Milwaukee-based A.O. Smith Corp. says its deal to be the primary water treatment supplier to Lowe’s could generate upwards of $40 million in revenue next year, but the company expects to lose money on the deal this year.
A.O. Smith announced earlier this month it had been named Lowe’s primary supplier for more than 20 products including water filters and softeners. The products are expected to be in stores by mid-August and generate about $15 million in revenue this year. However, with the costs of establishing merchandising displays in more than 1,700 stores and changing inventory practices, A.O. Smith is projecting it will lose $1 million to $2 million on the deal this year.
John Kita, A.O. Smith chief financial officer, said most of those costs would be in the third quarter as the products go into stores and the deal should be profitable starting in the fourth quarter.
By next year, A.O. Smith president and chief operating officer Kevin Wheeler said the Lowe’s deal could add $35 million to $40 million in revenue, pushing the company’s North American water treatment business to $140 million in sales.
A.O. Smith just entered the North American water treatment business a few years ago with the acquisition of water filer company Aquasana. It then added water softener company Hague before establishing a specific unit for the business. Reaching $140 million in sales in 2019 would represent about 4.2 percent of the company’s projected $3.3 billion in revenue this year for a business that was not in the market in 2015.
Ajita Rajendra, A.O. Smith chairman and chief executive officer, said the company’s moves in water treatment have been very specific and targeted to give the company a broad array of products to compete for opportunities like the Lowe’s deal.
“We see water treatment being a major growth driver for us in the future,” Rajendra said, describing getting into Lowe’s as a starting point.
The average municipal water infrastructure in major cities is 75 years old and there is a possibility for more situations like the crisis in Flint, Rajendra said.
“As people start realizing what the quality of their water is, we see this business growing and we’re investing behind it and counting on that growth,” he added.
Wheeler said the company’s displays in stores will be focused on educating consumers and helping them make decisions about which filtration products to buy.
“We believe the consumer; they’ve been confused about the product category how to pick, how to choose their products,” he said, adding future sales growth beyond 2019 will depend on how effective A.O. Smith’s education efforts are.
Kita said the water treatment category overall is expected to grow in the mid-to-high single digits.
“We hope we can, through education, improve it even higher than that,” he said.
The company’s discussion of the water treatment business came during its first quarter earnings call on Wednesday.
Net income for the quarter improved 12.7 percent to $98.8 million and earnings improved from 50 to 57 cents per diluted share.
Revenue was up 6.5 percent to $788 million.
