The operator introduces the A. O. Smith Fourth Quarter 2023 Earnings Conference Call and hands it over to the first speaker, Helen Gurholt. She introduces the other speakers, Kevin Wheeler and Chuck Lauber, and explains the non-GAAP measures that will be used. She also reminds listeners of the risks involved and the one question and follow-up limit. Slides will be used and can be accessed on the company's website. Kevin then begins the prepared remarks.

In 2023, A. O. Smith had a record year in sales and earnings, driven by strong demand for water heaters and successful execution by the team. Sales in North America and rest-of-world segments grew, with a 4% increase in local currency. The company also saw a 15% growth in sales in India, driven by new products. Free cash flow also increased, and the company returned $490 million to shareholders through dividends and share repurchases. In 2023, the company achieved record sales of $3.9 billion and adjusted EPS of $3.81, with strong demand for residential and commercial water heaters. However, there was a decrease in boiler sales due to backlog and inventory issues.

The company experienced strong sales growth in their CREST commercial boilers and North America water treatment products, with a 50% increase in 2023. In China, sales increased 4% despite a weak economy. The company's core water heating and treatment products also performed well, with double digit growth in HVAC and commercial categories. Replacement sales for residential water heaters reached 60%, and sales for consumables in residential water treatment remained resilient. In the North America segment, sales increased by 4% to $2.9 billion, while segment earnings rose by 19% to $726 million. The rest of the world segment saw a 1% decrease in sales, but a 4% increase on a constant currency basis.

In the fourth quarter of 2023, our sales increased due to higher sales of kitchen and water treatment products in China and a 15% increase in India sales. The rest of the world segment also saw an increase in sales, particularly in China, leading to a 3% increase in segment earnings. In the same period, North America segment sales and earnings also increased due to higher water heater volumes. However, rest of the world segment earnings decreased by 6% due to unfavorable currency translation in China.

In 2023, the company saw a decrease in earnings due to promotions and advertising for new products in China. However, they still generated a significant amount of pre-cash flow and have a strong balance sheet, allowing them to invest in growth and pursue strategic acquisitions. The company also increased their dividend for the 30th consecutive year and returned over $1 billion to shareholders in the past two years. The company's 2024 outlook shows an expected increase in EPS and is based on key assumptions, including a slight headwind from steel prices.

The company's projection for 2024 includes a decline in steel prices and assumes similar non-steel material costs and a stable supply chain environment. The launch of new products and investments in manufacturing will impact margins and result in an increase in CapEx. The company expects strong cash flow and plans to repurchase shares. The projected sales growth for 2024 is between 3% and 5%, with key assumptions including regulatory changes and expansion projects.

The article predicts that the U.S. new home construction will remain in a deficit and the residential industry unit volumes will be flat until 2023. The commercial water heater industry is expected to increase slightly, and there will be price increases for water heater products in North America. In China, sales are expected to grow due to replacement demand and new product releases. The North America boiler business is also expected to see growth due to the transition to more energy efficient boilers. Sales of North America water treatment products are predicted to increase at a faster pace than the market.

In 2024, A.O. Smith expects to see strong market demand in North America and a return to growth for boilers and water treatment. They are focused on expanding their high efficiency product portfolio, global water treatment capabilities, and deploying capital effectively. They have begun capacity expansion projects in North America and anticipate growth in China and India. This year also marks their 150th anniversary.

A.O. Smith, a water technology company, has grown significantly since its small beginnings in 1874. The company has over 12,000 employees and a rich history. They are celebrating their success with employees, shareholders, customers, and partners. During a recent question and answer session, they discussed their business in North America, where they expect new construction and proactive replacement to remain steady, while emergency replacement is non-discretionary. The company expects 2024 to have a similar outlook as 2023, which has been a bit unpredictable due to COVID and other factors.

The industry is expected to have a growth rate of 5.5% to 6% in 2021, which is stable compared to the 1.5% growth rate in 2019. The North American margins will have a 50 basis point headwind due to investments being made, but steel costs are expected to decrease slightly in the first quarter before increasing again in the back half of the year. However, the company has implemented pricing strategies to offset the higher steel costs.

The speaker discusses the cadence of the year, stating that most quarters in North America fall within a 24.5% to 25% range. They mention that the first quarter may have more pressure and that there are some headwinds due to the launch of a new product. The next question asks about feedback from the channel on a recent pricing increase, to which the speaker responds that their philosophy is to address cost increases before customers feel them. They also mention growth in boiler demand, which is partially due to easy comparisons from the previous year.

The paragraph discusses the factors that contribute to the slight decline in the boiler market, including inventory levels and the impact of residential demand. The company remains confident in their overall growth due to a combination of returning to normal operations and new product offerings. The speaker also mentions the stability of discretionary demand for residential water heaters and their belief in continued housing renovation. The long-term trend is uncertain, but the company is monitoring generational changes that may affect demand.

The company is confident that proactive replacement will remain stable in 2024 and they will continue to monitor it. Channel inventories are expected to be normalized in North America and China. Q4 saw stronger demand for water heaters, with the company getting their fair share of the market. January also showed strong performance in the water heater sector.

The company's orders remain strong and they are on track to meet their guidance. Despite flat margins in the rest of the world, there are expectations for higher sales. The company plans to invest in new products and promote growth in China and India. In North America, the gas tankless business is expected to contribute to a 50 basis point margin pressure, but there is no mention of the top line impact or timing of this impact.

Chuck Lauber and Kevin Wheeler discuss the company's revenue guide and how it ties into their overall 3% to 5% growth on the top line. They mention different drivers of growth, such as tankless, heat pump, and boilers, and note that these contribute to growth but are not the largest part of it. They also mention the launch of a new tankless product in late March and their expectations for its contribution to growth in the coming years.

The analyst asks about China's market segmentation and demand dynamics, particularly in the premium sector. The CEO and COO state that there has been no significant change in their mix, with the premium sector holding steady. They define the premium sector as above 3000 RMB for electric water heating and above 5000 RMB for gas water heating and water treatment. The premium sector has been in the 60-70% range for electric water heating and around 50% for water treatment. The company's balance sheet is in a good position with low leverage and a strong net cash position.

Adam asks about the company's plans to optimize their balance sheet and provides an update on their M&A pipeline. Chuck Lauber responds by stating that the company is currently underlevered and is in a good position for potential M&A opportunities. They are also investing in themselves through expansion projects and share buybacks. Kevin Wheeler adds that their pipeline is active and they are looking for opportunities in various industries and geographic expansions, but culture is an important factor in any potential acquisitions.

The speaker discusses the company's plans to remain disciplined in returning value to shareholders and expresses confidence in their pipeline for 2024. They also mention the need for a better economic backdrop to achieve their goal of 10% rest of world margin and 11% margin in China. They also mention the resilience of the business at current levels and the need for economic help to achieve expansion. The speaker then shifts to discussing the North American commercial water heater industry and their expectations of low single-digit growth in 2024, acknowledging the potential difficulty of a comparison to the previous year but expressing confidence in the market's stability.

The speaker discusses the growth of the commercial business and the impact of the greater than 55 gallon electrics. They mention a regulatory change and the need for the industry to adjust. The commercial business held up well, with growth in both gas and small electrics. The majority of the growth is in the replacement market, and they expect this to continue as restaurants and hotels reopen. The speaker also mentions a price increase that was announced in November but pushed to March, without giving specific reasons for the delay.

The speaker discusses the company's current focus on keeping customers competitive and mentions their growth in China, particularly in kitchen appliances and water treatment. They also mention the stabilization of core products and upcoming presentations at conferences.

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