Milwaukee-based A.O. Smith Corp. is projecting its 2023 sales will be flat as it navigates an expected decline in the U.S. residential water heater market.
The company, which makes both residential and commercial water heaters along with water treatment products, is coming off record sales of $3.75 billion in 2022, an increase of 6%.
Sales in the company’s North American segment were up 11% to $2.8 billion. Pricing actions added $370 million to sales for the year and acquisitions added $103 million, but lower volumes of residential water heaters were a $184 million drag on sales.
Looking ahead to 2023, A.O. Smith is projecting revenue to be in a range from 3% down to 3% up. The guidance includes an expectation for the U.S. residential water heater industry to be down 2% to 5%.
Around 15% to 20% of North American residential water heater sales at A.O. Smith come from new construction while 80% to 85% comes from replacement demand.
“While we believe that new home construction remains a deficit, we expect it will be a headwind in 2023,” said Kevin Wheeler, chairman and chief executive officer of A.O. Smith.
Despite concerns about new home construction, the company is seeing encouraging signs in the replacement market. Chuck Lauber, chief financial officer at A.O. Smith, said proactive water heater replacements historically accounted for around 20% or 25% of the market. In recent years, however, proactive replacements have been around 30% or 35%. The latest surveys have continued to show proactive replacements at around 30%,
“We’re still projecting a fairly strong proactive replacement portion of the replacement market,” Lauber said.
Elsewhere in its North American business, A.O. Smith is projecting boiler sales growth of 10% to 12% and water treatment growth of 5% to 7%.
Another potential area of growth is in China, where the company is anticipating 3% to 5% growth in local currency. Wheeler spoke positively about the chance for demand to return in China as the company emerges from its zero-COVID approach, although it may take a little bit to come to fruition.
Executives also said the company is maintaining an active pipeline of potential acquisitions, although Wheeler noted the current environment – marked by higher interest rates and concerns about a potential recession – is “a bit strange right now.”
“There’s a lot of wait and see approach out there with I would say targets,” Wheeler said. “We’re going to stay close to our potential targes and stay active in the pipeline.”
He said multiples may have ticked down slightly but haven’t really changed for potential deals.
“As far as actionability, it always depends on the person saying ‘yes,” Wheeler said, nothing there is a need to work through some of the uncertainty in the market.
“We look at this as an opportunity,” he said. “Uncertain times, with our balance sheet, could be some nice opportunities.”