Q2 2024 Earnings Summary
- A.O. Smith expects strong growth in its boiler business, projecting an 8%-10% increase for the year, driven by higher volumes, particularly in commercial boilers with high-efficiency products like the CREST boilers with Hellcat technology.
- Successful launch and positive market acceptance of A.O. Smith's own gas tankless products in North America, with plans to eliminate the 25% tariff by moving production to Juarez, Mexico in 2025, which will improve margins and competitiveness in the tankless category.
- Strong growth in heat pump water heaters, exceeding 25%-30% growth expectations in Q2, with continued momentum expected over the next several years due to increasing adoption and a robust product line.
- The company is experiencing pricing and promotional pressures in China due to weak consumer demand, which could impact margins in their Rest of World segment. Management admits the environment is tough and they are cautious about their guidance.
- The company has noted softer orders in May, June, and July in its North American water heater segment, with expectations of a challenging Q3 due to volume headwinds, which could impact margins.
- Increased selling expenses in North America due to the launch of the tankless products and higher commission expenses could pressure margins, with no guarantee of immediate returns from these investments.
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Margin Outlook
Q: How will margin cadence look in North America and Rest of World in H2?
A: Margins in the third quarter will be challenged due to volume headwinds in North America caused by some pre-buy effects, but the fourth quarter is expected to return to levels similar to Q2 with continued momentum in gas tankless products. In China, despite economic weakness and competitive pressures, margins are expected to be maintained around 11% for the year through cost actions and careful management. -
Acquisition of Pureit
Q: Can you discuss the profitability and growth prospects of the Pureit acquisition?
A: The acquisition of Pureit doubles our India business and adds a solid premium brand that complements our existing operations. Pureit has revenues of around $60 million with low to mid-single-digit profitability, similar to our current India business. The brand has achieved 10 consecutive quarters of 15%+ growth, and we expect to leverage operational synergies to continue this momentum and enhance profitability. -
Tankless Water Heater Launch
Q: What is the progress and impact of the tankless water heater launch?
A: The launch of our tankless water heaters has been very successful, exceeding expectations. We're adding two more products by year-end, and our Juarez factory is on track to begin production towards Q4, ready for 2025. Moving production to Juarez will eliminate the 25% tariff, reduce logistics costs, and provide a positive upside to our tankless category. -
Steel Pricing Impact
Q: How are changes in steel prices affecting the business?
A: Steel prices increased by 20% in Q2 compared to Q1 and were about 25% higher than Q2 last year. We've seen some softening, and with our lag of 90–120 days, we expect a little relief in Q3 and more in Q4. Our outlook remains roughly flat year over year, and lower steel costs may provide some opportunity in the back half of the year. -
US Residential Water Heater Market
Q: Is the outlook for the US residential water heater market changing given recent sales volumes?
A: Despite a strong first half, we maintain our outlook of a flat US residential water heater market for the year. The recent softness is seen as returning to our forecast, and we believe proactive replacement and new construction will remain relatively flat due to interest rates. -
Heat Pump Water Heater Growth
Q: What are the trends and expectations for heat pump water heaters?
A: Heat pump water heaters, while still about 2% of the market, are a growing category, especially in states like New York and California where subsidies are available. We anticipate 25–30% growth over the next several years, and in Q2, we saw growth several points above that. Availability and an attractive payback are driving adoption. -
China Sales and Price Pressure
Q: How is price competition affecting margins in China, and how are you addressing it?
A: The Chinese market remains very competitive with weaker consumer demand and increased promotional activities, particularly in the mid-price segment. We're managing margins by balancing price promotions with cost management, having made our cost structure more variable and closed less profitable stores. We aim to maintain margins around 11% for the year, similar to last year. -
Working Capital
Q: There was a bigger working capital build in H1; will this reverse in H2?
A: Yes, the increase in working capital in the first half is due to timing, including building up tankless water heater inventory. We expect to get it back in the second half of the year. -
Increased Selling Expenses
Q: What's the reason for increased selling expenses in North America, and how should we model it?
A: The increase in selling expenses is primarily due to higher volumes and the launch of our tankless products, which includes promotional activities and training. Selling expenses are largely commission-based and track closely with volumes. This is a one-time expense to support the successful introduction of the product. -
Boiler Business Growth
Q: How is the boiler business performing, and what about profitability compared to last year?
A: The boiler business is expected to grow 8–10% this year, with strong orders, quoting activity, and backlog, especially in the commercial segment. Increased volumes contribute positively to profitability in this segment.