The A. O. Smith Third Quarter 2023 Earnings Call is about to begin, with participants in a listen-only mode. The call will be led by Helen Gurholt, Vice President of Investor Relations and Financial Planning & Analysis, and will include CEO Kevin Wheeler and CFO Chuck Lauber. Non-GAAP measures will be used to provide transparency into the company's operating results, and forward-looking statements will be made with potential risks discussed. The call will also include a Q&A session, with participants limited to one question and one follow-up at a time. Slides will be used during the call and can be accessed on the company's website.

Kevin Wheeler, the speaker, is pleased with the company's strong third quarter performance, particularly in the North America segment. Sales in this region were driven by resilient demand for residential water heaters and new product introductions in China and India. The company also acquired a water treatment company in Arizona. In terms of specific product categories, North America water heater sales increased while boiler sales declined due to inventory destocking and a difficult comparison to the previous year. However, demand for commercial high-efficiency condensing boilers remained steady.

In the third quarter of 2023, North America water treatment sales increased by 5%, driven by pricing and e-commerce sales. China also saw a 9% increase in sales due to new product introductions. A new SmartFlow reverse osmosis filtration system was launched, showcasing the company's commitment to innovation. The North America segment saw a 9% increase in sales and a 28% increase in earnings compared to the same period last year.

The operating margin of 23.9% in the third quarter of this year improved by 350 basis points compared to the previous year, driven by higher residential water heater volumes and lower steel costs. The Rest of the World segment also saw an increase in sales and earnings, with a 6% growth in sales and a 6% increase in segment earnings. The company generated free cash flow of $396 million in the first nine months of the year, a significant increase from the previous year, allowing for a 7% increase in the quarterly dividend. The company's cash balance and net cash position are strong, with a leverage ratio of 6.4%.

The company has repurchased 2.4 million shares of common stock and plans to repurchase $300 million more in 2023. They also expect to see organic growth through innovation and new product development, as well as pursue strategic acquisitions. Their 2023 earnings guidance has been increased, with an expected adjusted earnings per share range of $3.70 to $3.80. The company's outlook is based on key assumptions, including a stable supply chain and strong free cash flow. They also provide details on their expected margins, CapEx, expenses, tax rate, and average outstanding diluted shares. The call is then turned back over to Kevin, who will provide more information on key markets, top line growth, and segment expectations for 2023.

The company has adjusted their 2023 sales outlook to a 2% growth compared to 2022, with assumptions that residential water heater orders will increase by 4%, demand for commercial electric water heaters over 55-gallon will remain strong, and sales in China will grow 3-5% despite a projected 6% devaluation of the Chinese currency. The company also maintains their previous guidance for their boiler business and North America water treatment sales. In the first nine months of 2023, the company's performance has been strong, with a normalized split of sales in the first and second half of the year. Despite higher steel costs, the company's operating margin in North America remains strong at 23.9%.

The company has been executing well in China and India, with strong growth in new product introductions and customer service. In North America, the residential water demand has been a surprise, with proactive replacements and positive completions leading to a 4% increase in volumes. The company is pleased with this growth and expects it to continue into 2024.

The speaker discusses the strong demand for water heaters and the positive impact on North America margins. They mention that pricing had little effect on segment growth, with most of it coming from volume. There were no significant one-time items that affected margins. The speaker also addresses the continued strength in proactive replacement business, which may be due to structural changes in the market.

The speaker discusses the strength of the company's business, attributing it to factors such as people staying in their homes and higher renovation rates. They also mention anecdotal evidence that suggests a generational impact on proactive replacement trends. However, they caution that it is too early to determine if this is a structural change in the industry. The speaker also mentions that the company has been monitoring this trend for a decade and it has held up well for 16 straight quarters. In response to a question about cost inputs, the speaker mentions that the company had previously guided for lower margins in the second half of the year.

The speaker discusses the company's outperformance and lower margins in the second half due to higher steel costs. They mention potential benefits from price-cost standpoint in the first half of 2024. The speaker also addresses questions about Rest of World segment profitability and potential M&A activity. There is some technical difficulty during the call, but the speaker reiterates key points about steel costs for the listener.

The speaker thanks the person for their helpful information and asks for more details on the difference between proactive replacement and nondiscretionary demand. They also ask for more information on the components of China growth and the durability of that growth. They then shift to discussing the strength of commercial water heaters in North America and ask about the expected duration of that strength and any effects of rising rates. The next question comes from another person who is experiencing technical difficulties.

An analyst apologizes for asking a question that may have already been asked about channel inventories and volume outlook for North America. The CEO responds but is interrupted by technical difficulties. The analyst also asks about the product cycle in China and its impact on the company's top line. Another analyst apologizes for not being able to understand the Q&A due to technical issues and asks about proactive replacement and efficiency credits. The CEO responds, mentioning mix shifts in efficiency.

The speaker is asking about the potential impact of lower steel prices on the company's costs and how they are thinking about it, considering they have both floating and index prices. The operator then thanks everyone for participating and turns the call back over to Helen Gurholt for closing remarks.

This summary was generated with AI and may contain some inaccuracies.