conscious decision to change a working product out and theres a lot of reasons for people do.

When it's not required from an emergency basis, an emergency that thats a replacement market when they use it as either leasing or not working so that would be wake up that day and thats, an emergency but anything past that proactive is really making a conscious decision to change a working product out and theres a lot of reasons for people do.

We've had and we've outlined it before so I'm just had their neighbor headwind leaks radiated proactive others change and their families need more hot water others, just want to move to high efficiency in those type of products. So there is a multitude of reasons why the proactive replacement can happen, but thats, how we separated.

We've had and we've outlined it before so I'm just had their neighbor headwind at least leave they did proactive others change and their families need more hot water others, just want to move to high efficiency in those type of products. So there is a multitude of reasons why the proactive replacement can happen, but thats, how we separated.

Separate that way for decades, now it's been proven out.

Separated that way for decades now it's been proven out.

And again like I said, we keep looking at a number of reasons.

Proactive stays up in again.

Home renovations people senior home high interest rates.

Available in the market there is a platitude of reasons and we just interject at a maybe a generational impact that I would just qualify that thats going to take some time to to work through.

Available in the market there is a platitude of reasons and we just interject at a maybe a generational impact that I would just qualify that that's going to take some time to work through.

But it's been consistent now and as we go back in our debt like I said it goes back to 2019. This is not a new phenomenon.

It's one that continues to to kind of proven itself out each quarter end and again it proved it out in Q3, and we see that continuing for some period of time, we're going to continue to look at and try to understand it but right now that's where we stand that's kind of our view when we look at it in the short term has continued.

It's one that continues to to kind of prove itself out each quarter end and again it proved it out in Q3, and we see that continuing for some period of time, we're going to continue to look at and try to understand it but right now that's where we stand thats kind of our view when we look at it in the short term has continued.

Yes.

And I think I think you ask a bit about kind of quantification.

And I think I think you asked a bit about kind of quantification.

Replacement is 80% to 85% of our vault.

Replacement is 80% to 85% of our industry.

Industry volumes and the proactive replacement had been in the 20% to 20% range, 20% to 25% range and its edged above 30% just to give you a bit of a magnitude. So it's still predominantly failed units, but that's edged up a bit.

Industry volumes and the proactive replacement had been in the 20% to 20% range, 20%, 25% range and its edged above 30% just to.

To give you a bit of a magnitude. So it's still predominantly failed units, but that's edged up a bit.

Okay. That's very helpful color. Thank you good luck with everything.

Thank you.

Please standby for our next question.

Thank you please standby for our next question.

Our next question comes from the line of Andy Kaplowitz of Citigroup. Your line is now open.

Hey, good morning, everyone.

Good morning, Good morning, good morning, Andy.

Good morning, good morning, Andy.

Kevin and Chuck can you give us more color into the components of China and growth in terms of the strength in commercial water treatment and the new products growth, you're seeing as well as the mix benefit Youre getting and then how do you think about the durability of that growth going into 'twenty four.

Kevin and Chuck can you give us more color into the components of China growth in terms of the strength in commercial water treatment and the new products growth, you're seeing as well as the mixed benefit Youre getting and then how do you think about the durability of that growth going into 2004.

Well, let me just step back too.

Well.

We did step back to Hal.

How we go to market and I think it will help.

How we go to market.

I think it will help.

Answer is some of those questions. If you look at US we've been a premium consumer brand known for high quality innovation for 25 plus years there.

And then you take a look at how diversified our channel or channels or we have our own stores. When we refer to specialty stores. We talked about we have national retail we have regional retail building.

When you take a look at how diversified our channel or channels or we have our own stores. When we refer to specialty stores. We talked about we have national retail we have regional retail we are building.

Building material customers E. Commerce. So we have a very diverse channel to go to market on top of that our product line continues to be diversified.

Building material customers E. Commerce. So we have a very diverse channel to go to market on.

On top of that our product line continues to be diversified.

We talked about the residential quite a bit commercial.

Talk about the residential quite a bit commercial.

The replacement market in China on water heaters is now about 60%.

And there is an area that continues to grow and thats, our consumable on the water treatment side.

So when you step back and talk about the growth I think we have a competitive advantage in this market were all.

So when you step back you talked about the growth I think we have a competitive advantage in this market.

One of those by themselves does it.

One of those by themself doesn't.

Make success, we can put all those together.

It makes success, we can put all four of those together.

And they gave us the ability to maximize our potential in the market.

And they give us the ability to maximize our potential in the market.

And really <unk>.

Speaker 1: all participants are in a listen-only mode.

Has the ability to kind of overcome some of these difficult times that we've had and it's been great to see our China team executed with last couple of years quite frankly, we're growing the business, we're keeping our margins theyre not great.

The ability to kind of overcome some of these difficult times that we've had and it's been great to see our China team executed with last couple of years quite frankly, we're growing the business. We're keeping our margins are not great, but they are in double digits, and we're managing and probably the most difficult market that we've been in the 25 years, we've been there so.

There's some anecdotal evidence.

Speaker 1: After the speaker's presentation, there will be a question and answer session.

Theres some generational impact here.

And so whether you look at a maybe a baby boomer would wait till our brakes, maybe the younger generation Gen Z and millennials.

Speaker 1: To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star one one again.

In double digits, and we're managing and probably the most difficult market that we've been in the 25 years, we've been there so when I look at it.

Indicate that they do a bit more proactive work then there.

Predecessor, but.

When I look at it.

We have much more upside than downside and as I've said on many calls before we just need a little help from the economy, but until that happens our strategy and our foundation that we built allows us to participate and be successful and a more challenging market.

I would take that with a with a grain of salt right now, but it's one trend that we've launched now for.

Speaker 1: please be advised that today's conference is being recorded.

Speaker 1: I would now like to hand the call over to our first speaker for today, Helen Gerholt. Your line is now open.

44 for a number of months.

It Hasnt changed and it continues to be strong.

Speaker 2: Good morning and thank you everyone for your patience while we dealt with our technical difficulties.

So you put that together is there a generational impact there maybe but we will continue to monitor it but right now it's held up surprisingly well now for 16 straight quarters.

That's very helpful. And then maybe shifting back to North America commercial water heaters.

Speaker 2: Welcome to our A.L. Smith's third quarter conference call. I'm Helen Gerhold, Vice President, Investor Relations Financial Planning and Analysis.

Kept up pretty impressive strength, maybe the expected duration of the strength of you still seem reasonably good quoting activity.

Speaker 2: Joining me today are Kevin Wheeler, Chairman and Chief Executive Officer, and Chuck Lauber, Chief Financial Officer.

That would be a nice tailwind if it's a structural change to the industry.

Any sort of conversations you're having given the rise in rates lately.

Any sort of conversations youre, having given the rise in rates lately.

I guess my second I would tell you, we think that as well, but we're not ready to say that but again, it's something we watch and the data that we use we have been doing this for a decade plus so it's been a good guidepost for us long term, but again, we'll see how it plays out but right now we see.

Speaker 2: In order to provide improved transparency into our operating results of our business, we provided non-GAAP measures. Free cash flow is defined as cash from operations less capital expenditures.

Any color would be helpful.

Yes, I would tell you that the market has been up and I'm going to separate this from commercial water heaters and commercial boilers commercial water heaters. The strength beer has been on the as I mentioned, the greater than 55 gallon that represents really about 85% of the growth So and Thats, a big replacement market for us and Thats.

Yes, I would tell you that the market has been up and down.

I'm going to separate this from commercial water heaters, and commercial boilers and commercial water heaters. The strength beer has been on the as I mentioned that greater than 55 gallon that represents really about 85% of the growth So and thats, a big replacement market for us and that's been steady.

Speaker 2: Adjusted earnings, adjusted earnings per share, adjusted segment earnings, and adjusted corporate expenses, F clues the impact of impairment charges, non-operating, non-hash pension income and expenses, as well as legal judgment income and terminated acquisition related expenses. We also provide-

The proactive side of it holding up pretty well.

Stay.

That's good news.

On the commercial boiler side, we talked about being down.

Second question on <unk>.

I guess your cost inputs.

That has slowed a bit and particularly when you get.

You guys had guided to seeing sequentially lower margins in the second half than the first half and despite the outperformance you still are getting a bit lower margins in the second half than the first half with higher priced steel costs.

In the 1 million Btu and below and some residential so we've seen some slowing activity but.

Speaker 2: Reconciliations from GAAP measures to non- GAAP measures are provided in the appendix at the end of this presentation and on our website.

Not detrimental slow, but just slower than we've seen in the past and you're still going to work through I, just think that the boiler side of the business. The commercial side has just been.

Rolling through the P&L in the second half, we did say pretty significant declines in steel costs over the last six odd months before the last week.

Speaker 2: A friendly reminder that some of our comments and answers during this conference call will be forward-looking statements that are subject to risk that could cause actual results to be materially different.

Is going through somewhat of a destocking that we saw in water heaters back last year, but overall the market is still steady, but a bit slower.

Speaker 2: Those risks include matters that we described in this morning's press release, among others.

Should we expect to see that.

Start rolling.

Now in the first half of 'twenty four.

I appreciate it.

Speaker 2: Also, as a courtesy to those in the question queue, please limit yourself to one question and one follow-up per turn. If you have multiple questions, please rejoin the queue.

I appreciate it.

You should get to not benefit.

Thank you for your question. Please standby for our next question.

From a price cost standpoint in the first half of 'twenty four.

Okay.

Yeah.

Okay.

Sure.

Rob.

Speaker 2: We will be using slides as we move through today's call. You can access them on our website at investor.aosmith.com. I will now turn the call over to Kevin to begin our prepared remarks. Please turn to the next slide.

Yeah.

Good morning.

Yeah.

So for.

For the right opportunity.

As the price.

Yes.

Thanks.

Our next question comes from the line of Matt Summerville of D.

Our next question comes from the line of Matt Summerville of D. A.

Yeah.

Speaker 3: Thank you, Helen. And good morning, everyone. I'm on slide four and we'll review a few of our third quarter highlights.

Okay.

Sure.

Davidson and company. Your line is now open.

Okay.

Right.

So.

Can you guys hear me.

Okay.

Speaker 3: I'm very pleased with the execution of our team across all of our businesses to deliver a strong third quarter EPS of 90 cents.

We can.

Perhaps.

Is it clear because every answer.

Yeah.

Is it clear because every answer.

Yes.

Great. Thanks for taking my questions.

Yes.

Really garbled on my end and what's happening to at least one other sell side counterparts that I'm aware of just FYI.

Speaker 3: The performance of our North America sediment was particularly strong. We saw resilient demand for our residential water heaters, as well as year-over-year improvement in our operating margin. We reliably have a whole

Please standby for our next question.

The holiday as far as Mike Yeah, Yeah no.

I apologize as far as my yes, yes no.

I appreciate that.

Speaker 3: China's new products drove you over your improvement as newly introduced kitchen appliance products were well received by the market.

If this has already been asked I completely apologize, but channel inventories can you give us kind of what youre thinking as of yearend assessment channel inventories will look like in North America, and Rosewater meters commercial water heaters boilers and treatment and how that may inform you as.

If this has already been asked alright completely apologize.

Our next question comes from the line of Bryan Blair of Op.

Panel inventories can you give us kind of what youre thinking as of year end. The Sussman channel inventories will look like in North America, and Rosewater meters commercial water heaters boilers and treatment and how that may inform you as to the volume outlook for each respectively higher level.

Your line is now open.

Speaker 3: Innovative new products combined with our strong brand drove growth despite a continued challenging economic backdrop

Thank you good morning, everyone solid quarter.

Okay.

To help us think about.

Speaker 3: India entered the year introducing a number of new products in both the water heating and water treatment categories. And that's delivered year to date sales growth of 17% in local currency.

And rest of World segment profitability and your potential there how does the contribution margin on your new China offerings.

To the volume outlook.

For each respectively level for next year.

For next year.

Tear to segment average and then what's the.

Yes. This is Chuck so hopefully you can hear me clearly.

Speaker 3: We also acquired WaterTech, a high-quality Arizona-based Water Treatment Company. This act was issued in line with our strategic growth aspirations to expand water treatment across the U.S. We welcome the WaterTech team to the AOS Smith family.

Run rate margin in India, and how does your team thinking about operating leverage there.

Yes, I can.

Hey, good good all the.

Okay.

I'll just cover them all they're all expected to exit the year pretty normal in fact, we we feel we're in a normal position really on water heating boilers and water treatment in the U S. We probably have some inventory from an export perspective that we're watching closely to see if on the water treatment side, we ended up.

Okay.

We're pleased with this development.

Additionally.

Thank you Brian.

Okay.

Speaker 3: North America water heater sales increased 13% in the third quarter as a result of continued strength in residential water heater demand.

Okay.

I'll now turn the call back.

Thank you Tamara.

It does.

Thank you Dan.

Speaker 3: As you may recall, sales in the third quarter of last year were negatively impacted by channel inventory desocking of residential water years, primarily in the wholesale channel.

Thank you Brian.

On a normal position right now we project, we will but for the.

On a normal position right now we project, we will but for the for the for the categories that you mentioned.

Yes.

Got it.

Okay.

For the categories that you mentioned.

Right.

Okay.

Speaker 3: are North America boiler sales to client 18% of the third quarter against a difficult cop in 2022.

We are normalized today in the U S. We feel and we're <unk>.

We are normalized today in the U S. We feel and we're.

Yes.

Okay.

Expecting to exit on a normalized basis on the boiler side. We think we're through we really do think we're through that inventory channel buildup on the smaller commercial and on the residential we'll watch that when we get into the colder weather and just a reminder, last year, we had some really tough comps to overcome so.

Got it.

Speaker 3: In the third quarter last year, we worked down our backlog after making significant production and supply chain improvements.

Yes.

Thank you Kurt.

We're going to talk about.

Please go ahead.

Okay.

Speaker 3: We believe channel inventories are approaching normal levels.

Thanks.

Speaker 3: Demand for our commercial high efficiency, condensing boilers, particularly our health cat crest boilers, remain steady in the quarter.

Okay.

Got it.

Last year, we were 28% growth year over year and that's.

Last year, we were 28% growth year over year end.

All makes sense.

Speaker 3: North America water treatment sales increased 5% in the third quarter of 2023, primarily driven by pricing and e-commerce sales. The quarter also benefited from pricing-related margin improvements.

Hi.

Reverse a bit as we as we had more normalized volume normalized inventory now, but benefited a bit from working down backlog last year.

That's reversed a bit as we as we had more normalized volume normalized inventory now, but benefited a bit from working down backlog last year.

Quick color you'd offer on your M&A pipeline.

We've executed some bolt ons that are.

Pretty down the middle in terms of your water treatment strategy, it's been an interesting year with.

Okay.

Speaker 3: China's third quarter sales increased 9% local currency compared to the third quarter of 2022. Primarily due to our newly introduced dishwasher and steam oven products.

Thank you and then just as a follow up and again my apologies if you answered this already.

Macro uncertainty in the rate environment.

Can you just that overall mosaic just curious how your deal funnel has progressed and how your team is thinking about action ability over the near term.

You've obviously kind of benefiting from this product cycle, if you will in China as it relates to <unk>.

You've obviously kind of benefiting from this product cycle. If you will in China as it relates to your kitchen related offering when did those products launch and how should we think about the duration of that cycle on the top line just in the context of the macro environment in China.

Speaker 3: The quarter also benefited from higher commercial water treatment sales and positive mix.

Okay.

Zero.

Your kitchen related offering when did those products launch and how should we think about the duration of that cycle on the top line just in the context of the macro environment in China. Thank you.

Thanks for the time.

Hey, Greg.

Yes.

Speaker 3: we continue to introduce new innovative products in water filtration.

Right.

Okay.

With regard to the.

Absolutely.

Speaker 3: Police to highly to launch of our new Smartflow reverse osmosis filtration system. Under both are AOS Smith and Aquastonogram.

Got it.

From the virus.

Thank you.

As a reminder.

Well, let me take the.

Well, let me take the the newer products the dishwasher and steam ovens, just launched last quarter basically had a soft launch may be a little bit before then but they are really due to the market.

Okay.

Newer products, the dishwasher and steam ovens, just launched last quarter basically had a soft launch maybe a little bit before then but they are really due to the market.

Okay.

Thank you.

Okay.

Speaker 3: The product takes up less space and features an easy filter replacement process.

Okay.

Good morning.

Speaker 3: Our SmartFlow technology features a multi-stage filtration process that removes up to 99.9% of non-contaminants, including PFAS, arsenic, microplastics, and lead.

Well, thank you Mark.

Got it.

That will again pick up as we get into 2024, we look to add a few more skus, but again.

That will again pick up as we get into 2024, we look to add a few more skus, but again, while the limited operating there.

Great.

Good luck.

Thanks.

For the quarter.

Okay.

For the quarter.

While the limited operating there.

Okay.

The thing we like about both those categories.

Yes.

The thing we like about both those categories is that they're both emerging categories in China. The penetration is very low on both of them and we like and as a reminder, when we bring products to market. We only bring products that have unique features and benefits to the consumer.

Speaker 3: And also features are innovative and exclusive side stream diverse Earth's most as technology. Making this one of the most water efficient systems in the market.

Okay.

Is that they're both emerging categories in China. The penetration is very low on both of them and we like.

Okay.

Understood. Thanks again.

Speaker 3: This is one example of our commitment to bringing an innovative water heating and water treatment treating products to the global market.

Yes.

Thank you please standby for our next question.

As a reminder, when we bring products to market, we only bring products that have unique features and benefits to the consumer. These two products have no difference they had revenue unique.

Speaker 3: On November 6th, at our Investor Day, each of our businesses will highlight new products that are driving results in the marketplace.

These two products have no difference they had revenue unique.

Benefits and features that the Chinese consumer we will see and recognize so at the very beginning it ties very well into our bathroom kitchen strategy. We had a very nice launch and we look for it to continue to grow and more importantly, we look for the category to grow as those.

Our next question comes from the line of Susan Macquarie of Goldman Sachs. Your line is now open.

Speaker 3: I'll now turn the call over to Chuck who will provide more details on our third quarter performance.

Speaker 3: Thank you, Kevin, and good morning, everyone. I'm on slide 7.

Thank you good morning, everyone.

Good morning.

Speaker 4: Third-corder sales in the North America segment were $710 million dollars, a 9% increase over the same period last year. The increase was primarily driven by a higher residential water-heated volumes that were partially offset by lower boiler-vac-

Maybe I'll start with I'm not sure if maybe it's our line, but I think you broke up a little bit when you were talking about the previous question on raw materials, and how we should be thinking about steel over the next coming quarters can you just maybe perhaps go back and reiterate some of those key points for us.

Type of <unk>.

Those type of.

Clients should become more mainstream to the Chinese consumer.

Appliance should become more mainstream to the Chinese consumer.

Got it thank you guys.

Speaker 4: North America's segment earnings of $177 million increased 28% compared with the adjusted segment earnings in the third quarter of 2022.

Got it thank you guys.

Thank you please standby for our last question.

Okay.

Thank you please standby for our last question.

Thank you.

Okay.

One of the initiatives.

Thanks, Brian.

Our last question comes from the line of Damien <unk> of UBS. Your line is now open.

Speaker 4: Operating margin of 23.9% improved 350 basis points compared to adjusted segment operating margin in third quarter of last year.

Okay.

Yes.

Very clear right now so it's all good.

Great.

Hey, good morning, everyone.

Yes.

Good afternoon.

Good morning, Good morning morning can you hear us.

Speaker 4: The higher segment earnings and operating margins were primarily due to higher residential water heater volumes. And lower steel costs partially offset by.

Good morning, Good morning, I mean, you hear us.

Because if you look at that.

Okay.

I can hear you guys loud and clear now, but I do echo Matt's comment I literally haven't been able to understand the lift of anything you said since we started the Q&A I think what's going on is like you know.

I can hear you guys loud and clear now, but I do echo Matt's comment I literally haven't been able to understand a lift of anything you said since we started the Q&A I think what's going on is like you know the analyst had asked a question can hear you, but it's very kind of garbled for everybody else. So I do apologize for touching on Brian you've already.

Okay.

Part of this year.

Okay.

So Atlanta.

Good morning.

Speaker 4: segment pricing was relatively flat in the quarter compared to last year.

Okay.

The analyst that asked a question can hear you, but it's very kind of garbled for everybody else. So I do apologize for touching on Brian you've already covered here, but I wanted to ask about the proactive replacement.

Thanks.

Speaker 4: Moving on to slide 8, rest of the world segment sales of $233 million increased 1% year over year and 6% constant currency basis.

Okay great.

Got it.

Sure.

Got it.

The bulk of the bank.

To cover here, but I wanted to ask about the proactive replacement.

Thank you for that matter.

A follow up or.

Okay.

A follow up.

Speaker 4: currency translation unfavorably impacted segment sales by approximately 11 million dollars.

Paul.

Sure.

Just trying to think if like to what extent, maybe IR array.

It has been.

Just trying to think if like to what extent, maybe IR array.

Thats correct.

Okay.

And some of these efficiency credits are factoring in.

Speaker 4: sales of newly introduced kitchen appliance products, higher commercial water treatment sales, and a positive mix in China drove the sales increase in the quarter.

And some of these efficiency credits are factoring in.

Sure.

Okay.

So I'm curious if you're actually seeing any notable mix shift mix shifts on the efficiency scale.

Some of those costs.

I'm curious if you're actually seeing any notable mix shift mix shifts on the efficiency scale.

Okay. That's very helpful. Thank you and then.

And that proactive replacement or not really.

In that proactive replacement or not really.

Following up on the conversation earlier as well on thinking of proactive replacement verses.

Speaker 4: India sales growth 13% in local currency in the third quarter compared the last year.

Yes, I mean, we've seen nice growth in the heat pump category, that's up 25% this year, but thats a small portion of the total industry is less than 2%.

Yes, I mean, we've seen nice growth in the heat pump category, that's up 25% this year, but thats a small portion of the total industry, it's less than 2%.

Speaker 4: Rest of the world's segment earnings at $23 million increased 6% compared to SIGMEN earnings in the third quarter of 2022. SIGMEN operating margins was 9.9%. An increase of 40 basis points compared to the same period last year, primarily as a result of higher sales of new products and positive mix.

The more non discretionary pieces of there can you give a bit more color, perhaps on how you're defining one versus the other and as you're thinking about that the potential structural shift that's coming through.

I would say.

Within proactive replacement in the <unk>. It's all it's all very positive going forward, but the actual impact that we're seeing within proactive replacement. It's very we think it's very small we don't think that that is driving a great deal of it. We believe it will help over time, we believe that it's great to have the credits there.

We've been proactive replacement in the IRR. It's all it's all very positive going forward, but the actual impact that we're seeing within proactive replacement. It's very we think it's very small we don't think that that is driving a great deal of it. We believe it will help over time, we believe that it's great to have the <unk>.

Thoughts on what portion of the volumes today or the demand today is really sort of the coming from that proactive replacement relative to the.

The sort of non discretionary side of it.

Speaker 4: We generated pre-cash flow of $396 billion in the first nine months of 2023, or the two times the pre-cash flow generated in the same period last year. This was largely due to higher earnings and lower working capital cash outweights, primarily related to lower inventory levels and lower 2022 and Santa payments paid in 2020.

Okay.

Yes.

There, but currently driving proactive replacement, but it just does not seem to be moving the needle on a great honor.

It's there, but currently driving proactive replacement, but it just does not seem to be moving the needle on a great on a large scale.

Okay.

Andrew.

Please go ahead.

A large scale.

Okay.

Proactive replacement, though I mean I think.

Proactive replacement, though I mean, I think Eaton.

In the quarter could you David.

Kevin had said a little earlier, it's been going on about four years now since 2019, where we've seen a pretty good resilience to proactive replacement.

Good morning.

Glen.

Thank you.

Okay.

Speaker 4: Our cash balance total $342 million at the end of September , and our net cash position was $212 million. Our leverage ratio was 6.4% as measured by total debt to total capital.

Okay.

Great.

Thank you.

And we measure it we measure it each quarter.

We measure it we measure it each quarter.

Okay.

As anticipated.

Year over year on a quarterly average and it's it's kind of hung in there at a rate of around 30% of replacement business.

Year over year on a quarterly average and it's kind of hung in there at a rate of around 30%.

Okay.

Tom Please.

Replacement business.

Speaker 4: Our free cash flow and solid balance sheet enable us to focus on capital allocation priorities and return of cash to shareholders. Earlier this month, our board approved a 7% increase to our quarterly dividend to $0.32 per share.

Okay.

Thank you Steve.

Okay, Great that's helpful.

Okay.

Okay, Great that's helpful.

Keith.

Thanks.

And <unk>.

And.

Okay.

Just having seen steel prices move lower since we're or we started earlier in the year.

Thank you.

Got it.

Okay.

How are you thinking about the next.

Okay.

How are you thinking about the next.

Thanks, Matt.

Potential price cost in pump impact from that just realizing that you do have some floating.

Speaker 4: We repurchase 2.4 million shares of common stock in the first nine months of 2023 for a total of $161 million. We expect to repurchase $300 million of our shares for the full year, 2023. why why should we keep seeing this $120 million at our

Potential price cost in pump impact from that just realizing that you do have some floating.

Yes.

Okay.

Price, but also index price.

Yeah.

Thank you.

But also index price.

Okay.

Yes.

Yeah price cost index.

Okay.

<unk> cost index.

Thanks Keith.

Okay.

I'll talk a little bit about steel because I don't think everybody kind of heard my answer on steel.

Well I'll talk a little bit about steel because I don't think everybody kind of heard my answer on steel.

Okay.

Speaker 4: In addition to returning capital to shareholders, we continue to see opportunities for organic growth through innovation and new product development across all of our product lines and geographies.

Okay.

Thank you.

We started the year with steel and the nine I'll call. It cold rolled is a metric index 950, it rolled up to <unk> hundred maybe $14 50, and then it came back down to 950 and as you track the indexes, we've seen kind of the index.

We started the year with steel and the nine I'll call. It cold rolled is a metric index 950, <unk> rolled up to <unk> hundred maybe $14 50, and then it came back down to 950 and as you track the indexes, we've seen kind of the index.

Okay.

Got it.

Speaker 4: Strength of our balance sheet also allows us to pursue strategic acquisitions along with organic growth.

Within that group.

Okay.

Yes.

Speaker 4: Please turn to slide 11 and our revised 2023 earnings guidance and outlook.

Understood.

Good morning, guys.

We see the index and our cost basis on a three to four month lag.

We see the index and our cost basis on a three to four month lag. So as we exited the year and think about kind of going into next year.

Okay.

Speaker 4: We have increased our 2023 outlook with an expected adjusted earnings per share range of $3.70 to $3.80 per share.

This quarter.

So as we exited the year and think about kind of going into next year, we would expect to be back back down to steel costs that have rotated kind of through the year back down to that point, where we entered the year.

Okay.

Thank you.

Okay.

We would expect to be back back down to steel costs.

Okay.

Good morning.

Rotated kind of through the year back down to that point, where we entered the year.

Speaker 4: The midpoint of our adjusted earnings per share range represents an increase of 19% compared with 2022 adjusted APS.

Thank you Tom.

Good afternoon.

Okay.

In our last call we would have seen most of the rest of 2023, and we called out for steel to be 20% higher back half on half.

We would have in our last call. We would have seen most of the rest of 2023, and we called out for steel to be 20% higher back half on half.

Okay.

Speaker 4: Our outlook is based on a number of key assumptions, which include. A stable supply chain with limited disruption.

Okay.

That's kind of still kind of hanging true slightly better than that but still rounded to that number.

Okay.

That's kind of still kind of hangs true slightly better than that but still rounded to that number so.

Yes.

Speaker 4: We have increased our North America full-year margin guidance to be approximately 25% based on our full-year outlook on volumes and price cost relations.

Great.

Good morning.

That's correct.

So we look.

About price cost relationship related to input cost.

30%.

Okay.

Most other costs remained relatively flat we have seen some increases in input costs here and there for specialty components, but that benefit coming back down would be kind of exiting the year and into next year.

Thanks Bill.

Speaker 4: We forecast that our Q4 material costs will be similar to our Q3 material costs.

Okay.

Okay. That's very helpful color. Thank you good luck with everything.

Speaker 4: Our rest of the world, margin guidance at the approximately 10% remains unchanged.

Okay. Thank you.

Thank you please standby for our next question.

Speaker 4: We expect to generate strong pre-cash flow of between $575 million and $600 million.

Yeah.

Okay got it thanks, a lot for the color best of luck.

Speaker 4: For the year cap X should be approximately $65 million.

Thank you. This concludes the question and answer session I.

Thank you. This concludes the question and answer session.

Speaker 4: corporate and other expenses are expected to be approximately $60 million.

I would now like to turn the call back over to Helen Guard Holt for closing remarks.

Our next question comes from the line of Andy Kaplowitz of Citigroup. Your line is now open.

Speaker 4: Effect to tax rate is estimated to be approximately 24%.

Thank you for joining us today and again my apologies for the audio issues that we've had please let me conclude by reminding you that our global a O Smith's team.

Thank you for joining us today and again my apologies for the audio issues that we've had.

Hey, good morning, everyone.

Speaker 4: And with the expectation to repurchase approximately 300 million dollars of shares of our stock. The resulting average outstanding diluted shares is expected to be 151Million. At the end of 2023.

Okay.

Good morning, Kevin and Chuck can you give us more color into the components of China growth in terms of the strength in commercial water treatment and the new products growth, you're seeing as well as the mixed benefit Youre getting and then how do you think about the durability of that growth going into 'twenty four.

Let me conclude by reminding you that our global a O Smith's team delivered strong performance in the third quarter. We look forward to updating you on our progress in the quarters to come please mark your calendars to join US our presentations at three conferences this quarter.

<unk> strong performance in the third quarter, we look forward to updating you on our progress in the quarters to come please mark your calendars to join our presentations at three conferences. This quarter Baird on November seven UBS on November 29, and Oppenheimer on December 13, I'd also like to remind you that we will host an investor day.

Speaker 4: We'll now turn the call back over to Kevin. We'll provide more color on our key markets. Top line growth outlook and segment expectations for 2023, staying on slide 11. Kevin?

Okay.

Third on November 7th UBS on November 29, and Oppenheimer on December 13th I'd also like to remind you that we will host an investor day on Monday November 6th and Chicago, We look forward to sharing and industrial review of our company strategy key initiatives and growth drivers.

Okay.

Please go to the market.

Got it thank you.

Okay.

Speaker 3: Thank you, Chuck. We have narrowed our 2023 sales outlook to grow approximately 2% compared to 2022, which was the high end of our previous guidance. Our outlook includes the following assumptions.

On Monday November 6th and Chicago, We look forward to sharing an industrial view of our company strategy key initiatives and growth drivers. Thank you and enjoy the rest of your day.

Okay.

<unk>.

Wonderful.

All of it.

Sure Sir.

You and enjoy the rest of your day.

Okay.

Speaker 3: Regents to water heater orders remain strong throughout October . Therefore, we project 2023 residential water heater and industry binds will increase approximately 4% compared to last year.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

Sure.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

Okay.

It's Kevin.

Bruce.

Speaker 3: The Continual Monitor Proactive Replacement and New Housing Completions, both of which remain favourable.

Mark.

Okay.

Thank you.

Alright.

Okay.

Speaker 3: Demand for commercial electric water here greater than 50 by gallon continue to be robust. Our guidance for commercial water heater industry volumes to increase mid teens compared to 2022 is on chain.

Okay.

Commercial.

Thanks to the market.

Thank you.

Okay.

Thanks, Mike.

Cool.

Speaker 3: We maintain our guidance that our sales in China will grow 3 to 5% local currency in 2023.

Alright.

Yes.

Okay.

This is mark.

Speaker 3: Our forecast assumes that the Chinese currency will devalue approximately 6% in 2023 compared to 2022.

Okay.

So.

Thank you.

Okay.

Speaker 3: Our broader business outlook of being down high single digits compared to last year is unchanged. As a reminder, 2022 is...

Thank you Patricia.

Okay.

Yes.

Okay.

Speaker 3: We entered last year with a large back walk, which we worked down and exited the year with a normalized back walk, partially contributing to our boiler business growth of 28% and 2020.

Okay.

Thanks for taking the question.

Okay.

The gross margin.

Yes.

Okay.

Speaker 3: Our outlook for North America water treatment sales is to grow approximately 5 to 7% for 2023. Also has not changed.

Yes.

Thank you.

Okay.

So.

Alright.

Speaker 3: We project ourselves in India, we'll grow 15% this year.

Okay.

Thanks.

Okay.

Thank you.

Okay.

Speaker 3: We're very pleased with our performance in the first nine months of 2023.

Good luck.

Okay.

Goodbye.

Speaker 3: In North America, residents who commercial water heater demand remain strong through the recorder. The year is lining up to have a normalized foot of a parking near 52% of volume in the first half of the year and 48% in the back half of the year.

Thanks, guys.

Yes.

Martin.

That's very helpful. And then maybe shifting back to North America commercial water heaters, you know ive kept up pretty impressive strength.

Maybe the expected duration of that strength of you still seem reasonably good quoting activity and any sort of conversations you're having given the rise in rates lately any color would be helpful.

Speaker 3: As we expected, North America operating margin was down to the country in the quarter, but we made strong relative to historical performance at 23.9%. Even as we recognized higher steel costs in the quarter, compared to the first half of the year.

Okay.

Speaker 3: China's team continues to execute very well across our various product lines through a balanced go-to market channel strategy.

Correct.

Okay.

Speaker 3: Due product introductions, continued growth in commercial water treatment, and positive mix led to a 10% operating margin in the quarter.

Okay.

Got it.

Thanks Bernard.

Yes.

Okay.

Speaker 3: India continues to outperform the industry. We see great potential for our India business as it continues to deliver growth through new product introductions and premium customer service.

No.

Thank you Bob.

Okay.

Great.

Elisa.

Sure.

Please proceed.

Speaker 3: Our focus remains on taking care of our customers. As we continue to execute our key strategic objectives, to advance our position as a global water technology leader.

Okay.

Please go.

Okay.

Speaker 3: With that, we conclude our prepared remarks and we are now available to request.

And just a quick question.

Thanks, Bob.

Patrick last year.

Thank you.

Speaker 1: Thank you. At this time, we will conduct the question and answer session.

I appreciate it.

Speaker 1: As a reminder, you will need to press star 11 on your telephone and wait for your name to be announced.

Thank you for your question. Please standby for our next question.

Okay.

Speaker 1: To withdraw your questions, please press star 11 again. Please stand by while we compile the Q&A Roth.

Speaker 1: Our first question comes from the line of the re-broditsky objectory. Your line is now open.

Our next question comes from the line of Matt Summerville of D. A Davidson and company. Your line is now open.

Speaker 5: Hi, good morning and congrats on the quarter.

Speaker 5: Just thinking a little bit more about North America residential water demand, it obviously came in much stronger than you initially anticipated at the start of the year. What's been the biggest surprise for you as you went from thinking of all of you were going to be down, I think 2 to 5% to now up 4%. And how did that tell you up as we look into 2024?

Can you guys hear me okay.

Okay.

Is it clear because every answer is.

Really garbled on my end and what's happening to at least one other sell side counterparts that I'm aware of just FYI.

Okay.

As far as my yes.

Yes.

Speaker 3: Well, I'll tell you, and we've been talking about it. Each quarter, a bigger surprise has been the proactive equation side of the business. That that

I appreciate that.

If this has already been asked I completely apologize, but channel inventories can you give us kind of what you're thinking as of year end assessment channel inventories will look like in North America, and Rosewater meters commercial water heaters boilers and treatment and how that may inform you as to.

Speaker 3: We thought that would moderate as we came into 2023 and by frankly, it stayed strong and continues to be strong.

Speaker 3: And we're very pleased with our number of completions. That's been positive as well. So you put those two together, a surprise, yeah. But along with having that strong emergency replacement, you put the three together and...

The volume outlook for each respectively.

For next year.

Okay.

The completed.

Got it.

Speaker 3: It's been a good year for water heater command, and we see that continue into the fourth quarter.

Yes, I can.

Okay.

Zero.

Speaker 5: And maybe just staying on that similar type of question, obviously North America margins have been stronger than you expected. It looks like price cost has been better. What was that contribution in the quarter? Is there anything else outside of higher volumes that we should think about with this year's margin performance? And is it a good starting point as we think about 2024?

Got it.

Okay.

100 <unk>.

Keep it up.

Okay.

Thanks Ross.

Consumer inquiry.

Perfect.

Gotcha.

Great.

Okay.

Right.

Go ahead.

Thank you Matt.

Speaker 4: Yeah, I mean, when you look at our organic growth for the North America segment, this is checked by the way, good morning. It's this pricing contributed very little to segment to segment growth. We had a little bit of incremental pricing on the boiler and water treatment side, and a slight headwind on the water eating side, but most of the organic growth in North America was contributed to volume.

Thank you.

Okay.

Thank you.

Okay.

Yes.

Good morning.

Okay.

We think we're through that.

And on the residential.

Sure.

Thank you Ron.

Perfect.

Almost zero.

Okay.

Good morning.

Thank you.

Speaker 4: Is there any one-time items in this year that we should think about or is this a good starting point for as we think about 2024? There's nothing significant from a one-time item. We are pleased with how the quarter came out from a margin perspective. It's been margins remained fairly resilient.

Maybe.

From a market decline of closing in on the corporate line.

Yes.

Well the backlog last year.

Thank you and then just as a follow up and again my apologies if you answered this already.

You've obviously been benefiting from this product cycle, if you will in China as it relates to <unk>.

Speaker 1: Well, congratulations on the quarter, and I'll leave it there. Thanks. Thank you. Thanks. We'll be right back for our next question.

Your kitchen related offering when did those products launch and how should we think about the duration of that cycle on the top line just in the context of the macro environment in China. Thank you.

Speaker 1: Our next question comes from the line of Nathan Jones of Cycle. Your line is now open. Good morning, everybody.

Okay.

Thanks.

Speaker 6: I just want to follow up on the proactive replacement side of the business and just say if you can give any more color or any thoughts around why that continues to be so strong. I mean I would have I know part of that is

Yes.

Okay.

Yes.

Please proceed.

Yeah.

Yes.

Thank you.

Speaker 6: Typically generated when you have thousands existing times.

Good morning.

Okay.

Speaker 6: Obviously high interest rates, the discourages, the sales, of existing homes, but that business has continued to be really strong for you guys.

Okay.

If I could.

Okay.

Speaker 6: Do you think there's something that's structurally changed in that market? Would you still expect it to go back to a more normal mix, or a more traditional mix of the business? Just any more commentary you can give us on why you think that business is and continues to be so strong.

Thank you.

Okay.

Thank you.

Good morning.

That's correct.

Sure.

Okay.

Okay great.

Speaker 3: Well, you outlined many of the reasons right now. Certainly people are standing in homes. There's higher renovation. People aren't moving, so they're taking different actions. There's some anecdotal here that we just have to be careful with. Really, you know, proactively placement has been training up since about 2009.

Thank you.

Thanks for the consumer.

And good luck to you guys.

Okay.

Got it.

Okay.

Yes.

Okay.

Speaker 3: And so we don't think one year as a trend, but we're in our fourth year here and it hasn't really changed. And there's some anecdotal evidence that there's some generational impact here.

Thanks, Amit.

Great.

Sure.

Got it thank you guys.

Thank you please standby for our last question.

Speaker 3: And so where you look at a baby boomer would wait until it breaks, maybe the younger generation, Gen Z's and millennials.

Speaker 3: and indicate that they do a bit more proactive work than their predecessors. But I would take that with a grain of salt right now, but it's one trend that we've watched now for.

Our last question comes from the line of Jamie in Caracas.

UBS Your line is now open.

Hey, good morning, everyone.

Speaker 3: 40, you know, for a number of months and it hasn't changed and it continues to be strong.

Good morning, good morning, good morning.

Sure.

I can hear you guys loud and clear now, but I do echo Matt's comment I literally haven't been able to understand a lift of anything you said since we started the Q&A I think what's going on is like you know the analyst that asked a question can hear you, but it's very kind of garbled for everybody else. So I do apologize for touching on ground you've already.

Speaker 3: So you put that together, is there a generational impact there? Maybe, but we'll continue to monitor it. But right now it's held up surprisingly well now for 16 straight quarters.

Speaker 3: That would be a nice tailwind if it's a structural change to the industry. I guess my second question is going to be on... We would think that as well, but we're not ready to say that. But again, it's something we watch and the data that we use, we've been doing this for a decade plus. So it's been a good guidepost for us long term. But again, we'll see how it plays out. But right now we see the proactive side of it holding up pretty well.

Covered here, but I wanted to ask about the proactive replacement.

A follow up or.

I'm just trying to think if like to what extent may be IOR array.

And some of these efficiency credits are factoring in.

So I'm curious if you're actually seeing any notable mix shift mix shifts on the efficiency scale.

In a proactive replacement or not really.

Thank you.

Speaker 6: Good news. I have a second question on, I guess your cost input.

Hi, Corrado.

Good morning.

Okay.

Speaker 6: you guys have guided to seeing sequentially low margins in the second half in the first half and despite the up performance you still are getting a bit lower margins in the second half than the first out of harry couldn't you just record it on your phone.

Okay.

The midstream just lastly routines.

Okay.

Thanks for your question.

Please go ahead.

Okay.

Gary.

Speaker 6: rolling through the P&L in the second half. We did see pretty significant declines in steel costs over the last six odd months before the last week. Should we expect to see that start rolling through the P&L in the first half of 24 and you should get some nice benefit from a price cost standpoint in the first half of 24.

Okay.

Yeah.

Go ahead for what happened.

Thank you Barry.

Okay.

Basic and diluted.

Believe it or not.

Okay.

Great.

Thank you Brian.

Okay.

Thank you.

If you don't mind.

Sure.

All of our scale.

Proactively.

Speaker 4: Yeah, this is Chuck. You know, it rolls in as a benefit and a detriment that goes the other way, but on about a three to four months leg. So the references that you had as the prices, you know, on the indexes, still indexes that kind of retreated a bit something the last handful of weeks should kind of come in roughly, you know, three to four months. So I would say, you know, exiting the year and early into next year is when we would see that benefit.

Okay.

Earlier.

Good morning, Kurt.

Okay.

Yes.

Because of the better it is.

Sure.

Okay.

It has been.

Okay, Great that's helpful.

And <unk>.

Just having seen steel prices move lower since we're or we started earlier in the year.

Speaker 1: Thank you. Please stand by for our next question.

How are you thinking about the net.

Speaker 1: Our next question comes from the line of Brian Blair of Oppenheimer. Your line is now open. Thank you, good morning.

Our potential price cost in pump impact from that just realizing that you do have some floating.

Price, but also index price.

Okay.

Speaker 7: To help us think about rest of world segment profitability and your potential there, how does the contribution margin on your new China offerings compared to segment average and and what's the Run rate margin in India and how does your team think about operating life?

Okay.

Thank you very much.

Okay.

Good morning.

Okay.

Correct.

Understood.

980 <unk>.

Thank you Vivek.

Speaker 4: The new products were, by the way, were pleased with how they've been received initially.

Thank you.

Okay.

Thank you.

Speaker 4: You know, right now we're working pretty heavily on promotions and advertising and I think I mentioned on the last call the back half of the year we'd be. Likely spending more on advertising and promotions as we get into the back half to make sure we're driving. Sales, so, you know, the incremental margins on the new products are not high. They're lower than the average at this point. We look forward to improving that over time, but it does.

Okay.

Alright.

Thank you Pat and good morning.

Last year.

You may now disconnect.

Okay.

Yes.

Good morning.

Sure.

Okay.

Hi.

Okay.

And on the call.

You can disconnect.

Speaker 4: blend well with the other core products that we have. And as a bundle, and we're gonna talk a little bit more about kind of our strategy when we get to our investor day on the six, but as a bundle, it works very well into our kitchen appliance portfolio matched with core products to sell more than one product at one time.

Okay.

Good morning.

Good luck.

Number two.

I'm thinking about.

Please proceed.

Cost.

Okay.

Good day, ladies and gentlemen.

Okay.

Speaker 7: Any quick color you'd offer on your M&A pipeline you've executed.

Okay.

Good morning, Matt.

Sure.

Okay got it thanks, a lot for the color best of luck.

Speaker 7: pretty down the middle in terms of your water treatment strategy. It's been an interesting year with macro uncertainty in the rate and is

Thank you. This concludes the question and answer session.

I would now like to turn the call back over to Helen Gerhart for closing remarks.

Speaker 7: You just bet over almost. I just curious how your deal funnel is progressed and how your team's thinking about actionability over the near future.

Thank you.

Thanks, Dan.

I had to go to Asia.

Thank you.

Speaker 4: Yeah, I mean our funnel remains active. I would say we've seen less, you know, less

Okay.

This concludes our conference.

Great.

Speaker 4: less processes. Processes, I would say, have slowed a bit for what's in front of us. But just a reminder that our target is not necessarily to go through a process, but to identify private companies that are not in a process and bring them into the A.O. Smith.

During the quarter.

Okay.

Thank you.

Okay.

Please go ahead.

Got it.

Quarter.

Yes.

Right.

Okay.

Good luck.

Go ahead David.

Speaker 4: Family, similar to what we've done, most of the water treatment acquisitions.

Sure.

Speaker 4: Through the last handful of years, and we're pleased to bring water tech in in this quarter. So it's, you know, it's active, less processes. We remain optimistic and we continue to kind of work that target audience. Understood. Thanks.

Okay.

The growth drivers.

Okay.

Yes.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

Yes.

[music] okay.

Speaker 1: Our next question comes from the line of Susan McCarrie of Goldman Sachs. Your line is now open.

Speaker 8: Good morning. Maybe to start with, I'm not sure if maybe it's our line, but I think you broke up a little bit when you were talking about the previous question on raw materials and how we should be thinking about steel over the next coming quarters. Can you just maybe perhaps go back and reiterate some of those key points for us?

Yes.

[music].

Speaker 4: I will do that. Apologies for breaking up with it. That is part of the issues we seem to be having with the phone this morning. So I

Speaker 4: I'm trying to speak quite loud and hopefully it's coming through at this point. Yeah, no, you're very clear right now. So great, great, great. Yeah, Nathan had asked about kind of the cadence of our costs and the fact that steel was low in the first part of the year, kind of ramped up and then we've seen it recede. And then now, in the last handful of weeks, a little more leveling off to a couple of weeks that have gone up a couple dollars. So.

Speaker 4: I was just saying that there's really a three to four month lag and when we see those costs based on tracking the index.

Speaker 4: So most of the back half of the year, and we kind of knew that on our last time we did the earnings call, is baked in for cost. But as we exit perhaps, you know, the end of December and early next year, we would be seeing the benefit of some of those costs that have come down.

Speaker 8: Okay, that's very helpful, thank you. And then following up on the conversation earlier as well on thinking of proactive replacement versus, the more non-discretionary pieces of there, can you give a bit more color perhaps on how you're defining one versus the other end of your, thinking about that potential structural shift that's coming through? Any thoughts on what portion of the volumes today or the demand today is really sort of coming from that proactive replacement relative to the sort of non-discretionary side of it?

Speaker 3: Well, let me just start with.

Speaker 3: If it's proactive, that means the unit is working and functioning normally. So it's someone taking action.

Speaker 3: when it's not required from an emergency basis, an emergency that that's our replacement market when the unit is either leaking or not working. So that they wake up that day and that's an emergency. But anything past that proactive is really making a conscious decision to change a working product out.

Speaker 3: And there's a lot of reasons for people doing that. We've outlined it before. Some just had their neighbor had one leak, so they did proactive. Others change in their family, they need more hot water. Others just want to move to high efficiency and those type of products. So there's a multitude of reasons why the proactive replacement can happen. But that's how we separate it. We've separated it that way for decades now. It's been pretty good.

Speaker 3: And again, like I said, we'll be keep looking at a number of reasons that proactive stays up and again, home renovations, people say they're home.

Speaker 3: not available in the market. There's a multitude of reasons that we just interjected a maybe a generational impact that I would just qualify that's gonna take some time to work through.

Speaker 6: But it's been consistent now, and as we go back in our debt, like I said, it goes back to 2019. This is not a new phenomenon. It's one that continues to kind of prove it's self-out each quarter, and again, it proved it out in Q3, and we see that continue for some period of time. We're going to continue to look at it and try to understand it, but right now that's where we stand. That's kind of our view, and we look at it in the short term as continuing.

Speaker 4: And I think you ask a bit about kind of quantification. I mean, if replacement is 80 to 85% of our, you know, of the industry volumes and the proactive replacement had been in the 20 to 20% range, 20 to 25% range, and it's edged about 30%. Just to give you a bit of a magnitude. So it's still predominantly, you know, failed units, but that's edged up a bit.

Speaker 8: Okay, that's very helpful color. Thank you. Good luck with everything. Thank you. Thank you.

Speaker 1: Our next question comes from the line of Andy Kaplowitz of City Group. Your line is now open. Good morning, everyone.

Speaker 9: Kevin and Chuck, can you give us more color into the components of China growth in terms of the strength and commercial water treatment and the new products that you're seeing as well as the mixed benefit you're getting? And then how do you think about the durability of that growth going into 2020?

Speaker 10: Well, let me just step back to how we go to market and I think it'll help.

[music].

Speaker 10: answer to some of those questions. You know, if you look at us, we've been a premium consumer brand known for high quality innovation for 25 plus years there.

Speaker 10: And then you take it and you look at how diversified our channels are. We have our own stores, we refer to specialty stores. We talk about the national retail, we have regional retail, we have building material customers, e-commerce, so we have a very diverse channel to go to market on. And on top of that, our product line continues to be diversified. We talk about the residential, quite a bit, commercial. The replacement market in China on water heaters is now about 16%.

Speaker 10: And there's an area that continues to grow and that's our consumable on the water treatment side.

Speaker 10: So when you step back, you talk about the growth, I think we have a competitive advantage in this market where one of those by themselves doesn't make success, but you put...

Speaker 10: And they give us the ability to maximize our potential in the market.

Speaker 10: And it really has the ability to kind of overcome some of these difficult times that we've had.

Speaker 10: And it's been great to see our China team execute over the last couple of years. Quite frankly, we're growing the business. We're keeping our margins, they're not great, but they're in double digits. And we're managing in probably the most difficult market that we've been in the 25 years we've been there. So when I look at it, I think we have a much more upcycling downside. And as I said, on many calls before, we just need a little help from the economy.

Speaker 10: But until that happens, our strategy and our foundation that we built allows us to participate and be successful. And, uh, and we're cham—

Speaker 9: very helpful and then maybe shifting back to North America commercial water heaters you know you've kept up pretty impressive strength maybe the expected duration of that strength that you still seem reasonably good quoting activity you know any sort of conversations you're having given the rise and rates lately any color would be helpful

Speaker 10: Yeah, I would tell you that the market has been up and I'm gonna separate this from commercial water heaters to and commercial boilers. Commercial water heaters, this Frank beer has been on that as I mentioned, the greater than 55 gallon, that represents really about 85% of the growth.

Speaker 10: So, and that's a big replacement, archer for us, and that's been steady.

Speaker 10: On the commercial boiler side, we talked about being down. That has slowed a bit. And particularly when you get in the 1 million BTUs in below, it's some residential.

Speaker 10: So we've seen some slowing activity, but not detrimental slow, but just slower than we've seen in the past. And we still got to work too. I just think that the boiler side of the business, the commercial side has just been...

Speaker 10: is going through some of the destocking that we saw in water heaters back last year. But overall the market's still steady but a bit slower.

Speaker 1: Thank you for your question. Please stand by for our next question.

Speaker 1: Our next question comes from the line of Matt Somerville of D.A. Davidson and Company. Your line is now open. Hey, can you guys hear me?

Speaker 11: Is it clear because every answer is really garbled on my end and it's happening to at least one other cell side counterpart that I'm aware of just FYI. The happened thank you.

Speaker 11: If this has already been asked, I completely apologize, but the channel inventories, can you give us kind of what you're thinking as a year end assessment, channel inventories will look like in North America, in reservoir heaters, commercial water heaters, boilers and treatment, and how that may inform you as to the volume outlook for each respectively.

Speaker 4: Yeah, this is Chuck. So I hopefully you can hear me clearly. I very yes, yes, I can.

Speaker 4: Okay, good, good. All the, you know, and I just cover them all. They're all expected to exit the year pretty normal. In fact, we...

Speaker 4: We feel we're in a normal position really on water heating boilers and water treatment in the U.S. We probably have some inventory from an export perspective that we're watching closely to see if on the water treatment side we end up in a normal position. Right now we project we will.

Speaker 4: for the categories that you mentioned. We're normalized today in the US, we feel, and we're...

[music].

Speaker 4: I expect to exit on a normalized basis. On the boiler side, we think we're through. You know, we really do think we're through that inventory channel build up on the smaller commercial and on the residential. We'll watch that when we get into colder weather.

Speaker 4: And just a reminder, last year we had some really tough comps to overcome. So, you know, last year we were 28% growth year over year.

Speaker 4: You know, that's reversed a bit as we've had more normalized volume, normalized inventory now, but benefited a bit from working down backlog last year.

Speaker 11: Thank you. And then just as a follow up, and again, my apologies if you answered this already, you've obviously kind of been benefiting from this product cycle, if you will, in China, is it relates to your kitchen related offering. When did those products launch? And how should we think about the duration of that cycle on the top line, just in the context of the macro environment in China? How to F cell images, explains why your existing? onion is less fotb

Speaker 10: Well, let me take the newer products, the dishwasher and steam ovens, just launch last quarter, basically. We had a soft launch, maybe a little bit before then, but they're really due to the market. And that will, again, pick up as we get into 2024. We looked at a few more skews, but again, one of the limited operating there.

Speaker 10: The thing we like about both those categories is that they're both emerging categories in China. The penetration is very low on both of them. And we like, and as a reminder, when we bring products to market, we only bring products that have unique features and benefits to the consumer. These two products have no difference. They have very unique.

Speaker 10: benefits and features that the Chinese consumer will see and recognize.

Speaker 10: So at the very beginning, it ties very well into our bathroom kitchen strategy. We had a very nice launch, and we look for it to continue to grow. And more importantly, to look for the category to grow as those types of appliances become more mainstream to the Chinese consumer. Got it. Thank you guys.

Speaker 1: Our last question comes from the line of Damian Corrosse of UBS. Your line is now open. Hey, good morning, everyone.

Speaker 12: I can hear you guys loud and clear now, but I do have to imagine that comment. I literally haven't been able to understand a lick of anything you said since we started the Q&A. I think what's going on is like, you know, the analyst that asked the question can hear you, but it's very kind of garbled for everybody else. So I do apologize for, you know, touching on ground you've already covered here, but I wanted to ask about the proactive replacement, just to follow up, you know, our...

Speaker 12: Just trying to think if like to what extent maybe IRA and some of these efficiency credits are factoring in

Speaker 12: So I'm curious if you're actually seeing any notable mixed shifts on the efficiency scale in that peroxid replacement or not really.

Speaker 4: Yeah, I mean, we've seen nice growth in the heat pump category. That's up 25% this year, but that's a small portion of the total industry. It's less than 2%.

Speaker 4: You know, I would say within proactive replacement and the IRA Act, you know, it's all it's all very positive going forward. But the actual impact that we're seeing within proactive replacement. It's very, we think it's very small. We don't think that that is driving a great deal of it. We believe it'll, you know, help over time. We believe that it's great to have the credits there, but

Speaker 4: Currently driving proactive replacement, the it just does not seem to be moving the needle out of great, you know, on a large scale.

Speaker 4: Proactive replacement though, I mean I think Kevin had said a little earlier it's been going on about four years now since 2019 where we've seen a pretty good resilience to proactive replacement and we measure it, you know, we measure it each quarter, you know, year over year on a quarterly average and it's kind of hung in there at right around 30 percent of replacement business.

Speaker 12: Just having seen steel prices move lower since where we started earlier in the year, how are you thinking about the next, you know, potential price cost impact from that? You know, just realizing that you do have some floating price, but also...

Speaker 4: Yeah, you know, price cost index, you know, we've well, I'll talk a little bit about steel, because I don't think everybody kind of heard my answer on steel. So we started the year with steel, you know, in the nine, I'll call it cold rolled as a metric index 950, it rolled up to 1400, maybe 1450. And then it came back down to 950. And as you track the indexes, you know, we've seen kind of the index

Speaker 4: Uh, we see the index in our cost basis on, you know, 3 to 4 month lag. So, as we exit the year and think about kind of going into next year, we would expect to be back, you know, back down to steel costs that have rotated kind of through the year back down to that.

Speaker 4: point where we answered the year. We would have, in our last call, we would have seen most of the rest of 2023, and we called out for steel to be 20% higher back half front half. That's kind of, still kind of hangs true of slightly better than that, but still rounded to that number. So we looked, you know, we would just think about price cost relationship related to input costs.

Speaker 4: You know, most other costs that we've made relatively flat, we've seen some increases in input costs here and there for specialty components, but that benefit coming back down would be kind of exiting the year and into next year.

Speaker 1: Thank you. This concludes the question and answer session.

Speaker 1: I would now like to turn the call back over to Helen Gerholt for closing remarks.

Speaker 2: Thank you for joining us today. And again, my apologies for the audio issues that we've had.

Speaker 2: Please let me conclude by reminding you that our global AOSMIS team delivered strong performance in the third quarter. We look forward to updating you on our progress in the quarters to come. Please mark your calendars to join our presentations at three conferences this quarter.

Speaker 2: Beard on November 7th, UBS on November 29th, and Oppenheimer on December 13th. I'd also like to remind you that we will host an investor day on Monday, November 6th in Chicago. We look forward to sharing an in-depth review of our company strategy, key initiatives, and growth drivers. Thank you and enjoy the rest of the-

Speaker 1: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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