Q2 2023 A O Smith Corp Earnings Call
Good day and thank you for standing by welcome to the a O Smith Corporation Q2, 20 twenty-three earnings conference call.
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Without further Ado I'll hand, the conference over to your first Speaker Helen Gerhold Helen. Please go ahead.
Thank you, Eric and good morning, everyone and welcome to the a O Smith second quarter Conference call.
I'm, Helen Girl, Vice President Investor Relations and financial planning and analysis, joining me today, or Kevin Wheeler, Chairman and Chief Executive Officer, and Chucked lover, Chief Financial Officer.
In order to provide improved transparency into the operating results of our business. We provide non-GAAP measures free cash flow is defined as cash from operations less capital expenditures adjusted earnings adjusted earnings per share adjustments segment earnings and adjusted corporate expenses exclude the impact of impairment charges.
Is non-operating non-cash pension income and expenses as well as legal judgment income and terminated acquisition related expenses. We also provide total segment earnings.
Conciliations 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 and the question queue. Please limit yourself to one question and one follow up for church. If you have multiple questions. Please rejoined the queue.
We will be using slides as we move through today's call you can access them on our website at Investor Aerosmith Dot Com I.
I will now turn the call over to Kevin to begin our prepared remarks, please turn to the next slide.
Thank you how long a good morning, everyone.
On slide four and.
And will review a few highways of our second quarter results.
Our team delivered record adjusted EPS with a dollar one in the second quarter driven by strong performance in our offer operating segments.
We saw margin expansion in a north American segment, primarily do right.
More favorable price across relationship as well as robust demand for a commercial and residential water heaters.
A restaurant segment delivered improved performance in the second quarter, even those headwinds and the economy and currency exchange continue in China.
Both China, and India delivered sales growth of 50% local currency in the second quarter.
Please turn to slide five.
North America water heater sales decreased 2% in the second quarter of 2023.
As higher volumes were offset by lower pricing.
We saw continued resilience and residents of water heater demand and year over year improvement in our commercial where heater business.
Or North America border sales declined 13% in the second quarter compared to a tough compo asked year.
Lower volumes more than offset the benefits from pricing.
General inventory levels of residential and like commercial borders remain elevated in the quarter.
As a warmer than normal winter resulted in lower industry demand.
We believe channel inventory levels are approaching normal levels at the end of the quarter.
Demand for our customer commercial high efficiency condensing boilers, particularly our healthcare crush boilers were <unk> technology.
Steady in the quarter and continues to gain traction in the market.
North America water treatment sales were down 2% in the second quarter of 2023 compared to another tough call from 2022.
As pricing and strong e-commerce sales were offset by lower sales and are especially wholesale and dealer channels.
Sales in the first half of 2022 benefited from strong shipments a supply chain constraints improved and we worked out our order backlog.
I'm, particularly pleased with the margin improvement we have seen this quarter and Ah North America order treatment business.
And China second quarter sales increased 50% local currency compared to the second quarter of 2022.
Which was negative negatively impacted by COVID-19 related shutdowns.
Demand continued to improve for our products, particularly for residential and commercial water treatment products.
Sales of water treatment consumables were particularly strong in the quarter.
We also saw a favorable mixed on our water treatment and electric water heater product categories. This quarter.
As recently launched products continue to be well received by the market.
I am now on slide six.
According to a recent national consumer survey nearly nine out of 10 Americans have concerns about micro classics in their drinking water.
Reducing classic pollution has long been a priority are in North America water treatment business.
Or North America orders from your products filter enough water to potentially eliminate over 1 billion single use plastic bottles per year.
I am pleased to announce that all of our countertop and understand water filters are now independently certified to remove up to 99.6% of micro plastics.
In addition to over 70, other contaminants, including P for us and pesticides.
We remain committed to leading the charge in identifying and b.
Certified to remove harmful contaminants as they emerge.
I will now turn the call over to Chuck who provide more details on our second quarter performance.
Thank you Kevin Good morning, everyone on slide seven.
Second quarter sales in the North America's segment, where $722 million or 3% decline from the same period last year.
The decreases primarily driven by higher commercial and residential water heater volumes that were more than offset by lower oil sales and prices.
Lower volumes contributed to approximately one half of the organic growth declines.
North America adjusted segment earnings of $194 million increased 19% compared with the second quarter of 2022.
Adjusted operating margin of 26.9% improved 510 basis points from the segment adjusted operating margin in the second quarter of last year.
Higher segment, Ernie and operating margin, we're primarily due to lower still costs and higher volumes of commercial and residential water heaters, partially offset by lower oily volumes.
Moving to slide eight rest of the World segment sales of $244 million increased 6% year over year and 12% on a constant currency basis.
Currency translation unfavorably impacted segment sales, but approximately $14 billion.
Our sales increase was primarily driven by higher consumer demand and favorable mix in China, particularly for residential and commercial water treatment products.
India sales grew 15% in local currency in the second quarter compared to last year.
Rest of the world's segment earnings of $28 million increased 56% compared to segment earnings in 2022.
Segment operating margin was 11.6% an increase of 370 basis points compared to the second quarter of last year.
Primarily as a result of higher volumes of water treatment products and positive mix.
Please turn to slide nine.
We generated free cash flow of $236 million in the first half of 2023 higher than the first half of 2022 due to higher earnings and lower working capital cash outlays, primarily related to lower inventory levels and lowered 2022 incentive payments paid in too.
23.
Our cash balance total total of $410 million at the end of June and our net cash position was $204 million.
Leverage ratio is nine 8% as measured by total debt to total capital.
Are strong annual free cash flow and solid balance sheet enable us to focus on capital allocation priorities and return of cash to shareholders earlier.
Earlier this month or board approved are nuts quarterly dividend of 30 per share we.
We repurchased approximately 1.075 million shares of common stock in the first half 2023 for a total of $70 million.
We are committed to repurchasing $300 million of those shares for the full year of 2023.
Now turn to slide 10.
In addition to return on capital of the shareholders. We continue to see opportunities for organic growth driven by innovation and new product development across all of our product lines and geographies.
We believe that our technology leadership and culture of innovation puts us in a strong position to capitalize on the mega trends of Decarbonisation and sustainability.
The strength of our balance sheet also allows us to pursue strategic acquisitions as we grow organically.
Please turn to slide 11, and our revised 2023 earnings guidance and outlook.
Increased our 2023 outlook with an expected adjusted EPS range of $3.45 and.
$3.60 per share.
The midpoint covered adjusted EPS range represents an increase of 12% compared with 2022 adjusted EPS.
Our outlook is based on a number of key assumptions, including.
Our outlook assumes that relatively stable supply chain with limited disruption.
We remain in close contact with our suppliers and logistics providers to manage and resolve supply chain issues as they arrived.
We have increased our North America full year margin guidance to a range of between 24 and 24.25%.
Based on our full year outlook on volumes and price cost relationship.
We will have higher still costs and the back half of the year, which will put some pressure on North America margin.
We forecast that steel costs and the second half of the year will be approximately 20% higher than the first half of the year.
Our guidance assumes that other costs outside of steel remain at current levels.
Ah rest of the world margin guidance of approximately 10% remains unchanged.
We expect to generate free cash flow of between $550 million and $600 million for.
For the year, capex should be between $70 million and $75 million.
Corporate and other expenses are expected to be approximately $55 million.
Are effective tax rate is estimated to be approximately 2004%.
And we expect to repurchase approximately $300 million of shares of our stock, resulting in an average outstanding diluted shares of $151 million at the end of 2023.
I will I will turn to call back over to Kevin will provide more color on our team markets and top line growth outlook.
Four 2023, all staying on slide 11.
Hey, Thank you Chuck we revised our 2023 sales projection to be a range of flat to up 2% compared to 2022, which includes the following assumptions.
Residential water heater demand was resilient in the first half of the year. Therefore, we project 2023 residential water heater industry volumes to be flat to up 2% compared to last year.
We continue to monitor proactive replacement in new housing completions, both of which remains strong.
Demand for commercial electric water heaters greater than 55 gallons with strong in the first half of the year.
Which leads us to raise our guidance for commercial water heater industry volumes to increase mid teens compared to 2022.
We maintain our guidance that our sales in China will grow 3% to 5% in local currency in 2023.
We believe it will take time for consumer confidence to strengthen the economy meet to improve in China.
Our forecast assumes that the Chinese currency will devalue approximately 5% in 2023 compared to 2022.
We have decreased our outlook for our boiler business from being up mid single digits to being down high single digits compared to last year.
Last year or boiler business grew 28% compared to 2021, partially driven by our backlog reduction during the year.
We believe channel inventory levels of residential and commercial where those were elevated coming into 2023.
The mild winter and warm spring resulted in lower demand coming out of the heating season, which so channel inventory reduction efforts.
Orders for our energy efficient custom commercial condensing borders remained steady.
Our outlook for North America, or treatment sales growth of 5% to 7% for 2023.
Has not changed.
We projected our sales in India will go 50% compared to last year.
Please turn to slide 12.
We are very pleased with our performance in the first half of 2023 <unk>.
Demand for our commercial water heaters was strong.
We saw resilient demand for a residential water heaters as new housing completion and proactive.
Main robust.
Our second quarter 23, 2023, North America, adjusted operating margin of 26.9%.
Was driven by improved price cost relationship and will lead to a full year margin improvement as even as our steel costs rise in the second half of the year.
Or China business performed well in a weak economy in the second quarter with sales growth that 50% and operating margins of over 12%.
Market, leading products, such as our high quote and hot water purifiers as well as dual tank electric water heaters led to a positive mix in the quarter.
India continues to outperform the industry as our innovative new products drive market share gains.
As a final note the U S Department of Energy has recently issued his proposal to raise the minimum energy efficient standards for residential water heaters that is targeted to be effective in 2029th.
As we review the Doa proposal, we continued dialogue with the <unk> and other industry participants to offer guidance from our unique market leadership perspective to ensure the final proposal considers all factors that may impact consumers, including affordability instilled.
Installation challenges marketed adoption and consumer awareness as well as state and local electrification regulations.
As a leader in energy efficient water heater solutions, we believe Aerosmith is well positioned to deliver a broad range of products that will meet or exceed the <unk> requirements.
And finally, our focus remains on maybe the needs of our customers as we continue to execute key strategic objective is to advance our position as a global water technology later.
With that we conclude our prepared remarks, and we are now available for your questions.
Thank you very much as a reminder to ask a question press star one one on your telephone and wait for your name to be announced to.
To withdraw your question simply press Star one one again.
Okay standby, while we compare.
Pile the Q&A roster.
And our first call comes from Matt Somerville with da Davidson, Matt. Your line is open. Please go ahead.
Thanks morning couple of questions as we think about kind of the first half second half margin cadence in North America, how should we be thinking about how much margin compression is gonna come from steel versus maybe some of the mixed headwinds you might have given the change in your boiler outlook for North America.
And then I have a follow up.
Hey, good morning, Ma'am this is Chuck.
So you kind of look at the front half back have I think of it in terms of three buckets right. So you've got the price cost relationship be compressed a bit by steel costs being up about 20% is probably the largest piece.
Of the Delta between first half and secondhand also kind of the way the year's setting up on residential water. He's got the first half and this is fairly typical but maybe a little stronger than normal.
Residential and butter eating at about 52.5% to 53% of the year and then.
Is 47% to 47 and a half in the back half so there's a little bit of pressure on that because of the depth of minutes in volume on the residential side and then the smallest piece I would say is kind of related to oilers in the mix a little bit less mix on the higher end commercial.
<unk>.
Got it and then as a policy with.
With respect to China can you talk about the sustainability of water treatment demand. There that you saw in the second quarter, perhaps maybe why the water heater business may be lagging a bit.
Also comment on selling versus sell through and inventory levels overall in China. Thank you.
That was quite a question and it was for women in there, but let me just take the.
The sell out sell out was good it was.
He was double digits, we saw solid.
Improve in each of the months and so that was a positive trend.
Inventories are between one and 2% similar.
One to two months two months gives me. Thank you try one to two months and.
Maybe just a tad, but nothing out of the ordinary.
And as far as going back to water treatment. We just have some terrific products out there that that we've introduced and you mentioned it in our remarks.
The hot water purifiers that we have on the high flow. They just continue to be well received in the market clean water is a priority for the Chinese consumer so we see that continuing and then you throw on top of that.
Our consumables that were really strong.
Up over 20 plus percent and each time, we several water treatment products, we have the potential of the ongoing consumable for the next several years. So that's gone really well we continue to see that.
Being a priority for the consumer going into the back half of the year and as far as water heating and water treatment electric.
They are tied a bit to some new housing formation. So that's been under pressure for awhile, but.
The electric side performed well, particularly.
Some of our some line product that we introduced last year and that continues to move in the right direction. So your overall to be up.
The 50% in Q2, considering the challenges that the.
The economy's, having there I think it's a positive statement of of our premium products and how they're they're viewed in the market.
And maybe the last thing is if you look at the back half there is talk about China wishing targeted stimulus that's that's going forward.
Also kind of pull back on on how on homes is not being able to buy them for speculation so.
Q3, make maybe a little bit tougher, but there's still some positive momentum and a number of areas not only with our products, but hopefully with some of the economic stimulus that should take effect in the back half of maybe Q3 Q for.
Thank you.
Okay standby for our next caller.
And we have Michael Halloran from Bird Michael Your line is open. Please go ahead.
Good morning, everyone.
So so just just some help on the margins North America here and you look at the.
Apply to assumption the back half the here, it's kind of a historically high pullback.
In the margin levels and.
The steel assumptions that you laid out C modal.
Steep relative to what the market pricing is today.
So maybe just help add some context to why there's that magnitude. After what was also impressive front half of the year on the margin side and.
And how how we should think about that normalizing for Ya.
Yeah, I mean, the 20% increase in the back half compared to the front half.
It's a it's a leg so just to kind of remind you remind you that and everybody that there is kind of a 90 to 120 day leg on that pricing.
So, even though steal cost come down a little bit from the peak.
Really are really being measured on those costs.
Particularly in the third quarter from the February timeframe for the next couple next couple of months so.
Even though these moderated a bit we're going to see that Edwin I think I think the other piece on the mix side and taking the boiler outlook down a little bit as maybe causing a little more pressure a little more pressure than pledged you might be might be accounting for and I think also if you kind of think about.
Just the volume sides.
And what I mentioned earlier, that's causing a bit of a bit of a mark.
We've got back half of the year pricing.
Boilers and water heating last year.
Anniversary right. So there was improvement year over year for the first half.
From a comp perspective, but we won't we won't be seeing that tobacco.
Hope that helps okay. Yeah, no does thanks for that truck and then the second one is then Kevin and the prepared remarks. He squeezed in the idea that you guys are pretty happy with the progression the margins for your situation business water water filtration business U S.
Just like some contacts theirs at scale mix operations.
What are the moving pieces there.
Yeah, So I mean.
We are pleased with the second quarter results for North America water treatment margins.
Margins for the quarter or right around 12%.
It did a couple of pieces of that one is pricing that we put in last year. That's now in place.
That helps a bit and there's still some pressure on costs shows a water treatment business with a little relief fund transportation is helping a bit.
And direct to consumer business was strong in the quarter. So we had a strong direct to consumer business that helped a bit on the margin side. So <unk>.
Pleased with that.
Volume.
Recall it last year, we were working through.
We're working through getting our backlog down and got a little bit of benefit there. So pleased with our operating performance volume is kind of right where we expected.
Five 5% to 7% growth for the year and maybe just maybe just throw in the teams also doing an excellent job in vertically integrating and it cost reductions and that's going to continue as we go forward as well.
Do you recall, we've been a collage of of some acquisitions were pulling the water treatment business together, one company and one one or treatment business and be able to leverage each of the locations.
And put production where it it's the best costs for us. So overall all the things that Chuck mentioned in just a real strong focus on driving costs and continuous improvement as really benefit the organization and I look at continuing over the next six seven months as well.
Thinks everyone's I appreciate it.
Excellent.
Standby for our next caller.
And we have David Mcgregor with Longbow Research David Your line is open. Please go ahead.
Hey, Good morning. This is Joe no-one on for David.
Good morning.
Good morning, I just have one quick follow up on boilers. I think you talked about inventory is approaching normalised level was kind of towards the end of the quarter.
I guess, if you could just talk a little bit more about order patterns and just when we might see those inventory levels officially get back to normalize levels and <unk>.
Oh, you're thinking about approaching inventories in the back half of the year.
Yeah, I mean, we exited the second corner, we exit this quarter now feeling like the inventories are approaching normal probably put in a good good spaced on normal let me kind of.
Break that into two pieces, though.
The boiler side so there's.
[noise] theirs are larger commercial product, that's not really an inventory items, so that larger commercial product and mentioned Kevin mentioned the crust Oh, two sensing product that is doing well those orders are steady larger product really doesn't have any any headwind.
In any way to kind of inventory bill, where we get the inventory product and I'd say lower smaller lighter commercial oilers, along with residential where we're seeing some of that.
But we do believe we are largely through that and you know as we get into the heating season next year.
Kind of have better visibility into kind of where we are on inventories, but we do believe we've kind of work through that.
Got it thanks, Alright, I'll pass it on.
Okay.
Our next question.
Comes from Susan Mark Yardy with Goldman Sachs. Susan Your line is open. Please go ahead.
Thank you good morning good.
Good morning.
Well, let me think about the change in the Sky.
As soon as it relates to the point. There's is there anything also in there as it relates to price, especially as you think about some of it didn't changes in demand, perhaps some of their shifts.
Cost of in the last few quarters.
Our assumption all this kind of summarize it all overall, our price costs relationships a bit improved and that's that's driving a piece of that increase.
Okay.
And then you know I guess.
Out the residential water heater demand and the level of say, it's been running for the industry and and putting ourselves through may really nicely versus 2019, even with the level of demand that we saw during the pandemic can you guess on a higher level, perhaps talk about what some of the core strengths of that.
And how do you think about it.
Ability of the current level volumes of the industry in that yourselves or seeing in here as we look out over the next call at 12 or even 24 months.
Well, let's just say.
Maybe break that down into again the replacement site is always going to be resilient. The emergency replacement that continues.
We look at right now where it's at.
On the on the proactive side of the business.
People were we look at the renovation is still a priority for current homeowners and people are going to be staying in their homes protecting their mortgage interest rates. So we we think that's part of it is it continues to move forward and will remain an important component of our volume.
New construction, if you look at just completions have been pretty steady and moving up as well. So and then you look at new building.
New builders are confident going forward so.
Overall, yeah, we're up over the 2019, but.
We had a a <unk> of 1.5% to 2% caterer.
You have to put on that on that 2019 number and as you start to look at where we're ending up this year. What we think we're going to end up it's gotta be fairly in line with what are the industry would have been at that we didn't go through the ups and downs of the pandemic. So I think.
We we get we got a little mixed up in 2021, and 22 and and now we're starting to see things more normalized in the economy's been good how would you spend good.
Renovations has been good so you work out in the next 12 to 24 months I think we'll start to see more of a normal lives growth rate coming out of our water heater business and maybe.
Maybe just a tad more.
Depending on where interest rates go on how the economy continues to progress.
Okay.
Caller, Thank you and good luck.
With everything.
Thanks.
Thank you.
And our next <unk>.
Question comes from Andrew Kaplowitz with Citigroup.
Good morning, everyone.
Andrew.
Could you talk about the strengths you continue to see and commercial water heaters here in North America, and maybe the durability of that strength you raised here for castle a visit a year you've had you know easy comps, obviously, given the regulatory situation, but you could you talk about Ah as financing cause I've been feeling moving up it still seems like the demand is is quite strong in that.
Business.
On the commercial water heater silent and again, that's different from boilers. Because it has the same profile residential with emergency replacements and so forth.
That remains strong and again, the cops get a little bit.
Difficult because of the greater than 55 gallon electrics. So there was there was a regulatory change that constitute downturn in the quarter of 2022 first quarter.
And now we're starting to really stabilized or anything and it looks like the greater than 55 gallon electric going to kind of come back in to where it was prior to that regulatory change.
We're also seemed.
Good mid single growth on commercial gas as well and from our perspective would we still have a backlog and and we're still work you through it it's we're making progress on it but the industry seems to be.
Resilient.
I look at restaurants in the area that we that we still quite a bit of prior to restaurants hotels those things are still coming back in.
Our units or be an exercise more so that's that's a plus for us. So overall it looks like the the industry's again kind of coming back to a normal level of volume coming off. If you remembered 21 were up I think 11% in 2200 down 17, and now we're moving up to mid teens I think when you are.
Level it all out we're getting back to a normal cadence.
And again from our perspective, we've been outperforming the market in both our residential and commercial products.
And in 2023.
It's helpful. And then you didn't change your rest of the world.
I'm shooting for margin for the year, but you did see a nice step up and teacher, which I think you you predicted but I think he also suggested that you would see incremental margin improvement as the year went on and getting and change your over all year got and so are you seeing any incremental competitive pressure given.
Now the the tough China market or you know incremental supply chain headwinds or it's just kind of conservatism give them a good teacher results.
Well you know, we're really pleased with Q2 right China margins were about 12%.
It was very pleased with the results in China for the quarter.
If you look out for the rest of the year in China drives the majority of.
The results and the rest of the world.
Q Q3, Arkansas Q4 is the big I'll call it holiday shopping online shopping quarter typically when we have our largest sales.
We are turning a corner on volume growing three to five percentage or outlook.
And it will be important to reinvest behind that so some of that some of it is.
Waiting to see how Q3 plays out which we expect.
Will be fine, but not not a ton of volume and then and then investing behind the growth in queue for keeps the margins with little bit a little bit in line with the 11th 10, 11%.
But not saying I'll, probably about competitive nature that we're concerned about.
I appreciate the color.
Thank you very much.
And our next question comes from Nathan Jones with Stifel. Nathan Your line is open. Please go ahead.
Good morning, and this was Adam Farley on for Nathan Jones, most of my questions have already been answered, but I wanted to ask you about your capital allocation.
<unk> strong cash position what are the priorities are pretty and has to work for shareholders.
Are there any M&A opportunities out there to lupus kapral forward.
Well good morning.
Capital allocation really hasn't changed we're going to we're going to continue to invest in ourselves making sure.
That we're investing in the new product development, the plant automation and the efficiencies that that we know we do need to continue to drive.
You know our dividends, we continue to have Ah increasing dividend year over year and declare the next dividend so dividends will be a part of that for sure.
We've got.
From a stock buyback, we certainly are.
Good Thunder Levered physician, so we do expect to repurchase $300 million of shares this year and.
That's expected to be carry out.
From an M&A perspective.
I'd say, it's still active so we've talked in the past about looking at kind of their priorities around water treatment.
Still see opportunities to grow geographically in North America, we see opportunities to look to acquire may.
Maybe in the commercial space and water treatment.
We also look globally since that's global technology and global product.
Other markets, where we can see our.
Our positioning and Ah premium space are also of interest so.
Continued to be active and.
Look to deploy capital.
Thank you for taking my question.
Thanks.
Thereby for our next caller.
Who is Damian carafe with U S. R U B S. Damien Your line is open. Please go ahead.
Hey, good morning, everyone.
Good morning, Damien Hello.
So sorry, if I messed this but I was hoping you might be able to give us a sense for Ah pricing in the second quarter in North America kind of thinking about you know the three product categories water heater toilers in water treatment.
If you could maybe just give us a sense, where where pricing is training and yeah. It's kind of the expectation as we get through the rest of the year you know maybe a little bit of modest price fade in North America water heaters, just just getting kind of steel in vaccine but.
You know no rail formally announced price increases kind of in the wholesale channels.
Yeah, just a couple of comments and you know we don't we don't get into a lot of detail on pricing, but for the quarter.
We've got pricing that's year over year improvement Oilers and water treatment because we've got price increases this year that were announced at the end of last year. So a little bit of improvement. There I think if you just look at North America over all in our bridges and our presentation, we show it organic.
We had a decrease in organic growth about about half of that is volume so you're kind of improve the other half is right around pricing. So if you look at the North America piece in total.
It's barely waited on organic growth equally.
The pressure is.
Back half of the year.
We've increased our guidance.
From where we were for North America margin. So it becomes kind of looking across North America, we're seeing a little bit of improvement are still outlook really hasn't changed.
It just made me another comment on this is it.
Again, we are very consistent how we manage our.
Businesses are pricing there's.
There's not much difference from Q1 Q2, we continue to have the underlying goal is to keep our our customers competitive.
Look at both the markets that were in in the oil market.
Remains very consistent so.
Not a not a big change.
Again, we we sell on Aerosmith value quality delivery a number of other things that go forward that's been consistent for for a number of years and it's not changing as we entered the back half of the year.
Understood.
And then Kevin I think you mentioned.
Getting back to normal I Ah demand for <unk> water heater.
So I'm just curious how you're thinking today about what normal life demand is I think historically, maybe you guys had talked about you know.
Flat ash that up a few points of volumes on an annual basis.
Plus a few points, perhaps a price next but how are you thinking about what that kind of framework is thinking about irag energy transition other other factors at play today.
Yeah, I don't think our thoughts on the industry as a whole has changed a whole lot that 1% to 2% growth is pretty consistent and it does move a bit when you have new construction and and again.
This economy right now we have the economy's still doing pretty well GDP came out still still move in the right direction housing we're still at a deficit in courtesy that I think I don't know how many years in a row.
There is quite a bit of work.
Work to be done maybe a few million homes is still need to be built.
So I think the key is gonna get back to that one or 2% in probably the variable we will be new construction and multifamily how that continues to progress. So over the next couple of years. My guess is probably going to be a bit favorable to the industry into our company.
And just to comment around the Irag Act I mean, there are incentives in there and the iras's or heat pump water heaters high efficiency water heaters.
Certainly that's an upside that we have we really haven't seen traction to move the consumer's decision away from kind of the decisions. They make today replacement, which generates under an emergency replacement type of environment to trade up to an energy efficient product with the supplement some sort of incentive.
Through I already act, but certainly a longer term opportunity as we look at that.
<unk>. Thanks for all the caller good luck.
Thanks.
Thank you very much and our last call comes from Jeff Hammond with Keybanc capital markets. Jeff. Your line is open and please go ahead.
Hey, guys. After morning, just unrest water heater. So I wanted to come back to price because I think he said it was gonna be similar but I'm just wondering if if some of that material price formulas flip into the second half was still up and then just so how should we think about.
Yours here to to you know industry number given that it seems like you know first half was a little more resilient Destocking Dawn and and you know the cops obviously in the second half I really easy.
Yeah, Let me, let me talk about the industry first and we kind of look back and look back at her Q1.
We talked about coming out of 2022 with inventories normal and I think they might have been a little low. So we got a little help in Q1 on volumes.
Building back some of the inventories in the industry that may have been depleted a bit so it's.
Kind of a little bit of help in that category I think if you look at the full year, though and Kevin kind of described it.
If you skip Covid and you just go to 2019 in the five years before and take an average of where we are in those five years and then look at the jumping off point of 2019 take a cake or a 105% you're kind of you're kind of in the ballpark of where we have.
The industry this year at flat to up a little bit the industry ended last year in the tank side residential maybe eight seven and change.
And if we're flat to that a little bit up that one in five per cent K her jumping off between 2019.
The other part of your question could you remind me on that.
Just material price formulas.
Yeah, I mean, they they.
As steel also follows what we see on anything we have with material price in the steel portion is that there is a 90 to 120 days lag so.
That portion.
Also sees pricing followed.
And thats baked into our guidance Yep.
Okay, and then last one water treatment.
I think you're kind of flat to slightly down first have your saying five to seven is that just.
Lapin tough comps or or what's driving kind of the re aksel there.
Well it certainly is lapping a tough cop I mean, if you look at all of our businesses Q2 of last year.
We were strong but I gave example, maybe in north North American water treatment back in Q2 of 2022, plus 80%. So it was solid.
But we are seeing some some softness in various parts of the market as things start to stabilize.
But overall if you look at our five core channels, we we still see positive.
Growth in them over time, and so that's just that.
Is that 2%.
<unk> still pretty good quarter quite frankly for a water treatment business and.
And every one of those channels, we have some ups and downs I have yet to see all five off on it to see all five down and and so but overall the business is going well I suspect, we'll see our deal especially business.
Come back in the back half of the year, they were down a little bit Q too, but overall the business is in good shape the overall underlying.
Water quality concerns are going to continue to grow and that's that's the key point I think when you look at this business.
You're going to have your your P faucet and different type of chemicals in the quality of water being questioned by consumers on a regular basis and we have great solutions, whether they be end of the counter.
Or use a point of entry in and we're going to be able to take.
Take advantage of that trend as it continues to go forward as we have in the past.
Okay. Thanks.
Since I'm showing no further questions at this time I will turn the conference back to Helen Gerhold for closing remarks.
Thank you Eric and thank you everyone for joining US today, let me conclude by reminding you that global Aerosmith team deliberate records second quarter performance and record EPS.
Look forward to updating you on our progress in the quarters to come.
Please mark your calendar to join our presentations at three conferences square Northcoast I know like a seventh Stipo on September 6th and Davidson on September 21st.
In addition, we are very pleased to announce that we will host an investor day on Monday November 6th in Chicago, Illinois <unk>.
Indentations to register for our event will be forthcoming in September . Thank you and enjoy the rest of your day.
And this does conclude today's conference call. Thank you for participating you may now disconnect.
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