Q1 2024 A. O. Smith Corporation Earnings Call

Yeah.

Operator: Good day, and thank you for standing by. Welcome to the A. O. Smith First Quarter 2024 Earnings 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 during the session, you need to press star 1 1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would like to hand the conference over to your speaker today, Helen Gurholt. Please go ahead.

Good day, and thank you for standing by and welcome to the Ao Smith first quarter 2024 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session I need to press star one on your telephone you will then hear an automated message advising you had in this race to withdraw your question. Please press star one again, please be advised.

Operator: Today's conference is being recorded I would like to turn the comps over to your speaker today Hellinger Holt. Please go ahead.

Helen E. Gurholt: Good morning, and welcome to the A. O. Smith first quarter conference call. I'm Helen Gurholt, 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-GAAP measures. 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, which exclude the impact of impairment. Reconciliations from GAAP measures to non-GAAP measures are provided in the appendix at the end of this presentation and on our website.

Operator: Good morning, and welcome to the a O Smith first quarter conference call I'm, Helen Gerhold, Vice President Investor Relations and financial planning and analysis joining.

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

Helen E. Gurholt: Order to provide improved transparency into the operating results of our business, we provided non-GAAP measures free.

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

Helen E. Gurholt: Adjusted earnings adjusted earnings per share adjusted segment earnings and adjusted corporate expenses exclude the impact of impairment expenses reckon.

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

Helen E. Gurholt: A friendly reminder that some of our comments and answers during this conference call will be forward-looking statements. (Inaudible) Also, as a courtesy to others in the question queue, please limit yourself to one question and one follow-up per turn. If you have multiple questions, please rejoin the queue. We will be using slides as we move through today's call. You can access them on our website at investor.aosmith.com. I will now turn the call over to Kevin to begin our prepared remarks.

Helen E. Gurholt: 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.

Kevin: Also as a courtesy to others in the question queue. Please limit yourself to one question and one follow up per turn.

Kevin: If you have multiple questions. Please rejoin the queue.

Kevin: We will be using slides as we move through today's call you can access them on our website at Investor a O Smith's dot com.

Helen E. Gurholt: I will now turn the call over to Kevin to begin our prepared remarks.

Kevin J. Wheeler: Thank you, Helen, and good morning everyone. I'd like to start off by extending a warm welcome to Steve Schaefer, who has recently joined A. O. Smith as our Chief Operating Officer. Steve is an accomplished business leader with deep global experience in manufacturing and leading innovative businesses. His strategic acumen and extensive global leadership experience will prove invaluable as we continue to focus on innovation and drive operational performance to enhance shareholder value.

Kevin: Thank you Helen and good morning, everyone.

Kevin J. Wheeler: I'd like to start off by extending a warm welcome to Steve Schafer, who has recently joined a O Smith as our Chief operating Officer Steve.

Kevin J. Wheeler: Steve is an accomplished business leader with deep global experience in manufacturing and leading innovative businesses and strategic acumen and extensive global leadership experience will prove invaluable as we continue to focus on innovation and driving operational performance to enhance shareholder value.

Kevin J. Wheeler: Let's now turn to the quarter on slide four. Our global A. O. Smith team delivered sales of $979 million in 2024 and EPS of $1, a 6% increase over 2023 adjusted EPS. North America sales increased 2%, and segment margins increased 80 basis points due to a positive mix, higher commercial volumes, and lower material costs, principally steel. In a reputable segment, sales grew 4%. Recently introduced products in China contributed to the majority of the growth. In India, our sales grew 16% in local currency in the first quarter of 2024. Please turn to slide 5.

Kevin J. Wheeler: Let's now turn to the quarter on slide four.

Kevin J. Wheeler: Our global a O Smith team delivered sales of $979 million in 2024.

Kevin J. Wheeler: And EPS of $1, a 6% increase over 2023 adjusted EPS nor.

Kevin J. Wheeler: North American sales increased 2% and segment margins increased 80 basis points due to a positive mix higher commercial volumes and lower material costs principally steel.

Kevin J. Wheeler: Our rest of World segment sales grew 4% recently introduced products in China contributed to the majority of the growth.

Kevin J. Wheeler: In India, our sales grew 16% in local currency in the first quarter of 2024.

Kevin J. Wheeler: Please turn to slide five.

Kevin J. Wheeler: North America water heater sales grew 2% in the first quarter due to higher commercial volumes and a positive mix towards commercial gas and high efficiency products, including heat pumps. Lines were favorably influenced by our price increase effective March 1st, however, year-over-year comps were somewhat muted by a strong first quarter of 2023. Our North America weather sales were flat compared to the first quarter of 2023.

Kevin J. Wheeler: North America water heater sales grew 2% in the first quarter due to higher commercial volumes and a positive mix towards commercial gas and high efficiency products, including heat pumps.

Kevin J. Wheeler: Volumes were favorably influenced by our price increase effective March one.

Kevin J. Wheeler: However year over year comps were somewhat.

Kevin J. Wheeler: Were somewhat muted by a strong first quarter of 2023.

Kevin J. Wheeler: Our North America, where their sales were flat compared to the first quarter of 2023.

Kevin J. Wheeler: As a reminder, we did not begin to see the effects of the 2023 channel inventory destocking until the second quarter of last year. We are pleased to see sales of our high-efficiency residential boilers return to more normalized levels in the first quarter of 2024. Sales of our Crest Commercial Boilers with Hellcat Technology increased over 30% in the quarter. North America Water Treatment Sales grew 4% in 2024, driven by acquisition-related sales growth and prices. Organic growth in the e-commerce and especially wholesale channels was offset by softness in the direct-to-consumer and retail channels in China.

Kevin J. Wheeler: As a reminder, we do not begin to see the effects of the 2023 channel inventory destocking until the second quarter of last year.

Kevin J. Wheeler: We were pleased to see sales of our high efficiency residential orders returned to more normalized levels in the first quarter of 2024.

Kevin J. Wheeler: Sales of our <unk> commercial boilers with <unk> technology increased over 30% in the quarter.

Kevin J. Wheeler: North America water treatment sales grew 4% in 2024, driven by acquisition related sales growth and pricing.

Kevin J. Wheeler: Again, a growth in the e-commerce, and especially wholesale channels were offset by softness in the direct to consumer and retail channels.

Kevin J. Wheeler: In China.

Kevin J. Wheeler: First quarter third-party sales increased 6% in local currency. Our recently launched kitchen products continue to be well-received in the market and provide bundling opportunities that drive overall sales growth. Sales of our HVAC systems, which generally combine a combi boiler with a heat pump water heater, increased 14% local currency in the quarter as well. I will now turn the call over to Chuck, who will provide more details on our first quarter performance. Thank you, Kevin. And good morning, everyone.

Kevin J. Wheeler: First quarter third party sales increased 6% in local currency.

Chuck: Our recently launched kitchen products continue to be well received in the market and provide bundling opportunities that.

Chuck: That drive overall sales growth.

Chuck: Sales of our HVAC systems, which generally combined a combi boiler with the heat pump water heater increased 14% local currency in the quarter as well.

Kevin J. Wheeler: I will now turn the call over to Chuck who will provide more details on our first quarter performance.

Chuck: You, Kevin and good morning, everyone I'm on slide six.

Charles T. Lauber: I'm on slide six. First quarter sales in the North America segment were $766 million, a 2% increase compared with 2023, driven by higher commercial volumes and the benefits of a mixed shift toward high efficiency water heaters, including heat pumps. North America segment earnings of $199 million increased 5% compared with 2023. Segment margin was 25.9%, an increase of 80 basis points year over year. The higher segment earnings and margins were primarily driven by positive mix and lower material costs, partially offset by selling and advertising expenses in support of higher sales. Moving to slide seven.

Chuck: First quarter sales in the North America segment were $766 million.

Charles T. Lauber: A 2% increase compared with 2023, driven by higher commercial volumes in our benefits of mix shift towards high efficiency water heaters, including heat pumps.

Charles T. Lauber: North America segment earnings of $199 million increased 5% compared with 2023 segment margin was 25, 9% an increase of 80 basis points year over year.

Charles T. Lauber: The higher segment earnings and margin were primarily driven by positive mix and lower material costs, partially offset by selling and advertising expenses in support of higher sales.

Charles T. Lauber: Moving to slide seven.

Charles T. Lauber: Rest of the world segment sales of $227 million increased 4% year over year, including unfavorable currency translation of $9 million, primarily related to China. Segment third party sales of $219 million increased 4% on a constant currency basis. The increase is primarily driven by higher sales of kitchen and HVAC products in China. India sales increased 16% in local currency in the quarter, driven by growth in both water heating and water treatment with particular strength in our e-commerce and commercial and retail market. Rest of the world segment earnings of $17 million decreased slightly compared to adjusted segment earnings in 2023, primarily due to sales promotions associated with new product introductions and product mix in China. Third party segment operating margin was 7.9%, a decrease of 20 basis points compared to adjusted segment margins Please turn to slide 8.

Charles T. Lauber: Rest of the World segment sales of $227 million increased 4% year over year, including unfair.

Charles T. Lauber: Unfavorable currency translation of $9 million, primarily related to China.

Charles T. Lauber: Segment third party sales of $219 million increased 4% on a constant currency basis the.

Charles T. Lauber: The increase was primarily driven by higher sales of kitchen, and HVAC products in China.

Charles T. Lauber: India sales increased 16% in local currency in the quarter driven by growth in both water heating and water treatment with particular strength in our e-commerce and commercial end markets.

Charles T. Lauber: Rest of the World segment earnings of $17 million decreased slightly compared to adjusted segment earnings in 2023, primarily due to sales promotions associated with new product introductions and product mix in China.

Charles T. Lauber: Third Party segment operating margin was seven 9% a decrease of 20 basis points compared to adjusted segment margins in 2023.

Charles T. Lauber: Please turn to slide eight.

Charles T. Lauber: We generated pre-cash flow of $85 million during the first three months of 2024, a decrease from the same period last year, primarily as a result of higher incentive payments associated with record sales and profits last year. Capital expenditures increased $11 million year-over-year driven by expansion projects. Our cash balance totaled $303 million at the end of March, and our net cash position was $183 million. Our leverage ratio is 6% as measured by total debt to total capital. I'll turn to slide nine.

Charles T. Lauber: We generated free cash flow of $85 million during the first three months of 2024, a decrease from the same period last year, primarily as a result of higher incentive payments associated with record sales and profits last year and higher inventory levels that more than offset higher earnings and lower accounts payable balances.

Charles T. Lauber: Capital expenditures increased to $11 million year over year, driven by expansion projects.

Charles T. Lauber: Our cash balance totaled $303 million at the end of March and our net cash position was $183 million, our leverage ratio was 6% as measured by total debt to total capital.

Speaker Change: Let's now turn to slide nine.

Charles T. Lauber: In addition to returning capital to shareholders, we continue to see opportunities for investment in 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 to earnings in the first year and return our cost of capital in three years. In the first quarter, we welcomed Impact Water Products to the A. O. Smith family.

Charles T. Lauber: In addition to returning capital to shareholders, we continue to see opportunities for investment in organic growth innovation and new product development across all of our product lines and geographies, we targeted strategic acquisitions that meet our financial metrics are accretive to earnings in the first year and return our cost of capital in three years.

Charles T. Lauber: In the first quarter, we welcomed impact water products to the <unk> Smith family.

Charles T. Lauber: Impact supports our growth strategy by expanding the West Coast presence of our water treatment business. Please turn to slide 10 in our 2024 earnings guidance and outreach. We reaffirm our 2024 EPS outlook of an expected range of $3.90 to $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 our steel costs in the full year 2024 will be a slight headwind compared to 2023. We project an increase in steel input costs in the second quarter of approximately 20% over the first quarter.

Charles T. Lauber: Impact supports our growth strategy by expanding the west coast presence of our water treatment business.

Charles T. Lauber: Please turn to slide 10, and our 2024 earnings guidance outlook.

Charles T. Lauber: We reaffirm our 2024 EPS outlook of an expected range of $3 90 to $4 15 per share.

Charles T. Lauber: The midpoint of our EPS range represents an increase of 6% compared with 2023 adjusted EPS.

Charles T. Lauber: Our outlook is based on a number of key assumptions, including.

Charles T. Lauber: Our guidance assumes that our steel costs and the full year 2024 will be a slight headwind compared to 2023.

Charles T. Lauber: We project an increase in steel input costs in the second quarter of approximately 20% over the first quarter.

Charles T. Lauber: Our full-year steel input cost projection includes a slight decline in the steel price index in the second half of the year. 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've experienced throughout 2023. We introduced our internally designed and manufactured gas tankless products earlier this year.

Charles T. Lauber: Our full year steel input cost projection includes a slight decline in the steel price index in the second half of the year.

Charles T. Lauber: Our outlook assumes non steel material costs are similar in 2024 as they were in 2023.

Charles T. Lauber: Our guidance also assumes a relatively stable supply chain environment similar to what we've experienced throughout 2023.

Charles T. Lauber: We introduced our internally designed and manufactured gas Tankless products earlier. This year. These products will be manufactured in our China facility until our North America capacity is completed in 2025.

Charles T. Lauber: These products will be manufactured in our China facility until our North America capacity is completed in 2025. We expect customer shipments to begin later in the second quarter. Associated import tariffs and other launch costs will negatively impact North American margins by approximately 50 basis points when we begin to ship products.

Charles T. Lauber: We expect customer shipments to begin later in the second quarter.

Charles T. Lauber: Associated import tariffs and other launch costs will negatively impact North American margins by approximately 50 basis points, when we begin to ship product.

Charles T. Lauber: We are investing in manufacturing in Juarez, Mexico that will eliminate the tariff in the future. For the year, CapEx should be between $105 and $115 million, an increase year over year due to capacity expansion projects related to our gas tankless manufacturing facility in Juarez, expansion of our engineering capabilities in Lebanon, Tennessee, and adding high efficiency commercial water heating manufacturing capacity to align with regulatory changes coming in 2026. We expect to generate strong free cash flow of between $525 million and $575 million. Corporate and other expenses are expected to be approximately $65 million.

Charles T. Lauber: We are investing in manufacturing in Juarez, Mexico that will eliminate the tariff in the future.

Charles T. Lauber: For the year Capex should be between $105 and $115 million, an increase year over year due to the capital or the capacity expansion projects related to our gas tankless manufacturing facility, whereas expansion of our engineering capabilities in Lebanon, Tennessee and.

Charles T. Lauber: Adding high efficiency commercial water heating manufacturing capacity to align with regulatory changes coming in 2026.

Charles T. Lauber: We expect to generate strong free cash flow of between $525 million and $575 million.

Charles T. Lauber: Corporate and other expenses are expected to be approximately $65 million. Our effective tax rate is estimated to be between 24 to 24, 5%.

Charles T. Lauber: Our effective tax rate is estimated to be between 24 and 24.5 percent. And we continue to expect to repurchase approximately $300 million of our shares of stock, resulting in outstanding diluted shares of $147 million at the end of the year. I will now turn the call back over to Kevin, who will provide more color on key markets and top line growth outlook and segment expectations for 2024, staying on slide 13.

Kevin: And we continue to expect to repurchase approximately $300 million of our shares of stock, resulting in the outstanding diluted shares of $147 million at the end of the year.

Charles T. Lauber: I will now turn the call back over to Kevin who will provide more color on key markets and top line growth outlook and segment expectations for 2020 for staying on slide 13, Kevin.

Kevin J. Wheeler: Thank you, Chuck. We reaffirm our outlook that 2024 sales will grow between three and 5% compared to 2023, which includes the following assumptions. We maintain our projection that 2024 U.S. residential industry unit volumes will be approximately flat for last year after seeing a 6% growth in 2023. Our assumption projects that new home construction and proactive replacement will remain at levels similar to last year.

Kevin: Thank you Chuck we reaffirm our outlook at 2024 sales will grow between three and 5% compared to 2023.

Kevin J. Wheeler: Which includes the following assumptions.

Kevin J. Wheeler: We maintain our projection that 2020 for U S residential industry unit volumes will be approximately flat for last year after seeing a 6% growth in 2023.

Kevin J. Wheeler: Our assumption projects that new home construction and proactive replacement will remain at levels similar to last year.

Kevin J. Wheeler: Our projection that U.S. commercial water heater industry volumes will increase low single digits in 2024 is subject to change. Our outlook includes the announced price increases in North America for water heating of 4% on most of our water heater products. The price increase for heat pump products is 8%. Our April orders are strong year-over-year as a result of resilient end demand and our management of pre-buy orders. In China, we believe that the economy and consumer confidence remain weak. The Real Estate and Housing Markets are challenged. We have not yet seen signs of improvement.

Kevin J. Wheeler: Our projections at U S commercial water heater industry volumes will increase low single digits in 2024 is unchanged.

Kevin J. Wheeler: 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 pumps products is 8%.

Kevin J. Wheeler: Our April orders are strong year over year as a result, as a result of resilient and demand.

Kevin J. Wheeler: In our management of pre buy orders.

Kevin J. Wheeler: In China, we believe that the economy and consumer confidence remains weak and the real estate and housing markets are challenged.

Kevin J. Wheeler: We have not seen signs of improvement.

Kevin J. Wheeler: Through March and April, we have seen headwinds in consumer demand. Given the continued weak economy and the softness we are seeing, we are lowering our... 2024 Third-Party Sales Growth Guidance in China to be flat to 3% up in local currency. Our forecast assumes a negative currency translation impact of approximately 1% for the year.

Kevin J. Wheeler: Through March and April we've seen headwinds in consumer demand.

Kevin J. Wheeler: Given the continued weak economy and the softness we are seeing we are lowering our two.

Kevin J. Wheeler: 2020 for third party sales growth guidance in China to be flat to 3% up in local currency.

Kevin J. Wheeler: Our forecast assumes a negative currency translation impact of approximately 1% for the year.

Kevin J. Wheeler: We entered the second quarter with a strong backlog in our boiler business and reaffirmed that we expect boiler sales to grow between 8 and 10 percent over last year. Additionally, we are revising our sales scope guidance for North America water treatment products from an increase of 10% to 12% to an increase of 8% to 10%. This reduction is a reflection of the softness we are experiencing in our direct-to-consumer business, average order price, and our retail channel, particularly for water softeners. Based on our 2024 assumptions, we expect our North America segment margin to be approximately 25%. And the rest of it will be a third-party segment margin of approximately 10%. Please turn to slide 11.

Kevin J. Wheeler: We ended the second quarter with a strong backlog and our boiler business and reaffirm that we expect boiler sales to grow between 8% to 10% over last year.

Kevin J. Wheeler: We are revising our sales growth guidance for North America water treatment products from an increase of 10% to 12% to an increase of 8% to 10%.

Kevin J. Wheeler: This reduction is a reflection of softness we are experiencing in our direct to consumer business average order price and our retail channel, particularly for water Softeners.

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

Kevin J. Wheeler: In rest of World Third party segment margin to be approximately 10%.

Kevin J. Wheeler: Please turn to slide 11.

Kevin J. Wheeler: We are pleased with our performance in early 2024. We had year-over-year growth in residential and commercial water heaters, along with a strong mix in the first quarter, and we are pleased with our order rates we are seeing this month. Indy is on track for another year of projected double-digit sales growth.

Kevin J. Wheeler: We are pleased with our performance in early 2024.

Kevin J. Wheeler: We had year over year growth in residential and commercial water heaters, along with a strong mix in the first quarter and we are pleased with our order rates. We are seeing in this month.

Kevin J. Wheeler: India is on track for another year of projected double digits sales growth.

Kevin J. Wheeler: During the quarter, we initiated three capital expansion projects that will add capacity for key product categories in North America. First, we broke ground on our tankless manufacturing facility in Juarez, which is on the same campus as our current residential water heater facility. Production in Juarez will improve logistics, as well as eliminate the tariff on products currently manufactured in our China facility.

Kevin J. Wheeler: During the quarter, we initiate three capital expansion projects that will add capacity for key product categories in North America.

Kevin J. Wheeler: First we broke ground on our Tankless manufacturing facility in Juarez, which is on the same campus as our current residential water heater facility production.

Kevin J. Wheeler: Production of more routers will improve logistics as well as eliminate the tariff on our products currently manufactured in our China facility.

Kevin J. Wheeler: Production is targeted to begin in 2025. In addition, we launched our high-efficiency commercial gas water heater expansion at McBee Self-Care Alliance. This expansion will increase our production capacity for our high-efficiency products, including our market-leading Cyclone products. As a reminder, Department of Energy regulatory changes, largely impacting commercial gas water heater efficiency levels, will eliminate lower efficiency products from the market beginning in late 2020. Finally, in support of our R&D and product innovation within our commercial water heater and boiler markets, we have initiated the expansion of our Lebanon, Tennessee, commercial lab and engineering test facility.

Kevin J. Wheeler: Production is targeted to begin in 2025.

Kevin J. Wheeler: In addition, we launched our high efficiency commercial gas water heater expansion and maybe South Carolina.

Kevin J. Wheeler: This expansion will increase our production capacity for our high efficiency products, including our market leading cycling product.

Kevin J. Wheeler: As a reminder, department of energy regulatory changes largely impacting commercial gas water heater efficiency levels, we will eliminate lower efficiency products from the market beginning in late 2026.

Kevin J. Wheeler: Finally in support of our R&D and product innovation within our commercial water heater and boiler market. We have initiated the expansion of our 11 in Tennessee commercial lab and engineering test facility.

Kevin J. Wheeler: The state-of-the-art facility will combine our commercial water heating engineering expertise under one roof and allow for cross-functional collaboration, particularly with mutual technologies like HIPAA. We're in the early stages of all three projects, but we're off to a very good start. As always, we remain focused on meeting the needs of our customers, as well as executing our key strategic priorities to advance our position as a leader in heating and treating water around the world. With that, we conclude our prepared remarks, and we are now available for your questions. Thank you, ladies and gentlemen, if you have a question.

Kevin J. Wheeler: The state of the art facility will combine our commercial water heating engineering expertise under one roof.

Kevin J. Wheeler: And allow for cross functional collaboration, particularly with mutual technologies like heat pump.

Kevin J. Wheeler: We are in the early stages of all three projects, but we're off to a very good start.

Kevin J. Wheeler: As always we remain focused on meeting the needs of our customers as well as executing our key strategic priorities to advance our position as a leader in heating and treating water around the world.

Kevin J. Wheeler: With that we conclude our prepared remarks, and we are now available for your questions.

Operator: Thank you, ladies and gentlemen. If you have a question or comment at this time, please press star 1-1 on your telephone. If your question has been answered or you wish to move yourself from the queue, please press star 1-1 again. And we also ask that you keep yourself to two questions. We will pause for a moment while we compile our Q&A roster. Our first question comes from Saree Boroditsky on Jeffreys. Your line is open.

Speaker Change: Thank you ladies and gentlemen, if you have a question or comment at this time. Please press star one on your telephone. If your question has been answered or you wish to move yourself from the queue. Please press star one again and we also ask that you keep yourself to two questions. We will pause for a moment, while we compile the Q&A roster.

Saree Emily Boroditsky: Our first question comes from <unk> <unk> with Jefferies. Your line is open.

James: Hi, this is James. I'm for Saree.

Samsung: Hi, This is Samsung for Serge Thanks for taking questions.

James: Thanks for taking questions. So I wanted to ask about the first quarter water heater demand. So January and February shipments came in higher than your full year expectation. So can you kind of talk about what you saw from the water heater demand in the first quarter and potentially into April?

James: So I wanted to ask about the first quarter water here for two months. So January and February shipments came in higher than your full year expectation. So can you kind of talk about what yourself from the water heater command in the first quarter and potentially into April.

Kevin J. Wheeler: You know, certainly, you saw the January and February AHRI data, and that was up, and a portion of that was really due to a pre-buy based on our price increase. We expect and see March coming in at a more normalized level and starting to get back to our forecast of a flat 2024 on the residential side of the business. We entered April with a really strong backlog, and we'll be working that down in the second quarter.

Speaker Change: Yes, certainly.

James: You saw the January and February AHRI data.

Kevin J. Wheeler: And that was up in a portion of that was really due to a pre buy based on our price increase.

Kevin J. Wheeler: We expect to see March coming in at a more normalized level and starting to.

Kevin J. Wheeler: Get back to our forecast of a flat 2024 on the residential side of the business.

Kevin J. Wheeler: We entered April with a really strong backlog and we will be working that down in the second quarter.

Kevin J. Wheeler: It kind of behaved like we thought. We thought the 4% was probably would not have as much of a pre-buy as it did, but it did. And we're working through that. We feel we got our fair share of orders from our customers. And again, in the second quarter, we'll work down that backlog, and we remain on track. And it really ties right into our forecast for, What do we expect the year to end on?

Kevin J. Wheeler: It kind of behave like we thought we thought the 4% was probably would not have as much of a pre buy as it did but it did and we're working through that we feel we got our fair share of orders from our customers and again in the second quarter, we'll work down that backlog and we.

Kevin J. Wheeler: We remain on track and it's really ties right into our forecasting and our.

Kevin J. Wheeler: We expect the year to end.

Speaker Change: Got it thanks for the color and I wanted to touch on the margins here. So I think you are now looking for North America segment margin to come in at the higher end of the range.

James: Got it. Thanks for the caller.

James: And I wanted to touch on the margin here. So I think you're now looking for North America's second margin to come in at a higher end of the range while maintaining the steel cost expectation. So can you kind of provide more color on increasing your margin expectation for North America?

James: While maintaining the steel cost expectation. So can you kind of provide more color on increasing your margin expectation for North America.

Kevin J. Wheeler: Yeah, we had previously guided them to 24 and a half to 25. Now we're saying approximately 25.

Speaker Change: Yes, we had previously guided to 24, 5% to 25 now we're saying approximately 25, we're very pleased with our North American margin performance in the first quarter came in nicely helped a bit by mix.

Kevin J. Wheeler: We're very pleased with our North America margin performance in the first quarter, coming in, you know, nicely helped a bit by mix. We had some weather-related situations in January, and the plants performed very well coming through that. So as we kind of look at the top end of that range and moved it slightly up, it's just, you know, some confidence in kind of the way the operations are running. We have pricing coming in in the April timeframe with steel costs going up.

Kevin J. Wheeler: We had some weather situations in January in the plants performed very well coming through that.

Kevin J. Wheeler: So as we kind of look at the top end of that range and moved it slightly up.

Kevin J. Wheeler: It's just some confidence in kind of the way the operations are running.

Kevin J. Wheeler: We have pricing coming in in the April timeframe with steel costs going up so there's a bit of pressure in the back half.

Kevin J. Wheeler: So there's a bit of pressure in the back half. But the way we started out and kind of looking through the full year and considering, you know, some of the launch costs that we know will be coming at us in the later part of the year with tankless, we feel pretty, pretty comfortable with moving closer to 25. Thank you.

Kevin J. Wheeler: But the way we started out in kind of looking through the full year and considering some of the launch costs that we know will be coming at us in later part of the year with Tankless, we feel pretty pretty comfortable with moving closer to 25%.

Operator: Thank you. One moment for our next question. Our next question comes from Mike Halloran with Baird. Your line is open.

Speaker Change: Thank you one moment for our next question.

Operator: Our next question comes from Mike Halloran with Baird. Your line is open.

Michael Patrick Halloran: Hey, good morning, everyone. Hey, just want to clarify what you were talking about right there, Chuck. When you said pressure in the back half, did you mean pressure sequentially versus front half, not year over year?

Michael Patrick Halloran: Hey, good morning, everyone.

Michael Patrick Halloran: Hey, Mike.

Michael Patrick Halloran: Hey, just wanted to clarify you are talking to right there Chuck.

Michael Patrick Halloran: When you said pressure in the back half you mean pressure sequentially versus front half net net year over year.

Charles T. Lauber: Correct, sequentially. Yeah, we're thinking about North American margins, you know, our lowest steel costs that we project for the year are in Q1. So we'll see some pressure on steel in the back three quarters of the year, quite actually. And then just relative to the first quarter, a little bit of pressure as we're, you know, excited to launch our tankless product. But for the time being, until we get production up and running in Mexico, it's going to be a bit of a headwind on North American margins of about 50%.

Michael Patrick Halloran: Correct sequentially, yes.

Charles T. Lauber: We're thinking about North America margins are lowest steel costs that we project for the year is in Q1.

Charles T. Lauber: So we will see some pressure on steel in the back three quarters of the year quite actually and then just relative to the first quarter a little bit of pressure as we were excited to launch our tankless product, but for the time being until we get production up running in Mexico, it's going to be a bit of a headwind to north America margins of about 50 basis points.

Charles T. Lauber: So what you're essentially suggesting then is one Q might be the high watermark, two Qs still decent, well, they're all decent margins regardless, and then the back half just down a touch from the front half, right? Right, right.

Charles T. Lauber: So what youre, essentially suggesting that as <unk> might be the high watermark <unk> still decent well they're.

Charles T. Lauber: They are all decent margins, regardless and then back half is down a touch from front half right.

Charles T. Lauber: Yeah, you know, 25.9 in Q1 and then we're saying about 25 for the year. So, Ben, could you put the earnings seasonality in context and how you're expecting the earnings to flow through? Is this a relatively normal seasonal year from your perspective, or do some of these margin nuances shift that around a bit?

Speaker Change: Right right yes.

Charles T. Lauber: 25, nine in Q1, and then we're saying about 25 for the year.

Ben: So could you put the earnings seasonality in context, and how you're expecting the earnings flow through.

Ben: Is this a relatively normal seasonal year from your perspective or does some of these margin nuances shift that around a bit.

Charles T. Lauber: Yeah, when we kind of look at water heater volume, and there's noise in the first quarter, as Kevin mentioned, there's a bit of pull-in. But when you kind of look at the whole year, it's still our projections, it's still 52-48 balanced from half back half. And then you think about that historically, boilers are typically stronger in the third quarter. So we would hope that that mix would help us a bit on margins. But relative to prior years, it's pretty normal, Mike. That is the way we have our outlook. Thank you.

Charles T. Lauber: Yes, we kind of look at water heater volume and there's noise in the first quarter as Kevin mentioned, there is a bit of a pull in but when you kind of look at the whole year is still our projections, it's still $52 48 balanced front half back half and then you think about historically boilers are typically stronger in the third quarter.

Charles T. Lauber: So we would hope that that.

Charles T. Lauber: Mix would help us a bit on margins, but relative to prior years, it's pretty normal Mike. This way we have in our outlook.

Operator: Thank you. One moment for our next question. Our next question comes from Susan Maklari with Goldman Sachs. Your line is open.

Speaker Change: Thank you one moment for our next question.

Operator: Okay.

Susan Marie Maklari: Our next question comes from Susan Mcclary with Goldman Sachs. Your line is open.

Susan Marie Maklari: Thank you good morning, everyone.

Susan Marie Maklari: Q. My first question is, given the level of pull-forward that you mentioned in the first quarter on the residential side, how would you characterize channel inventories coming into the second quarter? Any thoughts on where that stands?

Susan Marie Maklari: Morning, Susan.

Susan Marie Maklari: My first question is given the level of pull forward that you mentioned on the in.

Susan Marie Maklari: The first quarter on the residential side, how would you characterize channel inventories coming into the second quarter any thoughts on where that stands.

Kevin J. Wheeler: Yeah, I would tell you, based on the feedback that we have from our distributors, one, our distributors are all doing pretty well to, you know, even slightly higher. Inventories are basically in line. There's going to be some cold floors, but they'll work that off in the second quarter.

Susan Marie Maklari: Yes, I would tell you based on the feedback that we have from our distributors one of our distributors are all doing pretty well.

Kevin J. Wheeler: Even to slightly up.

Kevin J. Wheeler: Inventories are are basically in line and there's going to be some pull forward, but they will still work that off in the second quarter. So.

Kevin J. Wheeler: So things overall are pretty positive with our distributors. I wouldn't say crazy positive, but certainly they're starting the year off in a more positive sales kind of mode. And I don't think this whole pull forward thing is not a unique thing in our industry. We've gone through it many times with our distributors.

Kevin J. Wheeler: <unk> overall are pretty positive, but with our distributors I wouldn't see crazy positive, but certainly we're starting to Europe and.

Kevin J. Wheeler: In a more positive sales kind of mode.

Kevin J. Wheeler: <unk>.

Kevin J. Wheeler: I don't think this whole pull forward. This is not a unique thing in our industry. We've gone through with many times with our distributors. It was right in line, where we thought and we see that being worked off in the second quarter.

Kevin J. Wheeler: It was right in line with where we thought we'd see that being worked off in the second quarter. Yeah, I'll just add that some of the pull forward was within the quarter. You know, you saw the strong data that came out on HRI through February. For us, we saw a bit of moderation in March as we kind of worked through that price increase.

Kevin J. Wheeler: I'll just add that some of the pull forward was within the quarter.

Kevin J. Wheeler: Solid strong data that came out and AHRI and pet through February.

Kevin J. Wheeler: For us we saw a bit of moderation in March.

Kevin J. Wheeler: As we kind of work through that price increase.

Susan Marie Maklari: Okay, all right, that's helpful. And then maybe turning to commercial, you highlighted that as a bright spot in the quarter. Do you have any further color on what drove that strength that you're seeing and the sustainability of it as we go into the spring and the summer?

Speaker Change: Okay, Alright, that's helpful.

Speaker Change: And then maybe turning to commercial you highlighted that as a as a bright spot in the quarter just any further color on what drove that strength that youre seeing in the sustainability of it as we go into the spring and the summer.

Kevin J. Wheeler: I think there's a couple of points you're making with regard to the commercial. One, there was a pre-buy there as well. What was a bit different is, if you look back at last year and the increase we had in the commercial market, a lot of it was greater than 55 gallon electric. And in the quarter, we saw commercial gas up to the mid single digits, which was a nice, [inaudible] Thank you. One moment.

Speaker Change: I think theres a couple points here, making with regards to commercial one there was a pre buy there as well.

Kevin J. Wheeler: It was a bit different as you look back to last year and the increase we had in the commercial market a lot of it was that greater than 55 gallon electric.

Kevin J. Wheeler: In the quarter, we saw commercial gas.

Kevin J. Wheeler: Up kind of that mid single digits, which was a nice.

Kevin J. Wheeler: Positive surprise, we don't we don't think that was all pre buy but overall the industry. We've said, it's going to be that low single digit growth. We still think the majority of that's going to be in the electric category and were optimistic that part of that will also come in our commercial gap. So any of the really favorable and I think we're right in.

Kevin J. Wheeler: Align with that low single digit growth rate for the commercial market.

Operator: Thank you. One moment for our next question. Our next question comes from Matt Summerville with D. A. Davidson. Your line is open.

Speaker Change: Thank you one moment for our next question.

Operator: Our next question comes from Matt Summerville with D. A Davidson your line is open.

Matt J. Summerville: Yeah, thanks. A couple of questions, and I apologize if you touched on this. But just with respect to China, in the zero to 3% constant currency growth expected, can you kind of touch on your main product categories, water heaters, water treatment, some of the newer products, kitchen, and HVAC? Relative to that zero to three, how do you see those product groupings positioned, if you will?

Matt J. Summerville: Yes, Thanks couple of questions and I apologize if you touched on this but just with respect to China in there.

Matt J. Summerville: Zero to 3% constant currency growth expected can you kind of touch on your main product categories water heaters water treatment some of the newer products kitchen, and HVAC relative to that zero to three how do you see those product groupings positioned if you will.

Kevin J. Wheeler: Yeah, so we did lower a bit our guidance, we were saying three to five, and last year, we grew at three to 5%, Matt. And, you know, some of that is kind of what we've seen in demand through the first four months of the year. We've seen a bit of pressure on our core products as we've come in through the end of April and seen a bit of slowness in the market for core products. The newer products, the kitchen products that we've launched, you know, year over year, certainly we launched at the end of last year. So they continue to be well received. It's just early on in that process.

Matt J. Summerville: Yes, so we did lower it a bit our guidance, we were saying three to five and last year, we grew at 3% to 5%, Matt and some of that is kind of what we've seen in demand through the first four months of the year.

Kevin J. Wheeler: We've seen a bit of pressure on our core products as we have come in through the end of April we've seen a bit of.

Kevin J. Wheeler: Slowness in the market with core products.

Kevin J. Wheeler: The new newer products.

Kevin J. Wheeler: The kitchen products that we've launched.

Kevin J. Wheeler: Year over year, certainly we launches at the end of last year. So they continue to be well received it's just early on in that process, so seeing a little bit of pressure on the order rates.

Kevin J. Wheeler: So seeing a little bit of pressure on the order rates in, you know, through through April. Yeah, I just made that up. We saw some heavy promotions, particularly in the March timeframe. We took an approach that we were very selective and targeted how we went to market with our products. We have a premium brand there and really treated it as such. So part of that softness we saw in some of the water heating and water treatment products had to do with that.

Kevin J. Wheeler: In.

Kevin J. Wheeler: And through April.

Kevin J. Wheeler: And just maybe tie into that queue.

Kevin J. Wheeler: Q1, we saw some heavy promotions, particularly in the in the.

Kevin J. Wheeler: The March timeframe.

Kevin J. Wheeler: We took an approach that.

Kevin J. Wheeler: We're very selective and targeted in how we went to market on our approach we have a premium brand there and really treated as much so part of that.

Kevin J. Wheeler: Softness we saw in some of the water heating and water treatment products had to do with that we're not concerned about it but as you look forward. There is a couple of big drivers or consumer.

Kevin J. Wheeler: We're not concerned about it. But as you look forward, there are a couple big drivers there. Consumer sentiment is just not coming back, and the overhang from the The Bulletproof Executive 2013, We moved it down because that's what we're seeing today. As you know, in China, things can change pretty rapidly, but we feel positive that we're still going to be in that flat-to-up market. We're still getting our fair share, I think, of the product categories, and we're being very selective on how we're spending our money when it comes to promotion, and we're going to continue to watch our expenses to kind of balance that sales and profitability for China.

Kevin J. Wheeler: Sentiment is just not coming back.

Kevin J. Wheeler: The overhang from the.

Kevin J. Wheeler: Real estate market is still there so what.

Kevin J. Wheeler: We moved it down because thats what were seeing today as you know in China things can change pretty rapidly, but we feel positive that we're still going to be in that flat to up market.

Kevin J. Wheeler: We're still getting our fair share of I think of the product categories, and we're being very selective in how we're spending our money when it comes to promotion and we're going to continue to watch our expenses to kind of balance that sales and profitability for the China business.

Speaker Change: Got it.

Kevin J. Wheeler: Got it. And then as a follow-up, still sticking with China, what's your assessment of channel inventories in China? And then can you remind us how much of your China business today you feel is driven by replacement versus new?

Speaker Change: And then as a follow up still sticking with China, What's your assessment of channel inventories.

Speaker Change: In China, and then can you remind us how much of your China business. Today, you feel is driven by replacement versus new.

Kevin J. Wheeler: Yeah, I mean, channeled inventories are pretty normalized right now, and we believe they're kind of in that normal range. We are, we're estimating replacement business on the water heating side is about 50 to 60% in that range. So that does help our resiliency in China to have that buffer of replacement business continue to kind of drive a portion of our volume.

Speaker Change: Yes, I mean channel inventories are pretty normalized right now, we believe theyre kind of in that normal range.

Speaker Change: We are.

Kevin J. Wheeler: We're estimating replacement business is on the water heating side is about 50% to 60% in that range. So that does help our resiliency in China to have that buffer of replacement business continued to.

Kevin J. Wheeler: Kind of drive a portion of our volume.

Operator: Thank you. One moment for our next question. Our next question comes from Jeff Hammond with KeyBank. Your line is open.

Speaker Change: Thank you one of them for next question.

Operator: Yeah.

Operator: Our next question comes from Jeff Hammond with Keybanc. Your line is open.

Jeffrey David Hammond: Hey, good morning, guys.

Jeffrey David Hammond: Hey, good morning.

Jeffrey David Hammond: Hey, so just some clarifications here. Did you quantify or can you quantify, you know, how much you think was pulled forward to Q2-1Q from the pre-buy and then just this 50 basis point headwind from, you know, shipping product? Is that kind of a full year impact? And, you know, when do you think that the plant opens, and what happens to that headwind, you know, once you get the plant open in Maraz?

Jeffrey David Hammond: So just some clarifications here did you quantify or can you quantify how much you think was pulled forward to Q2 <unk> from the pre buy and then just this 50 basis point headwind from shipping product does that kind of a full year impact.

Jeffrey David Hammond: And what.

Jeffrey David Hammond: When do you think that the plant opens and what happens to that headwind once you get the plant opened in Juarez.

Charles T. Lauber: Yeah, I mean, that 50 basis points is a full year impact. It's kind of on an annualized basis. And, you know, production is scheduled for mid-2025, roughly. We've broken ground, and we've made good progress. We'll, you know, we'll give updates as we go. But we're, we're pleased with the start of the construction of the facility in Juarez.

Jeffrey David Hammond: Yes.

Jeffrey David Hammond: 50 basis points is a full year impact, it's kind of on an annualized basis.

Charles T. Lauber: And production is scheduled mid.

Charles T. Lauber: Mid mid 2025, roughly we broken ground. We've made good progress we'll give updates as we go but we're pleased with the start of the construction of the facility in Juarez.

Charles T. Lauber: You know, the, the, pull, the quantification of the pull forward in Q1, it's always a little bit difficult to estimate that, you know, it wasn't a huge price increase, 4%, but it did drive some volume. Clearly, we saw that in the data through February. But we felt a bit, you know, a bit of relief at that volume in March. Order rates are still strong through April. We do have a backlog, though, as we exit the quarter.

Charles T. Lauber: <unk>.

Charles T. Lauber: The.

Charles T. Lauber: The quantification of the pull forward in Q1, it's always a little bit difficult to estimate that it wasn't a huge price increased 4%.

Charles T. Lauber: Did drive some volume clearly we saw that in the data through February and we felt a bit.

Charles T. Lauber: Relief of that volume in March order rates are still strong through April.

Charles T. Lauber: We do have a backlog, though as we exited the quarter. So it doesn't impact our full year outlook.

Charles T. Lauber: So, it doesn't impact our full-year outlook. Not, not a significant amount, we don't believe, in the quarter, but there was some. You know, maybe just to make a comment on this, we also limit the amount of pre-buy that we have with, with, our price increases. We realize that, you know, people are going to try to pull forward a bit, but it's going to be less than 30 days, and again, it's really difficult because business has been pretty good going through the first quarter.

Charles T. Lauber: Not a significant amount we don't believe in the quarter.

Charles T. Lauber: But there was some.

Charles T. Lauber: Maybe just make a comment on this we also limit the amount of pre buy that we have with our price increases we realize that people are going to try to pull forward a bit, but it's going to be less than 30 days.

Charles T. Lauber: And again, it's really difficult because business has been pretty good going through the first quarter. How much was pre buy how much was just the need for the market and I think it is going to wash itself out as we go.

Charles T. Lauber: How much was pre-buy? How much was just the need for the market? And I think it's going to wash itself out as we, you know, go into the next month or so. And that's why we've kept our, our, flat U.S. residential industry volumes where they're at. We don't think the pre-buy is going to change our outlook at all.

Charles T. Lauber: Go into the next months or so and that's why we've kept our are flat.

Charles T. Lauber: Residential industry volumes and where they are at we don't think the pre buy is going to change our outlook at all.

Jeffrey David Hammond: Okay, and then just on that high-mix product. A shift, how much of that is kind of being driven by, you know, clarification or, or, you know, support from IRA? And then, you know, how sustainable do you think this kind of makeshift is?

Charles T. Lauber: Okay, and then just talking about the high mix product.

Jeffrey David Hammond: Shift how much of that is kind of being driven by clarification or art.

Jeffrey David Hammond: Support from IRI.

Jeffrey David Hammond: And then how sustainable do you think this kind of mix shift is.

Kevin J. Wheeler: Yeah, I would tell you the mix shifted. I'll separate that from the gas side of the business, and we've always been a high efficiency leader, and that continues to, as people replace their existing lower efficient products, that continues to replace those with higher efficiency. On the heat pump, rebates matter, and they're very regionalized to more the west coast and parts of the east, and they do matter, but there are a number of programs out there, certainly where we're going with the regulatory side of this in 2029.

Speaker Change: Yes, I would tell you the mix shifted.

Kevin J. Wheeler: I'll separate that from the from the gas side of the business and we've always been a high efficiency leader.

Kevin J. Wheeler: And that continues to as people replace their.

Kevin J. Wheeler: Existing lower fission products that continues to to replace those with higher efficiency on the heat pump.

Kevin J. Wheeler: <unk> matter.

Kevin J. Wheeler: And they are very <unk>.

Kevin J. Wheeler: Regionalized, two more on the west coast and parts of the eastern and and they do matter.

Kevin J. Wheeler: But there is number of programs out there certainly where we're going with the regulatory side of this in 2029. So we see this is not a one time.

Kevin J. Wheeler: So we see this as not a one-time thing; we've been increasing 20, 30, 40% on the year on heat pumps for the last three years, and we expect that's going to continue to 20, 25% as we get closer to 2029. This is not a one-time thing; it's going to be ongoing growth, and we expect that kind of growth over the next few years.

Kevin J. Wheeler: We've been increasing 2030, 40% on the year on heat pumps for the last three years, we expect thats going to continue through 2025% as we get closer to 2029. This is not a onetime it's going to be an ongoing growth and we expect that kind of growth over the next few years.

Operator: Thank you. One moment for our next question. Our next question comes from Scott Graham with Seaport Research Partners. Your line is open.

Speaker Change: Thank you one moment for our next question.

Operator: Okay.

Operator: Yes.

Operator: Our next question comes from Scott Graham with Seaport Research Partners. Your line is open.

Scott Graham: Hey, good morning, Kevin.

Scott Graham: Hey, good morning, Kevin Chuck Allen, Thanks for taking my question Hey.

Scott Graham: Thanks for taking my question. Hey Scott, I wanted to understand, you know, maybe ask the pre-buy question a little bit differently.

Scott Graham: Hey, Scott.

Scott Graham: I wanted to understand maybe ask the pre buy question a little bit differently.

Scott Graham: We're all looking at the AHRI data, and obviously February.

Scott Graham: We're all looking at the AHRI data and obviously February was.

Scott Graham: And obviously, February was, you know, quite strong. Are you suggesting that March?

Scott Graham: Quite strong are you, suggesting that March that we're going to see numbers of March down less than February was up and then that works then into April numbers being down.

Kevin J. Wheeler: that we're going to see numbers for March down less. Then February was up, and then that works then into, you know, April numbers being down because you said 30 days. I'm not sure if I understood.

Kevin J. Wheeler: Because you said 30 days I'm not sure if I followed that.

Speaker Change: Well, what I'd say is we limit.

Kevin J. Wheeler: Perfect.

Kevin J. Wheeler: <unk> doesn't mean, everybody pulls in 30 days and so.

Kevin J. Wheeler: What I have mentioned in our our our scripted remarks and so forth as we look at March we see March starting to become more normalized the pre buy is.

Kevin J. Wheeler: Well, what I say is we have a limit. D. K. P. M. G. M. N. G. N. S. M. R. R. N. K. P. M. S. M. S. M. G. M. N. N. S. M. N. [inaudible] How are we looking at this as we get into the quarter? As Chuck mentioned, some of it's already been shipped, and maybe a bit is still to be shipped out in Q2, but it's more of a we're gonna go back to normalize volumes there.

Kevin J. Wheeler: In February which everybody focused on March will be as a percentage of an increase year over year will be going back down to a more of a normalized level. So.

Kevin J. Wheeler: Again, a pre buys just a pull forward it doesn't necessarily always mean that theres additional orders out there and how we're looking at this as we get into the quarter as Chuck mentioned some of it's already been bid and.

Kevin J. Wheeler: Shifting to maybe a bit is still to be shipped out in Q2, but it's more of we're going to go back to normalize.

Kevin J. Wheeler: There's nothing to read that we see from the perspective that that 7% is gonna stick, nor is it going to be a negative as we go into the quarter, second quarter, and the rest of the year. It's going to be at that 9.2 million units a year.

Kevin J. Wheeler: Volumes, there is nothing to read that we see.

Kevin J. Wheeler: Respected at that 7% is going to stick nor is it going to be a negative as we go into the quarter second quarter and the rest of the year, it's going to be at that 9% to flat million units a year, that's kind of what we're seeing and based on what we know today, yes, I'll just add.

Charles T. Lauber: That's kind of where we're staying based on what we know today. Yeah, I'll just add that we've seen orders in April pretty strong on a relative basis. So we haven't seen a drop in that, Scott.

Charles T. Lauber: We've seen orders in April pretty strong on a relative basis. So we haven't seen a drop in that Scott so along with kind of managing as Kevin said the orders.

Scott Graham: So along with kind of managing, as Kevin said, the orders, and then pushing some out and extending a bit of our lead times to manage the order rate, we've also seen decent order rates through April. So we feel pretty good about going into the second quarter. Thank you. I guess really my other question was a very simple one.

Scott Graham: And then pushing some out and extending a bit of our lead times to manage the order rate. We are also seeing decent order rates through April so we feel pretty good about going into the second quarter.

Speaker Change: Thank you for that.

Speaker Change: I guess really my other question was a very simple one housekeeper.

Scott Graham: The.

Charles T. Lauber: Housekeeper, the boiler business, could you tell us how that did in the quarter and what that backlog looks like? Yeah, it was flat for the quarter. So if you recall last year, we had a pretty decent first quarter in boilers, and then we really got a bit of a comp headwind on, you know, channel inventories coming down. We had worked down our backlog quite a bit in 2022, so we saw some challenges with boilers last year.

Speaker Change: Boiler business could you tell us how that did in the quarter and what that backlog looks like.

Charles T. Lauber: Yes, it was flat for the quarter. So if you recall last year, we had a pretty decent first quarter in boilers and then we really got a.

Charles T. Lauber: A bit of a comp headwind.

Charles T. Lauber: Channel inventories coming down we have worked down our backlog is quite a bit in 2022.

Charles T. Lauber: We saw some challenges in boilers last year, so we've got easier comps as we go forward.

Charles T. Lauber: So we've got easier comps as we go forward. We feel good about the eight to 10% growth rate. You know, our third quarter is typically highest on boilers, and backlog is, you know, strong, it's strong, it's, a bit stronger than it was last year. And relative to other years, we feel, you know, relatively strong going into the second quarter for both commercial and residential.

Charles T. Lauber: Feel good about the 8% to 10% growth rate our third quarter is typically highest on boilers.

Charles T. Lauber: And backlog is strong it's strong it's a bit stronger than it was last year.

Charles T. Lauber: And relative to other years, we feel relative.

Charles T. Lauber: Relatively strong going into the second quarter in both commercial and residential.

Operator: Thank you. One moment for our next question. Our next question comes from Andrew Kaplowitz with Citi. Your line is open.

Speaker Change: Thank you one moment for our next question.

Operator: Our next question comes from Andrew Kaplowitz with Citi. Your line is open.

Andrew Alec Kaplowitz: Hey, good morning, everyone.

Andrew Alec Kaplowitz: Can you give us some more color on what you're seeing in the rest of the world's margins? Margin is usually, I think, seasonally weak, and in Q1, it was slightly weaker than I thought. Did you just have higher advertising expenses or something like that, and then you did keep your rest of the world margin the same for the year despite the slightly lower sales growth in China? So it looks like you still feel good about that, whatever you're doing to make sure that margins stay up at those levels.

Andrew Alec Kaplowitz: Hey, Andrew.

Andrew Alec Kaplowitz: Can you give us more color into what youre seeing in rest of world margins margin is usually I think seasonally weak in Q1.

Andrew Alec Kaplowitz: Slightly weaker than I thought did you just have higher advertising spend or something like that and then you did keep your rest of world margin. The same for the year, despite slightly lower sales growth in China. So it looks like you still feel good about that anything you're doing to make sure that margins.

Charles T. Lauber: Yeah, sure, Andrew. I mean, the first quarter is always a challenge for us in China on margins. It's usually our lowest margin quarter. And as you know, the rest of the world is, you know, largely China.

Andrew Alec Kaplowitz: Stay up at those levels.

Speaker Change: Yes, sure Andrew I mean first quarter is always a challenge for us in China on margins is usually our lowest margin quarter and as you know rest of the world is largely China.

Charles T. Lauber: So it wasn't out of line with what we expected for the first quarter. We haven't changed our full year outlook. You're right, we did lower our top line guide a bit. But you know, the team in China has done a great job of taking a look at SG&A, being more flexible, and more variable on those costs. And, you know, we have confidence that the team, even with a little lower volume, is going to continue to manage the bottom line. So, yes, a little bit of headwind on the top line is always a challenge in the first quarter. But we still feel good about that range for the full year.

Charles T. Lauber: So.

Charles T. Lauber: It wasn't out of line with what we expected for the first quarter, we haven't changed our full year outlook Youre right. We did lower our topline guide a bit but the team in China has done a great job of taking a look at SG&A being more flexible more variable on those cost and we have confidence that the team even with a little lower volumes is going to continue to manage to.

Charles T. Lauber: Bottomline so yes.

Charles T. Lauber: Yes, a little bit of headwind on the top line first quarter is always a challenge, but we feel we still feel good about that range for the full year.

Andrew Alec Kaplowitz: And then just on North American water treatment, you know, you did lower your forecast a little there. I think it was on the direct-to-consumer side that you said a little bit more weakness. Maybe just talk about visibility into sort of that end market. You know, it does tend to be a bit fragmented. How are inventories on the channel side? And just more elaboration around visibility would be helpful.

Speaker Change: Great and then just on North American water treatment.

Andrew Alec Kaplowitz: You did lower your forecast a little there I think it was on the direct to consumer side that you said a little bit more weakness, maybe just talk about visibility into that.

Andrew Alec Kaplowitz: That end market. It does tend to be a bit fragmented how are inventories on the channel side and just more elaboration of visibility would be helpful.

Kevin J. Wheeler: Yeah, I think it certainly is a fragmenting market. We're on five different channels.

Andrew Alec Kaplowitz: Yes.

Andrew Alec Kaplowitz: Certainly is a fragmented market where at five different channels.

Kevin J. Wheeler: So the visibility is not as crystal clear as we would like. But when you look at it, the two things we highlighted were on the consumer demand side of it, and just more average pricing for orders on our consumer side of the business, just a little bit lower people being a bit more price cautious. And then, um, also highlighted the water softeners and, and that just hasn't rebounded from where we thought it was going to be. I just think there's, you know, that's more of a discretionary item; sometimes people can go overboard on that. So those are two things that we're seeing. There's nothing fundamentally wrong with the channels.

Kevin J. Wheeler: So the visibility is not as crystal clear as we would like but if you look at it the two things we highlighted was on the consumer demand side of it and just more average.

Kevin J. Wheeler: Pricing for our orders and our consumer side of the business just a little bit lower peak will be in a bit more price conscious and then.

Kevin J. Wheeler: Also highlighted the water softeners and that just hasnt rebounded back from where we thought it was going to be I. Just think there is that's more of a discretionary items, sometimes people can delay. It. So those are two things that we're seeing there is nothing fundamentally.

Kevin J. Wheeler: Along with the channels, it's just a matter of.

Kevin J. Wheeler: It's just a matter of, you know, some of these discretionary spends; consumers are being a bit more cautious. But we still feel really good about the business. I mean, again, it's going to be up 8% to 10%. We didn't make an acquisition that puts us in California, which we're really excited about. So there are a lot of good things going on within the North America Water Treatment business, and each channel's got its own little challenges, but also its positive sides. Thank you.

Kevin J. Wheeler: Some of these discretionary spends.

Kevin J. Wheeler: Consumers are being a bit more cautious.

Kevin J. Wheeler: We still feel very good about the business I mean again, it's going to be up 8% to 10% we didn't make an acquisition it puts us in California, which we're really excited about so theres a lot of good things going on within the within the North America water treatment business in each channel has got its own little challenges, but also the positive side.

Operator: Thank you. One moment for our next question. Our next question comes from Damian Karas with UBS. Your line is open.

Speaker Change: Thank you one moment for our next question.

Operator: Our next question comes from Damian Karas with UBS. Your line is open.

Damian Karas: Hi, good morning, everyone. Good morning, Amy.

Damian Karas: Hi, good morning, everyone.

Unknown Executive: Appreciate all the color on the HRI data. Some of this monthly choppiness around distributor inventories. I was hoping maybe you could just give us an update on your perception of proactive replacement. Is that still around 30 percent, or have you seen any changes there versus where you, you know, we're exiting 2023?

Damian Karas: Good morning, Jamie.

Damian Karas: I appreciate all the color on the AHRI data on.

Unknown Executive: Some of this monthly choppiness around distributor inventories.

Unknown Executive: I was hoping maybe you could just give us an update on your perception of the proactive replacement is that still around 30% or have you seen any changes there.

Unknown Executive: Versus where are you.

Unknown Executive: We're exiting 2023.

Kevin J. Wheeler: You know, it's interesting. We watched that really closely because coming out, it's been elevated, and it's kind of normalized right now at that 30% level. We check it every quarter, and it's still holding up in that percentage. So, no change. [inaudible] Units and volumes that are made up are pretty consistent and have been that way for several, several months. Interesting. Good to hear.

Unknown Executive: No.

Unknown Executive: It's interesting we bought that really closely because coming out it's been elevated it's kind of normalized right now if that 30% level, we check it every quarter and it's still holding up and net debt.

Kevin J. Wheeler: That percentage so no change in.

Kevin J. Wheeler: With that.

Kevin J. Wheeler: Of course, our Mercury replacement always remains consistent.

Kevin J. Wheeler: Also like what we're seeing in the new construction side, particularly on single family.

Kevin J. Wheeler: Single family housing so.

Kevin J. Wheeler: Overall, I think the consumer.

Kevin J. Wheeler: And then I have a follow-up question for you on North American Tankless, obviously exciting; you're going to start shipping that product in the second quarter. I think you've been soliciting orders maybe since late last year. Any chance you can give us a sense of the level of orders that you've already been able to line up for that product and how you are thinking about the potential sales impact for this year on that new product?

Kevin J. Wheeler: The components of our <unk>.

Kevin J. Wheeler: Units and volume are made up of pretty consistent.

Kevin J. Wheeler: It has been that way for now for several several months.

Speaker Change: Interesting good to here.

Kevin J. Wheeler: And then I have a follow up question for you on North American Tankless, obviously exciting youre going to start shipping that product in the second quarter.

Kevin J. Wheeler: I think you've been soliciting orders, maybe since late last year.

Kevin J. Wheeler: Any chance you can give us a sense on the level of orders that you've already been able to line up for that product and how are you thinking about the potential sales impact for this year on that new product.

Kevin J. Wheeler: Well, one, we're really excited about the tankless and owning that technology and so forth. And yes, we do have pre-buy orders already in house and so forth. And, you know, as we look out on our tankless, we've kind of modeled an additional kind of 15 to $20 million of incremental growth throughout the year as we launch this new product and bring it to market. And again, that will come in phases, you know, that the condensing premixes is our high-end year. Thank you.

Speaker Change: Well, one we're really excited about the tankers can owning that technology and so forth and yes, we do have pre buy orders already in house and so forth.

Kevin J. Wheeler: As we look out on our tankers, we've kind of modeled an additional kind of $15 million to $20 million of incremental growth.

Kevin J. Wheeler: Throughout the year as we launch this new product and bring it to market and again that will come in phases.

Kevin J. Wheeler: Condensing premix is our high end.

Kevin J. Wheeler: Really a premium product that's what we're going to be launching next month, but we also have two other product lines that will be phased in.

Kevin J. Wheeler: In the back half of the year. So excited about it I'm excited to own the technology and being able to go to market with.

Operator: Thank you. One moment for our next question. Our next question comes from Nathan Jones of Stiefel. Your line is open.

Nathan Hardie Jones: We believe is a very competitive and compelling product line and we haven't had that for for a number of years. So.

Nathan Hardie Jones: That's kind of where we're at and look forward to sharing more of that as we get into the rest of the year.

Adam Michael Farley: Good morning, this is Adam Farley on for Nathan. I wanted to follow up on the commentary around kitchen products in China. I was wondering if you could provide any detail on the percentage of revenue these products account for and maybe where you expect different products in China to go over time.

Speaker Change: Thank you one moment for our next question.

Adam Michael Farley: Our next question comes from Nathan Jones of Stifel. Your line is open.

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

Speaker Change: I wanted to follow up good morning, I wanted to follow up on the commentary.

Adam Michael Farley: The commentary around kitchen products in China, I'm wondering if you could provide any detail.

Adam Michael Farley: On the percentage of revenue these products account for and maybe where you expect.

Adam Michael Farley: With our products in China to go over time.

Charles T. Lauber: Yeah, so this is Chuck. You know, kitchen products are still a very, very small part of our business in China. If you kind of look at the full year, it's, you know, it's around 5%. And I include in that range hoods, dishwashers, cooktops, and steam ovens. So, you know, you lump those all together; it's still a very small part of our revenue in China. It's an important part, though, of our strategy and having products that are in or around the kitchen that we can bundle together through an AI link and give our distributors a more value-oriented package to sell to consumers. So it is a small part of our business but fits very well into our strategy.

Adam Michael Farley: Yes. So this is Chuck.

Charles T. Lauber: Kitchen products are still a very very small part of our business in China. If you kind of look at the full year.

Charles T. Lauber: It's around 5% and I include in that range hoods dishwashers cooked.

Charles T. Lauber: Cook tops and steam oven so.

Charles T. Lauber: You lump those all together, it's still a very small part of kind of our revenue in China. It's an important part of our strategy and having products that are in or around the kitchen that we can bundle.

Charles T. Lauber: Together through AI link and give our distributors a more value oriented package to sell to consumers. So small part of our business, but fits very well into our strategy.

Charles T. Lauber: And are these products accretive to the rest of the old segment markets?

Charles T. Lauber: And are these products.

Charles T. Lauber: Accretive to rest of World segment margins.

Charles T. Lauber: You know, there's a little pressure on the rest of the world segment margins, you know; we're launching them. We've mentioned in some of our prepared remarks that we've got some costs and promotions behind them. You know, we do appreciate the fact, though, that launching into them and being a little bit of a headwind to average margins, they, you know, provide opportunities for us for top-line stability and growth as we bundle products and go to market that way.

Charles T. Lauber: They're a little pressure on the rest of the World segment margins were launching them and we've mentioned in some of our prepared remarks that we've got some cost and promotions behind them.

Charles T. Lauber: We do appreciate the fact, though that launching into them and being a little bit of a headwind to average margins that <unk>.

Charles T. Lauber: Provide opportunities for us for top line stability and growth as we bundle products and go to market that way.

Operator: Thank you. One moment for our next question. Our next question comes from David MacGregor with Longbow Research. Your line is open.

Speaker Change: Thank you one moment for our next question.

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

David Sutherland MacGregor: Yes, good morning, everyone. Thanks for taking the questions. I want to start off by asking you about the commercial business and whether you have rolled out the two-step pricing model yet? And if so, can you talk about the level of the I'm assuming two-step, you talk about our catalysts that we talked about during Investor Day? Yes, exactly. Yeah. Again, that's been rolled out, we've done a number of pilots, and we continue to roll it out to various customers. So, you know, I think right now we're still in the early stages of it.

David Sutherland MacGregor: Yes, good morning, everyone and thanks for taking the questions.

Speaker Change: Wanted to start off Mike Hey, Good morning, I wanted to start off by asking you about the commercial business and.

David Sutherland MacGregor: Have you rolled out the two step pricing model, yet and if so can you talk about the levels.

David Sutherland MacGregor: Acceptance that youre seeing and just the initial impact on the business.

David Sutherland MacGregor: Im assuming two step you've talked about are catalysts that we talked about during investor day, yes.

Speaker Change: Yes, exactly yes.

Speaker Change: Again thats.

David Sutherland MacGregor: It's been ruled out we've done a number of pilots we continue to roll it out.

David Sutherland MacGregor: To various customers. So I think right now we're still in the early stages of it.

Kevin J. Wheeler: The value proposition of it is outstanding, being able to have a few models and be able to turn them into 25 different products immediately. So you don't want to capture that inventory that you're tying up capital on, but more importantly, your availability goes up, and your customers are going to get served much, much better. So that continues to roll out. It's not going to be a program for everyone, but for our larger stocking commercial accounts, this is a real benefit and a real separation of us in the market on the value proposition. I am so very pleased with it, and customers seem to be very pleased with it as well. And we'll continue to, you know, leverage that with the appropriate customer.

David Sutherland MacGregor: Value proposition of this outstanding being able to have a few models and be able to turn it into 25 different products immediately. So you got one capture that inventory that you sign up capital, but more importantly, your availability goes up and you or your customers are going to get much much better so.

Kevin J. Wheeler: <unk> continues to rollout its not going to be a program for everyone, but our larger stock key commercial.

Kevin J. Wheeler: Accounts. This is a real benefit and a real separation of us in the market on the value proposition. So very pleased with it customers seem to be very pleased with it as well and.

Kevin J. Wheeler: We will continue to.

Kevin J. Wheeler: Leverage that with the appropriate customer.

David Sutherland MacGregor: Right, this is still early. Okay, I got that.

Speaker Change: Alright. This is still early okay got that.

David Sutherland MacGregor: And then I wanted to follow up and just ask you a little more on steel pricing, and I appreciate that a portion of this is indexed to what you're selling the product for, but thinking about the residual steel risk exposure, price risk exposure, how much variability is there still remaining this year in your steel forecast? You talked about 2Q being up 20% versus 1Q, and then you gave some general commentary about the second half, but I'm just wondering how much.

David Sutherland MacGregor: And then I wanted to follow up and just ask you a little more on the steel pricing in.

David Sutherland MacGregor: That a portion of this is index to which you are selling the product for.

David Sutherland MacGregor: But thinking about the residual steel risk exposure price risk exposure, how much how much variability is there still remaining this year.

David Sutherland MacGregor: Steel forecast, you've talked about <unk> being up 20% versus <unk> and then you gave some <unk>.

David Sutherland MacGregor: Commentary about the second half and I'm, just wondering how much variability uncertainty remains in that outlook.

David Sutherland MacGregor: Variability Uncertainty Yeah, I mean, we've talked about this.

Charles T. Lauber: Yeah, we've talked about, you know, kind of the lag that we see. So we've got visibility; we have visibility looking forward in kind of a 90 to 120 day timeframe. So when you kind of look from April, we can see forward through, you know, through that amount of time. So really, the fourth quarter is the biggest risk or opportunity for changes in the index in steel, as we as we kind of look forward to the rest of the year. So we've got a decent amount of the year covered by visibility.

David Sutherland MacGregor: Yes.

David Sutherland MacGregor: Talked about kind of the lag that we see so we've got visibility we have visibility looking forward and kind of a 90 to 120 day timeframe. So when you kind of look from April we can see forward through through.

Charles T. Lauber: That amount of time, so really fourth quarter is the biggest risk or opportunity for for changes in indexed in steel as we as we kind of look forward for the rest of the year. So we've got a decent amount of the year covered from visibility.

Operator: And I'm not showing any further questions at this time. I'd like to turn the call back over to Helen for any closing remarks.

Operator: And I'm not showing any further question at this time I would like to turn the call back over to Helen for any closing remarks.

Helen E. Gurholt: Thank you everyone for joining us today. Let me conclude by reminding you that our global AOSMIS team delivered strong sales and earnings in the first quarter. We look forward to updating you on our progress in the quarters to come. In addition, please mark your calendars to attend our presentations at four conferences this quarter. Oppenheimer on May 6th, KeyBank on May 29th, William Blair on June 4th, and Wells Fargo on June 12th. Thank you, and enjoy the rest of your day.

Helen: Thank you everyone for joining us today, let me conclude by reminding you that our global <unk> team delivered strong sales and earnings in the first quarter. 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 four conferences this quarter.

Helen E. Gurholt: Hymer on May 6th Keybank on May 29, William Blair on June 4th and Wells Fargo on June 12.

Helen E. Gurholt: Thank you and enjoy the rest of your day.

Operator: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Speaker Change: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

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