Milwaukee-based A.O. Smith Corp. took the somewhat unusual step Thursday of releasing preliminary results for the third quarter ahead of its scheduled earnings release at the end of the month. A.O. Smith reported sales of $874 million for the quarter, a 4% decline attributed to de-stocking in the North American residential water heater channel. The company also said it now expects its volume for water heater sales in North America to be down 12% to 13%, a larger decrease than the previously anticipated 4% to 6% decline. “While order rates from our commercial customers and our Rest of World segment performance were in line with expectations, North America residential water heater demand was weaker than expected in the third quarter, as we were impacted by a more prolonged and deeper than expected industry reset, primarily driven by a larger than expected wholesale inventory de-stocking. We believe this heightened de-stocking activity is in response to our return to pre-pandemic lead times which were previously elevated due to COVID-19-related supply chain constraints," said Kevin Wheeler, chairman and chief executive officer of A.O. Smith. Wheeler added the company also saw its profitability impacted as the lower residential water heater volumes cut into production efficiency and material costs were higher as the company used elevated inventory levels more slowly than expected. In a research note, analysts at Baird noted the potential for de-stocking as a known risk coming out of the second quarter with around 500,000 excess units in the sales channel. “Today’s pre-announcement was directionally unsurprising, though the downside magnitude was greater than we expected,” the note from Baird’s Michael Halloran and Michael Pesendorfer II said. “Ultimately, the softer 2022 residential volumes improve the set up into 2023 ... though modest residential declines remain likely in 2023 and we suspect earnings stagnate,” the analysts concluded.” The analysts pointed out they expected the company’s prior price increases to better offset the increasing costs it experienced. A.O. Smith reported preliminary earnings of 71 cents per share, a 13% drop from 2021. It also cut its guidance for full year earnings from a midpoint of $3.45 per share down to $3.10 per share.
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