Q3 2024 Earnings Summary
- North America boiler sales grew by 15% year-over-year, indicating strong performance and potential market share gains in the commercial condensing boiler segment. North America water treatment sales increased by 16%, driven by both acquisitions and organic growth.
- The strategic acquisition of Pureit is expected to double A. O. Smith's business in India and elevate it to the #3 market share position in the Indian market, enhancing scale, footprint, and access to new markets, particularly in e-commerce where Pureit has strengths.
- Despite current market challenges in China, A. O. Smith maintains a strong premium brand position and remains confident in the long-term upside due to the country's demographics and economic potential, reaffirming its commitment to key markets like the U.S., China, and India.
- China sales declined by 17% in local currency, with the entire market being depressed and increased pricing and promotional pressure, particularly in the mid-price sector. ,
- North America water heater sales decreased by 4%, as pricing actions were more than offset by lower volumes, with softer-than-expected orders and customers adjusting order patterns and reducing inventories. ,
- Delayed tankless water heater production is causing headwinds into 2025, with slower-than-expected sales and continued start-up delays impacting inventories and margins. , ,
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Total Sales Growth | Q3 2024 YoY | 3% to 5% growth compared to 2023 | Decreased 3.7% from $937.5MIn Q3 2023 to $902.6MIn Q3 2024 | Missed |
Boiler Sales Growth | Q3 2024 YoY | 8% to 10% growth | Increased 15.1% from $61.8MIn Q3 2023 to $71.1MIn Q3 2024 | Beat |
China Third-Party Sales Growth | Q3 2024 YoY | 0% to 3% in local currency with ~2% negative currency impact | Decreased 13.3% from $201.3MIn Q3 2023 to $174.6MIn Q3 2024 | Missed |
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China Sales Decline
Q: What caused the significant drop in China sales in Q3?
A: China sales declined by 17% in local currency due to decreased consumer confidence from worsening property markets and employment challenges. As property values, which represent about 70% of Chinese consumers' wealth, continued to decline, spending slowed across both premium and mid-tier products. -
China Outlook and Stimulus Impact
Q: How will China's stimulus affect your business in 2025?
A: It's too early to predict the impact, but we view the government's stimulus measures positively. Initiatives like increased credit for stalled construction and lowered mortgage rates could boost the market. However, the size and effect of the stimulus remain uncertain, so we'll manage cautiously and be ready to capitalize when recovery occurs. -
North America Residential Water Heaters
Q: How did your residential water heater volumes perform versus the market?
A: Our volumes were impacted by inventory corrections as distributors adjusted to normalized lead times after earlier price increases had extended them. While industry data may show shipments up, we anticipate the overall market to be relatively flat to slightly down by the end of 2024 and are comfortable with our position moving forward. -
Shift to Electric in Commercial Water Heaters
Q: Are you prepared for the shift from gas to electric units?
A: Yes, we're confident in our capacity and competitive stance in both electric and gas commercial water heaters. Although we face some headwinds due to a market shift toward electric units, our broad product portfolio ensures we can meet evolving demands without concern. -
Tankless Water Heater Launch Impact
Q: How is the tankless water heater launch affecting results?
A: The launch is causing a headwind of about 50 basis points this year, mainly impacting the fourth quarter. We're transitioning production from China to our Juarez facility through 2025, which will continue as a headwind next year. Despite slight delays, we remain confident in achieving $100 million in incremental sales by 2026. -
Cost Optimization Efforts
Q: What cost actions are you taking amid demand changes?
A: In North America, we've realigned production, reduced headcount through attrition, and balanced operations to adjust to volumes—impacting Q3 margins but setting us up well for Q4. In China, we're evaluating structural costs, optimizing our store footprint, and improving efficiencies to strengthen our foundation for profitable growth. -
Steel Costs and Price Trends
Q: How are steel costs affecting pricing and margins?
A: Steel costs are slightly favorable entering Q4, with about a 15% decrease from Q3 to Q4. Overall material costs are relatively flat. We feel stable regarding price and costs heading into the fourth quarter and don't foresee significant margin pressures. -
India Expansion with Pureit Acquisition
Q: How will the Pureit acquisition enhance growth in India?
A: Acquiring Pureit will double our India business, making us the #3 market share leader. This strategic move enhances scale, expands our footprint, and opens new markets like e-commerce. We anticipate both top-line growth and margin expansion in the coming years. -
Lead Times Normalization
Q: What's the status of lead times and inventories?
A: Lead times, previously extended due to price increases, have normalized. This led distributors to adjust inventories, causing temporary order reductions. Currently, lead times across our businesses are where they need to be, barring any disruptive events. -
Boilers Business Outlook
Q: Any concerns about a boilers market slowdown?
A: While we've observed some softness, our high-efficiency commercial boilers have outperformed the market, gaining share. With 80–85% of this business being replacement and the cold season approaching, we expect stable demand. Our backlog is solid as we enter Q4.