A.O. Smith still sees long-term growth in China despite slowdown

Expects trends towards urbanization and growing middle class there to continue

Last updated on July 31st, 2019 at 12:49 pm

For years, sales in China have helped fuel the growth of Milwaukee-based A.O. Smith Corp. and despite facing a number of challenges in recent months, the company’s chief executive says there is nowhere he would rather be over the long term.

“We still look at China as a long-term growth part of our business,” president and CEO Kevin Wheeler said during an earnings call Tuesday. “I wouldn’t want to be any other place than China when it comes to the growth.”

Wheeler said the company expects trends towards urbanization and a growing middle class in China to continue.

“Certainly we’re in a challenging environment. I wouldn’t categorize it as a fight of a lifetime,” he said, responding to an analyst’s description of A.O. Smith’s position in China.

China has been a major growth engine for A.O. Smith, going from around 10% of sales in 2008 to more than one-third in 2018. The company also topped $1 billion in China revenue for the first time in 2017. Short-seller J. Capital Research, however, questioned the success in a report earlier this year.

Wheeler said the company now faces “continued and prolonged headwinds” in China. Sales during the second quarter decreased 16% in local currency and earnings for A.O. Smith’s rest of world segment, which includes China, decreased 35%.

“The second quarter proved to be challenging, largely due to difficult revenue growth comparisons and the overall macroeconomic environment in China,” Wheeler said.

A.O. Smith said its distributors had built up inventories in the first half of last year but did not repeat the practice this year as inventory levels remained high amidst a weaker economy.

The company also said customers have indicated they plan to pull back on orders in the third quarter.

To counteract the slowdown, A.O. Smith reduced its employee headcount in China by 10% already and plans another 5% reduction during the rest of the year.

Wheeler said he has confidence in the company’s management team in China and the business will emerge leaner and stronger.

“We’ll be in position to take advantage of one of the best growth markets in the world,” he said.

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Arthur covers banking and finance and the economy at BizTimes while also leading special projects as an associate editor. He also spent five years covering manufacturing at BizTimes. He previously was managing editor at The Waukesha Freeman. He is a graduate of Carroll University and did graduate coursework at Marquette. A native of southeastern Wisconsin, he is also a nationally certified gymnastics judge and enjoys golf on the weekends.

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