Q3 2024 A. O. Smith Corp Earnings Call

October 22, 2024

Good day and thank you for standing by welcome to a O Smith Corporation third quarter 2024 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session 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 your hand is raised to withdraw your question. Please press star one one again.

Speaker Change: Be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Helen Gert Holt. Please go ahead.

Speaker Change: Good morning, and welcome to the a O Smith third quarter Conference call I'm, Helen Girl, 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.

Speaker Change: In order to provide improved transparency into the operating results of our business, we provide non-GAAP measures.

Speaker Change: 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 that exclude the impact of pension settlement income and restructuring and impairment expenses.

Speaker Change: Conciliation from GAAP measures to non-GAAP measures are provided in the appendix at the end of this presentation not our website.

Speaker Change: A friendly reminder, that some of our comments and answers during this conference call will be forward looking statements.

Speaker Change: They are subject to risks that could cause actual results to be materially different.

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

Speaker Change: Also as a courtesy to others in the question queue. Please limit yourself to one question and one follow up per turn.

Speaker Change: Multiple questions. Please rejoin the queue.

Speaker Change: We will be using slides as we move through today's call you can access them on our website at investor Dot a O Smith's dot com.

Speaker Change: Now I'll turn the call over to Kevin to begin our prepared remarks.

Kevin Wheeler: Thank you Helen and good morning, everyone I'm on slide four our third quarter results.

Kevin Wheeler: As we previously announced our third quarter sales and earnings decreased compared to last year as strong consumer demand in China and water heater demand in North America was weaker than expected.

Kevin Wheeler: Third party sales declined 17% in local currency.

Kevin Wheeler: North America water heater sales decreased 4% as pricing actions were more than offset by lower volumes.

Kevin Wheeler: I am pleased with the double digit growth, we had in the quarter and our North America boiler and water treatment businesses as well in India.

Kevin Wheeler: In October we increased our dividend by 6%.

Kevin Wheeler: We have increased our dividend annually for the last 32 years.

Kevin Wheeler: In addition, we are on track to close period by the end of the year.

Kevin Wheeler: Please turn to slide five.

Kevin Wheeler: In China third quarter third party sales decreased 17% local currency as a result of weaker than expected consumer demand.

Kevin Wheeler: We believe our position in the premium portion of the market remained stable. However.

Kevin Wheeler: However, we saw increased pricing and promotional pressure, particularly in the mid price sector of the market.

Kevin Wheeler: While we expect consumer demand softness to persist through the remainder of the year.

Kevin Wheeler: A government sponsored appliance trade in program and other recently announced government stimulus programs may provide a positive impact beyond 2024.

Kevin Wheeler: In our North America water heater business orders were softer than expected in the quarter.

Kevin Wheeler: In both the U S and Canada for both residential and commercial water heaters.

Kevin Wheeler: We believe their price increase related pre buy and a reduction in our order lead times and.

Kevin Wheeler: And a softening in end market demand with our customers to adjust order patterns and reduced their inventories during the quarter.

Kevin Wheeler: As we have discussed we launched our Ao Smith designed and manufactured Tankless product in the second quarter, which is currently manufactured in our China facility.

Kevin Wheeler: Early feedback has been positive on our innovative scale resistant design, while sales have lagged our expectations. We remain positive about the long term outlook and we are on track to launch two additional models in early 2025.

Kevin Wheeler: Our North America boiler sales grew 15% in the quarter compared to last year as our commercial condensing boilers continue to perform well in the market.

Kevin Wheeler: We believe we are growing our share in the commercial condensing portion of the market led by our crest boiler withheld cap technology.

North America water treatment sales increased 16% year over year.

Kevin Wheeler: Due to acquisition related dealer sales and organic growth in our dealer and wholesale channels.

Kevin Wheeler: I'm now on slide six.

Kevin Wheeler: As we have discussed earlier this year, we commenced several expansion projects in 2024 to support our long term growth strategy.

Kevin Wheeler: We recently celebrated the Grand opening of our new facility on our campus in Juarez.

Kevin Wheeler: <unk> manufactured gas Tankless water heaters for North America.

Kevin Wheeler: There is still start up work to be completed production is expected to begin in early 2025 with a ramp up through the year.

Kevin Wheeler: We have also added additional heat pump capacity on the same site in support of increased demand for our residential heat pump water heaters.

Also we have made progress on our new state of the art commercial product development Center, which is located on the same site as our Lebanon, Tennessee facility.

This expanded facility, which is projected to be completed in mid 2025.

Kevin Wheeler: And enhance our product development and testing capabilities and knowledge sharing by bringing together, our commercial water heater and boiler engineering teams.

Kevin Wheeler: 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.

Chuck Lauber: Third quarter sales in the North America segment were $703 million, a 1% decline compared with 2023 as higher boiler and water treatment sales and the benefit of year over year pricing actions were more than offset by lower residential and commercial water heater volumes.

Chuck Lauber: North America segment earnings of $163 million decreased 4% compared with 2023 segment margin was 23, 1% a decrease of 80 basis points year over year.

Chuck Lauber: The lower segment earnings and segment margin were primarily driven by lower water.

Chuck Lauber: Volumes that were partially offset by higher boiler and water treatment sales and pricing.

Chuck Lauber: Moving to slide eight.

Rest of the World segment sales of $210 million decreased 10% compared to last year. The decline was primarily driven by lower sales of our core water heater and water treatment products in China.

Chuck Lauber: India sales increased 12% in local currency in the quarter as our new products continue to be well received in the market.

Chuck Lauber: Rest of the World segment earnings of $14 million and segment margin was six 5% in 2024 compared to segment earnings of $23 2 million and segment margin of nine 9% in the prior year.

The lower segment earnings and segment margin were driven by lower sales, partially offset by lower material costs that resulted from cost saving projects in China.

Chuck Lauber: Please turn to slide nine.

Chuck Lauber: We generated free cash flow of $283 million during the first nine months of 2024, a decrease from the same period last year, primarily as a result of higher inventory balances as well as in higher incentive payments associated with record sales and profits last year, they were partially offset by lower.

Chuck Lauber: Accounts receivable balances capital.

Speaker Change: Capital expenditures increased $35 million year over year due to the growth focused expansion projects that Kevin just reviewed.

Speaker Change: Our cash balance totaled $256 million at the end of September and our net cash position was $136 million.

Speaker Change: Our leverage ratio was five 9% as measured by total debt to total capital.

Speaker Change: So now I'll turn to slide 10.

Speaker Change: In addition to returning capital to shareholders, we continue to see opportunities for organic growth innovation and new product development across all of our product lines and geographies as previously announced we signed an agreement to acquire <unk> from Unilever or $120 million.

Speaker Change: The acquisition aligns with our strategy of adding scale and enhancing our premium water treatment product portfolio and distribution footprint and the South Asia region, particularly in India.

The acquisition of pure it is on track to close by the end of 2024.

Speaker Change: Earlier this month, our board approved a 6% increase to our quarterly dividend to <unk> 34 per share.

Speaker Change: We repurchased approximately two 9 million shares of common stock in the first nine months of 2024 for a total of $237 million.

Speaker Change: Please turn to slide 11, and our updated 2024 earnings guidance and outlook.

Speaker Change: We reaffirm our recently revised 2024 EPS outlook to an expected range of $3 70 to $3 85 per share.

Our outlook is based on a number of key assumptions, including our guidance assumes that material costs in the full year 2024 will be roughly flat to 2023.

Speaker Change: Our guidance also assumes a relatively stable supply chain environment similar to what we experienced throughout 2023.

Speaker Change: For the year Capex should be between $105 and $115 million, an increase year over year and from the past several years due to our capacity expansion projects and expanded engineering capabilities.

Speaker Change: We expect to generate operating cash flow of $525 million and free cash flow of approximately $415 million a.

Speaker Change: The reduction from our previous guidance due to the lower earnings outlook increased inventories and lower customer deposits in China.

Speaker Change: Corporate and other expenses are expected to be approximately $70 million.

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

Speaker Change: And we expect to repurchase approximately $300 million of shares of our stock, resulting in outstanding diluted shares of $147 million at the end of 2024.

Speaker Change: I'll now turn the call back over to Kevin who will provide more color on key markets and topline growth outlook and segment X, but expectations all while staying on slide 11, Kevin. Thank you Chuck.

Kevin Wheeler: We reaffirm our recently revised outlook for 2024 sales to be approximately flat to 2023, which.

Kevin Wheeler: Which includes the following assumptions.

Kevin: In China, we believe that the weakness we experienced in the market in the third quarter will persist through the remainder of the year. While we are encouraged by the recently announced government stimulus programs, we expect minimal impact from the programs in 2024.

Kevin: As a result, we lowered our 2020 for China third party sales guidance to be decrease of between 6% to 8% local currency.

Kevin: Our forecast assumes a negative currency translation impact of approximately 1% for the year.

Kevin: Our North America residential water heater orders have been weaker than we expected since July when we provided our prior guidance.

Kevin: With our improved lead times reduce backlog and some signals of softness in the market, but we believe our customers have reduced their inventories and that inventories will remain at current levels for the remainder of the year.

Kevin: Our July outlook assumed we would outperform the market and slightly improve our share year over year.

On the weaker orders, we project our share will remain similar to last year.

Kevin: We maintain our projection at the 2024.

Kevin: Residential industry unit volumes will be relatively flat to last year.

Kevin: We have reduced our projection for the U S commercial water heater industry volumes from a low single digit increase to approximately flat in 2024.

Kevin: There has also been an industry wide mix shift within the commercial categories, where electric unit shipments have increased and gas unit shipments have decreased compared to last year.

Kevin: We are pleased with our share in both categories. However, the change in the mix creates a headwind as the average price of a commercial gas water heater is approximately three times that of our commercial electric heater.

Kevin: The benefits of our previously announced price increases in North America water, hitting a 4% across most of our water heater products and 8% on heat pumps are included in our outlook.

Kevin: Our outlook assumes proactive replacement will remain at levels similar to last year.

Kevin: However on signals of end market demand softening, we'll be watching our data closely.

Kevin: We revised our boiler sales growth guidance to be approximately 8% on the lower end of our previous range. We are pleased with our commercial boiler sales. However, we see weakness in our residential order rates.

Kevin: Our sales growth guidance for North America water treatment of an increase of 8% to 10% is unchanged.

Kevin: Based on our revised 2024 assumptions, we expect our North America segment margin to be approximately 24, 5% and rest of world.

Kevin: Third party segment margin to be approximately 8%.

Kevin: Please turn to slide 12.

Kevin: We are pleased with our boiler and in North America water treatment sales growth in the quarter.

Kevin: China, and North America water heater businesses experienced challenges in the third quarter.

Kevin: Although we have some caution around end market demand, we expect quarter over quarter improvement in North America water heater volumes and even though we expect the weak demand in China to continue through the end of the year, our outlook projects quarter over quarter sales improvements as fourth quarter sales are typically seasonally stronger in China due to shopping.

Kevin: Holidays.

We are pleased with our year to date sales growth in our North America boiler business, particularly for our high efficiency commercial products.

Kevin: Market optimism continues however, we have seen a modest slowdown in quoting activity.

Kevin: As we have in the past we are assessing the current environment in China and are reviewing our operations to optimize the business to align with lower volumes and create a solid foundation to leverage profitable growth in the future.

Kevin: And our manufacturing facilities in North America, we have adjusted to operate more efficiently at the current lower volume rates, while still maintaining our improved lead times.

Kevin: A O Smith has a 150 year history of navigating through all economic cycles.

Kevin: We estimate replacement demand represents approximately 80% to 85% of U S water heater and boiler volumes.

Kevin: That stable replacement as well as our strong balance sheet allows us to continue investing for the long term and ourselves and through acquisitions.

Kevin: We are focused on servicing our customer and continue to grow our leadership position in heavy and treating water.

Kevin: That concludes our prepared remarks, and we're now available for your questions.

Kevin: Thank you.

Speaker Change: As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again please.

Speaker Change: Please standby, while we compile the Q&A roster.

Our first question comes from the line of Susan Mcclary from Goldman Sachs.

Susan Mcclary: Thank you good morning, everyone. Good morning.

Susan Mcclary: My first question is focusing on the North America residential water heater segment of the business.

Susan Mcclary: If I'm doing the math right I think considering your guide that the industry volumes will be flat for the year and based on what we know in terms of your commentary around price in that part of the business.

Susan Mcclary: Jeff that you trailed the industry fairly significantly in the third quarter and then you expect that to reverse pretty meaningfully going through the fourth quarter. I guess first of all is that right and second of all if so can you just talk to what's driving there was a big move that we've been seeing in the last several months.

Speaker Change: Yes, I think its let.

Speaker Change: Let me just step back on that a little bit.

Speaker Change: The price increase that we had in the second quarter, we talked about generated more orders than we anticipated.

Speaker Change: 4% in particularly at an 8% increase.

Speaker Change: Generate.

Net debt increased our lead times and pushed out some orders and when that happens.

Speaker Change: We have.

Speaker Change: ERP systems, and our customers that also start to generate more orders and then we get behind.

Then as we get into the second quarter and then even on our call in July we had mentioned we saw some softness and that was us working down our backlogs and.

Speaker Change: Really kind.

Speaker Change: Kind of bringing in line of our lead times with again.

Speaker Change: Cause our distributors to reduce inventories as they change their ERP systems back to a normal lead time. So there's been some puts and takes moving up being down in the market, but a lot of that deficit is just the inventory imbalance in timing. So when you when you just look at it.

Speaker Change: From a share perspective from our customers getting their fair share of the market.

Speaker Change: We're in pretty good shape, but it's just some lumpiness that we experienced that.

Speaker Change: Just happens.

Speaker Change: During some price increases we're doing some volatile time, so nothing here from our side that I would tell you that we're concerned about.

Speaker Change: It's just something that we had to work through with our customers and the only concern. We have is maybe some softness that we saw.

In the market that we still have to work through.

Speaker Change: Maybe just a couple of comments. In addition, so as Kevin said there is a lot of timing that goes on with that and we haven't changed our full year outlook, but in July.

Speaker Change: A flat industry I would say, we were thinking of it as flat being really the floor and probably flat to up and now as we look at the full year being.

Speaker Change: Being flat, we would say that the flat is probably the ceiling and more flat to down so just kind of to gauge that for the fourth quarter. We feel very good about going into the fourth quarter at least that the trend rate of what we see in orders which have increased.

Speaker Change: Really starting from August through September.

Speaker Change: Thank you one moment for our next question.

Speaker Change: Our next question comes from the line of Jeff Hammond from Keybanc Capital Markets, Inc.

Speaker Change: Hey, good morning, guys, Hey, Joe Good morning.

Jeff Hammond: Just wondering.

Jeff Hammond: About the stickiness of your March price increase we've seen a lot of.

Deflation in steel and I'm, just wondering if thats, making it harder to push push price in North America.

Speaker Change: Well you know how much we like to talk about pricing here, but.

Jeff Hammond: It's a good question.

Speaker Change: As we look at it the increase was executed as we as we.

Speaker Change: We indicated and I would tell you the markets are always competitive, but as I step back and how we build to rebuild our business plan and what we expect out of.

Speaker Change: Volume and pricing were exactly where we thought we would be accordingly.

Speaker Change: According to our plants, so it's a competitive market but.

Speaker Change: Nothing from a.

Speaker Change: A perspective that we're concerned about our goal is always always come back to our goal is always to keep our customers competitive and I feel we're in that we're in good position as we head into the fourth quarter.

Okay, and then just on China, I mean, the business has been.

Speaker Change: Down significantly then uneven for some time.

Speaker Change: The returns are much lower than the North America business, just wondering how youre thinking about that business strategically long term does it makes sense in the portfolio.

Speaker Change: Isn't it as an analyst we get increasing number of questions about that over the last.

Speaker Change: 12 to 18 months thanks.

Speaker Change: A fair question I mean, let me step back a O Smith's has a long term company and.

Speaker Change: When we sit back and look at the markets.

Speaker Change: There are three markets that I think a O Smith should participate in and be a part of going forward on a long term basis. One is obviously as the U S.

Speaker Change: I'd tell you China is right behind that it's the second largest economy.

Speaker Change: Potentially to number one economy in the market.

Speaker Change: Still has a lot of upside from from.

Speaker Change: Urbanization and the Middle class and the third is India and you put those three countries together, where we have footprint some of those on those in those markets strong brands strong organization. So to answer your question more on a holistic standpoint, we're very comfortable in the markets that we're in and we.

Speaker Change: See them have an upside, albeit some markets go through some tough patches and we're going through one in China, but long term, we still feel the the demographics and.

Speaker Change: And so forth and the economics makes sense for a O Smith.

Speaker Change: Thank you.

Speaker Change: One moment for our next question.

Speaker Change: Our next question comes from the line of Matt Summerville from D. A Davidson.

Speaker Change: Thanks, maybe just to follow up on China.

Obviously.

Speaker Change: Any early read you have on how we should be thinking about that business in 2025 in the context of the stimulus that you.

Speaker Change: Mentioned in do you feel like this is the beginning of a longer duration down cycle in China, I'm, just kind of getting back to to Jeff's comment, which I thought was a fair one I mean this business has not been able to sustain string together a multiyear period of growth since the late <unk>.

Speaker Change: Thousand tests.

Speaker Change: Yes, I would.

Speaker Change: I think it's a little early on the stimulus side, we do think Thats a positive.

Outcome that.

Speaker Change: That we still need more information about but again as you look at it I think the government of China realizes that they need to do something they have announced a number of stimulus programs.

Speaker Change: To increase credit to two.

Speaker Change: Two the stall construction projects they've canceled.

Speaker Change: Purchasing restriction as lower mortgage rates down.

Speaker Change: The litany of list I think are going to have a positive impact.

Speaker Change: However, we still don't know the size of the stimulus and that's an important part of it but again.

Speaker Change: When you look at the market look at our brand.

Speaker Change: You look at our value proposition there, we still think theres upside again, it's been a.

Speaker Change: Tougher haul over the last few years, particularly coming out of Covid, but again.

Speaker Change: The.

Speaker Change: Stimulus programs people are talking about our brand positioning our distributors and so forth, we still feel good about the business now.

Speaker Change: <unk> going to come out of that that's a whole different story, we don't forecast that but we do prepare our business to two.

Speaker Change: We do business in that environment, and we've talked about that how we're assessing the business today.

Speaker Change: But overall it's.

Speaker Change: I think we'll get some good indication of what the stimulus looks like over the next few weeks and then we will start to tie that back into what it means for our business going forward.

Speaker Change: And then just just as a follow up you mentioned.

Speaker Change: It sounds like it may be more of a sustained pivot in your North America commercial business to <unk> electric away from gas are you appropriately capacity today to address that market trend help me kind of understand a little bit more about what's going on there.

Speaker Change: Yes, Matt we're very comfortable with our share in both electric and gas and if you recall earlier in the year, we were talking a bit about being heavier on the gas side of the business, which helped us a bit in Q1 and Q2 and now it's what we're really seeing is a little bit of an unwind of that and from a headwind will be facing that in the back half of the year, but we're very.

Speaker Change: Comfortable with our capacity and our position in both electric and gas crucial.

Speaker Change: Got it thank you guys.

Speaker Change: Thank you.

One moment for our next question.

Speaker Change: Our next question comes from the line of Saree borrow did ski from Jefferies.

Speaker Change: Hi, good morning.

Speaker Change: Yes.

Speaker Change: Look towards my 25 can you just walk us through the impact of the Tankless water heater factory switch until the rest of World and North America segments grew I think it should be maybe a headwind to rest of world sales better margin benefit so it would be helpful.

Speaker Change: Kind of walk through those impacts as well next year.

Speaker Change: Yes.

Speaker Change: We'll reserve kind of framing it in a lot of detail as far as what it actually means for 2025, but the headwind that we're talking about this year and we've been talking about 50 basis points to the full year to launch Tankless and Kevin mentioned, we're a little behind so most of the way it will be a little less than that because we're a little behind but most of the way it will hit the <unk>.

Speaker Change: The fourth quarter.

Speaker Change: Going into next year, we would still expect a headwind.

Speaker Change: There is there is some benefit to the rest of the world from the volume perspective, but as we've talked about will be transitioning that product for manufacturing in China to our facility over the course of 2025.

Speaker Change: So there'll be a continued headwind into 2025, but we'll frame that a little bit closer as we get into the end of January and on our fourth quarter call.

Speaker Change: Thank you and maybe just going into residential water heaters in North America, a little bit more it seems like quarter to date shipments are up to the industry can you just help us understand how you performed in residential water heater volume from a volume perspective in the third quarter.

Speaker Change: Does this differ from Novartis.

Speaker Change: And if there was a difference why is that the case. Thank you.

Speaker Change: Yes again.

Speaker Change: What you see as always.

Speaker Change: A month or two behind so based on our.

Speaker Change: September and how we finished the quarter, we look at that the industry has.

Speaker Change: We're in a pretty good ship back down.

Speaker Change: And that 10% range, if you will so.

Speaker Change: It's going to come in line to where we thought that the 3% you are talking about we don't believe its going to stick there is going to be.

Speaker Change: Further softening in that number and that's why we're we've been pretty consistent we've talked about it being flat for the rest of the year and as Chuck Just mentioned, we think it's flat maybe slightly down by the time, we exit 2024 so.

Speaker Change: I just think it's timing in the orders and how things are.

Speaker Change: Our ash.

Speaker Change: Actually going to play out in 2024, but we're very comfortable we think the industry is going to be relatively flat.

Speaker Change: Thank you one moment for our next question.

Speaker Change: Our next question comes from the line of Bryan Blair from Oppenheimer.

Speaker Change: Good morning, Brian.

Speaker Change: Hey, Brian if you can hear us we can't hear you.

Speaker Change: Bryan Blair from Oppenheimer. Your line is now open. Please proceed.

Speaker Change: One moment for our next question.

Speaker Change: Our next question comes from the line of Mike Halloran from Baird.

Speaker Change: Hey, good morning, everyone, Hey, Mike Good morning.

Mike Halloran: So just kind of following up on the last question. There maybe just talk about what sellout dynamics look like from an industry perspective, So I guess kind of twofold is it more stable from a sellout perspective.

Mike Halloran: And then secondarily when you look at your specific data to your channel.

Mike Halloran: Is that what kind of backs up the stable share side of things from your perspective.

Speaker Change: Yes, I would tell you we don't have perfect. Mike we don't perfect sell all the information, but we do communicate with our customers on a pretty regular basis and it varies by market, but we have distributors that are.

Speaker Change: Plus low single digits up to some of the low single down I think some of them are leaning a bit more to kind of even but.

Speaker Change: The feedback we're getting is things have slowed a little bit but overall the market is still holding up.

Speaker Change: But it's going to be in that kind of flattish zone as we go forward.

Speaker Change: Don't see anything changing there right now based on the customer feedback that we have and that goes for both our residential business and in our commercial business.

Speaker Change: And I would just add that one of the insights we get as we do that proactive replacement survey.

Speaker Change: So we did that again this quarter and it's maintained relatively in the same position. So proactive replacement has been fairly strong. So we don't we don't see a concern on proactive replacement movement down.

Speaker Change: As of this quarter.

Speaker Change: Alright, Thanks for that and then secondarily, just maybe talk about how youre thinking about steel cost.

Speaker Change: Kind of the price cost trend from here as we look at the fourth quarter and then.

Speaker Change: Kind of a loose thoughts on steel curves into the front part of next year.

Speaker Change: Yes, I mean, it will go into the fourth quarter, we get a little bit of help on steel and steel took a tick.

Speaker Change: Wearable.

Speaker Change: <unk>, maybe 15% movement from Q3 to Q4. Some of that also is timing as we slowed down kind of volumes, we have got a little bit of a lag in when we're going to experience that.

Speaker Change: But our price the other other costs I mean I think.

Speaker Change: <unk> remarks, we said overall material costs relatively flat, so still a little favorable.

Speaker Change: Fourth quarter year.

Speaker Change: <unk> fourth quarter and the year other material cost a little bit unfavorable so relatively flat.

Speaker Change: So price cost, we feel pretty stable ongoing into the fourth quarter.

Speaker Change: Thank you.

Speaker Change: One moment for our next question.

Speaker Change: Okay.

Speaker Change: Our next question comes from the line of David Macgregor from Longbow Research.

David Macgregor: Yes, good morning, everyone and thanks for taking the questions I guess.

David Macgregor: You had talked in your prepared remarks about.

David Macgregor: With respect to North America water heater destock.

David Macgregor: Software.

David Macgregor: Conditions slightly slower quoting activity I think is what you said.

Speaker Change: Is it your sense that this is just replacement demand slowing down and you've indicated proactive is stable so whereas it just built in.

David Macgregor: Particularly maybe multifamily starting to.

David Macgregor: In fact that and I guess.

David Macgregor: To what extent you can talk.

David Macgregor: Both these factors that you've identified as having again.

David Macgregor: A negative influence on North American second half or do you expect it to carry forward as earnings headwinds into 'twenty five.

David Macgregor: Largely looking upon these as second half 'twenty four issues.

Speaker Change: I guess I would take it that replacement so obviously.

Speaker Change: Continues to be stable and as Chuck just mentioned, it's been four years that we've had proactive replacement at a higher level, so I'm almost calling that a trend now.

Speaker Change: And so we look at the quarter in the lower order rates, we really believe that was primarily driven by inventory and just people rebalancing.

Speaker Change: The inventories for one our lead times, but also for maybe a bit slower demand over their counters. So that's really I think the key part of it was an inventory correction driven by lead times coming down and the rest of the business seems to be pretty stable multifamily is down a little bit, but I don't think.

Speaker Change: That's going to be a big driver as we close Q4.

Speaker Change: I'll add that we do get comfort on kind of what we see in trends overall residential order rates. So we said on our last call in July order rates were down.

Speaker Change: We saw August also a bit down in order rates in residential but then September took a tick up in order rates and in October month to date is also up a bit so that trend is very positive and gives us a confidence that its largely related to the pre buy as we go into the fourth quarter.

Speaker Change: Thank you.

Speaker Change: One moment for our next question.

Speaker Change: Our next question comes from the line of Scott Graham from Seaport Research partners.

Scott Graham: Hi, good morning, Thanks for taking the questions Hey, Scott I wanted to just talk about China again, because you had organic positive in the first half.

Third quarter was a pretty significant turnaround from that and I know you talked about pricing and the I.

Scott Graham: I guess it would be the upper middle price point.

Scott Graham: Thats I thought less than half of those sales. So could you unbundle that for us a little bit what do you think caused the.

Scott Graham: Significant.

Scott Graham: Flip in China sales in the third quarter versus the first half.

Speaker Change: Yes, I'm going to give you what we feel.

Speaker Change: Are some possible reasons for it and it comes back to consumer confidence and if you look at the <unk>.

Speaker Change: Q3.

Speaker Change: There is two items GDP doesn't always tell us a whole lot but.

Speaker Change: One area that we look at constantly is property development, what happened what's happening in that property market and it got significantly worse hasnt been addressed.

Speaker Change: And so.

Speaker Change: If you look at it if you owned property about 70% of the Chinese consumers wealth is in property.

Speaker Change: And so that's continued to decline so I think that's driven some real core confidence by the consumer and really holding back.

Speaker Change: They are spending and I think it accelerated in Q3 and.

Speaker Change: If you look at employment also.

Speaker Change: Has been a challenge there and a lot of that I think happened in Q3 and it just accelerated the lack of consumer confidence where consumers just step back and decided they weren't going to spend on lead was absolutely necessary. So those that's how we feel the quarter because it was going along pretty well as you've talked about for the first six months, but there was a.

Speaker Change: A change there, particularly in the property sector that I think that the consumer's attention and just one other one other add on to that and Kevin Kevin's comments cover the majority of the impact for the quarter. We also did launch our kitchen products last year in Q3 so.

Speaker Change: We're anniversarying that and up against kind of our launch so that we didn't have any benefit for kitchen products quarter over quarter year over year, as we've kind of come across that anniversary of launching those products.

Speaker Change: But that makes a lot of sense. Thank you for that color I guess really the other question is on Tankless I think.

Speaker Change: You had high hopes in that area.

Speaker Change: What do you think is the drawback here or is it maybe just that the market has weakened a little bit.

Speaker Change: Let's say on the.

Speaker Change: Maybe on the proactive side it would seem because the housing stats hasn't really gotten worse right. So maybe on the proactive side has that led into that sort of weaker reception to new products in this case the tankless.

Speaker Change: No.

Speaker Change: I don't I don't think its that that specific remember we launched one product category that was our our premium convention premix product lines. So that's the <unk>.

Upper end of the market as we.

As we launch date and again Theres still to other product lines that will be launching in early 2025. It might have got caught up a little bit into Q3, and some of the destocking that happened there, but if I step back.

Speaker Change: This is a long term approach to my view is we're going to have to take share on a regular basis. As we go forward. We think we have the product lines. The features and benefits being North America, having our own control I think is going to be terrific. It is going to reduce lead times for our customers will be able to put it on their trucks with water heaters. So theres a number of things that come along.

Speaker Change: Long here, but we're in the early early stages, we just launched it in may but.

Speaker Change: But we just wanted to give you some color on how things were going forward, but as we start to launch the new products start to build out we're still very comfortable and as we mentioned in our analyst meeting that we feel there is a $100 million incremental sales for us as we get towards 2026. So.

Speaker Change: Scott I just think it's just too early to make any assumptions there while the full product line, we should see a nice tick up as we enter 2025.

Speaker Change: Thank you one moment for our next question.

Our next question comes from the line of Nathan Jones from Stifel.

Nathan Jones: Good morning, everyone.

Nathan Jones: Good morning.

Nathan Jones: I wanted to just ask a question on the shortened lead times I. My recollection is that your lead times, we got back to normal post kind of a bit like a couple of years ago.

Speaker Change: Maybe you can provide just a little bit more color on what you're talking about on lead times.

Speaker Change: They extend out and I'll come back and again, our heavier interest in further or just what the details around that comment.

I think your memories perfect, but they did get extended out when we did the price increase in Q1 and Q2.

Speaker Change: And so and as we talked about that that increase was a little bit lower that increase was we thought would have.

Speaker Change: Minimal impact, but our customers really bought into the Max amount they could that raised our lead times up again, if you look at the overall part of our business. Our boiler lead times are in good shape, our water treatment with lead times are in good shape.

Speaker Change: But at that point in time for North America water heating.

Speaker Change: That increase did did put us out almost double our normal lead times and that was the reason for it. It was a specific event took us a little bit longer than we anticipated to work. It down. So that's why you're hearing lead times back and forth, but we're really across most of all of our businesses our lead times are pretty much.

Speaker Change: Where they need to be providing there is some kind of event like an increase that would change that.

Speaker Change: Okay and I wanted to ask a question on China from a different angle.

Speaker Change: It sounds like you don't have enough information to kind of figure out what impact. This one will have you guys seen through cycles, where China is providing stimulus to the market before.

Speaker Change: Bentley for water heater market for consumer spending.

Speaker Change: Can you, maybe just give us a little color on some of the previous stimulus impacts that you're seeing from the Chinese government kind of how long that typically takes to flow through should they consume any kind of magnitude you can put around that just from a historical perspective.

Speaker Change: Yes, I would tell you this is probably a bit different than the prior stimulus is there. It was still a lot of SDI going into the country and people were expanding and the environment has changed so if you go back historically on this now it's it's just a different environment. The market is much more mature.

Speaker Change: I think the property sector. This this issue there is one that they have to do what they haven't had to deal within the past. So I would really be cautious about us trying to predict how and when youll.

Speaker Change: China will come out of this I do think though the.

Speaker Change: The steps that they're talking about taking and it seems to be serious where they were doing more incremental stimulus and leaning in on a bit more.

Speaker Change: Larger stimulus package to move the economy I think is a good thing, but I couldnt really give you.

Speaker Change: A prediction of when we think it will come out of it.

Speaker Change: We know what they will come out of it in some form or fashion.

Speaker Change: Down the road, we just and again I think what we're going to do is we're going to manage our business on the current environment make the adjustments we need to make we still have a strong brand there and then as it starts to come out will be in position to really benefit from that.

Speaker Change: As as things start to get better in China from an economic standpoint.

Speaker Change: I would add that we have in the past heard of appliance programs specific to appliances that have not really gained much traction, but I would say that most recent program that they've announced a trade in program.

Speaker Change: At least appears at early early stages to be a little more specific a little more.

Speaker Change: Qualified type of a program, so we'll see where that goes but.

Speaker Change: Historically, the appliance programs have not been as specific as this last program and again, it's early stages for that program.

Speaker Change: Thank you one moment for our next question.

Speaker Change: Our next question comes from the line of Damian Karas from UBS.

Damian Karas: Hey, good morning, everybody Hey, Damian.

Damian Karas: A couple of follow up questions on China.

Damian Karas: When you were talking about the water heater business there it sounded like youre seeing bearing trends in the premium side of the market.

Damian Karas: Versus the mid tier price.

Damian Karas: A portion of your business could you maybe just break out the numbers.

Damian Karas: To help us better understand kind of like what that difference was in the year of our trends for those two pieces.

Speaker Change: Well I would say overall, we're feeling that the entire market is a bit down. So we're feeling that I think were down about 17% in local currency and I'd say, it's fairly fair.

Speaker Change: Fairly even we feel like we've protected the premium position that we had so our share from how we can measure and it's always a challenge to measure share in China that we protected our premium position, but the whole market, we feel is a bit down.

Speaker Change: We are down a little bit more on the upper mid priced to the market because we did not fully participate in our promotional programs, but overall, we just feel the whole market is a bit depressed based on some of the factors that Kevin mentioned earlier.

Speaker Change: I'll just add to that again, we've been very selective.

Speaker Change: Remember, we sell one water heater at that time to a consumer.

Speaker Change: So.

Speaker Change: If we don't participate in a promotion someone's going to maybe leaning towards a competitive brand, but overall our brand is strong and we're going to continue to.

Speaker Change: Take our targeted approach to promotions and.

Speaker Change: Think about the long term.

Speaker Change: Value of the <unk> brand and our premium position, which I think has held up really well in this difficult environment.

Speaker Change: Got it Okay, and then just thinking about that that 17% core sales decline.

Speaker Change: So how much of that was purely kind of volume.

Speaker Change: Pressures versus may be negative.

Speaker Change: Price and mix impacts.

Speaker Change: Mostly all volume Damian.

Damian Karas: Yes, it's substantially all volume.

Damian Karas: Yes, there is pricing pressure and again, we didnt participate in all of that.

Damian Karas: Pricing pressure.

Damian Karas: There's a little pressure on export off the majority of that decline in volume.

Speaker Change: Thank you.

One moment for our next question.

Speaker Change: Our next question comes from the line of David Macgregor from Longbow Research.

David Macgregor: Yes, thanks for taking the follow up I guess, just again on China, where our unit volumes today on your premium segment water heaters versus.

David Macgregor: As a percentage of pre COVID-19 levels.

Speaker Change: Well if you go back and if you go back pre 2019 2018, the majority of our sales were falling into the premium category in keeping the same baseline measurement on how we define premium.

David Macgregor: In the third quarter.

David Macgregor: <unk> over quarter year over year, we actually saw an increase in the premium portion of our market that we sold was 60, a little over 60% on the on the water heating side is in the premium category.

David Macgregor: And I would say on the water treatment side, it's a little bit less we're kind of hover in the 40% to 30% premium.

Speaker Change: Alright, I guess I was just trying to get a sense of a compare versus.

Speaker Change: Where you were pre COVID-19.

Speaker Change: No.

Speaker Change: Pre COVID-19.

Speaker Change: Before we before we started downturn a bid in the market we were above 90% premium.

Speaker Change: The majority of our product was premium.

Speaker Change: And particularly on the water heating side at that time.

Speaker Change: Thank you.

Speaker Change: One moment for our next question.

Speaker Change: Our next question comes from the line of Bryan Blair from Oppenheimer.

Bryan Blair: Thank you good morning, everyone.

Speaker Change: Good morning.

Unfortunately, it's a technical issue so.

Bryan Blair: I cut out from the call for a bit I apologize from repeating any questions.

Speaker Change: You mentioned optimizing costs, both China and North America in response to that and then conditions either.

Speaker Change: Structural cost actions that are in flight right now.

Speaker Change: So can you quantify the anticipated savings of our earnings more.

Speaker Change: Variable moves for the timing.

Speaker Change: Well I'll cover I'll cover China separately from North America, I mean, I'll stay in North America, We've made a few moves by realign aligning production between plants.

Speaker Change: We've reduced some head count through attrition, we've balanced really production and head count are at our largest facility. So taken some actions in the manufacturing facility to be able to adjust to the volumes in the third quarter, which did which did cause a headwind to our margin in Q3, but feel like we're in a decent position goes.

Speaker Change: Out of Q3 into Q4 in North America.

Speaker Change: In China.

Speaker Change: When we're looking at China, we have really two pieces. One is we're always looking at cost reduction rates, it's part of our process and it's part of our process through looking at product innovation redesigning product to take cost out process improvement in the plant. So that's an ongoing process along with that ongoing process.

Speaker Change: Particularly since Covid is looking at the efficiencies of our store footprint looking to streamline and improve the efficiencies in what we support for retail outlet. So those things continue in the current environment.

Speaker Change: As we did going into Covid.

Speaker Change: We're challenging ourselves to evaluate structurally is this the right.

Speaker Change: Foundation, and we want to have the best Foundation. So we're taking a look at kind of our cost in China to be in a stronger position for profitable growth in the future.

Speaker Change: We don't have a quantification of what that may or may not cost, but we will be looking at that through the course of the quarter and be back talking about kind of where we're at on China, when we get into January.

Speaker Change: Okay understood.

And perhaps offer.

Speaker Change: Smart color on your pending parrot acquisition, I think high level strategically.

Speaker Change: Makes a lot of sense.

Speaker Change: Just hoping you can offer some detail on how Kelly asset helps to accelerate profitable growth in South Asia and India in particular.

Speaker Change: In the low to mid single digit kind of margin profile any of that right now.

Speaker Change: The leverage to the upside is that as simple as scale channel presence.

Speaker Change: How how else will.

Speaker Change: Yeah.

Speaker Change: Your business that much stronger in <unk>.

Speaker Change: Yes.

Speaker Change: Those are two pretty important items that you just mentioned scale and footprint.

Along with complementary brands and.

Speaker Change: And the market's pure has some strengths in certain markets like e-commerce that we do.

Speaker Change: And you look at bringing the scale together and leveraging the various functions and so forth as we go forward have an access to different markets that may be one site and then putting the combination together too.

Speaker Change: Bring a package to a.

Speaker Change: Some type of deal or retailer. So the scale really matters. So we're going to double our business in India, which is which is a big deal we're going to move to the number three market share position, which again gives us.

Speaker Change: The foundation that we're looking for and it's been a goal for us on India is doing quite well, but organically. We just can't grow fast enough to get what we want to be and we think strategic actions acquisitions like pure theyre going to make.

A big difference as we scale that business up.

Speaker Change: It's I believe it's a perfect time coming.

Speaker Change: Coming up the election, and where India is going to go heavy too strong water treatment brands in the market being able to leverage.

The synergies between the two companies over the next year or two so when you put that all together I think it's.

It's going to drive certainly incremental margins and we're still in the early stages, we havent closed, but we look forward to not only top line growth, but profitable growth and margin enhancement as we get into the first couple of years.

Speaker Change: Thank you one moment for our next question.

Speaker Change: Our next question comes from the line of Andy Kaplowitz from Citigroup.

Andy Kaplowitz: Good morning, everyone, Hey, Eddie Ryan could.

Andy Kaplowitz: Could you give us a little more color into how youre thinking about north American commercial water heaters, obviously, you revise the industry forecast down a little bit and you mentioned the move towards electric versus gas, but what's the risk that commercial could still get a little worse before it gets better given it does tend to lag what happens in the U S residential water heaters.

Andy Kaplowitz: Yeah.

Speaker Change: It does lag a bit.

Speaker Change: As we look at again, we start with our quoting we look at our distributors' inventory replacement market.

Speaker Change: I think we don't really see a significant shift down.

Speaker Change: Cody, it's still seems to be holding up pretty well again remember boilers plus water. He's 85% 80, 85% is replacement.

Speaker Change: And then but there is a shift going on we have a nice heat pump product line that is in the commercial space as well.

Speaker Change: Of course, we have the premier condensing commercial gas product line. So.

Speaker Change: We just think they're just going to be different solutions, we're going to have to work through what I like about our position is we have a full portfolio from gas electric.

Speaker Change: To heat pump technology to condensing high efficient gas product that we can provide that solution going forward. So again, we see it being relatively flat but.

Speaker Change: Don't see a further downside to the business as we.

Speaker Change: Exit 2024.

Speaker Change #100: That's helpful. Obviously boilers still strong I think you said you saw a modest slowdown in quoting activity in boilers. Despite the overall strong growth.

You mentioned the weaker residential boiler market are you at all concerned regarding the slower slowdown in that market are generally still good outlook there.

Speaker Change #101: Well, we just we're kind of pointed out where we're at what's happening here are our commercial our condition commercial boilers have outperformed the market. This year, we have gained some share.

Speaker Change #101: Really good about the separate products, particularly some of the benefits that we have like healthcare technology. So there's still a lot of activity out there. We do said we saw some softness there, but again I go back to 80% to 85% of this business is still replacement, we're heading into the cold season, which is always a good time for us. So just wanted to.

Speaker Change #101: Maybe just put that on the table, but overall business is going well our backlog is where we expect it to be so overall performing really well I do want to make one cautious we were up significantly as we talked about for the quarter, but if you go back we were that was a pretty easy comp, but we look going into Q4.

Speaker Change #101: And of a normalized run rate for our commercial boilers.

Speaker Change #102: Thank you.

Speaker Change #103: One moment for our next question.

Speaker Change #104: Our next question comes from the line of Jeff Hammond from Keybanc Capital Markets, Inc.

Jeff Hammond: Hey, guys just a quick follow up free cash flow, you've cut pretty significantly clearly the lower earnings but just.

Jeff Hammond: Through the moving pieces.

Speaker Change #105: Yes, it's really two moving pieces there one is inventory our inventory forecast is up and you heard a little bit about a slowing a bit on our tangibles plans. We still are very positive about tankless, but it's going to be a little slower out of the gate and so.

Jeff Hammond: Our inventory Thats gone up.

Jeff Hammond: A meaningful piece of that probably about 40% of the increase is due to carrying more tankless inventory than we would have at the end of last year. Some of that is planned some of that is just a little heavier than what we would've expected in July the.

Jeff Hammond: The other pieces in China.

Jeff Hammond: We get we receive customer deposits in advance of shipments is and as we've seen China slow or.

Jeff Hammond: Our projection on year end customer deposits just come down so those are really the two major pieces.

Speaker Change #106: Okay. Thank you.

Speaker Change #107: Thank you at this time I would now like to turn the conference back over to Helen <unk> for closing remarks.

Speaker Change #108: Thank you for joining US today, let me conclude by reminding you that our global <unk> team delivered solid execution navigated many challenges in the third quarter.

Speaker Change #108: We look forward to updating you on our progress in the quarters to come. In addition, please mark your calendars to join our presentation at four conferences this quarter.

On November 12th Northcoast on November 13.

On December 3rd and Goldman Sachs.

Speaker Change #108: Thank you and enjoy the rest of your day.

Speaker Change #109: This concludes today's conference call. Thank you for participating you may now disconnect.

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Speaker Change #110: Good day and thank you for standing by welcome to a O Smith Corporation third quarter 2024 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one.

Speaker Change #110: One one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star one one again.

Speaker Change #111: Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today Hello.

Speaker Change #112: <unk>. Please go ahead.

Speaker Change #112: Good morning, and welcome to the a O Smith third quarter Conference call I'm, Helen Gurgle, 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.

Speaker Change #112: In order to provide improved transparency into the operating results of our business, we provide non-GAAP measures.

Speaker Change #112: Free cash flow is defined as cash from operations less capital expenditures.

Speaker Change #112: Justin earnings adjusted earnings per share adjusted segment earnings and adjusted corporate expenses.

Speaker Change #112: The impact of pension settlement income and restructuring and impairment expenses.

Speaker Change #112: Reconciliations from GAAP measures to non-GAAP measures are provided in the appendix at the end of this presentation.

Speaker Change #112: Right.

A friendly reminder, that some of our comments and answers during this conference call will be forward looking statements.

Speaker Change #112: And subject to risks that could cause actual results to be materially different.

Speaker Change #112: Those risks include matters that we described in this morning's press release among others.

Speaker Change #112: Also as a courtesy to others 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.

Speaker Change #112: We will be using slides as we move through today's call you can access them on our website at Investor Dot Smith Dot com.

Speaker Change #113: I will now turn the call over to Kevin to begin our prepared remarks.

Kevin Wheeler: Thank you Helen and good morning, everyone I'm on slide four and our third quarter results.

Kevin Wheeler: As we previously announced our third quarter sales and earnings decreased compared to last year as strength consumer demand in China and water heater demand in North America was weaker than expected.

Kevin Wheeler: China Third party sales declined 17% in local currency.

Kevin Wheeler: North America water heater sales decreased 4% as pricing actions were more than offset by lower volumes.

Kevin Wheeler: I am pleased with the double digit growth, we had in the quarter and our North America boiler and water treatment businesses.

Kevin Wheeler: As well in India.