A.O. Smith Slashes FY24 Guidance As China Woes And Weak Water Heater Sales Drag Q3 Performance

A.O. Smith Corporation AOS shares are trading lower after the company reported preliminary third-quarter results below estimates and cut its FY24 EPS guidance below estimates.

The company expects third-quarter sales of $902.6 million (vs. consensus of $957.73 million), reflecting a 4% Y/Y decline attributed to lower sales in China and North America's water heating segment.

Also, A. O. Smith sees third-quarter EPS of $0.82 (vs. $0.95 estimate), down 9% Y/Y.

For North America, the company sees third-quarter sales of $703 million, down from $710 million in 2023, primarily due to lower residential and commercial water heater sales in North America.

In the Rest of World segment, sales were $210 million, down 10% Y/Y, as China saw a 17% drop in local currency sales due to lower volumes of core products, while India reported a 12% increase driven by strong demand.

For the first nine months of 2024, the company generated preliminary cash from operations of $360 million and preliminary free cash flow of $283 million.

Moreover, A. O. Smith trimmed the FY24 EPS outlook from $3.95 – $4.10 to $3.70 – $3.85 (vs. consensus of $4.06) and sales guidance to $3.80 billion – $3.90 billion (from  $3.97 billion – $4.05 billion earlier).

As mentioned during the second-quarter earnings call, the company witnessed rising consumer demand headwinds in July, prompting caution for the second half of the year in China.

The company stated that these challenges proved to be more severe than anticipated in the third quarter, leading to a 17% decline in constant currency sales to third parties compared to last year.

Kevin J. Wheeler, chairman and chief executive officer added, ”We expect quarter-over-quarter improvement in North America water heater volumes in the fourth quarter; however, we project the softness in China will persist through the remainder of 2024.”

“As we have in the past, we are reviewing our operations in China and taking measures to optimize that business to align with the lower volumes…In North America, we expect improved volumes through the rest of the year. However, we remain cautious about residential and commercial water heater end market demand.”

This month, the board of directors approved a 6% dividend increase to $0.34, leading to a compound annual dividend growth rate of 8% over the past five years.

Investors can gain exposure to the stock via Global X Clean Water ETF AQWA and Tortoise Global Water ESG Fund TBLU.

Price Action: AOS shares are down 6.81% at $80.39 at the last check Friday.

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