The operator introduces the A.O. Smith earnings call and reminds participants that the call is being recorded. Helen Gurholt, Vice President of Investor Relations and Financial Planning and Analysis, introduces the speakers and discusses the use of non-GAAP measures. She also reminds listeners that some comments may be forward-looking statements and encourages them to limit themselves to one question and follow-up per turn. Kevin Wheeler, Chairman and CEO, will begin the prepared remarks.

In the second quarter, A.O. Smith had record sales of $1 billion and EPS of $1.06, with growth in North America, China, and India. They also announced the acquisition of Pureit, a water purification business. North America water heater and boiler sales grew 10%, and they are on track to meet their boiler sales forecast for the year. Sales of commercial boilers and water treatment products performed well. In China, third-party sales increased 2% due to sales of kitchen and HVAC products, partially offset by lower residential water treatment volumes.

The company is facing challenges in their core product markets, but is pleased with their market share in premium products. They are celebrating their 150th anniversary and have received several honors for their commitment to their core values, including being named one of the world's most ethical companies. The company has also been recognized for their innovation and energy management efforts. The speaker will now provide more details on the company's second quarter performance.

Second quarter sales in the North America segment increased by 9%, driven by higher volumes and pricing. Segment earnings also increased by 2%, but segment margin decreased by 180 basis points due to higher costs and expenses. Rest of the World segment sales were flat, with a 3% increase in third-party sales on a constant currency basis. Segment earnings decreased slightly due to unfavorable product mix and sales promotions in China. Third-party segment operating margin was 11.5%, slightly lower than the previous year.

In the first half of 2024, the company generated $119 million in free cash flow, which was lower than the same period last year due to higher inventory and accounts receivable balances. Despite this, the company's cash balance was $233 million and its net cash position was $93 million. The company also announced its acquisition of Pureit from Unilever for $120 million, which will strengthen its position in the global market. The company has narrowed its 2024 earnings guidance to an expected range of $3.95 to $4.10 per share, with a 6% increase compared to 2023. This outlook is based on assumptions of flat steel costs and similar non-steel material costs in 2024 as in 2023.

The company's guidance for 2024 assumes a stable supply chain and increased sales, with the launch of new products and expansion projects. The import tariffs and other costs will impact margins, but will be eliminated when production moves to Mexico. The company expects to generate free cash flow and repurchase shares, while also reaffirming their outlook for sales growth in 2024. This includes previously announced price increases for water heater products.

The company believes that a pre-buy ahead of price increases boosted demand for water heaters in the first half of the year, but there has been some softness in orders in July. They maintain their projections for flat residential industry unit volumes and low single digit growth for commercial water heaters in 2024. The outlook for new residential home construction and proactive replacement is expected to remain similar to last year. In China, the economy and consumer confidence are weak, leading to headwinds in consumer demand. The company maintains its third-party sales growth guidance for the year, with a negative currency impact of 2%. They also reaffirm their expectations for growth in boiler and North America water treatment sales, with segment margins of approximately 25% and 10% respectively. The company is pleased with their performance in the first half of the year, with strong growth in water heaters and a return to growth in the North America boiler business. They are also investing in capital expansion projects to support long-term growth.

The company is expecting double-digit sales growth in India and is excited about the upcoming Pureit acquisition. They remain focused on meeting customer needs and executing their strategic priorities. The margin cadence for the back half of the year will be impacted by a pre-buy in North America in Q3, but is expected to return to Q2 levels in Q4. The company expects continued momentum in tankless gas and tankless products.

The company is experiencing a solid first half of the year in China, but the economy is still weak. The fourth quarter is expected to be the strongest, but the third quarter may be challenging due to lower volume and weaker July orders. There is also some price competition in the mid-price point category, but the company is managing it well. Inventory levels are within expectations and there are some areas of growth in the Chinese market, such as kitchen products and commercial water treatment.

The company is pleased with its performance in China, thanks to its diversified presence in the water heating and treatment market. They are also looking to expand their business in India, both organically and through acquisitions. The recent acquisition of Pureit will complement their existing business in India and provide them with a stronger presence in e-commerce and retail. The company is excited about the potential growth and opportunities this acquisition will bring, as it will increase their scale and allow them to leverage their existing infrastructure in the region.

The speaker mentions that the company is excited to double their business with Pureit, a premium brand. They also discuss the financial profile of Pureit, which is similar to their India business in terms of profitability and growth. They expect to continue this growth momentum and leverage opportunities in the future. The speaker also mentions a working capital build in the first half, but expects to get it back in the second half. In response to a question, they mention that boilers saw growth in the quarter and discuss the factors driving it and its sustainability.

Kevin Wheeler, CEO of a company, discusses the competition they face in the commercial segment of their business and how they are performing compared to the industry. They have seen growth in their new products, particularly in the CREST boilers with Hellcat Technology. The company expects 8-10% growth in the back half of the year, with easier comps in the third and fourth quarter. The CEO also mentions the recent decrease in steel prices and expects their outlook to be flat year-over-year.

The paragraph discusses the increase in steel prices in the second quarter, which was 20% higher than the first quarter and 25% higher than the same quarter last year. However, there has been some softening in steel prices and the company expects some relief in the fourth quarter due to a lag in pricing. The company also mentions a pre-buy in May and June, leading to softer orders in July for water heaters. However, they expect demand to return in August and September and maintain a flat rate for the U.S. residential tank type market for the rest of the year. The company also started shipping tankless units in the second quarter.

The company has seen strong demand for its tankless products in China, with a mid-single-digit market share. The launch of a high-end condensing model has been well received and two more products will be launched by the end of the year. The company's Juárez factory is on track to start assembly in Q4, which will help with margins due to the tariff going away in 2025. The move to Juárez will also have a positive impact on the tankless category. The company is still facing pricing and promotion pressure in China.

The company's Rest of the World margin guidance of 10% is difficult to maintain due to price pressure. The team is balancing price, promotion, and cost to navigate through the tough market. Most of the pressure is in the mid to upper mid level, but the team is confident in their ability to navigate through the second half of the year. The company has taken cost actions to make their cost structure more variable and has closed less profitable stores. They anticipate maintaining a margin of 11% in China for the year and will introduce new products in the back half of the year. Q4 is their strongest quarter and they are building momentum in commercial water treatment.

The company is seeing growth in their HVAC sector and believes it is achievable to combine it with their other operations. The margin in North America is expected to be flat or slightly better, but there may be some headwinds in the third quarter due to launch costs for a new product. The increased selling expense in North America is primarily driven by higher volumes, as their cost structure is commission-based.

The company mentions that they offer different products with varying commission levels to drive initiatives. They also mention the launch of tankless products, which is driving expenses slightly higher. The company is excited about their tankless offering, which is internally designed and manufactured in North America. They will be promoting this product heavily in the first part of the year to ensure its success in the market. The boiler business is expected to see an 8% to 10% increase in volume, which will help improve profitability.

Scott Graham asks Kevin Wheeler about the U.S. residential water heater industry, which has remained flat despite expectations of growth. Graham questions whether the recent sales volumes indicate a weakening market or if the company is still holding onto their prediction of flat growth due to tougher comparisons in the second half of the year. Wheeler responds that they are not trying to send a message and that they have always anticipated a flat year with strong growth in gas-tankless and heat pump heaters. They are comfortable with this prediction based on the market trends and their strong performance in the previous year.

The speaker is asked about the North American segment margin and whether there will be any changes. The speaker responds that they are still expecting a 25% margin, but there may be some challenges in the third quarter due to lower volumes and steel prices. They also mention the growth of heat pump water heaters, which make up 2% of the market and are being promoted in states like New York and California.

The company has seen strong growth in their product line, with a forecasted 25-30% growth over the next few years. The category is growing, especially in states where there are subsidies for the product. The company has recently rolled out a new tankless product in North America, and distributors are showing interest in purchasing from them due to their strong relationships and options for both tank and tankless products.

The speaker discusses the company's plans to remain competitive in the market and introduce a new gas-tankless product line. They expect some distributors to continue with their current product lines, but are confident in the potential success of the new line. The company also delivered record sales and strong earnings in the second quarter and will be presenting at several conferences in the coming months.

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