The FCF Institute team had a warm and insightful discussion with Helen Gurholt, A.O. Smith Corporation‘s Vice President of Investor Relations and Financial Planning & Analysis, about the firm’s free cash flow performance.
As a key holding in FCF US Quality Strategy, A.O. Smith Corporation is a leader in the water technology industry. It has established itself as a premier manufacturer of residential and commercial water heaters, boilers, water treatment products, and air purifiers. With a strong reputation for innovation and quality, A.O. Smith has strived for growth and maintained its competitive advantage in the market.
Here are some key takeaways from our meeting:
1. A.O. Smith’s largest business, the North American business, has a high margin and serves as a key driver for their free cash flow.
2. The Rest of the World market, primarily driven by China, presents growth opportunities with lower growth rates and a focus on water treatment.
3. The China business, while profitable and providing constant cash flow through prepayment, faced challenges due to the economic impact of COVID-19 and high inventory levels.
4. Risks to their free cash flow performance include component costs in the European market and inflation in the North American market.
5. A.O. Smith sees opportunities in the water heater business with steady growth in megatrends and decarbonization initiatives.
6. While the boiler business is growing faster than the market, the water treatment business is underpenetrated and A. O. Smith is committed to increasing the lower margin.
7. The firm prioritizes R&D, dividends, and potential M&A opportunities over share repurchases.
A.O. Smith is one of the best Industrial Manufacturing Industry companies in our Free Cash Flow Quality Model #FCFQM,
an alpha model to identify a company with strong and sustainable profitability that could potentially generate consistent excess returns.
