A.O. Smith Corporation

Good day, and thank you for standing by. Welcome to the A.L. Smith Corporation's fourth 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 that session, you will need to press star 1-1 on your phone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded, and I would now like to hand the conference over to your speaker today, Ms. Helen Gerholt. Ms. Gerholt, please go ahead.

Good morning, and welcome to the A.O. Smith Fourth Quarter and Full Year 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 provide non-GAAP measures. Free cash flow is defined as cash from operations plus 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. Good morning, everyone. I'm on slide four and our full year results. Our team delivered record-setting sales and year-over-year improvement in earnings on an adjusted basis despite lingering supply chain headwinds, inflation, and a significant U.S. wholesale residential channel inventory destocking activity that took place in the third quarter and began to normalize in the fourth quarter. Residential industry volumes increased 15% in the fourth quarter compared to the third quarter. Despite the destocking activity, North America's sales were up 11% compared to 2021, primarily due to inflation-related pricing and strong demand for our commercial and residential boilers and water treatment products. Our rest of the world segment delivered consistent performance in 2022, despite headwinds in the economy and currency exchange. Segment operating margins improved 120 basis points, driven by our China team improving their full-year operating margins to almost 11%. In India, our sales grew 28% in local currency in 2022 and continued to be profitable. As expected, we settled the majority of our pension liabilities in December of 2022, which resulted in a non-cash pre-tax expense of $417 million, or $1.60 of EPS. This expense is excluded from adjusted earnings and adjusted EPS. With our dividend and share repurchases, we have returned $581 million of capital to shareholders. Please turn to slide five. Our global A.F. Smith team delivered record sales of $3.8 billion in 2022 and adjusted EPS of $3.14, a 6% increase over 2021. we achieved a strong performance as a result of effective execution from our team. North America water heater sales grew 10% in 2022 due to 2021 pricing actions implemented in response to rising material and logistic costs and acquisition-related revenue that was partially offset by lower residential volumes. After two years for greater than average growth, residential unit industry demand decreased approximately 12% compared to 2021, primarily due to a wholesale channel inventory destocking that occurred during the second and third quarters. The order reduction we experienced from our customer was driven in part by our improved performance in delivering residential product and reducing our lead times. Commercial industry units decreased approximately 17% year over year. A large portion of the decrease was due to a continued weakness in electric products greater than 55 gallons, which was impacted by a regulatory change at the beginning of 2022. We don't expect that product category to rebound to pre-2022 levels. Despite the 2022 contraction in both the residential and commercial industries, we are pleased with our market share strength in both residential and commercial water heaters. Our North America boiler sales grew 28%. driven by higher volumes and previously announced price increases to offset higher costs. Our supply chain improvement efforts allowed us to reduce our record backlog in the second half of 2022. Our focus on innovation, efficiency, and decarbonization contributed to strong demand for our high-efficiency condensing boilers, particularly our Hellcat crest boilers with O2 sensing technology. North America water treatment sales grew 10% in 2022, due to pricing actions and higher volumes, particularly in our dealer and specialty wholesale channels. Our strategy to pursue this market with an omni-channel approach as we work to grow our share through product development and acquisition opportunities. We believe our independent water quality dealers have been outperforming the market and gaining market share. In China, four-year sales decreased 5% in local currency compared to 2021. to the impacts from COVID-19 related disruptions. Our core water cleaning products performed well in a down market. Our water treatment business comprised of residential, commercial, and filter replacement consumables grew nearly 4% in local currency and now represents almost 40% of our overall business with repeatable consumable filter sales representing over 25% of overall water treatment sales. For the year, Operating margins in China were 10.7%. As a result of actions taken over the past several years to right-size the business and manage discretionary spending, China has achieved operating margins above 9% in each of the past seven quarters. I'm now on slide six. We released our third ESG report in December. We have made significant strides in our commitment to ESG, including progress towards our GHG emission reduction goal of 10% by 2025, preventing almost 500,000 metric tons of carbon emissions in 2021 through sales of our highly efficient water heaters and boilers, and achieving wave verification, a process developed by the Water Council as an initial step in creating this strategy to improve our water stewardship performance. ESG concepts are embedded within the foundation of our 149-year history. The ESG report demonstrates our commitment to our values of being a good citizen, a good place to work, emphasizing innovation, and preserving our good name and achieving profitable growth. I'll now turn the call over to Chuck, who will provide more details on our full year and fourth quarter performance.