A. O. Smith Corporation (AOS) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the A. O. Smith Corporation Annual Meeting of Stockholders 2020 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Rajendra. Thank you. Please go ahead, sir.

Good morning, ladies and gentlemen. It is now 8:00 a.m. Central time and time to begin our meeting. Please note that the polls are open and will remain open until we announce that the polls are closing. I'm Ajita Rajendra, Executive Chairman of A. O. Smith Corporation, and I would like to welcome you to the A. O. Smith Annual Meeting of Stockholders. I will be serving as Chairman of this meeting. I'd like to start our meeting by introducing fellow Board member, Kevin Wheeler, the company's President and Chief Executive Officer; and the other members of our Board of Directors who are all joining us virtually today: Ronald D. Brown, William P. Gruebel, Dr. Ilham Kadri, Paul W. Jones, Bruce M. Smith, Mark D. Smith, Idelle K. Wolf, Gene C. Wulf. We have also invited our independent registered public accounting firm, Ernst & Young LLP, to join us virtually for this meeting. Brian Kennedy and [ Kerry Bodman ] are present and representing Ernst & Young LLP. There are 4 items on the agenda requiring stockholder action at this meeting. There are no stockholder proposals for consideration. Jim Stern, Executive Vice President, General Counsel and Secretary, will serve as Secretary of the meeting. You may access a list of our stockholders during the meeting upon request by sending an e-mail to Jim now at [email protected].

Good morning. Please advance to Slide 2. This meeting is held pursuant to the notice mailed on March 6, 2020, to all stockholders of record as of February 18, 2020, who are entitled to vote, and the amended notice changing the location of our meeting to a virtual meeting, which was mailed on April 3, 2020. We have affidavits of mailing of those notices to stockholders. Upon review of the list of stockholders of the corporation and the proxies that are present, virtually and by proxy, stockholders holding a majority of the total shares outstanding and entitled to vote. Notice of the meeting has been duly given and a quorum is present. Therefore, the meeting is lawfully convened. Laura Jamison has been appointed inspector to record, count, confirm the voting at this meeting. Please advance to Slide 3.

Before proceeding with the 4 items on the agenda requiring stockholder action at this meeting, I would like to turn to Kevin Wheeler for his comments on the 2019 results and current operations.

Thank you, Ajita. Before I begin my remarks, I would like to remind you that some of the comments that will be made during this conference call will constitute forward-looking statements. These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks include, amongst other, matters that were -- we have described on Slide 4. Please turn to Slide 5. A. O. Smith is 145-year old global manufacturer of innovative residential and commercial water heaters, boilers and water treatment products. Our sales totaled nearly $3 billion in 2019 and we employ a little over 15,000 people worldwide. Our products are manufactured in 23 factories around the globe. Slide 6, please. We have a strong track record of driving financial performance and significant growth. Over the last decade, sales have grown 8%, and EBITDA and adjusted EPS have grown 15% and 21%, respectively. 2019 results are shown on Slide 7. Sales of nearly $3 billion were 6% lower than in 2018. The decline in 2019 sales was primarily a result of lower China sales, which declined 19% in local currency, largely due to weaker end market demand, elevated channel inventory levels at the beginning of 2019 and a higher mix of mid-price point products. Adjusted earnings in 2019 of $370 million declined 18% from 2018. In 2019, adjusted earnings per share of $2.22 were 15% lower than in 2018. The decline in profits were primarily due to lower performance in China. As weakness in our end markets in China persisted, we implemented several cost reduction actions in 2019 in that region. Compared with 2018, total annualized savings as a result of these actions is estimated to be approximately $45 million in 2020, of which approximately $30 million was realized in 2019. I'm pleased to review several items regarding our 2019 performance on Slide 8. Sales in our North America segment increased 2%, and operating margin performance in North America grew over 50 basis points compared with 2018. Our North America water heater operations continued to perform well. I'm particularly pleased with our performance despite a 1% decline in residential industry volumes. Productivity within North America water treatment manufacturing and the effectiveness of our direct-to-consumer channel continued to improve. We expanded our North America water treatment platform with the acquisition of Water-Right, and the performance is right on track to our expectations. We announced a 9% increase to our quarterly dividend rate in early October to $0.24 per share, which represents a 5-year CAGR of 24%. And in China, the fourth quarter came in where we expected, with channel inventory climbing by more than a month. Channel inventory ended 2019 within the normal range of 2 to 3 months of sales. I'd like to provide some -- several comments about our business in light of COVID-19 on Slide 9. We believe we are well prepared to navigate through this pandemic. As an essential business, we are proud to continue supporting our customers with utmost focus on the health and safety of our employees. We will continue to take a prudent and proactive actions to safely operate our business, maintain strong liquidity position during the -- this uncertain period and continue to position A. O. Smith for further success when the pandemic subsides. The high replacement component of our North America water heater and boiler products provide stability. I want to thank our entire A. O. Smith team for their unwavering dedication to our company, customers and communities during this volatile time. Before wrapping up, I would like to highlight several of our ESG activities on Slide 10. Further details can be found in our 2018 CRS report available on aosmith.com. Our water heater product portfolio, including Cyclone condensing water heaters and CREST boilers, provide energy-efficient and low greenhouse gas-emitting choices to building managers and homeowners. Our water treatment product portfolio contains our innovative reverse osmosis Side Stream Membrane, which conserves water at a significant rate higher than competing RO products. We have focused on health, safety and conservation in our plans for decades. Our employees consistently cite our culture of integrity and high ethical standards as most value to an accession A. O. Smith as a good place to work, and we expect to publish our second CRS report in the fall of this year. Next slide, please. We believe that particularly in these volatile times, A. O. Smith is a compelling investment for a number of reasons. We have leading market share in our major product categories. We estimate replacement demand represents approximately 85% of North America water heater and boiler volumes. We have a strong premium brand in China, a broad product offering our key product categories, broad distribution and a reputation for quality and innovation in that region. Over time, we are well positioned to maximize favorable demographics in both China and in India to enhance shareholder value. We have strong cash flow and balance sheet, providing opportunity to continue to invest in ourselves, acquisitions and return cash to shareholders. I will now turn the meeting back to Ajita, who will begin with the shareholder matters for vote on Slide 12.

Thank you, Kevin. The first order of business is the election of directors. The proposed nominees for Class A common stock directors are Ronald D. Brown, Paul W. Jones, Ajita G. Rajendra, Bruce M. Smith, Mark D. Smith, Kevin J. Wheeler. The proposed nominees for the common stock directors are William P. Gruebel, Dr. Ilham Kadri, Idelle K. Wolf, Gene C. Wulf. If you haven't already voted, please do so now by following the instructions that are available on this virtual meeting website during the meeting. The second item is the advisory vote to approve the compensation of our named executive officers. If you haven't already voted, please do so now. The third item is the ratification of the selection of Ernst & Young LLP as the independent registered public accounting firm for the company for the fiscal year 2020. Ernst & Young LLP has been appointed by the Board's Audit Committee and the selection of Ernst & Young LLP has been approved by the -- at the approval of the entire Board. Ernst & Young is in its 102nd consecutive year as A. O. Smith's auditor. If you haven't already voted, please do so now. The fourth item is an amendment of the A. O. Smith Combined Incentive Compensation Plan and increase of authorized shares of common stock by 2.4 million shares. If you haven't already voted, please do so now. Now if you have not had an opportunity to vote and are a stockholder of record, please vote at this time. The polls for voting will close in 2 minutes. [Voting]

This is Kevin Wheeler. While the votes are being finalized, I want to take a moment. After 15 years with A. O. Smith, Ajita will be retiring as Executive Chairman at the end of the month. As in all companies, the tone is always set from the top. Ajita has been an ambassador for A. O. Smith's culture and values, doing business with uncompromising outstanding integrity. And he demonstrated that every day in his words, but more importantly, in his actions. When Ajita commits doing something, you can count on it. He is respected and trusted by all who work or know him. He also has a passion for the customer that's been unwavering, and quite frankly, contagious, throughout our company. We have a simple mantra: take care of the customer. That mantra has been embedded in all of our employees worldwide. On a more personal note, Ajita truly cares about people, inside and outside of the work. A. O. Smith's employees were always his primary focus and most important assets. When you speak to Ajita, he gives you his undivided attention, and he always felt like you're the most important person at that time, a characteristic that everyone at A. O. Smith is trying to emulate. Now I could go on, but I'd like to end by saying, Ajita's fingerprints are all over our company. During his tenure, he helped make A. O. Smith a better company and positioned us for the future success. Although if you ask him, he'll always give credit to his team. On behalf of our entire A. O. Smith family, our employees, our Board of Directors and shareholders, thank you, Ajita, for your leadership and your contribution, and we wish you nothing but the best for the future.

Thank you, Kevin. That was a surprise addition to the script and the agenda. I really appreciate the kind words. And let's move on with the meeting. With the total executed proxies in the votes summary report received from EQ Shareholder Services (sic) [ EQ Shareowner Services ] on April 14, 2020, which constituted a majority of votes, Jim, will you report on the results?

The vote summary report shows that based on the preliminary tabulation of the votes cast, the nominees have been elected as directors, the compensation of named executive officers has been approved, the appointment of Ernst & Young as the company's independent registered public accounting firm for 2020 has been ratified and an amendment of the A. O. Smith Combined Incentive Compensation Plan and increase of authorized shares of common stock by 2.4 million has been approved. We will be reporting the final results in a Form 8-K to be filed within 4 business days.

Thank you, Jim. Based upon the results, I hereby declare that the nominees have been elected as directors, the compensation of named executive officers has been approved, the appointment of Ernst & Young LLP as the company's independent registered public accounting firm for 2020 has been ratified, and the amendment of the A. O. Smith Combined Incentive Compensation Plan and increase of authorized shares of common stock by 2.4 million has been approved. Please advance to Slide #13. Seeing that there are no other -- there's no other business on the agenda, this meeting is adjourned. I would like to thank all stockholders who attended the meeting and all those who submitted their proxies for the meeting. This concludes our annual stockholders meeting. Thank you very much for all for attending.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.