雅虎香港財經 A. O. Smith Corporation (NYSE:AOS) Q1 2024 Earnings Call Transcript
A. O. Smith Corporation (NYSE:AOS) Q1 2024 Earnings Call Transcript April 25, 2024
A. O. Smith Corporation beats earnings expectations. Reported EPS is $1, expectations were $0.98. AOS isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the A.O. Smith First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, today's conference is being recorded. I would like to hand the conference over to your speaker today, Helen Gurholt, please go ahead.
Helen Gurholt : Good morning. And welcome to the A.O. Smith first quarter conference call. I'm Helen Gurholt, 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 the 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 exclude the impact of impairment expenses. Reconciliations 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. 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. 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.
Kevin Wheeler: Thank you, Helen. And good morning, everyone. I'd like to start off by extending a warm welcome to Steve Shafer, who has recently joined A.O. Smith as our Chief Operating Officer. Steve is an accomplished business leader with deep global experience in manufacturing and leading innovative businesses. His strategic acumen and extensive global leadership experience will prove invaluable as we continue to focus on innovation and drive an operational performance to enhance shareholder value. Let's now turn to the quarter on Slide 4. Our global A.O. Smith team delivered sales of $979 million in 2024 and EPS of $1, a 6% increase over 2023 adjusted EPS. North America sales increased 2% and segment margins increased 80 basis points due to a positive mix, higher commercial volumes, and lower material costs, principally steel.
Our Rest of the World segment, sales grew 4%. Recently introduced products in China contributed to the majority of the growth. In India, our sales grew 16% in local currency in the first quarter of 2024. Please turn to Slide 5. North America water heater sales grew 2% in the first quarter due to higher commercial volumes and a positive mix towards commercial gas and high-efficiency products, including heat pumps. Volumes were favorably influenced by our price increase effective March 1. However, year-over-year comps were somewhat -- were somewhat muted by a strong first quarter of 2023. Our North America boiler sales were flat compared to the first quarter of 2023. As a reminder, we do not begin to see the effects of the 2023 channel inventory destocking until the second quarter of last year.
We were pleased to see sales of our high-efficiency residential boilers return to more normalized levels in the first quarter of 2024. Sales of our CREST commercial boilers with Hellcat technology increased over 30% in the first quarter. North America water treatment sales grew 4% in 2024, driven by acquisition-related sales growth and pricing. Organic growth in the e-commerce and especially wholesale channels were offset by softness in the direct-to-consumer and retail channels. In China, first quarter third-party sales increased 6% in local currency. Our recently launched kitchen products continue to be well received in the market and provide bundling opportunities that drive overall sales growth. Sales of our HVAC systems, which generally combine a combi boiler with a heat pump water heater, increased 14% in local currency in the quarter as well.
I will now turn the call over to Chuck, who will provide more details on our first quarter performance.
Chuck Lauber: Thank you, Kevin, and good morning, everyone. I'm on Slide 6. First quarter sales in the North America segment were $766 million, a 2% increase compared with 2023, driven by higher commercial volumes and the benefits of mixed shift towards high-efficiency water heaters, including heat pumps. North America segment earnings of $199 million increased 5% compared with 2023. Segment margin was 25.9%, an increase of 80 basis points year-over-year. The higher segment earnings and margin were primarily driven by positive mix and lower material costs, partially offset by selling and advertising expenses in support of higher sales. Moving to Slide 7. Rest of the World segment sales of $227 million increased 4% year-over-year, including unfavorable currency translation of $9 million, primarily related to China.
Segment third-party sales of $219 million increased 4% on a constant currency basis. The increase was primarily driven by higher sales of Kitchen and HVAC products in China. India sales increased 16% in local currency in the quarter, driven by growth in both water heating and water treatment with particular strength in our e-commerce and commercial end markets. Rest of the World segment earnings of $17 million decreased slightly compared to adjusted segment earnings in 2023, primarily due to sales promotions associated with new product introductions and product mix in China. Third-party segment operating margin was 7.9%, a decrease of 20 basis points compared to adjusted segment margin in 2023. Please turn to Slide 8. We generated pre-cash flow of $85 million during the first three months of 2024, a decrease from the same period last year, primarily as a result of higher incentive payments associated with record sales and profits last year and higher inventory levels that more than offset higher earnings and lower accounts payable balances.
Capital expenditures increased $11 million year-over-year, driven by expansion projects. Our cash balance totaled $303 million at the end of March, and our net cash position was $183 million. Our leverage ratio was 6% as measured by total debt to total capital. Let’s now turn to Slide 9. In addition to returning capital to shareholders, we continue to see opportunities for investment in organic growth, innovation, and new product development across all of our product lines and geographies. We target strategic acquisitions that meet our financial metrics that’s accretive to earnings in the first year and return our cost of capital in three years. In the first quarter, we welcomed Impact Water Products to the A.O. Smith family. Impact supports our growth strategy by expanding the West Coast presence of our water treatment business.
Please turn to Slide 10 and our 2024 earnings guidance and outlook. We reaffirm our 2024 EPS outlook of an expected range of $3.90 to $4.15 per share. The midpoint of our EPS range represents an increase of 6% compared with 2023 adjusted EPS. Our outlook is based on a number of key assumptions, including our guidance assumes that our steel costs in the full year 2024 will be a slight headwind compared to 2023. We project an increase in steel input costs in the second quarter of approximately 20% over the first quarter. Our full year steel input cost projection includes a slight decline in the steel price index in the second half of the year. Our outlook assumes non-steel material costs are similar in 2024 as they were in 2023. Our guidance also assumes a relatively stable supply chain environment, similar to what we've experienced throughout 2023.
We introduced our internally designed and manufactured gas tankless products earlier this year. These products will be manufactured in our China facility until our North America capacity is completed in 2025. We expect customer shipments to begin later in the second quarter. Associated import tariffs and other launch costs will negatively impact North America margins by approximately 50 basis points when we begin to ship products. We are investing in manufacturing at Juarez, Mexico that will eliminate the tariff in the future. For the year, CapEx should be between $105 million and $115 million, an increase year-over-year due to our capacity expansion projects related to our gas tankless manufacturing facility in Juarez, expansion of our engineering capabilities in Lebanon, Tennessee, and adding high efficiency commercial water heating manufacturing capacity to align with regulatory changes coming in 2026.
We expect to generate strong free cash flow of between $525 million and $575 million. Corporate and other expenses are expected to be approximately $65 million. Our effective tax rate is estimated to be between 24% to 24.5%. And we continue to expect to repurchase approximately $300 million of our shares of stock, resulting in outstanding diluted shares of $147 million at the end of the year. I will now turn the call back over to Kevin, who will provide more color on key markets and top-line growth outlook and segment expectations for 2024, staying on Slide 13. Kevin?
Kevin Wheeler: Thank you, Chuck. We reaffirm our outlook that 2024 sales will grow between 3% and 5% compared to 2023, which includes the following assumptions. We maintain our projection that 2024 U.S. residential industry unit volumes will be approximately flat for last year after seeing a 6% growth in 2023. Our assumption projects that new home construction and proactive replacement will remain at levels similar to last year. Our projection that U.S. commercial water heater industry volumes will increase low single digits in 2024, is unchanged. Our outlook includes the announced price increases in North America water heating of 4% on most of our water heater products. Price increase for heat pumps products is 8%. Our April orders are strong year-over-year as a result of resilient end demand in our management of pre-buy orders.
In China, we believe that the economy and consumer confidence remains weak, and the real estate and housing markets are challenged. We have not seen signs of improvement. Through March and April, we have seen headwinds in consumer demand. Given the continued weak economy and the softness we are seeing, we are lowering our 2024 third-party sales growth guidance in China to be flat to 3% up in local currency. Our forecast assumes a negative currency translation impact of approximately 1% for the year. We entered the second quarter with a strong backlog in our boiler business and reaffirmed that we expect boiler sales to grow between 8% and 10% over last year. We are revising our sales growth guidance for North America water treatment products from an increase of 10% to 12% to an increase of 8% to 10%.
This reduction is a reflection of softness we are experiencing in our direct-to-consumer business average order price in our retail channel, particularly for water softeners. Based on our 2024 assumptions, we expect our North America segment margin to be approximately 25% and rest of our third-party segment margin to be approximately 10% . Please turn to Slide 11. We are pleased with our performance in early 2024. We had year-over-year growth in residential and commercial water heaters along with a strong mix in the first quarter and we are pleased with our order rates we are seeing in this month. India is on track for another year of projected double-digit sales growth. During the quarter, we initiate three capital expansion projects that will add capacity for key product categories in North America.
First, we broke ground on our tankless manufacturing facility in Juarez, which is on the same campus as our tankless manufacturing facility in Juarez, which is on the same campus as our current residential water heater facility. Production in Juarez will improve logistics as well as eliminated tariff on products currently manufactured in our China facility. Production is targeted to begin in 2025. In addition, we launched our high-efficiency commercial gas water heater expansion in McBee, South Carolina. This expansion will increase our production capacity for our high-efficiency products, including our market-leading Cyclone product. As a reminder, Department of Energy Regulatory changes largely impacting commercial gas water heater efficiency levels will eliminate lower efficiency products from the market beginning in late 2026.
Finally, in support of our R&D and product innovation within our commercial water heater and boiler markets, we have initiated the expansion of our Lebanon, Tennessee commercial lab and engineering test facility. The state-of-the-art facility will combine our commercial water engineering expertise under one roof and allow for cross-functional collaboration, particularly with mutual technologies like heat pump. We are in the early stages of all three projects, but we're off to a very good start. As always, we remain focused on meeting the needs of our customers as well as executing our key strategic priorities to advance our position as a leader in heating and treating water around the world. With that, we conclude our prepared remarks, and we are now available for your questions.
Operator: Thank you. [Operator Instructions] Our first question comes from Saree Boroditsky [ph] with Jefferies. Your line is open.
See also
30 Countries that Receive the Most Aid from UNDP and
20 Affordable, Promising Cities to Buy Real Estate in 2024.
To continue reading the Q&A session, please click here.
