Q4 2023 A O Smith Corp Earnings Call

January 30, 2024

Yeah.

Speaker Change: Okay, and thank you for standing by and welcome to the a O Smith fourth quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question you will need to press star one one on your telephone you all done here and automated.

Speaker Change: Advising your hand is raised to withdraw your question. Please press star one again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today. Helen. Please go ahead.

Helen: Thank you Abigail.

Helen: Good morning, everyone and welcome to the a O Smith full year and fourth quarter Conference call I'm, Helen Gerhold, Vice President Investor Relations and financial planning and analysis. Joining me today are Kevin Wheeler, Chairman and Chief Executive Officer, and Chuck Lauber, Chief Financial Officer.

Helen: In order to provide improved transparency into the operating results of our business, we provided non-GAAP measures three.

Helen: Free cash flow is defined as cash from operations less capital expenditures adjusted earnings adjusted earnings per share adjusted segment earnings and adjusted corporate expenses.

Helen: The impact of restructuring and impairment expenses.

Non operating non cash pension income and expenses as well as legal judgment income and terminated acquisition related expenses.

Helen: Reconciliations from GAAP measures to non-GAAP measures are provided in the appendix at the end of this presentation and on our website.

Helen: A friendly reminder, that some of our comments and answers during this conference call will be forward looking statements.

Helen: That are subject to risks that could cause actual results to be materially different.

Helen: Those risks include matters that we described in this morning's press release among others.

Helen: Also as a courtesy to others in the question queue. Please limit yourself to one question and one follow up for chart. 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 Day, a O Smith's dot com I.

I will now turn the call over to Kevin to begin our prepared remarks, please turn to the next slide.

Kevin J. Wheeler: Thank you Helen and good morning, everyone I'm on slide four and our full year results.

Kevin J. Wheeler: 2023 was a record setting sales and earnings year, driven by resilient water heater demand and excellent execution by our team.

Kevin J. Wheeler: North American sales increased 4% and adjusted segment margin increased 310 basis points due to higher water heater volumes and the improved price cost relationship.

Kevin J. Wheeler: Our rest of World segment sales grew 4% in local currency as our recently introduced kitchen products in China were well received by the market.

Kevin J. Wheeler: In India, our sales grew 15% local currency in 2023 and benefited from sales of new products, which represented 30% of our sales.

Kevin J. Wheeler: Free cash flow grew to $598 million primarily.

Kevin J. Wheeler: Primarily driven by record profit.

Kevin J. Wheeler: We returned $490 million of capital to shareholders with our dividend and share repurchases.

Kevin J. Wheeler: Please turn to slide five.

Kevin J. Wheeler: Our global Ao Smith team delivered record sales of $3 9 billion in 2023.

Kevin J. Wheeler: Adjusted EPS of $3 81, a.

Kevin J. Wheeler: A 21% increase over 2022.

Kevin J. Wheeler: North America water heater sales grew 6% in 2023 due to strong demand for our residential and commercial water heater products.

Kevin J. Wheeler: The residential unit industry demand increase approximately 6% compared to 2022 as new construction and proactive replacement demand remained resilient.

Kevin J. Wheeler: Commercial industry units increased approximately 15% year over year as volume of commercial electric water heaters greater than 55 gallons rebounded and align closer to pre 2022 levels.

Kevin J. Wheeler: We are pleased with our market share strength in both residential and commercial water heaters.

Kevin J. Wheeler: Our North America boiler sales decreased 12% against a difficult comp of 28% growth in 2022.

Operator: Good day, and thank you for standing by. Welcome to the A.O. Smith 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode.

Kevin J. Wheeler: We worked down our backlog in 2022, after making significant production and supply chain improvements, which led to elevated channel inventories going into 2023.

Operator: After the speaker's presentation, there will be a question and answer session. To ask a question, you will need to press star 1-1 on your telephone. You will then hear an automated message advising that your hand is raised.

Kevin J. Wheeler: The resulting channel inventory destocking impacted our residential and small commercial boiler sales.

Operator: To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Helen Gerholt. Please go ahead.

Kevin J. Wheeler: Sales of our crest commercial boilers with <unk> technology increased over 50% in 2023.

Kevin J. Wheeler: North America water treatment sales grew 2% in 2023 as higher sales in the e-commerce and direct to consumer channels were partially offset by lower sales in the wholesale and retail channels sale.

Thank you, Abigail. Good morning, everyone, and welcome to the A.O. Smith full year and fourth 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, and Chuck Lauber, Chief Financial Officer. In order to provide improved transparency into the operating results of our business, we have provided non-gap measures. Free cash flow is defined as cash from operations less capital expenditures.

Kevin J. Wheeler: Sales in the prior year benefited from strong shipments of supply chain constraints improve and we work down our order backlog, which resulted in elevated channel inventories in early 2023.

Kevin J. Wheeler: And China full year sales increased 4% local currency.

Kevin J. Wheeler: We are pleased with our performance in a continued weak economy. In addition to the successful launch of our kitchen products. We saw a double digit sales growth of our HVA C and commercial water treatment product categories.

Adjusted earnings, adjusted earnings per share, adjusted segment earnings, and adjusted corporate expenses exclude the impact of restructuring and impairment expenses, non-operating, non-cash pension income and expenses, as well as legal judgment income and terminated acquisition-related expenses. Reconciliations from gap measures to non-gap 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.

Kevin J. Wheeler: Our core water heating and water treating products also performed well as replacement approaches 60% of residential water heater sales in residential water treatment sales, particularly consumables remained resilient.

I'll now turn the call over to Chuck Who'll provide more details on our full year and fourth quarter performance.

Thank you, Kevin and good morning, everyone I'm on slide six.

Charles T. Lauber: Full year sales in the North America segment Rose to $2 9, Billion% to 4% increase compared with 2020 to higher volumes of water heaters were partially offset by lower sales of boilers and pricing.

Charles T. Lauber: North America segment earnings of $726 million increased 19% compared with 2022.

Charles T. Lauber: Adjusted segment margin was 24, 8%.

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. Thank you, Helen, and good morning, everyone.

Charles T. Lauber: An increase of 310 basis points year over year.

Charles T. Lauber: Higher adjusted segment earnings and adjusted segment margin were primarily driven by higher water heater volumes and lower material costs.

Kevin J. Wheeler: I'm on slide four with our full year results. 2023 was a record-setting sales and earnings year, driven by resilient water heater demand and excellent execution by our team. North America sales increased 4%, and adjusted segment margin increased 310 basis points due to higher water heater volumes and an improved price-cost relationship. In our rest of the world segment, sales grew 4% in local currency, as our recently introduced kitchen products in China were well received by the market. In India, our sales grew 15% in local currency in 2023 and benefited from sales of new products, which represented 30% of our sales. Free cash flow grew to $598 million, primarily driven by record profits. We return $490 million of capital to shareholders with our dividend and share repurchase. Please turn to slide five.

Charles T. Lauber: Moving to slide seven.

Charles T. Lauber: Rest of the World segment sales of $957 million decreased 1% year over year, including unfavorable currency translation of $44 million primarily related to China.

Charles T. Lauber: Segment sales increased 4% on a constant currency basis.

Charles T. Lauber: Our sales increase was primarily driven by higher sales of kitchen products and water treatment products in China.

Charles T. Lauber: India sales grew 15% in local currency in 2023, which is approximately three times the market.

Charles T. Lauber: Rest of the World segment earnings of $999 million increased 3% compared to segment earnings in 2022, primarily due to higher sales in China.

<unk> segment operating margin was 10, 4% an increase of 40 basis points compared to 2022.

Charles T. Lauber: Please turn to slide eight.

Kevin J. Wheeler: Our global AOSMIT team delivered record sales of $3.9 billion in 2023, an adjusted EPS of $3.81, a 21% increase over 2022. North America water heater sales grew 6% in 2023 due to strong demand for our residential and commercial water heater products. The residential unit industry demand increased approximately 6% compared to 2022, as new construction and proactive replacement demand remain resilient.

Charles T. Lauber: Turning to fourth quarter performance, we delivered sales of $988 million in the fourth quarter of 2023, an increase of 6% year over year led by higher water heater volumes in North America, and higher kitchen product sales in China that more than offset lower boiler sales and <unk>.

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Charles T. Lauber: Adjusted earnings in the fourth quarter were <unk> 97 per share compared with adjusted earnings of <unk> 86 per share in the fourth quarter of 2022.

Kevin J. Wheeler: Commercial industry units increased approximately 15% year over year, as volume of commercial electric water heaters greater than 55 gallons rebounded and aligned closer to pre-2022 levels. We are pleased with our market share strength in both residential and commercial water heaters. Our North America boiler sales decreased 12% against a difficult comp of 28% growth in 2022. We worked down our backlog in 2022 after making significant production and supply chain improvements, which led to elevated channel inventories going into 2023. The resulting channel inventory destocking impacted our residential and small commercial boiler sales.

Charles T. Lauber: Please turn to slide nine.

Charles T. Lauber: Fourth quarter sales in the North America segment were $738 million a 7%.

<unk> increased compared to sales in the fourth quarter of 2022, as a result of higher water heater volumes, partially offset by lower boiler sales.

North America segment adjusted earnings of $173 million increased 8% compared to 2022.

Adjusted operating margin of 23, 5% increased 20 basis points compared to last year.

Charles T. Lauber: The higher adjusted segment earnings and adjusted segment margin were primarily due to higher water heater volumes.

Kevin J. Wheeler: Sales of our Crest Commercial Boilers with Hellcat Technology increased over 50% in 2023. North America water treatment sales from 2% in 2023, as higher sales in the e-commerce and direct-to-consumer channels were partially offset by lower sales in the wholesale and retail channels. Sales in the prior year benefited from strong shipments, as supply chain constraints improved, and we worked out our order backlog, which resulted in elevated channel inventories in early 2023. In China, four-year sales increased 4% in Woku currency. We are pleased with our performance in a continued weak economy. In addition to the successful launch of our kitchen products, we saw double-digit sales growth in our HVAC and commercial water treatment product categories. Our core water heating and water treating products also performed well as replacement approaches 60% of residential water heater sales. Residential water treatment sales, particularly consumables, remain resilient. I'll now turn the call over to Chuck, who will provide more details on our full year and four-quarter performance. Thank you, Kevin. And good morning, everyone.

Charles T. Lauber: Moving on to slide 10.

Fourth quarter rest of the World segment sales of $260 million increased 4% year over year, primarily driven by sales of new products, partially offset by unfavorable currency translation of $3 million in China.

India sales grew 11% in local currency in 2023 compared to 2022.

Charles T. Lauber: Rest of the World adjusted segment earnings of $30 million decreased 6% compared to Q4 2022 segment earnings and.

Charles T. Lauber: And adjusted segment margin of 11, 5% decreased to 120 basis points compared to segment margin in the same period last year the.

Charles T. Lauber: The decreases were primarily due to promotions and advertising supporting the launch of our dishwasher and steam oven products in China.

Charles T. Lauber: Please turn to slide 11.

Charles T. Lauber: We generated free cash flow of $598 million during 2023, an increase of 86% over 2022, primarily driven by higher earnings and lower working capital needs.

Charles T. Lauber: 2023 free cash flow conversion was 107%.

Charles T. Lauber: I'm on slide six. Full year sales in the North America segment rose to $2.9 billion, a 4% increase compared with 2022. Higher volumes of water heaters were partially offset by lower sales of boilers and prices. North America segment earnings of $726 million increased 19% compared with 2020. Adjusted segment margin was 24.8%, an increase of 310 basis points year over year. The higher adjusted segment earnings and adjusted segment margins were primarily driven by higher water heater volumes and lower materials. Moving to slide seven.

Charles T. Lauber: Our cash balance totaled $363 million at the end of December and our net cash position was 236 billion our leverage ratio was six 5% as measured by total debt to total capital.

Speaker Change: Now I'll turn to slide 12.

Speaker Change: As we detailed at our Investor day.

Speaker Change: In addition to returning capital to shareholders, we continue to see opportunities for organic growth innovation and new product development across all of our product lines and geographies.

Speaker Change: We targeted strategic acquisitions that meet our financial metrics that are accretive to earnings in the first year and return our cost of capital in three years, the strength of our balance sheet allows us to continue to invest in ourselves through research and development and capital expansion, while pursuing strategic acquisitions.

Charles T. Lauber: Rest of the world segment sales of $957 million decreased 1% year over year, including unfavorable currency translation of $44 million primarily related to China. However, segment sales increased 4% on a constant currency basis. Our sales increase was primarily driven by higher sales of kitchen products and water treatment products in China. India sales grew 15% in local currency in 2023, which is approximately three times the market. Rest of the world segment earnings of $99 million increased 3% compared to segment earnings in 2022, primarily due to higher sales in China. Adjusted segment operating margin was 10.4%, an increase of 40 basis points compared to 2022. Please turn to slide 8. Turning to fourth-quarter performance, we delivered sales of $988 million in the fourth quarter of 2023, an increase of 6% year over year, led by higher water heater volumes in North America and higher kitchen product sales in China that more than offset lower boiler sales and price. Adjusted earnings in the fourth quarter were $0.97 per share, compared with adjusted earnings of $0.86 per share in the fourth quarter of 2022. Please turn to slide nine.

Speaker Change: Earlier this month, our board approved our next quarterly dividend of 32 per share we have increased our dividend for over 30 consecutive years.

Speaker Change: We repurchased approximately four 4 million shares of common stock in 2023 for a total of $307 million.

Speaker Change: We continue our strong track record of delivering returns to shareholders over.

Speaker Change: Over the last two years, we have returned over $1 billion to shareholders through our dividends and share repurchases.

Please turn to slide 13, and our 2024 earnings guidance and outlook.

Speaker Change: We are pleased to introduce our 2024 outlook with an expected EPS range of $3 90.

Speaker Change: $4 15 per share the midpoint of our EPS range represents an increase of 6% compared with 2023 adjusted EPS.

Speaker Change: Our outlook is based on a number of key assumptions, including <unk>.

Speaker Change: Our guidance assumes that steel prices in 2024 will be a slight headwind compared to 2023 realm.

Speaker Change: Relative to current steel prices our projection includes the decline in steel price index in the second half of the year.

Charles T. Lauber: Fourth quarter sales in the North America segment were $738 million, a 7% increase compared to sales in the fourth quarter of 2022 as a result of higher water heating volumes partially offset by lower boilers. North America segment adjusted earnings of $173 million, increased 8% compared to 2022. Adjusted operating margin of 23.5%, increased 20 basis points compared to last year. The higher adjusted segment earnings and adjusted segment margins were primarily due to higher water heater volumes. Moving on to slide 10.

Speaker Change: Our outlook assumes non steel material costs are similar in 2024 as they were in 2023.

Speaker Change: Our guidance also assumes a relatively stable supply chain environment similar to what we experienced throughout 2023.

We are monitoring the situation the Red Sea in Panama Canal, and currently have not experienced any negative impacts.

Speaker Change: We launched our internally designed and manufactured gas tankless products earlier this month.

Speaker Change: As we mentioned at our Investor Day. These products will be manufactured in China, Our China facility until our North America capacity is completed in 2025.

Charles T. Lauber: Fourth quarter rest of the world segment sales of $260 million increased 4% year over year, primarily driven by sales of new products, partially offset by unfavorable currency translation of $3 million in China. India's sales grew 11% in local currency in 2023 compared to 2022, and the rest of the world adjusted segment earnings of $30 million decreased 6% compared to Q4 2022. An adjusted segment margin of 11.5% decreased 120 basis points compared to segment margin in the same period last year. The decreases were primarily due to promotions and advertising supporting the launch of our dishwasher and steam oven products in China. Please turn to slide 11.

Speaker Change: Associated import tariffs and other launch costs will impact North American margins by approximately 50 basis points, we are investing in manufacturing and whereas Mexico that would eliminate the tariff in the future.

Speaker Change: For the year Capex should be between 105 and $115 million an increase over the last several years due to capacity expansion projects related to our gas tankless manufacturing facility in Juarez.

The expansion of our engineering capabilities in Lebanon, Tennessee, and an increase in high efficiency commercial water heating manufacturing capacity to align with regulatory changes coming in 202026.

We expect to generate strong free cash flow between $525 million and $575 million.

Charles T. Lauber: He generated pre-cash flow of $598 million during 2023, an increase of 86% over 2022, primarily driven by higher earnings and lower working capital. In 2023, free cash flow conversion was 107%. Our cash balance totaled $363 million at the end of December, and our net cash position was $236 million.

Corporate and other expenses are expected to be approximately $60 million.

Speaker Change: Our effective tax rate is estimated to be between 24% and 24, 5%.

Speaker Change: And we expect to repurchase $300 million of shares of our stock, resulting in our outstanding diluted shares of $147 million at the end of 2024.

Speaker Change: I will now turn the call back over to Kevin who will provide more color on our key markets and top line growth outlook and segment expectations through 2020 quarter staying on slide 13.

Charles T. Lauber: Our leverage ratio is 6.5% as measured by total debt to total capital. Now turn to slide 12, as we detail in our investor day. In addition to returning capital to shareholders, we continue to see opportunities for organic growth, innovation, and new product development across all of our product lines and geographies. We target strategic acquisitions that meet our financial metrics of accretive earnings in the first year and return our cost of capital in three years. The strength of our balance sheet allows us to continue to invest in ourselves through research and development and capital expansion while pursuing strategic acquisitions. Earlier this month, our board approved our next quarterly dividend of $0.32 per share.

Kevin J. Wheeler: Thank you Chuck We project 2024 sales will grow between three.

Kevin J. Wheeler: And 5% compared to 2023, which includes the following assumptions.

Kevin J. Wheeler: We believe the U S. New home construction remains in a deficit we projected will be flat in 2023.

Kevin J. Wheeler: We also assume that 2020 for proactive replacement will remain at a level similar to 2023.

Kevin J. Wheeler: Therefore, after approximately 6% increase in the industry in 2023 compared to 2022, we projected 2024 residential industry unit volumes will be approximately flat to last year.

We project U S commercial water heater industry volumes to increase low single digits as demand for our commercial electric greater than 55 gallons continues its positive trend to pre 2022 levels.

Charles T. Lauber: We have increased our dividend for over 30 consecutive years. We repurchased approximately 4.4 million shares of common stock in 2023 for a total of $307 million. We continue our strong track record of delivering returns to shareholders. In the last two years, we have returned over $1 billion to shareholders through our dividends and share repurchases.

Kevin J. Wheeler: In addition, our outlook includes the announced price increases in North America water heating up 4% on most of our water heater products.

Kevin J. Wheeler: Price increase for heat pump products is 8%.

Kevin J. Wheeler: These increases are projected to be effective late in the first quarter.

Kevin J. Wheeler: In China, we believe it will take time for the economy to improve a bit weakened consumer confidence in a challenged real estate and housing market and we have not yet seen signs of significant improvement.

Charles T. Lauber: Please turn to slide 13 for our 2024 earnings guidance and out. We are pleased to introduce our 2024 outlook with an expected EPS range of $3.90 and $4.15 per share. The midpoint of our EPS range represents an increase of 6% compared with 2023 adjusted EPS. Our outlook is based on a number of key assumptions, including: Our guidance assumes that steel prices in 2024 will be a slight headwind compared to 2023. Relative to current steel prices, our projection includes a decline in the steel price index in the second half of the year.

Kevin J. Wheeler: Even with the continued backdrop of a weak economy, we project our sales in China will again grow 3% to 5% in local currency in 2024, driven by resilient replacement demand growth and demand for our water treatment products and our recently released kitchen products.

Kevin J. Wheeler: Our forecast assumes that the currency translation impact will be minimal in 2024.

We expect to return to growth in our North America boiler business with a projected sales increase of between 8% to 10% in 2024.

Kevin J. Wheeler: We expect to continue to benefit from the transition to higher energy efficient boilers, particularly as commercial buildings look to improve their overall carbon footprint.

Charles T. Lauber: Our outlook assumes non-steel material costs are similar in 2024 as they were in 2023. Our guidance also assumes a relatively stable supply chain environment, similar to what we experienced throughout 2023. We are monitoring the situation in the Red Sea in Panama now and currently have not experienced any negative impact.

Kevin J. Wheeler: We predict sales of North America water treatment products to increase approximately 10% to 12% as we expect to grow at two times the pace of the market.

Kevin J. Wheeler: Based on our 2024 assumptions, we expect our North America segment margin to be between 24, and a half and 25%.

Kevin J. Wheeler: And rest of World segment margin to be approximately 10%.

Charles T. Lauber: We launched our internally designed and manufactured gas tankless products earlier this month. As we mentioned at our investor day, these products will be manufactured in our China facility until our North America capacity is completed in 2025. Associated import tariffs and other launch costs will impact North America margins by approximately 50 basis points. We are investing in manufacturing in Juarez, Mexico, that would eliminate the tariff in the future. For the year, CapEx should be between $105 and $115 million, an increase over the last several years due to capacity expansion projects related to our gas tankless manufacturing facility in Juarez, expansion of our engineering capabilities in Lebanon, Tennessee, and an increase in high efficiency commercial water heating manufacturing capacity to align with regulatory changes coming in 2026. We expect to generate strong free cash flow between $525 million and $575 million. Corporate and other expenses are expected to be approximately $60 million.

Kevin J. Wheeler: Please turn to slide 14.

Kevin J. Wheeler: I'd like to thank everyone, who joined us at our Investor day late last year, either in person or via webcast.

Kevin J. Wheeler: According to the webcast is available on our website.

Kevin J. Wheeler: The team and I enjoyed sharing the exciting growth opportunities that we see on the horizon for all of our businesses.

Kevin J. Wheeler: A summary of the key topics that we covered are on slide 14.

Kevin J. Wheeler: I look forward to assurant periodic updates on our initiatives, including the launch of our gas tankers products.

Kevin J. Wheeler: As we look to 2024, we remain focused on our key strategic priorities to advance our position as a leader in heating and treating water around the around the world.

Kevin J. Wheeler: Those priorities are.

Kevin J. Wheeler: Expand and enhance our high efficiency product portfolio, including heat pumps for space and water heating.

Kevin J. Wheeler: Expand our global water treatment capabilities by investing in technology people and geographic expansion and.

Kevin J. Wheeler: And deploy capital effectively by investing in ourselves pursue our active acquisition pipeline and returning capital to shareholders.

Kevin J. Wheeler: We have many reasons to be up to have optimism as we enter 2024.

Kevin J. Wheeler: We see strong end market demand in North America for all of our product categories, and we expect to return to growth for boilers and North America water treatment as we believe our customers exited 2020 for 2023 with normalized channel inventories.

Charles T. Lauber: The effective tax rate is estimated to be between 24 and 24.5 percent, and we expect to repurchase $300 million of our stock, resulting in an outstanding diluted share count of $147 million at the end of 2024. I'll now turn the call back over to Kevin, who will provide more color on our key markets and top-line growth outlooks and segment expectations for 2024, staying on slide 13. Thank you, Chuck.

Kevin J. Wheeler: We have begun several capacity expansion projects in North America that will support our growth in the long term.

Kevin J. Wheeler: In China, we are projecting a second year of growth driven by innovative new products and resilient demand for our core products and.

Kevin J. Wheeler: And we expect to continue double digit growth in India, as our premium products and customer service are well received in the market.

Kevin J. Wheeler: We project 2024 sales will grow between three and 5% compared to 2023, which includes the following assumptions. We believe U.S. new home construction remains in deficit, and we project it will be flat in 2023. We also assume that 2024 proactive replacement will remain at a level similar to 2023. Therefore, after approximately 6% of an increase in the industry in 2023 compared to 2022, we project that 2024 residential industry unit volumes will be approximately flat. We project U.S. commercial water heater industry volumes to increase in low single digits as demand for commercial electric water heaters greater than 55 gallons continues its positive trend to pre-2022 levels. In addition, our outlook includes the announced price increases in North America water heating of 4% on most of our water heater products. The price increase for heat pump products is 8%. These increases are projected to be effective late in the first quarter. In China, we believe it will take time for the economy to improve amid weakened consumer confidence and a challenged real estate and housing market. We have not yet seen signs of significant improvement.

Kevin J. Wheeler: And finally this year marks an important milestone for a O Smith as we celebrate our 150 <unk> anniversary.

What began as a small machine machine shop in Milwaukee, Wisconsin, and $18 74.

Kevin J. Wheeler: Grown into an innovative industry, leading global water technology company with more than 12000 employees.

Kevin J. Wheeler: A O Smith has a rich and proud history, and we're excited to celebrate it with employees shareholders customers and partners across the globe.

Speaker Change: With that we conclude our prepared remarks, and we are now available for your questions.

Speaker Change: Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait.

Fair enough to be announced to withdraw your question. Please press star one again, one moment for our first question.

Speaker Change: Our first question comes from Michael Halloran with Baird. Your line is open.

Michael Halloran: Hey, good morning, everyone.

Michael Halloran: Good morning, Mike Good morning.

Michael Halloran: So.

Michael Halloran: I figured after last time issues on my end getting getting through I figured I'd give a pregnant pause there to make sure you guys can hear me.

Kevin J. Wheeler: Even with the continued backdrop of a weak economy, we project our sales in China will again grow three to five percent in local currency in 2024, driven by resilient replacement demand, growth in demand for our water treatment products, and our recently released kitchen products. Our forecast assumes that the currency translation impact will be minimal in 2024. We expect to return to growth in our North America boiler business with a projected sales increase of between 8 to 10% in 2024. We expect to continue to benefit from the transition to higher energy-efficient boilers, particularly as commercial buildings look to improve their overall carbon footprint. We predict sales of North America water treatment products to increase by approximately 10 to 12 percent, as we expect them to grow at two times the pace of the market.

Michael Halloran: We can I hope you can hear us also.

Michael Halloran: Yes.

Michael Halloran: Great. So two questions here, both on North America first could you give some context to how youre thinking about the moving pieces within the residential water heater business between discretionary replacement Newbuild and then the non discretionary replacement pieces.

Speaker Change: Yeah, I'll touch on that we don't see much difference in 2024 as we.

Speaker Change: Forecasted in our guidance at $9 2 million.

Speaker Change: New construction, whether it's single family or multifamily continues to two progression, we see it flat and.

Speaker Change: The proactive replacement has stayed very resilient, it's been six to eight quarters now.

Speaker Change: We just received data from it recently and it continues to move down that path and of course.

Kevin J. Wheeler: Based on our 2024 assumptions, we expect our North America segment margin to be between 24.5% and 25%, and the rest of the world segment margin to be approximately 10%; please turn to slide 14. I'd like to thank everyone who joined us at our Investor Day late last year, either in person or via webcast. A recording of the webcast is available on our website.

Speaker Change: The Mercury replacement as a non discretionary and we expect that to continue so we look at really 'twenty 'twenty four is having a very similar outlook as 2023.

Speaker Change: And maybe I'll just comment Mike.

Speaker Change: It's been a couple lumpy years right I mean, we've been to Covid has been a bit of a correction last year. We think the industry. This year it'll be up maybe in that five 5% to 6%, but if we kind of step back to 2019, and just look at a growth rate of one 5%. We kind of we ended up at what we think our outlook is going to be for 2024.

Kevin J. Wheeler: The team and I enjoyed sharing the exciting growth opportunities that we see for all of our businesses. A summary of the key topics that we covered is on slide 14. I look forward to sharing periodic updates on our initiatives, including the launch of our gas tankless product. As we look to 2024, we remain focused on our key strategic priorities to advance our position as a leader in heating and treating water around the world. Those priorities are... expand and enhance our high-efficiency product portfolio, including heat pumps for space and water heating, expand our global water treatment capabilities by investing in technologies, people, and geographic expansion, and deploy capital effectively by investing in ourselves, pursuing our active acquisition pipeline, and returning capital to shareholders.

Along with those assumptions that Kevin just mentioned so.

Speaker Change: It feels like it's fairly stable residential market for us as we go into 'twenty four.

Speaker Change: Got it and just to be clear the six 6% with a 20.

Speaker Change: 2023 reference point right. It was 23 over 'twenty two I always trip up as we go into the next year here.

Speaker Change: Yes, no same page me too. So second question then is just putting the north American margins in context, I, certainly get the 50 basis point headwind from some the investments you're making.

Speaker Change: Could you talk about why the confidence in the down steel costs, the lower levels of inflation and limited inflation remaining.

Kevin J. Wheeler: We have many reasons to have optimism as we enter 2024. We see strong and marked demand in North America for all of our product categories, and we expect a return to growth for boilers and North American water treatment, as we believe our customers will exit 2024-2023 with normalized channel inventory. We have begun several capacity expansion projects in North America that will support our growth in the long term. In China, we are projecting a second year of growth driven by innovative new products and resilient demand for our core products. And we expect to continue double-digit growth in India as our premium products and customer service are well received in the market. And finally, this year marks an important milestone for A.O. Smith.

Speaker Change: And then maybe in the context of what you saw in the fourth quarter and how that will grant through the year I know a lot in there, but just looking for a little bit more color around that that North America margin guide.

Speaker Change: Yes so.

Speaker Change: We see steel cost as a slight headwind as we go into the year.

Speaker Change: Steel costs have been kind of in that bandwidth and I'll quote cold rolled of <unk> 50 to <unk> hundred $13 50, I mean, it's been in that bandwidth at the higher end of that bandwidth right now.

Speaker Change: So as we come out of the fourth quarter, we're going to see.

Speaker Change: A little bit of help on steel in the first quarter and then we're going to see steel ramp up again in the back back three quarters likely although we're calling out slight relief in the back half of the year.

Speaker Change: Fortunately, we have pricing coming in when steel kind of comes in in the second quarter.

So as we come out of 2023, we're looking at a little bit better margin profile in the first quarter because steel is down slightly.

Speaker Change: And then get helped a little bit on pricing coming in with a higher cost steel.

Speaker Change: If we kind of look at the cadence for the year.

Speaker Change: Kind of most quarters in North America or within that bandwidth of range or at least pretty close in the 'twenty.

Speaker Change: 24% in the 24, 5% to 25% bandwidth I would say Q1 is maybe a little more pressure.

Speaker Change: And then of course as you mentioned, we do have some headwinds just launching our tankless product is about a 50 basis point headwind as we import out of China.

Speaker Change: Due to transportation and.

Speaker Change: Continue to promote promote that product.

Speaker Change: One moment our next question.

Speaker Change: Yes.

Speaker Change: Our next question comes from Jeff Hammond with Keybanc capital markets. Your line is open.

Hey, good morning, everyone.

Jeff Hammond: Hey, Jeff Good morning, Jeff.

Jeff Hammond: Just just trying to get a sense of a feedback from the channel on the March pricing you guys put through quite a bit.

Jeff Hammond: I think we were a little surprised to see a follow on here, but maybe just speak to how the channels reacting to it.

Jeff Hammond: Supporting that that price increase thanks.

Speaker Change: Yes, I would just tell you that.

Speaker Change: Our philosophy has always been on pricing that we feel the the cost before our customers do and so as much as steel bounces up and down there is still other other parts of components and other chemicals and so forth and so our increase is always based on.

Speaker Change: What we have to address going forward with our suppliers. So.

Speaker Change: And the cadence, it's up a little bit we pushed it out to.

Speaker Change: Two.

Speaker Change: March and that's pretty rare, but it happens on occasion, our goal has always been and will continue to be to keep our our customers competitive and the price increase along with the timing.

Really reaches that goal for us.

Okay, and then just on the boiler you seen any kind of inflection in boiler demand or is this just growth off of easy comps.

Speaker Change: It's yes, it's certainly.

Speaker Change: Certainly some coming off some comps when you get to remember first quarter of last year was a pretty good year or a strong quarter for us on the boiler side and we didn't see destocking until starting in the second quarter.

Speaker Change: But much of it has to do with coming off some comps inventories coming down arguably getting back to a regular cadence and we always get little tripped up on sell out versus sell in and remember our sell in was down but our sell out we felt we held our own in the market. So overall the border market is slightly down on some coding residential.

Has been a headwind for us most of the year that we look at turning that around in 2024, but overall the market is.

Speaker Change: A combination of comps and some of our new products our own Crestwood <unk> technology continues to grow we outlined how much it's growing this year or last year. So a combination of getting back to a normal cadence and some new product offerings as how we get to that 8% to 10%.

Speaker Change: One moment our next question.

Our next question comes from Susan Macquarie with Goldman Sachs. Your line is open.

Susan Marie Maklari: Thank you good morning, everyone.

Morning, Susan.

Susan Marie Maklari: My first question is going back to that discretionary demand on the residential water heaters that you've obviously seen that in the last several years, you've talked to that holding fairly flat for 2024, when we think about that relative to some other categories such as appliances, where we're seeing that discretionary demand has been weak.

Susan Marie Maklari: Just sort of across our building products coverage.

Susan Marie Maklari: Gives you the confidence that that will hold this year and.

Any additional thoughts on where that may trend over time.

Speaker Change: Yes, again, we've been watching it.

Speaker Change: And it's held pretty steady for a long time certainly.

Speaker Change: As we go forward and look at it.

Speaker Change: We still see housing renovation, even though things are to be relatively flat people are staying in their homes. We think housing renovation is still going to be a big part of how we go forward and where it goes long term.

Speaker Change: Still trying.

Speaker Change: Get our arms around it we talked a little bit about some.

Speaker Change: Generational issues that we've seen but overall right now in 2024, we're confident that the proactive replacement will stay steady and we will continue to monitor it as we continue over the years.

Speaker Change: Okay, Alright thats helpful.

Speaker Change: And then as we come into this year any thoughts on where channel inventories are anything that you would highlight there or expectations as we move through the year on that.

Speaker Change: Well I'll start with North America water heating.

Speaker Change: We entered the year this year pretty strong January and I think we've maybe had a little bit lower channel inventories coming into 'twenty three but.

Speaker Change: But we feel like we're in great shape very normalized on North America water heating.

Speaker Change: On the boiler and water treatment side, I think we still feel a bit of a headwind as we go through the end of 2023, but feel like we're going to exit the year in a good position of normalized inventories.

Speaker Change: In China.

Speaker Change: Channel inventories are pretty much very normal kind of event for a while and kind of continue in that normalized zone.

One moment our next question.

Speaker Change: Our next.

Saree: <unk> comes from Saree <unk> with Jefferies. Your line is open.

Saree: Hi, good morning.

Saree: Could you just go back and talk about what you saw from the water heater demand or market share in the fourth quarter as shipments in October through November seem pretty strong versus third quarter results and then any color on what you saw in January.

Saree: Okay.

Q4 came in a little bit stronger than we expected and mostly on the residential side.

Saree: <unk> held their own and we got our fair share of that.

Saree: So that was a nice positive plus.

Saree: I think we've talked about being up for being close to 6%.

Saree: In the residential side of the business I will say, how that actually comes out specifically and I would tell you January it's early.

Saree: And.

January was a pretty strong month, particularly on the water heater side of the business, but orders remained strong.

We continue to track towards our guidance. So in a one month view, we feel pretty good where we're at and I would just tell you orders are fairly strong across all of our businesses starting to the year again, one month doesn't make a year, but we're off to a good start.

Saree: Thanks.

The rest of world margins at 10% or flat for this year. Despite the expectations for higher sales. So maybe just talk about some offsets that you expect to see there.

Saree: Offsets for next year.

Speaker Change: Yeah on the rest of the world side on the margin yes.

Speaker Change: I'll speak to China, So China first.

Speaker Change: Expecting growth in China, 3% to 5%.

Speaker Change: Next year looks very similar in our outlook and that we're going to be investing in new products promoting new products looking to have topline growth and kind of maintaining margins in China right around that 11% So margin operating margins in China year over year roughly the same.

Speaker Change: We're we're really leaning on growth is in India, and maybe when you look at overall rest of the world.

You look at our outlook for India, we continue to invest in growth. So we're going to continue to put kind of our.

Speaker Change: Certainly we're pleased to be in a profitable position in India, and we would like to continue to invest in growth.

Speaker Change: Both outlooks of 15% in India next year.

Our next question.

Speaker Change: Our next question comes from David Macgregor with Longbow Research. Your line is open.

David S. MacGregor: Yes, good morning, everyone. Thanks for taking my questions.

David S. MacGregor: I wanted to start by asking you about the North American gas Tankless business you talked about.

David S. MacGregor: <unk> contribution to that 50 basis points of margin pressure.

David S. MacGregor: Pressure, but could you talk about the top line impact, which should we expect in terms of timing and the size of the impact in terms of the initial channel fill it.

David S. MacGregor: How are you thinking about that within the context to your revenue guidance.

David S. MacGregor: Yes.

We've got a revenue guide others tie it back to the overall, 3% to 5% growth on the top line.

David S. MacGregor: We're pleased that there's a number of drivers within that growth and all of them are within the same amount roughly and if you kind of look at.

David S. MacGregor: Just overall growth growth on Tankless heat pump, Kevin talked about pricing, we've got boilers growing kind of in that in.

David S. MacGregor: In that 8% to 10%, we've got North America water treatment growing 10%, 12% and then.

David S. MacGregor: Growth in China add four in India.

David S. MacGregor: The ones that I mentioned are all very similarly sized.

David S. MacGregor: So it contributes in a meaningful way to growth, but it's not it's not the largest part of growth in North America next year.

David S. MacGregor: I'll, just kind of tie it back to.

David S. MacGregor: We're expecting $100 million on the topline over over three years so.

David S. MacGregor: Get to 2026, we would expect to be incremental there.

David S. MacGregor: It will probably be a little lumpy as we start out but we're looking for contribution in year. One yes, just to add on that on the Tankless side of it we are building inventory as we speak.

David S. MacGregor: Ground and will launch in late March.

David S. MacGregor: We're already taken orders for it and we're excited about one that we own the technology, we're manufacturing, but more importantly, the first product that we're bringing to market, which is a a condensing premix has all the features that quite frankly, we've been a little bit hamstrung with our product line. So two inch Ben happens connection better flow.

Rates for all our team is excited about getting into market and being able to compete. So we will start in March early indications from a lot of customers are pretty excited about the product. We're excited about the product, but as Chuck mentioned this will be a ramp that will start this year and continue to gain momentum over the next couple of years.

Speaker Change: Got it thanks for that and then as a follow up I just wanted to ask about China.

This meeting you outlined kind of a three segment good better best.

Speaker Change: Market segmentation model I Wonder if you could just talk about what youre seeing in terms of demand dynamics across those three segments right now.

Speaker Change: AI link is still pretty new but.

If you could share what you're thinking and what youre seeing there.

Yes.

Speaker Change: Touch on that and maybe Chuck will jump in on it.

Charles T. Lauber: Not seen much change on our mix and I would tell you that were are good as premium good.

Charles T. Lauber: We're not down in the low end of the market, but throughout even the pandemic and even into last year and how we're looking going into 2020 for our premium priced products that premium sector of the market has held up its not growing but it's holding and so our mix looks relatively the same as it has over the last year.

Charles T. Lauber: Years, and we feel pretty good about that considering the consumer's not as engaged as it needs to be in and then we look at that as being upside.

Charles T. Lauber: Consumer confidence grows a bit.

Charles T. Lauber: Yes, just put some numbers to that so I mean, we define kind of the premium sector of the market above 3000, RMB for electric water heating and above 5000, RMB four gas gas water heating and water treatment, which are our core products in China in the premium sector of the market.

That we sell it's been in the 60% to 70% range, a little lower on water treatment right around 50, but it's been a nice Zip code.

Charles T. Lauber: For quite a while now so for probably the last couple of years. So we haven't seen a change.

Certainly hasnt decreased but it's been pretty steady.

Speaker Change: One moment our next question.

Next question comes from Nathan Jones with Stifel. Your line is open.

Speaker Change: Good morning, This is Adam Farley on for Nathan.

My question relates to the balance sheet.

Adam Farley: A very good position.

Significantly under Levered with a strong net cash position so.

Adam Farley: What are your plans to optimize the balance sheet and maybe could you provide an update on your M&A pipeline.

Adam Farley: Thanks.

Speaker Change: Sure Good morning, Adam.

Yes, we are we are under Levered, we like the position that we're in going into an opportunity for M&A, which which we'll talk about.

Speaker Change: We continue to have kind of a balanced approach I talked a little bit earlier about investing in ourselves, which are some of the three major expansion projects that we have going on with building manufacturing.

Speaker Change: Manufacturing capabilities.

Speaker Change: Gas tankless for investing in commercial high efficiency capacity, and then and then continuing to invest in our R&D facilities in Lebanon, Tennessee. So we continue to.

Speaker Change: Make sure we're doing the right things to invest in ourselves and have three major projects going on.

We're also doing our.

Speaker Change: A bit on the share buyback.

Speaker Change: We've got a $300 million of share buyback and our outlook for 2024, we continue to feel that that's an appropriate component of capital allocation as we are under Levered.

We're reserving firepower for the opportunities within M&A.

Speaker Change: We look forward to may be some opportunities this year, it's always difficult to tell.

Certainly investors expectations always remained high we feel like we're in a great position now to continue to kind of look for those opportunities as we go into 2024.

I would just maybe add on to that I mean, our pipeline is active.

Speaker Change: And we continue to look at spaces, not only within our core certainly water treatment, but geographic expansions and even levering.

Speaker Change: Potentially our customers and footprint that we have in various industry. So.

Speaker Change: A lot of different.

Spots on the board, we are engaged on a pretty regular basis with a number of companies and again.

Speaker Change: Just a matter of.

Speaker Change: Not if but when the timing comes about but again, we look at when we look at acquisitions culture is exceptionally important for us and making sure that we find the right company that fits within a O Smith <unk> top of that we are going to stay disciplined and making sure that we can return the right.

Return to our shareholders, so putting that all in context, we feel really good about the pipeline and we'll see if we can bring some of those home and.

Speaker Change: 2024.

Speaker Change: Thank you.

Speaker Change: One moment our next question.

Our next.

Comes from Andrew Kaplowitz with Citigroup. Your line is open.

Andrew Alec Kaplowitz: Good morning, everyone Hey.

Andrew Alec Kaplowitz: Hey, Andrew Good morning, I, just wanted to follow up on the 10% rest of world margin of 11% in China, you, obviously spoke about at the Investor Day 400 basis points of improvement over the next several years do you need a better change the economy for that margin expansion to kick in or do you start to dial down your advertising and promotions soon in the new kitchen products and that will help.

Andrew Alec Kaplowitz: How does that work.

Andrew Alec Kaplowitz: We need to we need a better economic backdrop to to achieve that I mean, we really we really are in a situation now where we feel good about the cost we've taken out at the level we're at.

Andrew Alec Kaplowitz: Affiliate, we can leverage growth going forward, but many of the to get the economy back needed to get housing formation.

Andrew Alec Kaplowitz: Reignited so that we've got a larger portion of the market that is.

Andrew Alec Kaplowitz: Is growing in house formation as you know most of the water heaters go in with an individual moves into their home, even if it's a new construction.

Andrew Alec Kaplowitz: We're pleased we've got 60% replacement on the water heating side. So in the meantime, we are very happy with the resiliency of the business at the levels. We're at but we will need some economic help to kind of achieve that expansion.

That's helpful color and then just shifting gears North American commercial water heater industry.

Have a good year in 2003, so maybe a difficult comparison in 'twenty four but you've dialed in the low single digit growth can you talk about the visibility you have to that end market holding up in 'twenty four.

Speaker Change: Yes, it held up in typical primarily back to and we've mentioned a couple of times that greater than 55 gallon electrics.

Speaker Change: Went to a regulatory kind of change and we have to get the industry had to get its legs underneath which it did and we're starting to benefit from that.

Speaker Change: The growth of almost 70% came out of that category.

And it's almost back to where it needs to be but you look at that low single digits.

Speaker Change: A large majority of that growth is going to be.

In that particular category as it gets back to a more normalized level that exited in 2022, but overall commercial business held up well.

Our gas business.

It showed some growth we saw we break it down small electrics versus large small electrics had growth with each category.

Speaker Change: Still growing and.

Speaker Change: We expect that to continue there is still a very big part we talked about residential replacement and described versus discretionary still 85% of that business is replacement market for us and we have a.

Speaker Change: Really nice market share in that particular category and as you know restaurants hotels continue to come back online like they have been.

Speaker Change: Our units are going to get exercises.

Speaker Change: Body else's that replacement should continue for the foreseeable future.

Speaker Change: Thank you as a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

Our next question comes from Chicago, and John Murray with UBS. Your line is open.

Hi, Good morning, guys I'm on for Damien.

John Murray: Good morning.

John Murray: So a quick question on Dr makeup pricing, so you announced a 4% increase in November and got pushed to March I wanted to understand what was the reason for.

The price increase did you get some pushback whats happening there.

John Murray: Yes.

Details on pricing are really within our strategy here, we always evaluate each time, we bring a price increase to market and early on as we discussed.

John Murray: We make sure that we.

John Murray: We're addressing cost we always make sure that we feel the cost before our customers is in the bottom line, where we're at today is what's going to keep our customers competitive in and Thats really really all we're going to stay on the pricing side of this.

Okay.

Speaker Change: And as a quick follow up on China.

Speaker Change: It seemed to see most of the growth is coming from kitchen appliances in water treatment. So I just wanted to get your color on what are you seeing sort of what the heating demand in China going into 2024.

Speaker Change: Yes, most of the growth that we see in 2024 relates to commercial commercial business on water treatment water treatment overall, particularly consumables.

Speaker Change: And then we do see some growth in our kitchen products the newly introduced.

Speaker Change: Overall, the core products relatively relatively flat year over year, I mentioned, a little bit earlier about we've kind of seen the stabilization of maybe what's being sold to the premium side. So we think we're in a good spot for when the economy does come back, but we're looking at relatively year over year flat for our core products.

Speaker Change: Thank you that does conclude the question and answer session. At this time I would like to turn the call back to Helen <unk> for closing remarks.

Helen Gerhold: Thank you everyone for joining us today, let me conclude by reminding you that our global team delivered record sales and earnings in 2023.

Helen Gerhold: We look forward to updating you on our progress in the quarters to come. In addition, please mark your calendars to join our presentations at three conferences this quarter.

Helen Gerhold: City at February 21st Barclays on February 22nd Northcoast at March seven Thank you and enjoy the rest of your day.

Speaker Change: Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

Helen Gerhold: Okay.

Okay.

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Speaker Change: Hello, and thank you for standing by and welcome to the Ao Smith fourth quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question you will need to press star one one on your telephone you will then hear an odd.

Speaker Change: <unk> message advising your hand is raised to withdraw your question. Please press star one again, please be advised that today's conference is being recorded.

I'd now like to hand, the conference over to your Speaker today Helen. Please go ahead.

Speaker Change: Thank you Abigail and good morning, everyone and welcome to the a O Smith full year and fourth quarter Conference call I'm, Helen Gerhart, Vice President Investor Relations and financial planning and analysis joining.

Helen Gerhart: Joining me today are Kevin Wheeler, Chairman, and Chief Executive Officer, and Chuck Lauber, Chief Financial Officer and.

Helen Gerhart: In order to provide improved transparency into the operating results of our business, we provided non-GAAP measures.

Helen Gerhart: Free cash flow is defined as cash from operations less capital expenditures.

Helen Gerhart: Adjusted earnings adjusted earnings per share adjusted segment earnings and adjusted corporate expenses.

Helen Gerhart: Excluding the impact of restructuring and impairment expenses.

Helen Gerhart: Nonoperating noncash pension income and expenses as well as legal judgment income and terminated acquisition related expenses.

Helen Gerhart: Reconciliations from GAAP measures to non-GAAP measures are provided in the appendix at the end of this presentation and on our website.

Helen Gerhart: 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.

Helen Gerhart: Those risks include matters that we described in this morning's press release among others.

Helen Gerhart: Also as a courtesy to others in the question queue. Please limit yourself to one question and one follow up for churn. If you have multiple questions. Please rejoin the queue.

Helen Gerhart: We will be using slides as we move through today's call you can access them on our website at investor The a O Smith Dot com.

Helen Gerhart: I will now turn the call over to Kevin to begin our prepared remarks, please turn to the next slide.

Kevin J. Wheeler: Thank you Helen and good morning, everyone I'm on slide four and our full year results.

Kevin J. Wheeler: 2023 was a record setting sales and earnings year, driven by resilient water heater demand and excellent execution by our team.

Kevin J. Wheeler: North American sales increased 4% and adjusted segment margin increased 310 basis points due to higher water heater volumes and an improved price cost relationship.

Kevin J. Wheeler: Our rest of World segment sales grew 4% in local currency as our recently introduced kitchen products in China were well received by the market.

Kevin J. Wheeler: In India, our sales grew 15% local currency in 2023 and benefited from sales of new products, which represented 30% of our sales.

Kevin J. Wheeler: Free cash flow grew to $598 million.

Kevin J. Wheeler: Primarily driven by record profit.

Kevin J. Wheeler: We returned $490 million of capital to shareholders with our dividend and share repurchases.

Kevin J. Wheeler: Please turn to slide five.

Kevin J. Wheeler: Our global <unk> team delivered record sales of $3 9 billion in 2023, and adjusted EPS of $3 81 a.

Kevin J. Wheeler: A 21% increase over 2022.

Kevin J. Wheeler: North America water heater sales grew 6% in 2023 due to strong demand for our residential and commercial water heater products.

Kevin J. Wheeler: The residential unit industry demand increased approximately 6% compared to 2022 as new construction and proactive replacement demand remained resilient.

Commercial industry units increased approximately 15% year over year as volume of commercial electric water heaters greater than 55 gallons rebounded and align closer to create 2022 levels.

Kevin J. Wheeler: We are pleased with our market share strength in both residential and commercial water heaters.

Kevin J. Wheeler: Our North America boiler sales decreased 12% against a difficult comp of 28% growth in 2022.

Kevin J. Wheeler: We worked down our backlog in 2022, after making significant production and supply chain improvements, which led to elevated channel inventories going into 2023.

Kevin J. Wheeler: The resulting channel inventory destocking impacted our residential and small commercial boiler sales.

Kevin J. Wheeler: Sales of our crest commercial boilers with <unk> technology increased over 50% in 2023.

Kevin J. Wheeler: And China full year sales increased 4% local currency.

Kevin J. Wheeler: We are pleased with our performance in a continued weak economy. In addition to the successful launch of our kitchen products, we saw double digit sales growth of our HVAC and commercial water treatment product categories.

Kevin J. Wheeler: I'll now turn the call over to Chuck Who'll provide more details on our full year and fourth quarter performance. Thank.

Charles T. Lauber: Thank you, Kevin and good morning, everyone I'm on slide six.

Full year sales in the North America segment Rose to $2 9, Billion% to 4% increase compared with 2020 to higher volumes of water heaters were partially offset by lower sales of boilers in pricing.

Charles T. Lauber: North America segment earnings of $726 million increased 19% compared with 2022.

Charles T. Lauber: Adjusted segment margin was 24, 8%.

Charles T. Lauber: An increase of 310 basis points year over year.

Charles T. Lauber: The higher adjusted segment earnings and adjusted segment margin were primarily driven by higher water heater volumes and lower material costs.

Charles T. Lauber: Moving to slide seven.

Charles T. Lauber: Rest of the World segment sales of $957 million decreased 1% year over year, including unfavorable currency translation of $44 million primarily related to China.

Charles T. Lauber: <unk> sales increased 4% on a constant currency basis.

Charles T. Lauber: Our sales increase was primarily driven by higher sales of kitchen products and water treatment products in China.

Charles T. Lauber: India sales grew 15% in local currency in 2023, which is approximately three times the market.

Charles T. Lauber: Rest of the World segment earnings of $999 million increased 3% compared to segment earnings in 2022, primarily due to higher sales in China.

Charles T. Lauber: <unk> segment operating margin was 10, 4% an increase of 40 basis points compared to 2022.

Charles T. Lauber: Please turn to slide eight.

Charles T. Lauber: <unk>.

Charles T. Lauber: Adjusted earnings in the fourth quarter were <unk> 97 per share compared with adjusted earnings of <unk> 86 per share in the fourth quarter of 2022.

Charles T. Lauber: Please turn to slide nine.

Charles T. Lauber: North America segment adjusted earnings of $173 million.

Charles T. Lauber: Increased 8% compared with 2022.

Adjusted operating margin of 23, 5% increased 20 basis points compared to last year.

Charles T. Lauber: The higher adjusted segment earnings and adjusted segment margin were primarily due to higher water heater volumes.

Charles T. Lauber: Moving on to slide 10.

Charles T. Lauber: Fourth quarter rest of the World segment sales of $260 million increased 4% year over year, primarily driven by sales of new products, partially offset by unfavorable currency translation of $3 million in China.

Charles T. Lauber: India sales grew 11% in local currency in 2023 compared to 2022.

Charles T. Lauber: Rest of the World adjusted segment earnings of $30 million decreased 6% compared to Q4 2022 segment earnings and.

Charles T. Lauber: And adjusted segment margin of 11, 5% decreased to 120 basis points compared to segment margin in the same period last year the.

Charles T. Lauber: The decreases were primarily due to promotions and advertising supporting the launch of our dishwasher and steam oven products in China.

Charles T. Lauber: Please turn to slide 11.

Charles T. Lauber: We generated free cash flow of $598 million during 2023, an increase of 86% over 2022, primarily driven by higher earnings and lower working capital needs.

Charles T. Lauber: 2023 free cash flow conversion was 107%.

Charles T. Lauber: Our cash balance totaled $363 million at the end of December and our net cash position was $236 million our leverage ratio was six 5% as measured by total debt to total capital.

Speaker Change: Now I'll turn to slide 12.

Speaker Change: As we detailed at our Investor day.

Speaker Change: Earlier this month, our board approved our next quarterly dividend of 32 per share we have increased our dividend for over 30 consecutive years.

Speaker Change: We repurchased approximately four 4 million shares of common stock in 2023 for a total of $307 million.

Speaker Change: We continue our strong track record of delivering returns to shareholders over.

Speaker Change: Over the last two years, we have returned over $1 billion to shareholders through our dividends and share repurchases.

Please turn to slide 13, and our 2024 earnings guidance and outlook.

We are pleased to introduce our 2024 outlook with an expected EPS range of $3 90.

Speaker Change: $4 15 per share the midpoint of our EPS range represents an increase of 6% compared with 2023 adjusted EPS.

Speaker Change: Our outlook is based on a number of key assumptions, including <unk>.

Our guidance assumes that steel prices in 2024 will be a slight headwind compared to 2023 realm.

Speaker Change: Relative to current steel prices our projection includes the decline in steel price index in the second half of the year.

Speaker Change: Our outlook assumes non steel material costs are similar in 2024 as they were in 2023.

Speaker Change: Our guidance also assumes a relatively stable supply chain environment similar to what we experienced throughout 2023.

Speaker Change: We are monitoring the situation the Red Sea in Panama Canal, and currently have not experienced any negative impacts.

Speaker Change: We launched our internally designed and manufactured gas tankless products earlier this month.

Speaker Change: As we mentioned at our Investor Day. These products will be manufactured in China, Our China facility until our North America capacity is completed in 2025.

For the year Capex should be between 105 and $115 million.

An increase over the last several years due to capacity expansion projects related to our gas tankless manufacturing facility in Juarez.

Speaker Change: The expansion of our engineering capabilities in Lebanon, Tennessee, and an increase in high efficiency commercial water heating manufacturing capacity to align with regulatory changes coming in 202026.

We expect to generate strong free cash flow between $525 million and $575 million.

Speaker Change: Corporate and other expenses are expected to be approximately $60 million.

Speaker Change: Our effective tax rate is estimated to be between 24% and 24, 5%.

And we expect to repurchase $300 million of shares.

Speaker Change: Of our stock, resulting in our outstanding diluted shares of $147 million at the end of 2024.

Speaker Change: Sure.

Speaker Change: I will now turn the call back over to Kevin who will provide more color on our key markets and topline growth outlook and segment expectations through 2020 quarter staying on slide 13.

Kevin J. Wheeler: Thank you Chuck We project 2024 sales will grow between three and.

Kevin J. Wheeler: And 5% compared to 2023, which includes the following assumptions.

Charles T. Lauber: We believe the U S. New home construction remains at a deficit we projected will be flat in 2023.

We also assume that 2020 for proactive replacement will remain at a level similar to 2023.

Charles T. Lauber: Therefore, after approximately 6% increase in the industry in 2023 compared to 2022, we projected 2024 residential industry unit volumes will be approximately flat to last year.

Charles T. Lauber: We project U S commercial water heater industry volumes to increase low single digits as demand for our commercial electric greater than 55 gallons continues its positive trend to pre 2022 levels.

In addition, our outlook includes the announced price increases in North America water heating up 4% on most of our water heater products.

Charles T. Lauber: Price increase for heat pump products is 8%.

Charles T. Lauber: These increases are projected to be effective late in the first quarter.

Charles T. Lauber: In China, we believe it will take time for the economy to improve a bit weakened consumer confidence in a challenged real estate and housing market and we have not yet seen signs of significant improvement.

Charles T. Lauber: Even with the continued backdrop of a weak economy, we project our sales in China will again grow 3% to 5% in local currency in 2024, driven by resilient replacement demand growth and demand for our water treatment products and our recently released kitchen products.

Charles T. Lauber: Our forecast assumes that the currency translation impact will be minimal in 2024.

We expect to return to growth in our North America boiler business with a projected sales increase of between 8% to 10% in 2024.

Charles T. Lauber: We expect to continue to benefit from the transition to higher energy efficient boilers, particularly as commercial buildings look to improve their overall carbon footprint.

Charles T. Lauber: We predict sales of North America water treatment products to increase approximately 10% to 12% as we expect to grow at two times the pace of the market.

Charles T. Lauber: Based on our 2024 assumptions, we expect our North America segment margin to be between 24, and a half and 25%.

Charles T. Lauber: And rest of World segment margin to be approximately 10%.

Charles T. Lauber: Please turn to slide 14.

Charles T. Lauber: I'd like to thank everyone, who joined us at our Investor day late last year, either in person or via webcast.

Charles T. Lauber: According to the webcast is available on our website.

Charles T. Lauber: The team and I enjoyed sharing the exciting growth opportunities that we see on the horizon for all of our businesses.

Charles T. Lauber: A summary of the key topics that we covered are on slide 14.

Charles T. Lauber: I look forward to assurant periodic updates on our initiatives, including the launch of our gas tankers products.

Charles T. Lauber: As we looked at 2024, we remain focused on our key strategic priorities to advance our position as a leader in heating and treating water around the around the world.

Charles T. Lauber: Those priorities are.

Charles T. Lauber: Expand and enhance our high efficiency product portfolio, including heat pumps per space and water heating.

Charles T. Lauber: Expand our global water treatment capabilities by investing in technology people and geographic expansion and.

Charles T. Lauber: And deploy capital effectively by investing in ourselves pursue our active acquisition pipeline and returning capital to shareholders.

We have many reasons to be up to have optimism as we enter 2024.

Charles T. Lauber: We see strong end market demand in North America for all of our product categories, and we expect to return to growth for boilers and North America water treatment as we believe our customers exited 2020 for 2023 with normalized channel inventories.

Charles T. Lauber: We have begun several capacity expansion projects in North America that will support our growth in the long term.

Charles T. Lauber: In China, we are projecting a second year of growth driven by innovative new products and resilient demand for our core products and.

And we expect to continue double digit growth in India, as our premium products and customer service are well received in the market.

Charles T. Lauber: And finally this year marks an important milestone for a O Smith as we celebrate our 150 <unk> anniversary.

Charles T. Lauber: What began as a small machine machine shop in Milwaukee, Wisconsin, and $18 74.

Grown into an innovative industry, leading global water technology company with more than 12000 employees.

Charles T. Lauber: A O Smith has a rich and proud history, and we're excited to celebrate it with employees shareholders customers and partners across the globe.

Speaker Change: With that we conclude our prepared remarks, and we are now available for your questions.

Speaker Change: Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait.

Speaker Change: Fair enough to be announced to withdraw your question. Please press star one again, one moment for our first question.

Speaker Change: Our first question comes from Michael Halloran with Baird. Your line is open.

Michael Halloran: Hey, good morning, everyone.

Michael Halloran: Good morning, Mike Good morning.

Michael Halloran: So.

Michael Halloran: I figured after last time, where I had issues on my end getting getting through I figured I'd give a pregnant pause there to make sure you guys can hear me.

Michael Halloran: We can I hope you can hear us also.

Yes.

Michael Halloran: Great. So two questions here, both on North America first could you give some context to how you are thinking about the moving pieces within the residential water heater business between discretionary replacement Newbuild and then the non discretionary replacement pieces.

Speaker Change: Yeah, I'll touch on that we don't see much difference in 2024 as we.

Speaker Change: Forecasted in our guidance at $9 2 million.

Speaker Change: New construction, whether it's single family or multifamily continues to progress and we see it flat and.

Speaker Change: The proactive replacement has stayed very resilient, it's been six to eight quarters now.

We just received data from it recently and it continues to move down that path and of course.

The Mercury replacement as a non discretionary and we expect that to continue so we will look at really 'twenty 'twenty four is having a very similar outlook as 2023.

And maybe I'll just comment Mike that it's been a couple lumpy years right. I mean, we've been to Covid has been a bit of a correction last year. We think the industry. This year it'll be up maybe in that five 5% to 6%, but if we kind of step back to 2019, and just look at a growth rate of one 5% we kind of.

Speaker Change: We ended up at what we think our outlook is going to be for 2024, along with those assumptions that Kevin just mentioned so.

Speaker Change: It feels like a fairly stable residential market for us as we go into 'twenty four.

Speaker Change: Got it and just to be clear the six 6% with a 20.

2023 reference point right.

Speaker Change: It's 23 over 22 hours a trip up as we go into the next year here.

Speaker Change: Did you talk about why the confidence in the down steel costs, the lower levels of inflation and limited inflation remaining.

Speaker Change: Yes so.

Speaker Change: We see steel cost as a slight headwind as we go into the year.

Speaker Change: So as we come out of the fourth quarter, we're going to see.

Fortunately, we have pricing coming in when steel kind of comes in in the second quarter.

Speaker Change: So as we come out of 2023, we're looking at a little bit better margin profile in the first quarter because steel is down slightly.

Speaker Change: And then get helped a little bit on pricing coming in with a higher cost steel.

Speaker Change: If we kind of look at the cadence through the year.

Speaker Change: Kind of most quarters in North America or within that bandwidth of range or at least pretty close in the 'twenty.

Speaker Change: 24 to 24, 5% to 25% bandwidth I'd say Q1 has maybe a little more pressure.

Speaker Change: And then of course as you mentioned, we do have some headwinds just launching our tankless product is about a 50 basis point headwind as we import out of China.

Speaker Change: Due to transportation and continue to promote promote that product.

Speaker Change: One moment our next question.

Speaker Change: Okay.

Speaker Change: Our next question comes from Jeff Hammond with Keybanc capital markets. Your line is open.

Speaker Change: Okay.

Jeff Hammond: Hey, good morning, everyone.

Jeff Hammond: Hey, Jeff Good morning, Jeff.

Jeff Hammond: Just just trying to get a sense of a feedback from the channel on the March pricing you guys put through quite a bit.

Jeff Hammond: I think we were a little surprised to see a follow on here, but maybe just speak to how the channel is reacting to it.

Jeff Hammond: Supporting that that price increase thanks.

Speaker Change: Yes, I would just tell you that.

Speaker Change: What we have to address going forward with our suppliers, so and the cadence it's up a little bit we pushed it out to.

Speaker Change: Two.

Speaker Change: Really reaches that goal for us.

Speaker Change: Okay, and then just on the boiler you seen any kind of inflection in boiler demand or is this just growth off of easy comps.

Speaker Change: It's yes, it's certainly.

Speaker Change: Certainly some are coming off some comps get remember first quarter of last year was a pretty good year or a strong quarter for us on the boiler side and we didn't see destocking until starting in the second quarter.

Speaker Change: But much of it has to do with coming off some comps inventories coming down argued getting back to a regular cadence and we always get little tripped up on sell out versus sell in and remember our sell in was down but our sellout and we felt we held our own in the market. So overall the board and the market is slightly down on some coding or residential.

Speaker Change: Has been a headwind for us most of the year that we look at turning that around in 2024, but overall the market is.

Speaker Change: One moment our next question.

Speaker Change: Our next question comes from Susan Macquarie with Goldman Sachs. Your line is open.

Susan Marie Maklari: Thank you good morning, everyone.

Susan Marie Maklari: Morning, Susan.

My first question is going back to that discretionary demand on the residential water heaters that you've obviously seen that in the last several years, you've talked to that holding fairly flat for 2024, when we think about that relative to some other categories such as appliances, where we're seeing that discretionary demand has been weak.

Susan Marie Maklari: Just sort of across our building products coverage.

Gives you the confidence that that will hold this year and.

Susan Marie Maklari: Any additional thoughts on where that may trend over time.

Speaker Change: Yes, again, we've been watching it.

Speaker Change: And it's held pretty steady for a long time certainly.

Speaker Change: As we go forward and look at it.

Speaker Change: We still see housing renovation, even though things will be relatively flat people are staying in their homes. We think housing renovation is still going to be a big part of how we go forward and where it goes long term.

Speaker Change: Still trying.

Speaker Change: Get our arms around it we talked a little bit about some.

Okay, Alright thats helpful.

Speaker Change: And then as we come into this year any thoughts on where channel inventories are anything that you would highlight there or expectations as we move through the year on that.

Speaker Change: Well I'll start with North America water heating.

Speaker Change: We entered the year this year pretty strong January and I think we've maybe had a little bit lower channel inventories coming into 'twenty, three but we feel like we're in great shape very normalized on North America water heating.

Oiler and water treatment side, I think we still feel a bit of a headwind as we go through the end of 2023, but feel like we're going to exit the year in a good position of normalized inventory.

Speaker Change: In China.

Speaker Change: All of the channel inventories are pretty much very normal kind of event for a while and kind of continue in that normalized zone.

Speaker Change: One moment our next question.

Okay.

Speaker Change: Yeah.

Speaker Change: Our next question comes from Saree <unk> with Jefferies. Your line is open.

Hi, good morning.

Saree: Could you go back and talk about what you saw from the water heater demand or market share in the fourth quarter.

Saree: October through November seem pretty strong versus third quarter results and then any color on what you saw in January.

Saree: Correct.

Saree: Q4 came in a little bit stronger than we expected and mostly on the residential side, we held our own and we've got our fair share of that.

Saree: And so that was a nice positive plus.

I think we've talked about being up for being close to 6%.

Saree: In the residential side of the business I will say, how that actually comes out specifically and I would tell you January it's early.

Saree: And.

Saree: January was a pretty strong month, particularly on the water heater side of the business, but orders remained strong.

Saree: We continue to track towards our guidance. So in a one month view, we feel pretty good where we're at and I would just tell you orders were really strong across all of our businesses starting to the year again, one month doesn't make a year, but we're off to a good start.

Saree: Thanks.

The rest of world margins at 10% or flat for this year. Despite the expectations for higher sales. So maybe just talk about some offsets that you expect to see there.

Saree: Sure.

Saree: Offsets for next year.

Yeah on the rest of the world side on the margin.

I'll speak to China, So China first.

Speaker Change: Expecting growth in China, 3% to 5%.

Speaker Change: <unk>.

Speaker Change: We're really leaning on growth is in India, and maybe when you look at overall rest of the world. When you look at our outlook for India. We continue to invest in growth. So we're going to continue to put kind of our.

Speaker Change: Certainly we're pleased to be in a profitable position in India, we would like to continue to invest in growth and healthy growth outlooks of 15% in India next year.

Speaker Change: Our next question.

Okay.

Speaker Change: Our next question comes from David Macgregor with Longbow Research. Your line is open.

David S. MacGregor: Yes, good morning, everyone. Thanks for taking my questions.

Want to start by asking you about the North American gas Tankless business you talked about.

David S. MacGregor: <unk> contribution to that 50 basis points of margin.

David S. MacGregor: Sure, but could you talk about the top line impact, which should we expect in terms of timing and the size of the impact in terms of the initial channel fill.

David S. MacGregor: How are you thinking about that within the context of your revenue guidance.

David S. MacGregor: Yes, So we've got a revenue guide others tie it back to the overall, 3% to 5% growth on the top line.

David S. MacGregor: We're pleased that there's a number of drivers within that growth and all of them are within the same amount roughly and if you kind of look at.

David S. MacGregor: Just overall growth growth on Tankless.

Heath pump, Kevin talked about pricing, we've got boilers growing kind of in that.

David S. MacGregor: In that 8% to 10%, we've got North America water treatment growing 10%, 12% and then.

Growth in China for in India.

David S. MacGregor: The ones that I mentioned are all very similarly sized.

So it contributes in a meaningful way to growth, but it's not it's not the largest part of growth in North America next year.

David S. MacGregor: I'll, just kind of tie it back to.

David S. MacGregor: We're expecting $100 million on the topline over over three years so.

Get to 2026, we would expect to be incremental there.

David S. MacGregor: Our ramp that will start this year and continue to gain momentum over the next couple of years.

Got it thanks for that and then as a follow up I just wanted to ask about China.

This meeting you outlined kind of a three segment good better best.

Market segmentation model I Wonder if you could just talk about what youre seeing in terms of demand dynamics across those three segments right now.

David S. MacGregor: AI link is still pretty new but.

David S. MacGregor: If you could share what you're thinking and what youre seeing there.

David S. MacGregor: Yes.

David S. MacGregor: Touch on that and maybe Chuck will jump in on it.

Not seen much change on on our mix and I would tell you that were are good as premium growth.

We're not down in the low end of the market, but throughout even the pandemic and even into last year and how we're looking going into 2020 for our premium priced products that premium sector of the market has held up its not growing but it's holding and so our mix looks relatively the same as it has over the last year.

Years, and we feel pretty good about that considering the consumer's not as engaged as it needs to be in and then we look at that as being upside as.

Consumer confidence grows a bit.

Speaker Change: Yes, just put some numbers to that so I mean, we define kind of the premium sector of the market above 3000, RMB for electric water heating and above 5000, RMB four gas gas water heating and water treatment, which are our core products in China in the premium sector of the market.

Speaker Change: That we sell it's been in the 60% to 70% range, a little lower on water treatment right around 50, but it's been in that Zip code.

Speaker Change: For quite a while now so for probably the last couple of years. So we haven't seen a change.

Speaker Change: Certainly hasnt decreased but it's been pretty steady.

Speaker Change: One moment our next question.

Speaker Change: Next question comes from Nathan Jones with Stifel. Your line is open.

Speaker Change: Good morning, This is Adam Farley on for Nathan.

Adam Michael Farley: My question relates to the balance sheet.

Adam Michael Farley: A very good position.

Adam Michael Farley: Significantly under Levered with a strong net cash position so.

Adam Michael Farley: What are your plans to optimize the balance sheet and maybe could you provide an update on your M&A pipeline.

Adam Michael Farley: Thanks.

Speaker Change: Sure Good morning, Adam.

Speaker Change: Yes, we are we are under Levered, we like the position that we're in going into an opportunity for M&A, which which we'll talk about.

Speaker Change: Manufacturing capabilities.

Gas tankless for investing in commercial high efficiency capacity, and then and then continuing to invest in our R&D facilities in Lebanon, Tennessee. So we continue.

Speaker Change: Make sure we're doing the right things to invest in ourselves and have three major projects going on.

Speaker Change: We're also doing our.

Speaker Change: A bit on the share buyback.

We've got a $300 million of share buyback and our outlook for 2024, we continue to feel that that's an appropriate component of capital allocation as we are under Levered.

Speaker Change: We're reserving firepower for the opportunities within M&A.

Speaker Change: We look forward to may be some opportunities this year, it's always difficult to tell.

Speaker Change: Certainly investors expectations always remained high we feel like we're in a great position now to continue to kind of look for those opportunities as we go into 2024.

Speaker Change: Just maybe add on to that I mean, our pipeline is active.

Speaker Change: And we continue to look at spaces, not only within our core certainly water treatment, but geographic expansions and even levering.

Speaker Change: Potentially our customers and footprint that we have in various industry. So.

Speaker Change: A lot of different spot.

Speaker Change: Spots on the board, we are engaged on a pretty regular basis with a number of companies and again.

Speaker Change: Just a matter of.

Speaker Change: Not yet, but when the timing comes about but again, we look at when we look at acquisitions culture is exceptionally important for us and making sure that we find the right company that fits within a O Smith and on top of that we are going to stay disciplined and making sure that we can return the right.

Return to our shareholders, so putting that all in context, we feel really good about the pipeline and we'll see if we can bring some of those home and.

<unk> 2024.

Speaker Change: Thank you.

Speaker Change: One moment our next question.

Speaker Change: Our next question comes from Andrew Kaplowitz with Citigroup. Your line is open.

Andrew Alec Kaplowitz: Good morning, everyone.

Andrew Alec Kaplowitz: Good morning, I, just wanted to follow up on the 10% rest of world margin of 11% in China, you, obviously spoke about at the Investor day 400 basis points of improvement over there.

Andrew Alec Kaplowitz: The next several years do you need a better change economy for that margin expansion to kick in or do you start to dial down your advertising and promotion soon in the new kitchen products.

Andrew Alec Kaplowitz: And that will help out how does that work.

Yes, we need to we need a better economic backdrop to to achieve that I mean, we really we really are in a situation now where we feel good about the cost we've taken out at the level we're at.

Andrew Alec Kaplowitz: We can leverage growth going forward, but many of the to get the economy back need to get housing formation kind of reignited. So that we've got a larger portion of the market that.

Is growing in house formation as you know most of the water heaters go in with an individual moves into their home, even if it's a new construction.

That's helpful color and then just shifting gears North American commercial water heater industry had a good year in 2003, so maybe a difficult comparison in 'twenty four but you've dialed in a low single digit growth can you talk about the visibility you have.

That end market holding up in 24.

Speaker Change: Yes, it held up in typical primarily back to and we've mentioned a couple times the greater than 55 gallon electrics, we went to a regulatory change and we have to get the industry to get its legs underneath which it did and we're starting to benefit from that.

Speaker Change: But the growth of almost 70% came out of that category.

It's almost back to where it needs to be but you look at that low single digits. A large majority of that growth is going to be in that particular category as it gets back to a more normalized level that exited in 2022, but overall commercial business held up well.

Our gas business.

Speaker Change: Showed some growth we saw we break it down small electrics versus large small electrics had gross with each each category.

Speaker Change: It's still growing and we.

Really nice market share in that particular category and as you know restaurants hotels continue to come back online like they have been.

Speaker Change: Our units are going to get exercises.

Speaker Change: Body else's in that replacement should continue for the foreseeable future.

Speaker Change: Our next question comes from Chicago, and Joe Murray with UBS. Your line is open.

Hi, Good morning, guys I'm on for Damien.

Joe Murray: Good morning.

So a quick question on Dr makeup pricing, so you announced a 4% increase in November and got pushed to March I wanted to understand what was the reason for pushing the price increase did you get some pushback whats happening there.

Joe Murray: Yes.

Speaker Change: Details on pricing are really within our strategy here we go.

Always evaluate each time, we bring a price increase to market and early on as we discussed.

Speaker Change: We make sure that we're good.

Speaker Change: <unk> costs, we always make sure that we feel the cost before our customers and the bottom line, where we're at today is what's going to keep our customers competitive in and Thats really really all we're going to stay on the pricing side of this.

Speaker Change: Okay.

Speaker Change: As a quick follow up on China.

Speaker Change: You seem to see most of the growth is coming from kitchen appliances in water treatment. So I just wanted to get your color on what you're seeing.

Speaker Change: Demand in China going into 2024.

Speaker Change: Yes, most of the growth that we see in 2024 relates to commercial commercial business on water treatment water treatment overall, particularly consumables.

Speaker Change: And then we do see some growth in our kitchen products the newly introduced.

Speaker Change: Overall, the core products relatively relatively flat year over year, I mentioned, a little bit earlier about we've kind of seen the stabilization of maybe what's being sold into the premium side. So we think we're in a good spot for when the economy does come back, but we're looking at relatively year over year flat for our core products.

Speaker Change: Thank you that does conclude the question and answer session. At this time I would like to turn the call back to Helen <unk> for closing remarks.

Helen: Thank you everyone for joining us today, let me conclude by reminding you that our global <unk> team.

Helen: <unk> delivered record sales and earnings in 2023.

Helen: We look forward to updating you on our progress in the quarters to come. In addition, please mark your calendars to join our presentations at three conferences this quarter.

City at February 21st Barclays on February 22nd Northcoast at March seven Thank you and enjoy the rest of your day.

Speaker Change: Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

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