A.O. Smith Corporation

Hello, thank you for standing by and welcome to the AO Smith third quarter 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Helen Gerholt. Please go ahead.

Thank you, Josh. Good morning and welcome to the A.O. Smith Third 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 as well as legal judgment income and terminated acquisition related 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. I'm on slide four in our third quarter results. As we announced on October 13th, we saw our customers reduce their North America residential water heater inventory levels particularly in the wholesale distribution channel. This inventory destocked activity was larger than we expected going into the third quarter. Based on market data, we believe this destock was industry-wide. As a result of the destock, our third quarter sales decreased 4% year over year due to lower residential water heater volumes, which more than offset our 2021 inflation-related pricing actions, incremental sales from our acquisition of Giant Industries late last year, as well as commercial water heater and boiler growth in North America. A rest-of-world segment, sales decreased 13% year-over-year as COVID-related lockdown headwinds persisted in China. Despite lower volumes, our China business achieved margin growth of 40 basis points in the quarter. The acquisition of giant factories added $25 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, which led to higher commercial water heater and boiler volumes. Please turn to slide five. Our global A.O. Smith team delivered third quarter 2022 adjusted EPS of 69 cents, a 15% decrease that was driven in part by a 4% decrease in sales compared to the third quarter of 2021, as well as higher costs associated with production inefficiency and higher cost materials. I commend the global AO Smith team for meeting the many challenges we faced in the third quarter and taking the necessary steps to right-size our production and meet current demands to improve efficiencies going forward. Excluding the impact of Giant, North America water heater sales decreased 9% in the third quarter of 2022 due to greater than expected residential water heater destocking activity. that more than offset pricing actions implemented in 2021 in response to rising material and logistic costs. The residential industry experienced greater than average growth in 2020 and in 2021. We began to see softness in our orders toward the end of the second quarter and into the third quarter as our customers began to destock their inventories in response to our lead times returning to pre-pandemic levels. However, this destocking activity was prolonged and deeper than we originally expected. We have seen an increase in our orders in October, and while we expect higher residential water heater volumes in the fourth quarter compared to the third quarter, we do not expect volumes to be as robust as the fourth quarter of 2021. We again saw quarter-over-quarter improvements in our commercial gas water heater shipments as supply chain constraints continue to ease in the third quarter. Our North America boiler sales grew 27% in the quarter, mainly driven by previously announced price increases to offset higher material and transportation costs and higher volumes. We continue to see improvement in our supply chain in the third quarter, which allowed us to reduce lead times and begin to reduce our backlog. Our strategy to focus on innovation and decarbonization contributed to strong demand for our high-efficiency condensing boilers. North America water treatment sales grew over 4% in the third quarter, primarily due to pricing actions taking to offset higher input costs. Our water treatment business was also impacted in the quarter by customer destocking in the professional channels. In line with expectations, sales in China decreased 10% in local currency compared to the third quarter of 2021, primarily due to the continued impact of COVID-19-related lockdowns. Our team in China continue to effectively manage discretionary spend in the quarter. In the fourth quarter, we forecast that consumer demand will be down approximately 15% compared to last year. Please turn to slide six. As I mentioned on our January call, one of our key strategic priorities in 2022 is to innovate and expand our DCAR portfolio, including heat pump technology. In the third quarter, we launched our best-in-class Voltics AL residential heat pump water heater. The Voltics AL has industry-leading energy efficiency and provides peace of mind with new integrated leak protection technology. The Voltics AL also has zero clearance design and versatile top and side water connections to ease installation for contractors. We believe the new Voltex AL is a market-leading product that puts us in a strong position to capitalize on the decarbonization and electrification megatrends. I'll now turn the call over to Chuck, who will provide more details on our third quarter performance.