Earnings call transcript: A.O. Smith beats Q1 2025 earnings forecast, stock rises

A.O. Smith Corporation reported its first-quarter 2025 earnings, surpassing analysts’ expectations with an earnings per share (EPS) of $0.95 compared to the forecasted $0.91. The company’s revenue also exceeded projections, coming in at $963.9 million against an anticipated $953.2 million. Following the announcement, A.O. Smith’s stock price rose by 4.31% to $67.57, reflecting positive investor sentiment. According to InvestingPro analysis, the company currently appears slightly undervalued compared to its Fair Value, with analysts setting price targets ranging from $56 to $84.

Key Takeaways

• A.O. Smith’s Q1 2025 EPS and revenue both beat market forecasts.
• Stock price increased by 4.31% in pre-market trading.
• North America sales decreased by 2% year-over-year.
• The company launched new products and continued its strategic transition in manufacturing.
• Challenges persist in the Chinese market due to low consumer confidence.

Company Performance

A.O. Smith’s performance in Q1 2025 showed resilience despite a 2% year-over-year decline in sales, totaling $964 million. Earnings per share fell by 5% compared to the previous year. The North American segment, a key market for the company, saw a 2% decrease in sales, while the rest of the world segment remained flat. The company continues to navigate a challenging macroeconomic environment, particularly in China, where consumer confidence is low. InvestingPro data reveals the company maintains strong fundamentals with a healthy gross profit margin of 38.1% and an impressive return on equity of 29%. InvestingPro subscribers have access to 8 additional key tips about A.O. Smith’s financial strength.

Financial Highlights

• Revenue: $964 million (-2% YoY)
• Earnings per share: $0.95 (-5% YoY)
• North America sales: $749 million (-2% YoY)
• Operating cash flow: $39 million
• Free cash flow: $17 million

Earnings vs. Forecast

A.O. Smith’s Q1 2025 EPS of $0.95 exceeded the forecast of $0.91, representing a surprise of approximately 4.4%. Revenue also surpassed expectations, reaching $963.9 million against a forecast of $953.2 million. This positive performance contrasts with the company’s previous quarters, where results were more aligned with expectations.

Market Reaction

Following the earnings announcement, A.O. Smith’s stock price increased by 4.31%, reaching $67.57. This movement places the stock closer to its 52-week high of $92.45, indicating strong investor confidence. The rise is significant when compared to broader market trends, where many stocks have shown volatility.

Outlook & Guidance

For the full year 2025, A.O. Smith has set an EPS guidance range of $3.60 to $3.90. The company anticipates 250 basis points of operating margin expansion and expects North American segment margins to be between 24% and 24.5%. However, it projects a 5-8% decline in China sales due to ongoing challenges in the region. InvestingPro highlights the company’s strong financial position, maintaining more cash than debt on its balance sheet and a consistent 16-year track record of dividend increases. The current dividend yield stands at 2.1%, with a sustainable payout supported by robust cash flows. Get detailed insights and access to the comprehensive Pro Research Report covering A.O. Smith and 1,400+ other top stocks through InvestingPro.

Executive Commentary

"We have confidence in our ability to navigate the volatile 2025 macro environment," said Steve Schaefer, President and Incoming CEO. Kevin Wheeler, Chairman and CEO, emphasized the company’s strategic focus: "We’re in country for country, and that’s on a global basis."

Risks and Challenges

• Market Conditions in China: Continued low consumer confidence could impact sales.
• Tariff Impacts: Anticipated increases in the cost of goods sold could pressure margins.
• Supply Chain Disruptions: Ongoing global supply chain issues may affect production.
• Regulatory Changes: New regulations in commercial gas products could require adjustments.

Q&A

During the earnings call, analysts inquired about the company’s strategies for mitigating tariff impacts and maintaining pricing power. Executives also addressed questions about their manufacturing footprint and capacity, as well as potential demand changes due to pricing actions.

Full transcript - A.O Smith Corp (AOS) Q1 2025:

Conference Operator: Thank you for standing by and welcome to the A. O. Smith Corporation’s First Quarter twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers’ presentation, there will be a question and answer session.

As a reminder, today’s program is being recorded. And now I’d like to introduce your host for today’s program, Helen Gerholt. Please go ahead.

Helen Gerholt, VP Investor Relations, Financial Planning and Analysis, A.O. Smith Corporation: Thank you, Jonathan, and good morning, everyone, and welcome to the AYO Smith first quarter conference call. I’m Helen Gerholt, vice president, investor relations and financial planning and analysis. Joining me today are Kevin Wheeler, Chairman and Chief Executive Officer Steve Schaefer, President and Chief Operating Officer and Chuck Lauber, Chief Financial Officer. Within today’s presentation, we have provided non GAAP measures. Free cash flow is defined as cash from operations plus capital expenditures.

Reconciliations from GAAP measures to non GAAP measures are provided in the appendix at the end of this presentation and on our website. A friendly reminder that some of our comments and answers during this conference call will be forward looking statements that are subject to risks that could cause actual results to be materially different. Those risks include matters that we described in this morning’s press release, among others. Also, as a courtesy to others in the question queue, please limit yourself to one question and one follow-up per turn. If you have multiple questions, please rejoin the queue.

We will be using slides as we move through today’s call. You can access them on our website at investor.aosmith.com. I will now turn the call over to Kevin to begin our prepared remarks. Please turn to the next slide.

Kevin Wheeler, Chairman and CEO, A.O. Smith Corporation: Thank you, Helen, and good morning. Before I review our first quarter performance, I’d like to take a moment to highlight our recent announcement that Steve will assume the role of President and Chief Executive Officer effective July 1. Over the past year, Steve has worked closely with me and our leadership team to deepen his understanding of our business and identify opportunities to enhance performance and drive growth. I have full confidence in his ability to lead A. Smith and advance our position as a global water technology leader.

As we have throughout this process, we will continue to ensure a smooth CEO transition over the next two months. I’ll remain actively engaged as Executive Chairman of the Board, continuing to support the company’s strategic direction. Now turning to slide four and our financial performance. Our team delivered a solid performance in the first quarter with volumes tracking our expectations. I’m pleased with our sequential quarter over quarter improvement.

As anticipated, North America segment sales declined by 2% as higher boiler sales were more than offset by lower water heater volumes. As a reminder, we had a very strong first quarter in ’20 ’20 ’4 for water heating, creating a challenging year over year comparison. Rest of world sales were essentially flat compared to last year, and China Third party sales declined 4% local currency, reflecting ongoing economic weakness and soft consumer demand. In the quarter we repurchased $121,000,000 of our shares front loading a portion of our full year 2025 repurchase outlook of $400,000,000 Please turn to slide five. North America water heater sales declined 4% in the first quarter driven by lower volumes.

First quarter twenty twenty four shipments benefited from pre vibe related volumes ahead of an announced price increase and a favorable commercial gas mix. In contrast, 2025 volumes reflect a more normalized annual cadence. One of our key initiatives for 2025 is to level low production across the year to ensure optimal plant efficiencies. We have maintained our planned production schedule despite stronger recent order rates, which appear to be in response to our announced price increases. Working closely with our customers, we are managing orders based on historical order rates and have adjusted lead times accordingly.

We are continuing to monitor the situation closely. Our North American boiler sales increased by 10% compared to the first quarter of twenty twenty four, as our high efficiency commercial boilers continue to outperform the market. North America water treatment sales increased slightly in the first quarter as growth in our priority channels, e commerce, dealer and direct to consumer offset retail declines as we intentionally shift focus away from that channel. We are pleased with first quarter profitability, which is tracking in line with the full year two fifty basis point improvement we discussed during January’s call. In China, First Quarter Third party sales decreased 4% in local currency.

Higher sales of electric water heaters and commercial water treatment products were more than offset by lower volumes of residential water treatment products and gas water heaters. Margin improved by 200 basis points in the quarter, driven by ongoing cost control efforts and benefits from our twenty twenty four restructuring initiatives. I’ll now turn the call over to Chuck, who will provide more details on our first quarter performance. Thank you, Kevin. Good morning, everyone.

Chuck Lauber, Chief Financial Officer, A.O. Smith Corporation: We delivered sales of $964,000,000 in the first quarter of twenty twenty five, a decrease of 2% year over year and earnings were $0.95 per share, a decrease of 5% compared to the prior period. Please turn to slide six. First quarter sales in the North America segment were $749,000,000 decreased 2% compared to a tough comp last year. Higher boiler sales were more than offset by lower volumes of water heaters. North America segment earnings of $185,000,000 decreased 7% compared to last year.

Segment margin was 24.7%, a decrease of 120 basis points year over year. The lower segment earnings and segment margin were primarily driven by higher boiler sales that were more than offset by lower water heater volumes, lower volume related absorption, and continued strategic investments, including tankless. Moving to slide seven. Rest of the world segment sales of $227,000,000 were essentially flat to last year, including sales from the Purit acquisition of $12,000,000 China third party sales decreased 4% on a constant currency basis. Lower sales in China were offset by the addition of Purit.

Rest of the world segment earnings of $20,000,000 increased 15% compared to segment earnings in 2024, as expense management offset lower sales in China. Segment operating margin was 8.7%, an increase of 110 basis points compared to last year, driven by strong margin improvement in China. PureIT will be a margin headwind in the near term as we focus on integration. Turning to slide eight. We generated operating cash flow of $39,000,000 and free cash flow of $17,000,000 during the first three months of twenty twenty five, which is lower than the same period in 2024, but is in line with historical first quarter cash flow, which typically is our lowest cash generating quarter.

The decrease was primarily due to lower accounts receivable collections as a result of higher sales in the first quarter of twenty twenty five compared to the fourth quarter of twenty twenty four, as well as lower year over year earnings. Our cash balance totaled $200,000,000 at the March, and our net debt position was $70,000,000 Our leverage ratio was 12.7% as measured by total debt to total capital. I’ll turn to slide nine. Earlier this month, our board approved our next quarterly dividend of $0.34 per share. We repurchased approximately 1,800,000.0 shares of common stock in the first three months of twenty twenty five for a total of $121,000,000 an increase over the same period last year as we increased our planned repurchase intentions from $3.00 $6,000,000 in the full year of 2024 to approximately $400,000,000 of shares for the full year of 2025.

We also weighted our share repurchases more heavily in the first quarter relative to our full year outlook as we opportunistically bought shares during the quarter. We continue to cultivate an active acquisition pipeline and have adequate dry powder available for the

Steve Schaefer, President and Incoming CEO, A.O. Smith Corporation: right

Chuck Lauber, Chief Financial Officer, A.O. Smith Corporation: acquisition. As always, we remain focused on transactions that meet our financial metrics and expand shareholder value. Please turn to slide 10 in our 2025 earnings guidance and outlook. We maintain our 2025 EPS outlook with an expected range of $3.6 and $3.9 per share. The midpoint of our EPS range is slightly higher than our 2024 adjusted EPS.

We maintain our outlook on what has been a backdrop of uncertainty in tariff related cost increases to our business. The tariff related impacts that we considered in maintaining our outlook are based on what has been announced as of today. While our manufacturing footprint supports our in country, for country business model, Our supply chain costs are impacted by not only our direct import of components, but also our suppliers’ footprint and import strategies. We have confidence in our manufacturing and supply chain strategy and execution, as well as our suppliers’ ability to manage in uncertain times. In a moment, Steve will discuss the actions we have taken to mitigate the tariff impact, including pricing, expense management, supply chain and manufacturing initiatives.

We have included the following key assumptions in our outlook. Due to the uncertainty of the tariff environment, we have considered within maintaining EPS guidance, but excluded from our sales guidance the impact of announced tariffs and related offsetting actions. Based on the current announced tariffs, which could change in the future, we estimate that annual impact could increase our total cost of goods sold by approximately six to 8%, exclusive of mitigation efforts. Our guidance assumes that our annual steel and other input costs, exclusive of tariffs, will be similar to last year. This includes our projection that steel will increase in the second half of the year.

We estimate that our 2025 CapEx will be between 90,000,000 and $100,000,000 as we continue to invest in engineering capabilities and prepare for the upcoming regulatory changes. We expect to generate free cash flow of between $500,000,000 and $550,000,000 Interest expense is projected to be between $15,000,000 and $20,000,000 Corporate and other expenses are expected to be approximately $75,000,000 Our effective tax rate is estimated to be between 24 to 24.5%, and we project our outstanding diluted shares will be 142,000,000 at the end of twenty twenty five. I’ll now turn the call over to Steve, who’ll provide more color around tariffs, our key markets and top line growth outlook, and segment expectations for 2025 on slides ten and eleven. Steve? Thank you, Chuck,

Steve Schaefer, President and Incoming CEO, A.O. Smith Corporation: and good morning, everyone. First of all, I would like to take a brief moment to let you all know how honored I am to be announced as the next CEO of A. O. Smith effective July 1. It is a real privilege to be able to work with my dedicated and capable colleagues to help lead this iconic company into the future.

I would also like to thank Kevin and his leadership and commitment to the company over the last thirty plus years and for the trust and confidence that both you and the board have put in me. As Chuck mentioned, there’s still uncertainty around tariffs. And while we are largely in country for country, our business is impacted by the changing tariff environment as we have certain components that are globally sourced. We have mobilized cross functional tariff response teams across our businesses to identify tariff and supply chain related risks and to develop action plans to mitigate those risks. These teams meet regularly to address the evolving tariff impacts on each of our businesses to ensure that we continue meeting the needs of our customers while taking action to mitigate tariff related costs.

In North America, in response to tariff cost increases as well as higher steel and other input costs, we have announced price increases of an average range of 6% to 9% on most of our water heater products. We have also announced price increases on our other product categories. Because of the uncertainty of the tariff environment, we have not included in our announced pricing in our top line guidance. In addition to pricing, other mitigating actions include footprint optimization, strategic sourcing, and other cost containment measures. Assuming the current tariffs go into effect as announced, we expect to begin seeing the benefits of our pricing actions by the end of the second quarter, while we are already experiencing tariff impacts as we enter the second quarter.

In North America, the majority of our residential water heaters and all of our boilers and commercial water heaters are manufactured in The United States. Approximately 15% of our residential tank water heaters are produced in our Juarez, facility and are USMCA compliant. As previously planned, the production of our recently launched gas tankless products is being transitioned from our China facility to our recently completed tankless facility in Juarez. We are taking action to accelerate the transition given the current tariff environment. Key assumptions and top line outlook include the following.

Our projection at twenty twenty five residential and commercial industry unit volumes will be approximately flat to last year, which is unchanged. In China, we believe the economy remains challenged with low consumer confidence and a weak real estate market. While we see the stimulus programs as positive, we expect the program to act more as a stabilizer in the market as opposed to a meaningful catalyst for growth. We have not changed our full year 2025 outlook and continue to project that our sales in China will decrease 5% to 8% in local currency. Our forecast assumes that the currency translation impacts will be minimal in 2025.

We anticipate that our restructuring program in China will be substantially complete by the end of the second quarter, and we continue to expect to realize annual savings approximately $15,000,000 As a result, China operating margin is projected to be in the 8% to 10% range for 2025, even with lower volumes. I feel confident that our restructuring actions position us well for the market today and also to realize the benefits when the Chinese economy improves. We remain cautious about the near term market outlook, including the level of sustainable impact from the appliance discount trading program. But we are pleased with how our China team continues to manage the challenging environment and maintain our premium brand position. We project our North American boiler sales will increase between 35% in 2025.

While we are very pleased with our first quarter growth of 10%, we believe we may have benefited from a minimal amount of pre buy from price increases to be implemented in the second quarter. We are also cautious around the back half of the year and are monitoring the commercial market closely. We have not changed our guidance that North America water treatment sales will decline approximately 5% in 2025 as we deemphasize the less profitable retail channel. We are pleased to see the strong start to the year in our priority channels and are looking to build on that momentum. We continue to project an operating margin expansion of approximately two fifty basis points in 2025 for the North American Water Treatment business.

We expect the addition of Purit will add approximately $50,000,000 in the sales in 2025 and will not have a significant bottom line contribution this year as we work through the integration of this business. As I have noted, based on the significant volatility in the tariff landscape, we maintain our sales growth expectation of a range of flat to up 2% pending further clarification on tariffs as we move through 2025. We expect our North American segment margin to be between 2424.5% and rest of world segment margin to be between 89%. Please turn to slide 12. While we expect 2025 to be a year of muted bottom line growth as we navigate the volatile tariff landscape and continue to support our long term strategic investments, as Kevin noted, we are pleased with our team’s first quarter performance.

I was particularly pleased with the following. Our manufacturing execution, as well as the steps taken to level load production and work with customers to manage order fluctuation caused by pricing actions. Our cost containment actions, which resulted in nearly flat SG and A spend in the first quarter compared to first quarter last year. That included increased SG and A expenses as a result of inflation and our Purit acquisition. Our boiler sales growth of 10% in the quarter, the fourth consecutive quarter of growth for this category.

Encouraging North American water heater sales, which while lower relative to a tough comp last year, grew over 10% compared to the previous quarter. Both North America water treatment and China’s profit improvement actions. We are on track to meet margin improvement goals through cost management and the benefits of restructuring. During the quarter, we also cut the ribbon and opened our world class commercial R and D testing lab facility in Lebanon, Tennessee. This facility leverages our product development and engineering talent in one location, focused on continuing to drive our leadership in commercial water heating and boilers.

And lastly, but very important to us, for the second year in a row, A. O. Smith was recognized as one of the world’s most ethical companies by Ethisphere, a global leader in defining and advancing the standards of ethical business practices. Living our values and doing business the right way is always front and center to how we operate, and it is great validation to be recognized by Ethisphere. We have confidence in our ability to navigate the volatile 2025 macro environment.

Our leadership position in all the markets that we serve, the stable recurring revenue provided by our core water heater and boiler businesses, and our strong balance sheet allow us to continue to invest in ourselves, make attractive strategic acquisitions and maximize shareholder return even in times of uncertainty. As always, we are in close communication with our suppliers, customers and other stakeholders as we navigate the challenging environment. We are deploying diligent cost management actions across our businesses to ensure that we maximize profitability during this time of cost volatility. We are committed to leading the industry forward and are confident that we will continue to build on our long history of innovation and proven ability to drive profitable growth. With that, we conclude our prepared remarks, and we are now available for your questions.

Conference Operator: Certainly. First question for today comes from the line of Jeff Hammond from KeyBanc Capital Markets. Your question please.

Jeff Hammond, Analyst, KeyBanc Capital Markets: Hey. Good morning, everyone. Kevin, congrats on a great run and Steve for your promotion. I to start here with, I guess you’re not really changing anything in the assumptions, but I’m just wondering where you think you might see some demand destruction around incremental pricing actions and just the general uncertainty out there? And then just the price increases, would you expect to get margin on that price or just cover the incremental inflation?

Thanks.

Chuck Lauber, Chief Financial Officer, A.O. Smith Corporation: Hey, Jeff. Let me start out on the margin question. So our assumption in 2025 is really EPS neutral. Know we’re expecting to have pricing cover costs. We’ve kind of laid it out that way.

If you kind of look at our pricing, we’ll have probably a little bit of headwind in Q2 as we start incurring those costs before we have the pricing actions in place, and I’d say a little bit of headwind relative to Q1. We’re really pleased with twenty four point seven percent America margins in Q1. With regard to demand destruction, you know we’re really fortunate to have a replacement stable business with recurring revenue on the water heating side between that 8085%, so that certainly does stabilize our business. You know our boiler business performed very well in the first quarter at 10% up as Steve noted. Know there may be a little bit of pricing pull forward there but we’re watching the commercial markets as we go through the year and have not increased our boiler guidance based on that.

You know from our perspective and it’s early there’s certainly early in the year but we haven’t seen you know any negative activity. Orders and quoting have been pretty stable on the commercial side of the business but again it’s pretty early in the year.

Jeff Hammond, Analyst, KeyBanc Capital Markets: Okay, great. And then you mentioned that the tariff exposure, six to 8% of cost

Analyst: of goods sold. I’m just wondering if

Jeff Hammond, Analyst, KeyBanc Capital Markets: you could just unpack that a little bit. How much of that is steel inflation or steel tariffs? And then any other kind of bigger buckets as you think about direct or indirect or purchase components?

Chuck Lauber, Chief Financial Officer, A.O. Smith Corporation: Yeah, you know, we kind of carve out steel separately when we think about tariffs. Even though there is steel tariffs, we’ve had those before. It is in our outlook, and we’ve got back half steel increases in our outlook. The tariff themselves that I would say are more direct and more near term and announced as of today, know in that six to 8% that’s an annual number, know so we’re looking at kind of annual volumes in the six to 8%. The largest component of that is bringing in product either through our suppliers or directly, including our tankless, from the China market.

And we’ve talked a little bit about mitigating that through accelerating our tankless production as we’ve always planned to move from China to Mexico to mitigate that in the future, but China is our largest piece of that.

Conference Operator: Thank you. And our next question comes from the line of Mike Ollerman from Baird. Your question please.

Mike Ollerman, Analyst, Baird: Hey, just a clarification there Chuck, I’m sorry. Did that include so you’re saying the 6% to 8% does not include the steel inflation and is simply the tariff piece?

Chuck Lauber, Chief Financial Officer, A.O. Smith Corporation: Our outlook includes the steel piece, but that 6% to 8%. Got it.

Kevin Wheeler, Chairman and CEO, A.O. Smith Corporation: Perfect. Yeah.

Chuck Lauber, Chief Financial Officer, A.O. Smith Corporation: Got it. But very specific tariffs.

Mike Ollerman, Analyst, Baird: Yes. No, no, no. I appreciate that. And good morning, everyone. Sorry about that.

Congrats

Kevin Wheeler, Chairman and CEO, A.O. Smith Corporation: could you just talk to how you think about the sequentials as

Mike Ollerman, Analyst, Baird: you work through the year? I understand the steel comments into the back half of the year. But from a demand perspective, as you sit here today, is this just kind of relatively normal seasonality as you work through the year? Or are there any other nuances I should think about?

Chuck Lauber, Chief Financial Officer, A.O. Smith Corporation: No, I mean think about it in terms of what we talked about in January. ’50 ’1 percent, ’40 ’9 percent of residential product in the front half, back half. Orders haven’t fallen in quite that way. As Steve talked about our initiatives to level load the plant, We could have pushed out more shipments if we had wanted to, but we really are working and very focused on managing the orders that have come in. And because of that, we would expect the cadence of the year to be much more normalized, even though we have some announced pricing out there.

So think of it in terms of a fairly normal year as we lay it out and we’re you know we’re working to try to do that so that we’re most efficient as possible. Yeah Mike maybe another just

Kevin Wheeler, Chairman and CEO, A.O. Smith Corporation: a bit of color on that. We’ve done a quite a bit of inventory checks with our channel partners and right now we’re in pretty good shape. Most channel partners are relatively flat to last year even slightly down so it’s a little bit different environment than we had last year as we exited Q1 of twenty twenty four.

Mike Ollerman, Analyst, Baird: That makes sense. And then follow-up, just maybe talk about the rebalancing or how much you feel like you need to rebalance some of the sourcing or some of the footprint for these changes. Obviously, the tankless coming over this way over the course of this year and into next year, that was well telegraphed. But maybe any of the other changes as you look at the network and how important that is all else equal competitively or however you want to frame it?

Steve Schaefer, President and Incoming CEO, A.O. Smith Corporation: Yeah, Mike, I’ll take it as we mentioned the teams we’ve got that are working on this. And there’s shorter term actions you can take relative to working with your suppliers where they they have facilities that you can take advantage of. I mentioned even in within our own supply chain network of getting tankless into Mexico faster. So teams are working on those things. There are longer term items as well where there might be either a change in supplier or requalification requirements.

So we’re we’re studying those, and some of them are are are harder than others. And obviously, some of them will be dependent upon what plays out in the year relative to tariffs. So we we have an understanding if things stay the way they are, certain actions we are working on and we would take. If they move, it might it might, you know, change those actions. So it’s it’s it’s a pretty fluid state, and that’s why we’ve got kind of these task force set up so that it’s not just executing a plan as the world is today, but it’s helping us, realign our supply chain as new information comes available.

Conference Operator: Thank you. And our next question comes from the line of Suri Baroditsky from Jefferies. Your question please.

Suri Baroditsky, Analyst, Jefferies: Hi, thanks for taking the questions and congratulations to Kevin and Steve on the new roles. You talked about pre buy impacting the comps for water heaters last year on kind of a low single digit price increase. So I was just curious on the pre buying expectations given expected pricing actions in response to tariffs. I think you mentioned a difference in orders versus factory levels. So will you be delivering on lower priced products into more of the year as a result?

Thanks.

Chuck Lauber, Chief Financial Officer, A.O. Smith Corporation: So we we’ve really been managing production to not pull in orders in the first quarter. We expect pricing to come into play you know later in the in the second quarter. So the order rate from a price pull forward, we would expect to be pretty smooth from first to second quarter, of rounding out that 50 oneforty 9 perspective on units being shipped.

Steve Schaefer, President and Incoming CEO, A.O. Smith Corporation: And I just say, you know, we work really closely with our customers on this. So one of the ways we handle this is is, you know, we we float our lead times as we get orders coming in. We work with our customers in terms of an allocation of how to work through those orders so that we can actually provide some clarity around when the price transition occurs. But it’s something we work closely with our customers on, and I think we’re handling that through this year with the price changes and the uncertainty around tariff costs very, very effectively, both to serve our customers well, but also to run our plants efficiently.

Kevin Wheeler, Chairman and CEO, A.O. Smith Corporation: You know, maybe one other comment there. The the whole key

Chuck Lauber, Chief Financial Officer, A.O. Smith Corporation: is we’re just not pulling in

Kevin Wheeler, Chairman and CEO, A.O. Smith Corporation: a bunch of overtime in q one to pull it into q one, We’re trying to be a bit more systematic about it and that may that’s not going to change within the quarter how we’re going to ship and so we expect to you know to be as we said to be through shipping through the quarter and then start to benefit from the back half of Q1 with the pricing. It’s just a little bit of timing but it’s narrow but it makes a big difference to our factories and it makes a big difference to our customers to make sure that they can order on a regular basis and have the stock in hand when their contractors need it.

Suri Baroditsky, Analyst, Jefferies: Appreciate the additional color. And then I’m sorry if this is just me being confused, but you have announced price actions, but I believe you’ve not included this in guidance. So I guess, would you expect those price increases to not go into effect if tariffs are not implemented in the current form? And then what would sales guidance be, assuming the announced price increases do go into effect?

Chuck Lauber, Chief Financial Officer, A.O. Smith Corporation: Tariffs are so volatile right now and unpredictable that we felt it was prudent to not include a top line assumption of what may or may not be held into going forward costs or tariffs. So I just you know EPS we’re very conscious of the tariffs that are in place today and the mitigating actions that Steve outlined, one of which includes pricing. So we’re you know we’re comfortable with our EPS outlook and just where we fall within the $3.60 to $3.90 but we haven’t decided we just felt it was prudent and not try to put a top line assumption out there.

Kevin Wheeler, Chairman and CEO, A.O. Smith Corporation: Yeah I would tell you that those you know those can go either way. I think we know where we’re at today we want to make sure you understood that we have taken action and that we’re confident in how we’re going to maintain EPS and our guidance on sales but it’s just a really early because the equation changes sometimes literally every day. So I think when we get a nice better view of this but I think that the takeaway here is we’re prepared not only with our pricing but all the other actions we’ve taken with regards to cost controls and so forth and optimizing our manufacturing that we’re in good position to navigate through these tariffs regardless of where they end up.

Conference Operator: Thank you. And our next question comes from the line of Brian Blair from Oppenheimer. Your question please.

Brian Blair, Analyst, Oppenheimer: Thanks. Good morning, Echo the sentiment, Kevin and Steve. Congrats to you both. I wanted to just make sure that I’m understanding that six to 8% of COGS potential tariff exposure, that does include the full run rate impacts of tankless imports from China, correct? And an extension of that, what would the pro form a figure be assuming the full transition to Juarez production?

Chuck Lauber, Chief Financial Officer, A.O. Smith Corporation: Yeah, mean, there’s a lot of moving parts to a pro form a number, particularly with us accelerating manufacturing from China to Mexico, meaning there’ll be some trailing tariffs on components because we’re probably going to have some components go in to Mexico. And prior, we would probably focus more on moving those to local sourcing. It’s going to take a little bit of working through to kind of come up with that number, we’re certainly looking to mitigate it. Six to 8% includes tankless. It includes tankless at a volume of twenty twenty four.

I think I talked about it on the last call. We have a meaningful amount of tankless inventory in place, so that may not be quite that number in 2025. But from full year perspective, tankless is the largest single component within the China import costs.

Brian Blair, Analyst, Oppenheimer: Understood. Appreciate that detail. And then high level, just with regard to competitive positioning and strategy, I guess setting aside near term price cost for the moment, maybe offer some color on how your team’s thinking about the risks versus opportunities presented by all of the uncertainties around tariff trade policy, etcetera.

Steve Schaefer, President and Incoming CEO, A.O. Smith Corporation: Well, I’d say anytime there’s uncertainty, it’s an opportunity to find a way to respond faster, faster than your competitors, navigate it more successfully than others in the marketplace. And I think I feel confident in our team’s ability, way we’ve rallied behind this, the way we’ve understood the dynamics. We’ve got our supply chain data pulled together. We’ve got experts within our organization that I think understand the dynamics well. I think we’re very plugged in in terms of understanding some of the policies policy decisions that are out there today as well.

And I think from my standpoint, I’m confident that we can respond better than most because of

Chuck Lauber, Chief Financial Officer, A.O. Smith Corporation: the capabilities we’ve put in place.

Kevin Wheeler, Chairman and CEO, A.O. Smith Corporation: Yeah. I think we just put it you know, one of the things we’re in country for country, and that’s that’s on a global basis. So, being able to navigate this, with our local teams, I think, is just an opportunity where maybe other companies don’t have that luxury. But again, not being this low cost producer, moving things around, being in country for country with local management, I think it’s going to make a could make a difference for us as this thing plays out.

Conference Operator: Thank you. And our next question comes from the line of Scott Graham from Seaport Research Partners. Your question please.

Helen Gerholt, VP Investor Relations, Financial Planning and Analysis, A.O. Smith Corporation0: Hey, thank you. Good morning. Kevin, it’s been a true pleasure working with you. Spent some great time together and thank you for that. And Steve and I wish you all the luck in the world and look forward to working with you.

My questions are really around the residential water heater shipments assumption and then China. The residential macros to date have really not been overly optimistic, overly positive, particularly when you consider inflation impacting some of them. I was just wondering what is your assumption for proactive this year within the industry on a year over year basis? Are you assuming proactive is flat, maybe even down?

Kevin Wheeler, Chairman and CEO, A.O. Smith Corporation: Yeah, you know, it’s been interesting, Scott. We track this, I think we’ve talked about it many times for over a decade. And we just got to recent data last night quite frankly to be honest with you. And right now the proactive and the university placement is still tracking at that level that we came out of COVID. You know as we’ve talked about maybe this is just an embedded change in the industry.

So as we see it right now, we see proactive in the replacement which is going to be 88%, eighty five % of our business to be rather stable and resilient.

Helen Gerholt, VP Investor Relations, Financial Planning and Analysis, A.O. Smith Corporation0: Okay, thank you for that. And then when you look at China, I know obviously with the stimulus over there targeting helping consumers is, do you need a broader improvement in housing there to kind of get that business going? What are the things that you’re looking for for that business to start to improve again?

Steve Schaefer, President and Incoming CEO, A.O. Smith Corporation: I would characterize it, Scott, as more we’re looking for consumer confidence to build in China. And I think with consumer confidence, and some of that is connected to the housing market. Right? Because there’s a lot of wealth tied up for the the Chinese middle class in their real estate. But with that consumer confidence, you get both the benefit of how folks will invest in their real estate and or invest in upgrade of their homes.

And with the upgrade of homes, you see the premiumization of of, you know, appliances and kitchen updates that we can take advantage of. So I would characterize it more as consumer confidence than the housing market. The housing market in China, it’s got a ways to go, I think, to really recover, but it’s that close connection to consumer confidence that we’re watching.

Conference Operator: Thank you. And our next question comes from the line of Andrew Kaplowitz from Citi. Your question, please.

Helen Gerholt, VP Investor Relations, Financial Planning and Analysis, A.O. Smith Corporation1: Good morning, everyone. Kevin, Steve, congratulations. Chuck, I’m just trying to understand the EPS cadence a little bit more for the year in tariff versus pricing. If we think that the 6% to 8% of annualized cost of tariffs is going to be the headwind, do you see full impact in Q2 without much help from pricing yet? So we need to forecast that in Q2.

And then do you end up covering more than the tariffs in the second half of the year under the transition costs from tankless later in the year? Like how does that cadence work?

Chuck Lauber, Chief Financial Officer, A.O. Smith Corporation: Yeah. Let me start with we’re very pleased with North America margins in Q1 at 24.7%. Cost containment measures and some of the other actions to level load the plan have been very helpful to that margin. A reminder, our full year guidance is 24 to 24.5, so Q1 was a little bit better than that full year guidance. We haven’t changed our full year guidance.

From an EPS standpoint, we’ve from a margin profile standpoint, but from a North America margins, we would expect to be slightly down in Q2 because we are starting to see costs on tariffs. We’re working to mitigate those costs, as Steve mentioned, working with our suppliers through the quarter, and we’ll see pricing come in in June. There’ll be a little bit of a headwind, and we haven’t changed our full year guidance, ’24 to 20 four point So a lot to play out yet in the rest of the year. Q2 will probably see a little bit of North America margin headwind, but for the full year, we’re comfortable that EPS is kind of on track.

Helen Gerholt, VP Investor Relations, Financial Planning and Analysis, A.O. Smith Corporation1: Very helpful. And then maybe just a follow-up on China for Kevin or Steve. Your sales started out only down 4%, which I think was slightly better than Q4. Did stimulus help at all? Can you give us more color on sort of what you see there?

And I know you continue to think about China as strategically important, but has it become at all more difficult to do business in China recently given what’s going on?

Steve Schaefer, President and Incoming CEO, A.O. Smith Corporation: Yeah, just regarding the start to the year, I think we’re starting out kind of as we had expected to start the year and we’re cautious. I think we’re cautious about how the euro play out the economic conditions in China. So we’re watching it closely, but as we’ve said, we still think that the market recovery will take some time there. And so I think that’s reflected in our guidance of how we proceed forward. Our focus really is making sure that we can maintain our competitiveness in China, maintain our premium brand position in China.

And that’s what the team has been focused on, while at the same time rightsizing organization, I think, to the new market reality. So I think we’re off to a good start there, but we’re very cautious as it relates to how the year will play out. Regarding whether we’re seeing a major shift in dynamic, I’d say the trends are very consistent to what we’ve seen over the last few years. It’s a challenging macro environment. As we talked about, consumer confidence is not where it needs to be to sort of drive growth.

The trade in program is stabilizing, but not really driving growth for us in the marketplace. And so, you know, right now we’re we’re we’re looking to compete, you know, and obviously we have local competitors there that, that means we’ve gotta be really on our game. And so I think those conditions haven’t changed. We haven’t really seen a big shift relative to consumer sentiment around our products. We’re in China for China and we’re well respected and we have a great brand there.

And I think, we still see that as the way in which we’re, we’re competing and seen in the marketplace.

Conference Operator: Thank you. And our next question comes from the line of David MacGregor from Longbow Research. Your question please.

Analyst: Yes. Good morning everyone and congratulations to Kevin and Steven. I guess I wanted to start off by just asking you about capacity available to you in The United States and specifically maybe how much excess capacity do you have in your Tennessee and Kentucky component plants and your ability to repatriate manufacturing to The US? And I guess as part of that, how does an increase in the tariffs affect your thinking around vertical integration? And I have a follow-up after that.

Thanks.

Chuck Lauber, Chief Financial Officer, A.O. Smith Corporation: Well maybe I’ll touch on that.

Kevin Wheeler, Chairman and CEO, A.O. Smith Corporation: In the water heater side we’re very vertically integrated already and so again we’re in country for country so you know that repatriating I don’t think that’s an issue because we don’t we don’t have many products that come in from outside The United States. So that’s played out well for us and it continues to play out well for us. And so I just don’t see that being a major challenge for us. From a capacity standpoint, we do have this capacity. We structure our plants appropriately like we’ve been talking about and making sure that we have the right run rate so we can optimize our efficiencies.

We have the ability and we have three large residential plants, we have the ability to shift things around and move them where it’s more optimal for our customers as well as for AO Smith from a margin standpoint. No big plans to repeat because we don’t do that. And I think our teams are working well together with Steve and the operating groups to make sure we’re positioning ourselves well to kind of navigate this situation. That’s where we’re at, and again, it’s playing out well. Our strategy for end country, poor country is playing out pretty well on a global basis considering the uncertainty and volatility in the market today.

Analyst: Okay, good. Thanks for that. I guess secondly, just given all the changes that are taking place at the administration level in this country, I wanted to ask you about the 2026 change in regulatory requirements around the elimination of low efficiency commercial gas product. Are you seeing anything at the federal level that would suggest that this might be delayed or would be reduced in scope? I think at one point you thought the changes would impact about 55% of units sold.

Kevin Wheeler, Chairman and CEO, A.O. Smith Corporation: Yeah. I would tell you, I’m just gonna take there’s two major rule makings out there. One is on the commercial rule making which is October 26 and that’s reason for non conditioning to condensing product in the commercial segment. And then of course there’s what we refer to as NAGA four which is a little bit further out, that’s going be in 2029. What I’ll start with is both of these have gone through Congress and they are law.

Okay? So, it’s going to be difficult to change any of those standards that we have there. So what we’re doing is we’re simply preparing for that. And the first step is going to be on the commercial side, and that’ll be mainly in our MACB commercial facility, which we’re taking steps there. There is a lot of, you know, out there with regards to this and regulatory, but, we’re proceeding until we see something really meaningful, we’re proceeding as both of these rulemakings will go into effect at the appropriate time.

And if they don’t, we’re a pretty nimble company and we can make adjustments. But as of right now, again, they’re law and we’re proceeding as if they’re going go into effect as scheduled.

Conference Operator: Thank you. And our next question comes from the line of Damian Karas from UBS. Your question, please.

Helen Gerholt, VP Investor Relations, Financial Planning and Analysis, A.O. Smith Corporation2: Hey, good morning, everyone. Hopping on the line late here, so apologies for any repetition. Morning, morning. Yeah, was just wondering if you could elaborate on the pricing actions for North America water heaters. Again, sorry if I missed this, but have you, your 6% to 8%, Is this kind of like already executed like a round of increases or are there, you know, sort of some pending rounds of price changes that are going to take effect?

I’m also just curious, you know, I mean, thinking about the past, right? And the North American industry kind of construct like price increases have typically been, you know, similar happening at the same time, whether it was, you know, steel inflation or supply chain bottlenecks. This time is a little bit different just because of the very specific tariff factors and the fact that you have a different footprint from some of your peers. So, just curious if like your price actions, if you’re seeing anything kind of different in the market out there.

Steve Schaefer, President and Incoming CEO, A.O. Smith Corporation: So first off, on the pricing announcements, they have been made and they’re out in the marketplace and we’ve been communicating with our customers around that. So that is a step we’ve already taken. You are correct in that this is a little bit of a different dynamic as you think about tariffs versus other inflationary pressures that we’ve worked through in the past and tariffs sort of have defined dates and supply chains and we’re all impacted a little bit differently across the different companies. But I would say it comes down to we have really good relationships with our customers. We work through these things.

Right now, obviously, we have to move forward with what we know and the best information we have available to us. And I think as that information changes, what might be different is we will continue to work with our customers around the implications that has in terms of our pricing.

Helen Gerholt, VP Investor Relations, Financial Planning and Analysis, A.O. Smith Corporation2: Okay, understood. And I was wondering if you could maybe update us to the status of the Mexico capacity ramp. And I’m curious, if like on the tankless side, if tariffs might actually present an opportunity to kind of accelerate your position in North American tankless. My understanding is that a lot of the North American market is still coming from overseas ex Mexico.

Steve Schaefer, President and Incoming CEO, A.O. Smith Corporation: We are looking to accelerate our ramp up in Juarez. We have our premium condensing adapt product that is launched there already. We have two more products that were planning to launch through the course of this year to be ready for next year with the full portfolio. And we are looking to accelerate those efforts so that we can get our products producing out of our Juarez, Mexico facility. And part of that acceleration is the economic case presented from the tariffs.

Chuck Lauber, Chief Financial Officer, A.O. Smith Corporation: Yeah, Damian, it’s always been our intent to start production in China and move it to Juarez. And this just accelerates the ability for us to start production in Juarez versus on the last two products, start up production in China.

Conference Operator: Thank you. And this does conclude the question and answer session of today’s program. I’d like to hand the program back to Helen Gerholt for any further remarks.

Helen Gerholt, VP Investor Relations, Financial Planning and Analysis, A.O. Smith Corporation: Thank you, everyone, for joining us today. Let me conclude by reminding you that we are pleased with our quarter over quarter improvement even in a challenging environment. We look forward to updating you on our progress in quarters to come. In addition, please mark your calendars to join our presentations at four conferences this quarter: Oppenheimer on May 5, North Coast on May 6, KeyBank on May 28, and Stifel on June 3. Thank you, and enjoy the rest of your day.

Conference Operator: Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.

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