A.O. Smith Corporation

Thank you for standing by. Welcome to the A.O. Smith Second Quarter 2022 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 1-1 on your telephone. Please be advised that today's call is being recorded. I would now like to hand the conference over to your speaker today, Helen Gerholt. Ma'am, please go ahead.

Good morning, and welcome to the A.O. Smith Second Quarter Conference Call. I'm Helen Gerholt, 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 non-operating, non-cash pension income and 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. Please turn to the next slide.

Thank you, Helen, and good morning, everyone. Thank you for joining us today. I'm on slide four and our second quarter results. Our team performed well throughout the quarter, despite an uncertain macro environment, to deliver strong sales and EPS performance. Second quarter sales improved 12% year over year, driven by our 2021 inflation-related pricing actions, the acquisition of giant factories late last year, as well as water treatment, boiler, and commercial water heater volume growth in North America. Our rest-of-world segment performance decreased 13% year over year, driven by COVID-19-related lockdowns in China. However, we experienced sequential sales improvement in China through the quarter as restrictions began to ease. The acquisition of giant factories added $31 million to quarterly sales and one cent to EPS. We are pleased with the performance of the team and our integration is on track. We saw quarter-over-quarter improvement in our supply chain in the second quarter, which led to higher boiler and commercial water heater volumes. Please turn to slide five. Our global A.O. Smith team delivered second quarter of 2022 adjusted EPS of 82 cents, a 14% increase that was driven in part by a 12% increase in sales compared with the second quarter of 2021. Our strong second quarter performance resulted from our team's outstanding execution. Despite the backdrop of an uncertain macro environment, COVID-19 related lockdowns in China and softness in the residential water heater industry. I am proud of how my A.O. Smith colleagues work together to overcome many challenges to deliver value to our customers across the globe. Excluding the impact of Giant, North America water heater sales grew 19% in the second quarter of 2022 due to pricing actions implemented in 2021 in response to rising material and logistics. Lower sales of residential water heaters partially offset sales growth in the quarter. The residential industry saw record orders in the second quarter of 2021, creating a difficult comparison for 2022. With that said, we saw order rate softness as we exited the second quarter and into July as customers right-sized their inventories. We saw quarter-over-quarter improvement in our commercial gas water heater shipments, as supply chain constraints eased in the second quarter, as well as our sales of commercial electric water heaters greater than 55 gallons, as order rates normalized after the regulatory change impacted orders at the beginning of the year. Our North America border sales grew 27% in the quarter, driven by pricing increases to offset higher material and transportation costs and strong demand. We again ended the quarter with a significant backlog, largely composed of commercial condensing boilers, and we continue to see stable order rates for these market-leading, energy-efficient products. Our strategy to focus on innovation and decarbonization contributed to strong demand for our high-efficiency condensing boilers. North America water treatment sales grew 19% in the second quarter, as our independent water quality dealers continued to outperform the market and gain share. We also benefited from strong demand in the wholesale channel. In China, sales decreased 14% in local currency compared to the second quarter of 2021, primarily due to the expected impacts of COVID-19 related lockdowns. Our sales improved sequentially through the quarter as lockdowns lessened and consumer demand improved. The steps that our China team have undertaken to right-size the business and manage discretionary spend paid dividends this quarter. as China held its operating margins flat to last year despite lower sales in the quarter. The first half of July, we saw consumer demand down approximately 5 to 10% compared to last year, a sequential improvement from second quarter consumer demand levels. Please turn to slide six. As I mentioned on our January call, one of our key strategic priorities in 2022 is to expand our water treatment business through innovation, new product development, and strategic acquisitions. In May, we launched our redesigned Aquasonic Clean Water Machine, the first power countertop water filter to combine a sleek, compact, no-install design with four different methods of advanced filtration technology. The new Clean Water Machine is tested and certified to NSF standards for the removal of up to 99.9% of 77 contaminants, including lead, the forever chemicals such as PFOPs and many more. AquaSun's patented clarion filtration ensures industry-leading contaminant removal while retaining the beneficial and naturally occurring minerals in water, such as calcium, magnesium, and potassium, for optimal hydration. In addition, we welcomed Atlantic Filter Corporation to the A.O. Smith family last month. Atlantic Filter is the fifth acquisition we've made the North America water treatment market since 2016. With a strong presence in southern Florida, Atlantic Filter will expand our capabilities in this key area of the market. I'll now turn the call over to Chuck, who will provide more details on our second quarter performance.