Q2 2024 A. O. Smith Corp Earnings Call

July 23, 2024

Okay.

Operator: Good day. Thank you for standing by. Welcome to the 2024 Second Quarter A. O. Smith Earnings Call. At this time, all participants are in listen-only mode.

Speaker Change: Good day, Thank you for standing by welcome to the 2024 second quarter a O Smith's earnings call. At this time, all participants are in listen only mode.

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

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 first speaker today, Helen Gurholt.

After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone you will then hear an automated message if I see your hand is race to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to.

Helen E. Gurholt: To hand, the conference over to your first speaker today Helen cohort. Please go ahead.

Helen E. Gurholt: Thank you, Marvin. Good morning and welcome to the A.O. Smith second 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 provide non-gap measures. Free cash flow is defined as cash from operations plus capital expenditures, adjusted earnings, adjusted earnings per share, adjusted segment earnings, and adjusted corporate expenses, which exclude the impact of pension settlement income and restructuring and impairment. 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: Thank you Marvin and good morning, and welcome to the a O Smith second quarter Conference call I'm, Helen Girl, Vice President Investor Relations and financial planning and analysis.

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

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

Helen E. Gurholt: Cash flow is defined as cash from operations less capital expenditures adjusted earnings adjusted earnings per share adjusted segment earnings and adjusted corporate expenses exclude the impact of pension settlement income and restructuring and impairment expenses.

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 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.

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.

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

Helen E. Gurholt: 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 E. Gurholt: 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. Thank you, Helen, and good morning, everyone.

Helen E. Gurholt: We will be using slides as we move through today's call you can access them on our website at investor Dot <unk> Dot com.

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

Kevin J. Wheeler: I'm on slide four with our second quarter results. I'm very pleased with our second quarter performance and how we are tracking for the year. In the second quarter, our global A.O. Smith team delivered record quarterly sales of $1 billion and an EPS of $1.06, a 5% increase over 2023 adjusted EPS. North American Water Heater and Boiler Sales increased 10% due to higher volumes and pricing action. China third-party sales grew 2% in local currency; Indy achieved double-digit growth in local currency for the 10th consecutive quarter.

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

Kevin J. Wheeler: I'm very pleased with our second quarter performance and how we are tracking for the year.

Kevin J. Wheeler: In the second quarter, our global a O Smith's team delivered record quarterly sales of $1 billion and the EPS of $1 six 5% increase over 2023 adjusted EPS.

Kevin J. Wheeler: North American water heater, and boiler sales increased 10% due to higher volumes and pricing actions.

Kevin J. Wheeler: China Third party sales grew 2% in local currency.

Kevin J. Wheeler: Andy achieved double digit growth in local currency for the 10th consecutive quarter.

Kevin J. Wheeler: And last week, we announced that we signed an agreement to acquire PURIT, a leading water purification business in South Asia. We look forward to welcoming the PURIT team to the A. O. Smith family later this year.

Kevin J. Wheeler: And last week, we announced that we signed an agreement to acquire period, a leading water purification business in South Asia.

Kevin J. Wheeler: We look forward to welcoming the <unk> team to the a O Smith family later this year.

Kevin J. Wheeler: Please turn to slide five.

Kevin J. Wheeler: North America water heater sales grew 10% in the second quarter due to higher residential and commercial volumes and pricing action. We began shipping our internally developed and manufactured gas tanker products in the quarter, and we are very pleased with market acceptance. Our North American boiler sales grew 10% compared to the second quarter of last year, driven by higher commercial volume. I am pleased to see a return to growth as channel inventory levels normalize, and we are on track to achieve our boiler sales forecast of 8-10% for the year.

Kevin J. Wheeler: North America water heater sales grew 10% in the second quarter due to higher residential and commercial volumes and pricing actions. We began shipping our internally developed and manufactured gas tankers products in the quarter and we're very pleased with the market acceptance.

Kevin J. Wheeler: Our North America boiler sales grew 10% compared to the second quarter of last year, driven by higher commercial volumes I.

Kevin J. Wheeler: I am pleased to see a return to growth as channel inventory levels normalize we.

Kevin J. Wheeler: We are on track to achieve our boiler sales forecast of 8% to 10% for the year.

Kevin J. Wheeler: Sales of our commercial boilers, particularly our Crest boilers with Hellcat technology, continue to outperform the market. North America water treatment sales increased 8% in 2024, as acquisition-related dealer sales increases were partially offset by weakness in the retail channel. In China, second quarter third-party sales increased 2% in local currency as a result of sales of kitchen products as well as HVAC products that were partially offset by lower volumes of residential water treatment.

Kevin J. Wheeler: Sales of our commercial boilers, particularly our cross border <unk> technology continue to outperform the market.

Kevin J. Wheeler: North America water treatment sales increased 8% in 2024 as ex acquisition related dealer sales increases were partially offset by weakness in the retail channel.

Kevin J. Wheeler: And China's second quarter third party sales increased 2% in local currency as a result of sales of kitchen products as well as HVAC products that were partially offset by lower volumes of residential water treatment.

Kevin J. Wheeler: While markets for our core products remain challenged, we are pleased with our market share in the premium portion of the water heater and water treatment product category. However, we have seen pricing and promotion pressures, particularly in the mid-price sector of the market. I'm now on site 6.

Kevin J. Wheeler: Our markets for our core products remain challenged we are pleased with our market share in the premium portion of the water heater and water treatment product categories.

Kevin J. Wheeler: However, we are seeing pricing and promotion pressures, particularly in the mid price sector of the market.

Kevin J. Wheeler: I'm now on slide six.

Kevin J. Wheeler: This year we are celebrating our 150th anniversary. It's a time to reflect on those 150 years of living our values, of achieving profitable growth, of emphasizing innovation, preserving our good name, of being a good place to work, and of being a good citizen. It is also gratifying to be recognized for the continuation of those values. So far in 2024, our team has received several honors that reflect our employees' dedication to our core values. Early this year, A. O. Smith was named one of the world's most ethical companies by Ethosphere, a global leader in defining and advancing the standards of ethical business practice.

Kevin J. Wheeler: This year, we are celebrating our 150 <unk> anniversary.

Kevin J. Wheeler: It's a time to reflect on those 150 years of living our values of achieving profitable growth.

Kevin J. Wheeler: Besides in innovation.

Serving our good name in a good place to work and being a good citizen.

Kevin J. Wheeler: It is also gratifying to be recognized for the continuation of those values.

Kevin J. Wheeler: In addition, our commitment to innovation and energy management has resulted in our Nanjing plant in China being selected as one of the 2024 Nanjing Environment Protection Model Enterprises in recognition of our waste and emission reduction efforts. We also received a 2024 ENERGY STAR Sustained Excellence Partner of the Year Award from the EPA for the sixth year in a row for our long-term commitment to energy management through our product. In addition, we were named the 2024 U.S. News Best Companies to Work for in Manufacturing by U.S. News and World Report. The reward is the satisfaction our team receives for doing the right thing and living our values.

So far in 2024, our team has received several orders that reflect our employees dedication to our core values.

Speaker Change: Early this year a O Smith was named one of the world's most ethical companies by Ethisphere.

Ethisphere: A global leader in defining and advancing the standards of ethical business practices.

Ethisphere: In addition, our commitment to innovation and energy management has resulted in our <unk>, China plant being selected as one of the 2024 named <unk> environment Protection model enterprises, and recognition of our waste and emission reduction efforts.

Ethisphere: We also received a 2024 energy star sustained excellence partner of the year Award from the EPA for the sixth year in a row for a long term commitment to energy management through our products.

Ethisphere: In addition, we renamed 2024 U S News best companies to work for Remanufacturing by U S News and World report.

Ethisphere: While the reward is the satisfaction our team received for doing the right thing and living our values.

Kevin J. Wheeler: These honors validate our values as a differentiator for our employees and stakeholders. I'll now turn the call over to Chuck, who will provide more details on our second quarter performance. Thank you, Kevin. And good morning, everyone. I'm on slide seven.

Ethisphere: These honors validate our values as a differentiator for our employees and stakeholders.

Ethisphere: I'll now turn the call over to Chuck who will provide more details on our second quarter performance.

Charles T. Lauber: Second quarter sales in the North America segment were $791 million, a 9% increase compared with 2023, driven by higher water heater and boiler volumes, as well as year over year pricing. North America segment earnings of $198 million increased 2% compared with 2023 adjusted segment. The higher segment earnings were primarily driven by increased volumes and pricing that were partially offset by higher steel costs and higher selling expenses to support our growth, including the launch of our gas tankless product. Segment margin was 25.1%, a decrease of 180 basis points year-over-year.

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

Charles T. Lauber: Second quarter sales in our North America segment were $791 million, a 9% increase compared with 2023, driven by higher water heater and boiler volumes as well as year over year pricing actions North America segment earnings of $198 million increased 2% compared with 2023.

Charles T. Lauber: Adjusted segment revenues the higher segment earnings were primarily driven by increased volumes and pricing that were partially offset by higher steel costs and higher selling expenses to support our growth initiatives, including the launch of our gas Tankless product segment margin was 25, 1%.

Charles T. Lauber: Decrease of 180 basis points year over year, the lower segment margin was due to the reasons I reviewed with regard to segment earnings, which more than offset higher volumes in the quarter.

Charles T. Lauber: The lower segment margin was due to the reasons I reviewed with regard to segment earnings, which more than offset higher volumes in the quarter. Moving to slide 8, rest of the world segment sales of $245 million. We were essentially flat to last year and included unfavorable currency translation of approximately $7 million, primarily related to China, as well as intersegment sales associated with the recently launched tankless water segment. Third party sales increased 3% on a constant currency basis.

Charles T. Lauber: Moving to slide eight.

Charles T. Lauber: Rest of the World segment sales of $245 million.

Charles T. Lauber: We're essentially flat to last year and included unfavorable currency translation of approximately $7 million.

Charles T. Lauber: Primarily related to China as well as inter segment sales associated with recently launched Tankless water heaters.

Speaker Change: <unk> third party sales increased 3% on a constant currency basis. The increase was partially driven by higher sales of kitchen, and HVAC products, partially offset by lower sales of residential water treatment products in China.

Charles T. Lauber: The increase was partially driven by higher sales of kitchen and HVAC products, partially offset by lower sales of residential water treatment products in China. India sales grew 16% in local currency in the quarter, driven by growth in both water heater and water treatment categories, with particular strength in our e-commerce, retail, and commercial markets. Rest of the world segment earnings of $26 million decreased slightly compared to segment earnings in 2023, primarily due to the unfavorable product mix and sales promotions. Third-party segment operating margin was 11.5%, slightly lower than segment margin in 2023. Please turn to slide 9.

Speaker Change: India sales grew 16% in local currency in the quarter driven by growth in both water heater and water treatment categories with particular strength in our e-commerce retail and commercial end markets.

Speaker Change: Rest of the World segment earnings of $26 million decreased slightly compared to segment earnings in 2023, primarily due to the unfavorable product mix and sales promotions in China Third Party segment operating margin was 11, 5% slightly lower than segment margin in 2023.

Speaker Change: Please turn to slide nine.

Charles T. Lauber: We generated free cash flow of $119 million in the first half of 2024, a decrease from the same period last year, primarily as a result of higher inventory and accounts receivable balances, as well as higher incentive payments associated with record sales and profits last year, which more than offset higher earnings and higher trade payable balance. Capital expenditures increased $21 million year-over-year driven by our expansion project. Our cash balance totaled $233 million at the end of June, and our net cash position was $93 million.

Speaker Change: We generated free cash flow of $119 million during the first half of 2024, a decrease from the same period last year, primarily as a result of higher inventory and accounts receivable balance as well as higher incentive payments associated with record sales and profits last year, which more than offset higher earning.

Speaker Change: And higher trade payables balances.

Speaker Change: Capital expenditures increased $21 million year over year, driven by our expansion projects.

Speaker Change: Our cash balance totaled $233 million at the end of June and our net cash position was $93 million.

Charles T. Lauber: The leverage ratio is 6.8% as measured by total debt to total capital. Now, let's turn to slide 10. 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. As Kevin mentioned earlier, we signed an agreement last week to acquire Purit from Unilever for $120 million. Purit offers a broad range of residential water purification solutions and has annual sales of approximately $60 million US dollars, primarily in India.

Speaker Change: Our leverage ratio was six 8% as measured by total debt to total capital.

Speaker Change: Now, let's turn to slide 10.

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 as Kevin mentioned earlier, we signed an agreement last week to acquire pure from Unilever for $120 million pure offers a broad range of residential water purification.

Speaker Change: <unk> solutions and has annual sales of approximately $60 million primarily in India.

Charles T. Lauber: The addition of PURET strengthens our leadership position as a global supplier of premium water treatment products and will double our market penetration in South Asia. The acquisition will also support our corporate strategy by enhancing our premium product portfolio and distribution footprint. Please turn to slide 11 in our 2024 Verdicts, Guidance, and Outlook. We have narrowed our 2024 EPS outlook to an expected range of $3.95 to $4.10 per share.

The addition of pure it strengthens our leadership position as a global supplier of premium water treatment products, and we will double our market penetration in South Asia.

Speaker Change: The acquisition will also support our corporate strategy by enhancing our premium product portfolio and distribution footprint.

Speaker Change: Please turn to slide 11, and our 2024 earnings guidance and outlook.

Speaker Change: We narrowed our 2024 EPS outlook to an expected range of $3 95 to $4 10 per share.

Charles T. Lauber: The midpoint of our EPS range has not changed and 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 for the full year 2024 will be roughly flat to 2023. Our outlook assumes non-steel material costs will be similar in 2024 as they were in 2010. Our guidance also assumes a relatively stable supply chain environment, similar to what we experienced throughout 2023. We began shipping our internally designed and manufactured gas tankless products in the second quarter.

Speaker Change: The midpoint of our EPS range has not changed and it represents an increase of 6% compared with 2023 adjusted EPS.

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

Speaker Change: Our guidance assumes that our steel costs and the full year 2024 will be roughly flat to 2023, 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.

Charles T. Lauber: These products are being manufactured in our China facility until our North America capacity is completed in 2025. Associated import tariffs and other launch costs will impact North American margins by approximately 50 basis points in 2024. The tariff will be eliminated when production moves to Mexico.

Speaker Change: We began shipping our internally designed and manufactured gas tankless products in the second quarter. These products are being manufactured in our China facility until our North American capacity is completed in 2025.

Speaker Change: Associated import tariffs and other launch costs will impact North American margins by approximately approximately 50 basis points in 2020 for the tariff will be eliminated when production moves to whereas Mexico.

Charles T. Lauber: For the year, CapEx should be between $105 and $115 million, an increase over the last several years due to our capacity expansion projects, including our gas tankless facility in Juarez, expansion of our engineering capabilities in Lebanon, Tennessee, and adding high efficiency commercial water heating manufacturing capacity ahead of the 2026 regulatory changes. We expect to generate free cash flow of between $525 and $575 million. Corporate and other expenses are expected to be approximately $65 million.

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

Speaker Change: Expansion of our engineering capabilities in Lebanon, Tennessee, and adding high efficiency commercial water heating manufacturing capacity ahead of the 2026 regulatory changes.

Speaker Change: We expect to generate free cash flow of between 525 and $575 million.

Speaker Change: Corporate and other expenses are expected to be approximately $65 million.

Charles T. Lauber: Our effective tax rate is estimated to be approximately 24%, and we expect to repurchase approximately $300 million of our shares of stock, resulting in outstanding diluted shares of $147 billion 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 outlook and segment expectations for 2024 while staying on slide 11.

Speaker Change: Our effective tax rate is estimated to be approximately 24%.

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

Kevin J. Wheeler: I'll now turn the call back over to Kevin who will provide more color on our key markets and topline growth outlook and segmented, but expectations for 2024, while staying on slide 11, Kevin.

Kevin J. Wheeler: Thank you, Chuck. We reaffirm our outlook that 2024 sales will grow 3-5% compared to 2023, which includes the following assumptions. Our outlook includes previously announced price increases in North America water heating of 4% on most of our water heater products, and the price of yeast for heat pump products is 8%.

Kevin J. Wheeler: Thank you Chuck we reaffirm our outlook, that's 2024 sales will grow.

Kevin J. Wheeler: 3% to 5% compared to 2023, which includes the following assumptions.

Kevin J. Wheeler: Our outlook includes previously announced price increases in North America water heating of 4%.

Speaker Change: Most of our water heater products price release for heat pump products is 8%.

Speaker Change: We began to see realization of the price increases in the second quarter.

Speaker Change: We believe that a pre buy ahead of the price increases pulled forward some demand in the first half of the year for both residential and commercial water heaters.

Speaker Change: <unk> seen some softness in our orders in July.

Speaker Change: Due to normal seasonality and the pre buy we maintain our projections at 2024 U S. Residential industry unit volumes will be flat to last year, and our projection that U S. Commercial water heater industry volumes will increase low single digits. In 2024 is also unchanged.

Kevin J. Wheeler: And our projection that U.S. commercial water heater industry volumes will increase by low single digits in 2024 is also unchanged. Our outlook assumes that new residential home construction and proactive replacement will remain at levels similar to last year. In China, we believe the economy and consumer confidence will remain weak.

Speaker Change: Our outlook assumes that new residential home construction and proactive replacement.

At level similar to last year.

Kevin J. Wheeler: We continue to see headwinds in consumer demand. While we are cautious about the second half of the year, we maintain our 2024 third-party sales growth guidance of between 0 and 3% in local currency. Our forecast assumes a negative currency translation impact of approximately 2% for the year.

Speaker Change: In China, we believe the economy and consumer confidence remains weak we continue to see headwinds in consumer demand.

Speaker Change: While we are cautious about the second half of the year, we maintain our 2020 for third party sales growth guidance to be between zero and 3% in local currency.

Our forecast assumes a negative currency translation impact of approximately 2% for the year.

Kevin J. Wheeler: We reaffirm that we expect our boiler sales to grow 8 to 10% over last year. Our sales growth guidance for North America Water Treatment of an increase of 8-10% is also unchanged. Based on our 2024 assumptions, we expect our North America segment margin to be approximately 25%, and the rest of the world third-party segment margin to be approximately 10%. Please turn to slide 12.

Speaker Change: We reaffirm that we expect our boiler sales to grow 8% to 10% over last year.

Speaker Change: Our sales growth guidance for North America water treatment of an increase of 8% to 10% is also unchanged.

Speaker Change: Based on our 2024 assumptions, we expect our North America segment margin to be approximately 25%.

Speaker Change: And the rest of the World Third party segment margin to be approximately 10%.

Speaker Change: Please turn to slide 12.

Kevin J. Wheeler: We are pleased with our performance in the first half of 2024. We saw strong growth in water heaters in the first half of the year, which we believe was partially driven by the pre-buy. We are pleased to see a return to growth in our North America boiler business as channel inventory levels normalize, and we continue to benefit from the transition to higher energy efficiency boilers, particularly in commercial applications. Our three capital expansion projects that will add capacity for key product categories in North America are on track and will position us well for long-term growth.

Speaker Change: We are pleased with our performance in the first half of 2024.

Speaker Change: We saw strong growth in water heaters in the first half of the year, which we believe was partially driven by the pre buy.

Speaker Change: We are pleased to see a return to growth in our North America boiler business as channel inventory levels normalize and we continue to benefit from the transition to higher energy efficiency boilers, particularly in commercial applications.

Speaker Change: Our three capital expansion projects that will add capacity for key product categories. In North America are on track and will position us well for long term growth.

Kevin J. Wheeler: India remains on track for another year of projected double-digit sales growth, and we're excited to complete the PURIT acquisition later this year, which will double our sales in the South Asia region. Purest's strong brand and strength in the e-commerce channel will complement our premium brand and make us the number three residential water treatment company in India.

Speaker Change: India remains on track for another year of projected double digit sales growth.

Speaker Change: And we're excited to complete the Purion acquisition later this year.

Speaker Change: Which will double our sales in the South Asia region.

Speaker Change: <unk> strong brand and strength in the E Commerce channel will complement our premium brand will make us the number three residential water treatment company in India.

Operator: Even as we celebrate our 150th anniversary and a rich history of innovation with employees, customers, and partners, we remain focused on meeting the needs of our customers and executing our key strategic priorities to advance our leadership position in heating and treating water around the globe. That concludes our prepared remarks, and we are now available for your questions. Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced.

Speaker Change: Even as we celebrate our 150 <unk> anniversary and our rich history of innovation with employees customers and partners. We remain focused on meeting the needs of our customers and executing our key strategic priorities to advance our leadership position in heating and treating water around the globe.

Speaker Change: That concludes our prepared remarks, and we're now available for your questions.

Operator: To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A raw. Our first question comes from the line of Matt Summerville of D.A. Devison.

Speaker Change: Thank you at this time, we will conduct a question and answer session.

Speaker Change: To ask a question you will need to press star one on your telephone and wait for your name to be announced.

Speaker Change: Your question. Please press star one again.

Speaker Change: These tam pie will be composite Q&A roster.

Speaker Change: Our first question comes from the line of Matt Summerville of D. A Davidson your line is now open.

Matt J. Summerville: Your line is now open. Thanks. A couple of questions. I was hoping maybe, Could, sudden moment, Chuck, kind of talking about how we should be thinking about the margin cadence in both North America and the rest of the world in the back half of the year, given some of the pluses and minuses you were describing. Yeah, good morning, Matt. Happy to.

Matt J. Summerville: Thanks couple questions I was hoping maybe you.

Speaker Change: Could sudden moment, Chuck kind of talking about.

Matt J. Summerville: Should be thinking about the margin cadence in both North America and the rest of world in the back half of the year given some of the pluses and minuses you were describing.

Charles T. Lauber: You know, if you look at the cadence for the back half of the year, clearly, we had a strong first six months. We mentioned a bit of what we believe to be a pre-buy in the North American market with our price increase. So as you kind of look at volumes in North America, look at Q3 as being a bit challenged because of some of that pre-buy, and then Q4 probably looking very similar to Q2.

Speaker Change: Yes, good morning that happy too.

Speaker Change: If you look at the cadence for the back half of the year clearly we had a strong first six months.

Speaker Change: We mentioned a bit of what we believe to be a pre buy in the north American market.

Speaker Change: Market with our price increase so as you kind of looking at volumes North America look at Q3 as being a bit challenged because of some of that pre buy and then Q4, probably looking very similar to Q2, so a little bit of headwind on the volumes in Q3, and a little bit of return back to.

Charles T. Lauber: So a little bit of headwind on volumes in Q3 and a little bit of a return back to where we were in Q2 in the fourth quarter with continued momentum on the tankless, gas tankless product. Margins will follow.

Where we were in Q2 in the fourth quarter.

Speaker Change: With continued momentum on the Tankless gas Tankless product.

Speaker Change: Margins will follow the margin cadence in the third quarter will be challenged by the volume headwind in the third quarter.

Charles T. Lauber: You know, the margin cadence in the third quarter will be challenged by the volume headwind in the third quarter. In China, you know, we're coming off what I would say a solid first half of the year, but we still see weakness in the economy, as Kevin mentioned. As always, our fourth quarter is expected to be the strongest as we go into the back half of this year. However, the third quarter also will be a big challenge on the volume side, we believe.

Speaker Change: In China we're.

Speaker Change: We're coming off what I would say a solid first half of the year.

Speaker Change: We'll see weakness in the economy as Kevin mentioned.

Speaker Change: As always our fourth quarter is expected to be the strongest as we go into the back half of this year third quarter also will be a big challenge on the volume side, we believe.

Charles T. Lauber: We've seen a bit of weakness in July orders, both in China and both within China and in North America. So a little bit of a slow start to the third quarter, and that'll probably translate into volume headwinds, and it'll leave a little bit of an impact on the. And then, as a follow-up, could you maybe comment on what the channel inventory picture looks like in China? And I think in your prepared remarks, there was a mention about maybe seeing a little bit more price competition in the mid price point category. Can you elaborate on that a bit? Yeah, hi, this is Kevin.

Kevin J. Wheeler: We've seen a bit of weakness July orders bolt on China.

In both.

Speaker Change: I'm, sorry, within China, and in North America, So a little bit of a slow start to the third quarter and that will probably translate into volume headwinds and it will leave a little bit of an impact on the margins.

Speaker Change: Got it and then.

Speaker Change: As a follow up could you maybe comment on what the channel inventory picture looks like in China, and I think in your prepared remarks, there was a mention about maybe seen a little bit more price competition in the mid price point category can you elaborate on that a bit.

Kevin J. Wheeler: I'll touch base on inventories being pretty much where we expect them to be in that four to six weeks range. So nothing that meaningful, you know; there are ups and downs as we go forward. What we mentioned is that it's a very competitive market; consumer demand is weaker than it's been, and so consumers are a bit cautious. So we're seeing a bit more, I would say promotional activities. We saw that in Q1. And that's kind of carried over into Q2 as well.

Speaker Change: Yes, Hi, this is Kevin I'll touch base on inventories are are pretty much where we expect them to be in that four to six week range. So nothing that meaningful there is ups and downs as we go forward.

Speaker Change: What we mentioned is.

Speaker Change: It's a very competitive market consumer demand is weaker than it's been and so the consumers are a bit cautious so we're seeing a bit more.

Speaker Change: I would say promotional activity as we saw it in Q1, and that's kind of carried over into Q2 as well I think our teams managing it really well again, we don't Chase every border we're very selective in how we go to market and if you look at our overall growing 2% in <unk>.

Kevin J. Wheeler: I think our team's managing it really well. Again, we don't chase every order; we're very selective in how we go to market. And if you look at overall, going 2% in a local currency in a very competitive market and have some consumer headwinds, I think our team's done a really nice job of balancing those competitive dynamics. Thank you.

Speaker Change: In local currency in a very competitive market and have some consumer headwinds.

Speaker Change: Our team has done a really nice job of balancing.

Speaker Change: Those competitive dynamics also want to remind people that we also have some areas.

Speaker Change: In China that are growing well you look at our kitchen products are doing well our commercial water treatment is doing well and so was our HVA see part of the business. So being diversified as we are on the water heating side of water treatment, but also having the other adjacencies has helped and it made a difference in this difficult market.

Speaker Change: So overall I'm very pleased that we were at when China, and we'll keep manage it in the back half of the year.

Operator: One moment for our next question. Our next question comes from the line of Jeff Hammond of KeyBank Capital Markets. Your line is now open. Hey, good morning. Good morning, Jeff.

Speaker Change: Thank you for our next question.

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

Jeffrey David Hammond: Hey, good morning.

Jeffrey David Hammond: Good morning.

Jeffrey David Hammond: Maybe just to start on the acquisition, just give us a sense of, you know, kind of profitability, the business or opportunity, you know, from a profitability standpoint, and kind of what the growth rates have been for the business, you know, over the last five years. Well, I'll take the first part of it and just talk about the acquisition in general. First, I want to go back to our Indian business performing really well. We have a terrific management team that's been executing quarter after quarter. And we're looking to scale that business both organically and inorganically, and Purit plays a nice role in that business.

Jeffrey David Hammond: Maybe just to start on the acquisition just give us a sense of.

Jeffrey David Hammond: Kind of profitability of the business or opportunity from a profitability standpoint, and kind of what the growth rate spend for the business in the last five years.

Speaker Change: Well I'll take the first.

Speaker Change: First part of it and just to talk about the acquisition in General first I want to go back to our Indian business is performing really well we have a terrific management team has been executing for quarter after quarter and we're looking to scale that business, both organically and inorganically in pure it. Please plays a nice role in that business.

Speaker Change: <unk>.

Kevin J. Wheeler: It's a solid brand in the market. It complements our India business that we have today. They're stronger in e-commerce and have a nice retail presence.

Speaker Change: It's a solid brand in the market.

Speaker Change: Compliments, our India business that we have today there are stronger in e-commerce have a nice retail president.

Kevin J. Wheeler: Presidents That also dovetails with our general trade and our retail presence. So overall, the business is doing well. It's a premium brand, but we're not, we do overlap.

Speaker Change: Presence that also dovetails with our general trade in our retail presence. So overall the business is doing well, it's a premium brand we're.

Speaker Change: We're not we do overlap we're not exactly.

Kevin J. Wheeler: We're not exactly having products positioned right next to each other. So if you look at it, the overall brand, the product positioning, we're excited about bringing the team on board. And doubling our business is going to make a big difference. It's going to make a difference on our scale. We're also going to be able to leverage our infrastructure and what we have on the ground there, whether it be logistics, manufacturing, you name it.

Speaker Change: We have products positioned right next to each other so if you look at the overall the brand the product positioning we are excited about bringing the team on and.

Speaker Change: <unk>, our business is going to make a big difference, it's going to make a difference in our scale. We're also going to be able to leverage our infrastructure.

Speaker Change: That we have on the ground there whether it be logistics manufacturing you name it.

Speaker Change: Out of Dublin, our businesses, we're excited and dealing with a premium company like period and premium brands really sets up nicely as we go forward after the close.

Kevin J. Wheeler: So doubling our businesses, we're excited about doing with a premium company like Purit and a premium brand, really sets up nicely as we go forward after the close. And from a financial perspective, it looks very similar to our India business today. I mean, pure business is the majority is in India, but it's also in Bangladesh and some shipments outside of Sri Lanka and Vietnam.

Charles T. Lauber: But in total, roughly the same size as our business, around $60 million. Profitability wise, very similar to what our India business has experienced in the last couple years, meaning, you know, low to mid single-digit profitability. Growth wise, as a premium brand, they've seen very good growth in the region. Kevin mentioned 10 consecutive quarters of 15 plus percent growth. And, you know, I believe they've seen very similar growth rates.

Speaker Change: And then from a financial profile it looks very similar to our India business today, I mean purely business as the majority is in India, but it's also in Bangladesh and some shipments.

Speaker Change: Outside of the.

Speaker Change: Sri Lanka, and Vietnam, but in total roughly same same sizes of their business around $60 million profitability wise very similar to what our India business has experienced.

Speaker Change: In the last couple of years, meaning low low low to mid single digit profitability growth wise as a premium brand. They have seen also very good growth in the region Kevin mentioned.

Speaker Change: 10 consecutive quarters of 15 plus percent growth and you die.

Dave: I believe Dave sticking very similar growth rates. So we're pleased with the way the financial profile matches up and as Kevin said coming together, we would hope to continue that growth momentum on a larger base and look for opportunities to leverage the bottom line as we go forward.

Charles T. Lauber: So we're pleased with the way the financial profile matches up. And as Kevin said, coming together, we would hope, you know, to continue that growth momentum on a larger base and look for opportunities to leverage the bottom line as we go forward. Okay, and then just on working capital, it seems like you had a much bigger working capital buildup in the first half versus, you know, maybe the last couple years. Is that just timing?

Charles T. Lauber: Do we expect to get a lot of that back in the second half? Yeah, we expect to get it back in the second half. It's timing, there is a little bit of tankless water heater inventory being built up, but for the large part, it's timing. Thank you. One moment for our next question. Our next question comes from the line of Susan Maklari of Goldman Sachs. Your line is now open.

Speaker Change: Okay, and then just on working capital it seems like you had much.

Speaker Change: A much bigger working capital build in the first half versus maybe.

Speaker Change: Maybe the last couple of years.

Speaker Change: That just timing.

Speaker Change: Do you expect to get a lot of that back in the second half.

Speaker Change: Yes, we expect to get it back in the second half is timing is a little bit of Tankless water heater inventory being built up for the large part of its timing.

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

Our next question comes from the line of Susan Macquarie of Goldman Sachs. Your line is now open.

Susan Marie Maklari: Thank you. Good morning, everyone. Good morning, Susan.

Speaker Change: Thank you good morning, everyone.

Susan: Thanks, Susan.

Kevin J. Wheeler: My first question is, you know, you mentioned that Boilers saw some growth and reverted back to growth in the quarter. Can you talk about what's driving that and the sustainability of it? Just any comments on the comps that you face in the back half and how you're thinking about the path from here?

My first question is you mentioned that boilers.

Speaker Change: Awesome growth.

Speaker Change: Reverted back to growth in the quarter can you talk about whats driving that and the sustainability of it just any comments on the comps that you face in the back half and how youre thinking about the path from here.

Kevin J. Wheeler: Well, if you look at it, it's mainly on the commercial side of our business, Susan. And we came off a pretty difficult quarter last year, but still, our quoting has been active, you know, and that transition from, from, you know, kind of standard models to high efficiency continues. So, you know, overall, we're about where we thought we would be, our new products are doing well. I mean, the Crest Boiler has always done well, but you add the Hellcat technology on top of that, and that's just being really well received in the market.

Speaker Change: Well if you look at it it's mainly on the commercial side of our business Susan.

Speaker Change: We came off of a pretty difficult quarter last year, but still our quota has been active.

Speaker Change: That transition from.

Speaker Change: Kind of standard models to high efficiency continues.

Speaker Change: Overall.

Speaker Change: We're about where we thought we would be our new products are doing well the crestwood theres always done well, but you add the <unk> technology on top of that and Thats, just being really well received in the market.

Kevin J. Wheeler: Order rates have been good, they continue to be good, and backlog is, is strong. So, you know, overall, I just think the commercial segment is doing well, the overall industry is slightly up, we're doing better than the industry. And even on the residential side of the business, that's also a positive. So, again, 8 to 10 coming off some easier comps, but the overall macro environment is good.

Order rates have been good they continue to be good backlog is as strong. So overall I just think the commercial segment is doing well the overall industry slightly up we're doing better than the industry and even on the residential side of the business. That's also a positive so again.

Speaker Change: 10 coming off some.

Speaker Change: Some easier comps, but the overall macro environment.

Speaker Change: Is good and it plays really well into lochinvar and our high efficiency I'll focus that we've had over the years and we're seeing some some real benefits from that.

Kevin J. Wheeler: And it plays really well into lock and bar and our high efficiency focus that we've had over the years, and we're seeing some real benefits from that. And just to comment on the cadence on the comps. So I mean, we're up 8% this quarter, but the comps get easier quarter over quarter when we get to the third and fourth quarter. So we feel very comfortable with the 8 to 10%. Okay, that's helpful. And then, turning to steel, we've seen that come down quite a bit recently.

Speaker Change: And just to comment on cadence on the comps we were up 8% this quarter, but the comps get easier quarter over quarter, when we get to the third and fourth quarters. So we feel very comfortable with the 8% to 10% growth.

Kevin J. Wheeler: How do you think about the flow through of that to the business? You know, perhaps any impact there on North America over the coming quarters and just, you know, overall, the trend for pricing? Yeah, I mean, the steel has come down a little bit. By the way, boilers grew at 10%. I said 8%.

Speaker Change: Okay.

Speaker Change: Helpful and then.

Speaker Change: Turning to steel, we've seen that come down quite a bit recently, how do you think about the slow through of that to the business.

Speaker Change: Perhaps any impact there to north America over the coming quarters, and just overall the trend for pricing.

Kevin J. Wheeler: So I'll just correct that it's 10% growth for the second quarter. As we look at steel, we're thinking, you know, our outlook has steel roughly flat year over year. As we mentioned, steel went up in the second quarter compared to the first quarter by about 20%, and it was about 25% higher than Q2 last year. So, you know, there was a bit of a ramp up, and we've seen some softening in steel.

Speaker Change: Yes, I mean, the steel has come down a little bit by the way boilers grew at 10% I said, 8%. So it is correct that it's a 10% growth for the second quarter.

Speaker Change: As we look at steel, we're thinking our outlook as steel roughly flat year over year.

Speaker Change: As we mentioned steel went up in the second quarter compared to the first quarter by about 20%. It was about 25% higher than Q2 last year. So.

Speaker Change: There was a bit of a ramp up we've seen some softening in steel as you recall, our lag is 90 to 120 days.

Kevin J. Wheeler: As you recall, our lag is 90 to 120 days. So as we kind of look at the back half of the year, we see, you know, quarter over quarter, Q2 to Q3, a little bit of relief. And then as we look into the fourth quarter, you know, with that lag, we haven't baked in all of our indexes because they haven't all been issued.

Speaker Change: As we kind of look at the back half of the year, we see quarter over quarter Q2 to Q3, a little a little bit of a little bit of relief and then as we look into the fourth quarter.

Speaker Change: With that lag.

Speaker Change: We haven't baked in all of our indexes because they haven't all been issued.

Speaker Change: No. It's a monthly index that sets the.

Speaker Change: The pricing as you look 90 to 120 days out so we do expect a little bit of relief in the fourth quarter and if peg kind of our outlook very similar to what the index was issued for the month of June.

Kevin J. Wheeler: As you know, it's the monthly index that sets the prices as you look 90 to 120 days out. So we do expect a little bit of relief in the fourth quarter and have had our outlook very similar to what the index was issued for the month of June. Thank you. Please take a moment for our next question. Our next question comes from the line of Saree Boroditsky on Jeff Brees. Your line is now open.

Speaker Change: Thank you our next question.

Saree Emily Boroditsky: Our next question comes from the line of Saree <unk> of Jefferies. Your line is now open.

Saree Emily Boroditsky: Good morning. Thanks for taking our question. You know, you cited some softer orders in July on the water heater side. Could you quantify this at all?

Saree Emily Boroditsky: Good morning, and thanks for taking our question.

Saree Emily Boroditsky: David from softer orders in July on the water heater side could you quantify this at all and then does your guidance assume that demand stays in line with the stock takes a high rate.

Kevin J. Wheeler: And then does your guidance assume that demand stays in line with this softer July rate? Yeah, just to mention, we've always given you an outlook, you know, for the month we're in on the call. But if you look at, we talked about a pre-buy, we do believe there was a pull ahead, and we started to see a bit of softness, you know, in May and June and into July. But I think, you know, July is also one of our weaker months, and really, the third quarter is one of our weaker months because of the summer and the heat and so forth.

Speaker Change: Yes, just mentioned, we always give you an outlook for the month were in on the call, but if you look at we talked about a pre buy we do believe there was some pull ahead and we started to see a bit of softness and maintenance maybe may and June into July but I think July is also our one of our weaker months.

Speaker Change: And really the third quarter's one of our weaker must because of the summer and the heat and so forth. So.

Speaker Change: That's why we do think it's going to.

Speaker Change: Return as we get into August and September and Thats, why we are holding a flat rate for the U S residential tanks.

Kevin J. Wheeler: So that's why we do think it's going to return as we get into August and September, and that's why we're holding a flat rate for the U.S. residential tank type market through the balance of the year. So it's a temporary low that I think just gets us back to where our forecast has been for the entire year. Thank you. And then, turning to Tankless, you started to ship some in the second quarter.

Speaker Change: Tank type market through the balance of the year. So it's a temporary lull, but I think just gets us back to our forecast has been for the entire year.

Speaker Change: Thank you and then turning to <unk> starting to ship some of the second quarter. What are you seeing from a demand perspective, there and then just on the modeling what is the impact from Congress to China sales. This year and that does create a challenging segment comp when you do shift production to North America next year.

Kevin J. Wheeler: Now, what are you seeing from a demand perspective there? And then, just on the modeling, you know, what is the impact of Tankless to China sales this year? And does this create a challenging segment comp when you do ship production to North America?

Kevin J. Wheeler: Well, I will tell you again, we're coming from a low kind of mid single-digit market share. So we've had a very good launch. And I don't want to give you any numbers, because they would sound, you know, really high.

Speaker Change: Well I would tell you again, we're coming from a.

Speaker Change: Low kind of a mid single digit market share. So we've had a very good launch and I don't want to give you numbers because they would sounds really higher than they are for us. We're very pleased with the adoption by our customers.

Speaker Change: And again, we launched the high end condensing model first and Thats been well received by a number of customers and it's easily hitting our expectations as we as we start to launch this product going forward again, we will have two more products coming in by the end of the year, which.

Kevin J. Wheeler: And they are for us; we're very pleased with the adoption by our customers. Then, and again, we launched the high-end condensing model first. And that's been well received by a number of customers, and it's easily meeting our expectations as we start to launch this product going forward. Again, we'll have two more products coming in by the end of the year, which will complete the line. And then our factory in Juarez is on track, maybe a bit ahead of schedule, and we'll start to do some assembly and manufacturing towards Q4 and get ready in 2025. Maybe I'll have Chuck touch on that.

Charles T. Lauber: We'll complete the line and then our factory in <unk> is on track maybe a bit ahead of schedule and we will start to do some assembly to manufacturing towards Q4 and get ready in 2025, maybe ill touch Chuck touch on that but.

Charles T. Lauber: Having the tariff will go away at the start of 2020 is going to make a big difference in how we view this from a margin perspective going forward right I mean, sorry from a comp perspective.

Charles T. Lauber: But you know, having the tariff go away at the start of 2025 is going to make a big difference in how we view this from a margin perspective. Right. I mean, Siri, from a comp perspective, you know, it's all positive.

All positive and we move to more as we relieve ourselves at the 25% tariff we take away the long logistics lead time, and some of the costs associated with bringing the product all the way back to North America from China.

So we're really viewing when we when we start up production of ore as a very positive upside to our tankless category.

Charles T. Lauber: And when we move to Juarez, we relieve ourselves of the 25% tariff, we take away the long logistics lead time and some of the costs associated with bringing the product all the way back to North America from China. So we're really viewing when we start up production at Juarez as a very positive upside to our tankless category. Thank you.

Speaker Change: Thank you gentlemen for next question.

Operator: One moment for our next question. Our next question comes from the line of Andy Kaplowitz of Citigroup. Your line is now open. Good morning, everyone.

Speaker Change: Our next question comes from the line of Andy Kaplowitz with Citigroup. Your line is now open.

Andrew Alec Kaplowitz: Good morning, everyone.

Andrew Alec Kaplowitz: Morning. Good morning. So you mentioned lingering pricing promotion pressure in China. I think you talked about margin there a little bit, but you obviously kept your guidance for the rest of the world at 10%. So my question is, how difficult is it to maintain that margin sort of guidance moving forward? What cost actions or anything else are you doing to sort of offset lingering price? Yeah, I'll touch on that first. And then maybe Chuck will jump in.

Andrew Alec Kaplowitz: Good morning, and good morning.

Andrew Alec Kaplowitz: So you mentioned the lingering pricing promotion pressure in China, I think you've talked about margin a little bit but you. Obviously kept your guidance for rest of world margin, 10%. So my question is how difficult is it is to maintain that margin guidance moving forward, what cost actions or anything else that you're doing to sort of offset.

Kevin J. Wheeler: You know, it's a tough market, and as we said, we're cautious about even our guidance, but our team's doing a terrific job balancing not only price and promotion but also the cost of our business. You know, we talked way back when when we went through the pandemic, a lot of our costs are now more variable than they are fixed. And so we're just balancing it.

Yes, I'll touch on that first and then maybe Chuck will jump in.

Charles T. Lauber: It's a tough market and as we said were cautious about our guidance, but our team is doing a terrific job balancing not only price and promotion, but also the cost of our business, we talked way back when when we went through the pandemic a lot of our costs are now more variable than they are fixed and so we.

Charles T. Lauber: We're just balancing it again, we're a premium brand so.

Charles T. Lauber: We're in a different part of the market in a different clientele, but overall, it's still a tough environment and most of the pressures that we're receiving are kind of in that mid to upper mid level not on the higher level and our teams are evaluating it again I think we're taking a targeted approach.

Charles T. Lauber: It's not going to be easy, but we're confident in our China management that they can navigate their way through the second half of the year.

Charles T. Lauber: Yes, we took quite a few cost actions over within the Covid timeframe in China.

Charles T. Lauber: Like Kevin said to change some of our cost structure to more variable will take cost out of the business.

<unk> closed some very.

Kevin J. Wheeler: The less profitable store store footprints.

Kevin J. Wheeler: Feel pretty good about our position to be flexible as volumes challenges a bit.

Kevin J. Wheeler: So we'll continue to watch it right now I think we've got China is about 11% for the year very similar to last year.

Kevin J. Wheeler: We anticipate being able to kind of work through it and continue to focus on cost and be at that percentage.

Kevin J. Wheeler: It will introduce a few new products in the back half of the year. Chuck had mentioned Q4 is our strongest quarter and again, we are building some momentum and commercial water treatment. We are building momentum in our HVAC side, so again, putting that combination together challenging, but we think it's very doable.

Got it and then I just wanted to maybe ask the same question on North America again like in terms of the margin, let me sure I understand it so.

Speaker Change: Slightly better youre, saying flattish versus a modest headwind I think you previously said, but you also talked about Q3, maybe being a little light or lighter in sort of volume and I guess, that's the incremental margin.

Wind holding you back is there anything else like launch costs investments a little higher than you expected I know you said 50 basis points. So any color would be helpful.

Speaker Change: I mean, nothing nothing new I don't think that we've talked to that we haven't talked about before.

Speaker Change: I'll just mention that the Tankless launch.

Does cause some pressure on margins at 50 basis points is sort of spread to the full year margin projection of 25%. So clearly as we launch it is heavier weighted into Q2, three and four so that's probably the only other area of a little bit of hedge.

Linda: Linda margins that I would say to take into account as you're thinking about the back half of the year.

Speaker Change: Thank you one more for next question.

Our next question comes from the line of David Macgregor of Longbow Research. Your line is now open.

David Sutherland MacGregor: Yes, good morning, everyone and thanks for taking my questions I guess I wanted to.

David Sutherland MacGregor: Focusing on the increased selling expenses in North America can you talk about how that north American selling expense compared year over year, when you exclude the gas tankless rollout.

David Sutherland MacGregor: And also I guess, how we should be modeling out to second half.

David Sutherland MacGregor: Yes.

Speaker Change: It really tracks closely with volumes right. So our cost structure and selling expense is largely based on a commission basis. So as we sell more product we're going to have a higher selling expense. We also.

Speaker Change: Emphasize different products.

With a different commission level to drive initiatives from time to time so.

Speaker Change: Somewhat variable I think is the best way to look at it and tracks closer to volumes than than it does just kind of flat out expenses. We mentioned the launch of Tankless product. So we've got some initiatives within our launch of the tankers products, that's driving that number just a little bit higher.

Speaker Change: Yes, I'll just add I mean.

Speaker Change: We're excited about our tankless offering b that is internally designed is going to be manufactured in North America.

Speaker Change: And we're going to.

Speaker Change: We're going to own the category from a.

Speaker Change: From our own perspective, rather than from a partnering with somebody so we're going to expend some.

Speaker Change: We're going to promote this product for the first part of the year make sure we get it.

Speaker Change: Everybody to understand what the product does trainee some promotional activities all of those are really important for us to.

Speaker Change: To get that product in the market make sure people understand the features and benefits and how they really can benefit them going forward and how we can compete long term in this category. So.

Speaker Change: This is.

Speaker Change: Onetime expense, but it's one that we're going to kind of lean into to make sure that we get the product cost and off to a good start.

Speaker Change: Got it thanks for that and then as a follow up on the boiler business.

Speaker Change: Guided to up 8% to 10% for the year.

Speaker Change: What's the right way to think about how profitability compares with last year.

Speaker Change: What you may have in your guidance.

Speaker Change: Well volumes being up certainly helps us when you look at the boiler business is largely commercial product that we're talking about being increased 8% to 10%.

Speaker Change: So it's an improvement when you've got growth in that segment or in that product category.

Speaker Change: Thank you <unk> for next question.

Speaker Change: Our next question comes from the line of Scott Graham of Seaport Research Partners. Your line is now open.

Scott Graham: Hey, good morning, Thanks for taking the questions.

Scott Graham: Yes.

Okay.

Rajeev: No change in the U S rajeev water heater industry thinking up flat.

Speaker Change: I know, we talked about in quarters past couple of quarters that SEC.

Speaker Change: Second half comparisons get a little bit tougher so you want to be careful with that number.

Speaker Change: First half year to date is up in resi maybe.

Speaker Change: Maybe even a little unexpectedly certainly from this point.

Speaker Change: Point of view.

Speaker Change: Is your thinking on flat now, maybe a little bit more leaning into that.

Speaker Change: Maybe the market is in fact weakening.

Speaker Change: Given your.

Speaker Change: Last couple of months sales volumes.

Speaker Change: Or are you kind of get us hold the course with flat because the comps are tougher and this is really trying to message anything.

Speaker Change: Yes, I don't think we are really trying to message.

Speaker Change: First thought we came off a pretty strong year last year.

Speaker Change: And going forward. If you look you look at our our Mercury replacement, which is always going to stay the same proactive new construction again, whether its nuclear single family or multifamily. We felt that was going to be relatively flat interest rates would probably keep it flat so.

Speaker Change: We saw that the pre buy were a little surprised on the 4% pull forward a bit more than we had thought but when you step back now and you kind of look at how we started the year kind of a.

Speaker Change: Trending down to maybe give some back in May you look forward. The next five months.

Speaker Change: We're just very comfortable as a flat year with <unk>.

Speaker Change: Strong growth in gas Tankless, and we're going to see some good growth in heat pump book residential and maybe even some commercial as well. So just trying to get back on track, where we really think the market is and we're very comfortable with that flat residential outlook, just based coming off a very strong year.

Kevin J. Wheeler: Thanks for that Kevin So.

Speaker Change: Similar question on the North American segment margin and kind of you didnt change that either you're kind of calling for some.

Kevin: Some spot weakness here in the third quarter no pun intended.

Speaker Change: I'm just wondering is that that is the no change in that margin because maybe you left some wiggle room in there and or that Youre actually seeing things that are making you more bullish on the fourth quarter margin and if so why.

Speaker Change: No I wouldn't say, we're more bullish I mean, we still believe 25% it is going to be.

Speaker Change: Where we're at.

Speaker Change: We'll end up we're about at that in Q2 on some really nice volumes.

Speaker Change: So Q3 will be a little more challenge on that because we will give back some on the volumes at least in our outlook and then back to.

Speaker Change: Volumes.

Drop to the Bottomline, a little lower steel.

Speaker Change: And then our last assumption so.

Speaker Change: There is a little bit of opportunity on the steel side, when we look at kind of our guidance from a quarter ago.

But.

Speaker Change: We are still feeling 25% is kind of.

Speaker Change: The midpoint of where we think we'll end up.

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

Speaker Change: Again as a reminder to ask a question you will need to press star one on your telephone.

Speaker Change: Our next question comes from the line of Damian Karas of UBS. Your line is now open.

Damian Karas: Hi, good morning, everyone.

Damian Karas: Good morning.

Damian Karas: I was wondering if you might be able to give us a little bit of an update on what youre seeing for.

Speaker Change #104: Heat pump water heaters.

Speaker Change #101: I think we've seen states like New York, and some others finalize their IRI allocation a lot of those.

Speaker Change #105: Kind of really.

Speaker Change #103: Ramping up.

Speaker Change #108: Could you tell us.

Speaker Change #101: What <unk> been seeing with the heat pump product, how it's been trending and kind of expectations.

Speaker Change #102: Through the rest of the year into next year.

Speaker Change #109: Yes, I would tell you that one I just wanted to start with the just to calibrate its still 2% of the market, but it is a growing category and it's very specific can you just mentioned New York, California. Other parts that are really promoting it that continues to grow.

Speaker Change #106: Pretty nicely.

Speaker Change #107: We've kind of forecasted at 25% to 30% growth over the next several years, but we were north of that in Q2. So it still gets momentum we have a great product line, we're having more and more distributors and retailers stock it in a broader variety of so that's a good thing availabilities everything so overall the cat.

Speaker Change #102: <unk> continues to grow.

Speaker Change #102: Albeit in certain states, but again.

Speaker Change #102: Well above our growth of.

Speaker Change #102: That we've had and we see it continuing we did so to great.

Speaker Change #102: Product, we have a great product line.

Speaker Change #102: It has a nice payback story, it's just one that needs to be planned in and so far in the markets that are subsidizing, it and putting money upfront in helping with the purchase is growing quite well. So again, 25%, 30% going forward next several years and we had a nice Q2, there was several points above that.

Speaker Change #110: Great that's good to hear.

Speaker Change #111: And then maybe if we could touch back just on the North American Tankless.

Speaker Change #111: Congrats on getting that product rolled out now.

Speaker Change #112: I know a lot of your <unk>.

Wholesale distributors across the country for your your tank products have relied on.

Speaker Change #113: Other manufacturers such as benign navient regime for Tankless in the past could.

Speaker Change #114: Could you just talk a little bit more about what youre seeing and hearing from your distributors.

Speaker Change #115: Are they kind of sampling in your product or is it sort of more of an <unk>.

Speaker Change #116: All our non type of.

Speaker Change #116: Switch that they would have to make.

Any any color you could give us just kind of on the receptivity and what your conversations have been like.

Speaker Change #117: What I would tell you you described the market pretty well and so.

Speaker Change #117: What we're hearing from our distributors they like some optionality and they would like to buy from US when you look at.

Speaker Change #118: The commitments, we have and the long term relationships that we have with our distribution and be able to sell not only tank typing commercial but also with tankless on there I think is really important we still have to meet the market and be competitive and so forth and we are so overall do I expect every one of our distributors.

Speaker Change #118: To drop their current product lines. The answer is no but I do.

Speaker Change #118: Look forward to adding a very competitive gas tankless product line too.

Speaker Change #118: To their to their inventory and then let us compete in the market and I think we're going to do very well, it's going to take us several years to to move that forward, but again, we control our own destiny now we have great support from our distributors and I look forward to what's going to happen with our gas Tankless line is next.

Speaker Change #118: Our next few years kind of develop.

Speaker Change #119: Thank you I'm showing no further questions at this time I would now like to kind of.

Back to <unk> for closing remarks.

Thank you everyone for joining us today, let me conclude by reminding you that our global team delivered record sales and strong EPS in the second 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 three conferences this quarter key part on August <unk>.

Speaker Change #119: <unk> 20th Stifel on September four at da Davidson September 19, Thank you and have a great day.

Speaker Change #119: Sure.

Speaker Change #120: Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

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Unknown Executive: Thank you so much for watching this video.

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Unknown Executive: Good day, thank you for standing by. Thank you so much for watching this video.

Kevin J. Wheeler: Again, we're a premium brand, so we're in a different part of the market with a different clientele. But overall, it's still a tough environment.

Speaker Change #120: Good day, thank you for standing by.

Speaker Change #121: The 2024 second quarter, a O Smith earnings call at this time, all participants are in a listen only mode.

Speaker Change #122: After the speaker's presentation, there will be a question and answer session to ask a question. During this session you will need to press star one on your telephone you will then hear an automated message, forcing your hand. This race to withdraw your question. Please press star one again.

Speaker Change #123: We advised that today's conference is being recorded.

Speaker Change #123: Like to hand, the conference over to your first speaker today Heather please.

Please go ahead.

Kevin J. Wheeler: And most of the pressures that we're receiving are kind of in that mid to upper mid level, not on the higher level. And our team is evaluating it. Again, I think we're taking a targeted approach. It's not going to be easy, but we're confident in our Chinese management that they can navigate the way through the second half of the year. Yeah, we took quite a few cost actions within the COVID time frame in China.

Heather: Thank you Marvin and good morning, and welcome to the a O Smith second quarter Conference call.

Scott Graham: Good morning and welcome to the AO Smith's second quarter conference call.

Heather: Helen <unk>, 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.

Kevin J. Wheeler: And like Kevin said, to change some of our cost structure to be more variable, take costs out of the business, close some very, you know, less profitable store footprints, and feel pretty good about our position to be flexible as volumes challenge a bit. So, you know, we'll continue to watch it right now.

Speaker Change #125: In order to provide improved transparency into the operating results of our business. We provide non-GAAP measures free cash flow is defined as cash from operations less capital expenditures adjusted earnings adjusted earnings per share adjusted segment earnings and adjusted corporate expenses exclude the impact of pension settlement income.

Unknown Executive: Thank you so much for watching this video.

Speaker Change #125: And restructuring and impairment expenses.

Speaker Change #125: Reconciliations from GAAP measures to non-GAAP measures are provided in the appendix at the end of this presentation and on our website.

Speaker Change #126: 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.

Speaker Change #126: Those risks include matters that we described in this morning's press release among others.

Speaker Change #126: Also as a courtesy to others in the question queue. Please limit yourself to one question and one follow up for churn if.

Speaker Change #126: If you have multiple questions. Please rejoin the queue.

Speaker Change #126: We will be using slides as we move through today's call you can access them on our website at Investor Dot <unk> Dot Com I will now turn the call over to Kevin to begin our prepared remarks.

Charles T. Lauber: I think we've got China at about 11% for the year, very similar to last year. We anticipate being able to kind of work through it and continue to focus on costs and be at that. Yeah, and we'll introduce a few new products in the back half of the year. Chuck had mentioned Q4 is our strongest quarter. And again, we're building some momentum in commercial water treatment, and we're building momentum in our HVAC site.

Charles T. Lauber: So again, putting the combination together is challenging, but we think it's very doable. I just want to maybe ask the same question on North America again, like in terms of the margin, just to make sure I understand it. So you feel slightly better, you know, you're saying Flatish versus a modest headwind, which I think is what you previously said.

Kevin: Thank you Helen and good morning, everyone I'm on slide four in our second quarter results.

Andrew Alec Kaplowitz: But you also talked about Q3, maybe being a little light or lighter in sort of volume. And I guess that's the incremental margin headwind holding you back. Is there anything else like launch costs, or investments a little higher than expected? I know you said the 50 days one, so any color would be helpful.

Kevin: I'm very pleased with our second quarter performance and how we are tracking for the year.

Kevin: In the second quarter, our global a O Smith team delivered record quarterly sales of $1 billion.

Kevin: And an EPS of $1 six 5% increase over 2023 adjusted EPS.

North American water heater, and boiler sales increased 10% due to higher volumes and pricing actions.

Kevin: China Third party sales grew 2% local currency Andy.

Kevin: <unk> achieved double digit growth in local currency for the 10th consecutive quarter.

Kevin: And last week, we announced that we signed an agreement to acquire period, a leading water purification business in South Asia.

Kevin: We look forward to welcoming the <unk> team to the <unk> family later this year.

Kevin: Please turn to slide five.

Kevin: North America water heater sales grew 10% in the second quarter due to higher residential and commercial volumes and pricing actions. We began shipping our internally developed and manufactured gas tankers products in the quarter and we're very pleased with market acceptance.

Kevin: Our North America boiler sales grew 10% compared to the second quarter of last year, driven by higher commercial volumes I.

Kevin: I am pleased to see a return to growth as channel inventory levels normalize.

Kevin: We are on track to achieve our boiler sales forecast of 8% to 10% for the year.

Kevin: Sales of our commercial boilers, particularly our crest boilers with <unk> technology continue to outperform the market.

Kevin: North America water treatment sales increased 8% in 2024 as acquisition related dealer sales increases were partially offset by weakness in the retail channel.

Kevin: And China second quarter third party sales increased 2% in local currency as a result of sales of kitchen products as well as HVAC products that were partially offset by lower volumes of residential water treatment.

Kevin: While markets for our core products remain challenged we are pleased with our market share in the premium portion of the water heater and water treatment product categories.

Kevin: However, we have seen pricing and promotion pressures, particularly in the mid price sector of the market.

Speaker Change #127: I'm now on slide six.

Speaker Change #127: This year, we are celebrating our 150 <unk> anniversary, it's a <unk>.

Speaker Change #127: Time to reflect on those 150 years of living our values of achieving profitable growth.

Speaker Change #127: Emphasizing innovation.

Speaker Change #127: Preserving our good name and a good place to work and being a good citizen.

Speaker Change #127: It is also gratifying to be recognized for the continuation of those values.

Speaker Change #127: So far in 2024, our team has received several honors that reflect our employees' dedication to our core values.

Speaker Change #128: Early this year a O Smith was named one of the world's most ethical companies by Ethisphere.

Ethisphere: A global leader in defining and advancing the standards of ethical business practices.

Ethisphere: In addition, our commitment to innovation and energy management has resulted in our named James China plant being selected as one of the 2024 named <unk> environment Protection model enterprises, and recognition of our waste and emission reduction efforts.

Ethisphere: In addition, we were named 2024 U S News best companies to work for in manufacturing by U S News and World report.

Ethisphere: While the reward is the satisfaction our team receive for doing the right thing and living our values.

Ethisphere: These honors validate our values as a differentiator for our employees and stakeholders.

Ethisphere: I'll now turn the call over to Chuck who will provide more details on our second quarter performance.

Charles T. Lauber: I mean, nothing, nothing new. I don't think that we've talked about that we haven't talked about before. I'll just mention that the tankless launch does cause some pressure on margins, 50 basis points is sort of spread to the full year margin projection of 25%. So clearly, as we launch it, it's heavier weighted into Q2, 3, and 4. So that's probably the only other area of a little bit of headwind on margins that I would say to take into account as you're thinking about the back half of the year. Thank you.

Charles T. Lauber: Thank you, Kevin and good morning, everyone I'm on slide seven <unk>.

Operator: One more for our next question. Our next question comes from the line of David MacGregor of Lombard Research. Your line is now open. Yes, good morning, everyone.

David Sutherland MacGregor: And thanks for taking my questions. I guess I wanted to focus in on the increased selling expense in North America. Can you talk about how that North American selling expense compared year over year when you exclude the gas tank? Let's go.

Charles T. Lauber: And also, I guess how we should be modeling that through the second. Yeah, I mean, it really tracks closely with volumes, right? So our cost structure on selling expenses is largely based on a commission basis. So as we sell, you know, more product, we're going to have a higher selling expense. We also emphasize different products with a different commission level to drive initiatives from time to time. So, somewhat variable, I think, is the best way to look at it and tracks closer to volumes than it does just kind of flat out expenses.

Charles T. Lauber: Increased 2% compared with 2023 adjusted segment earnings the higher segment earnings were primarily driven by increased volumes and pricing that were partially offset by higher steel costs and higher selling expenses to support our growth initiatives, including the launch of our gas Tankless product set.

Kevin J. Wheeler: We do mention, you know, the launch of tankless products. So we've got some initiatives within, you know, the launch of tankless products that's driving that number just a little bit higher. I'll just add, we're excited about our Tankless offering, being that it's internally designed, it's going to be manufactured in North America, and we're going to own the category from our own perspective rather than from partnering with somebody. So we're going to promote this product for the first part of the year, make sure we get everybody to understand what the product does. Training, some promotional activities, all those are really important for us to get You know, this is a one-time expense, but it's one that we're going to kind of lean into to make sure that we get the product off and off to a good start. Got it.

Charles T. Lauber: <unk> margin was 25, 1% a decrease of 180 basis points year over year. The lower segment margin was due to the reasons I reviewed with regard to segment earnings, which more than offset higher volumes in the quarter.

Charles T. Lauber: Moving to slide eight.

Charles T. Lauber: Rest of the World segment sales of $245 million were essentially flat to last year and included unfavorable currency translation of approximately $7 million.

Charles T. Lauber: Primarily related to China as well as inter segment sales associated with recently launched Tankless water heaters.

Charles T. Lauber: Segment third party sales increased 3% on a constant currency basis. The increase was partially driven by higher sales of kitchen, and HVAC products, partially offset by lower sales of residential water treatment products in China.

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

Charles T. Lauber: Rest of the World segment earnings of $26 million decreased slightly compared to segment earnings in 2023, primarily due to the unfavorable product mix and sales promotions in China Third Party segment operating margin was 11, 5% slightly lower than segment margin in 2023.

Charles T. Lauber: Please turn to slide nine.

Charles T. Lauber: As higher incentive payments associated with record sales and profits last year, which more than offset higher earnings and higher trade payables balances.

Charles T. Lauber: Capital expenditures increased $21 million year over year, driven by our expansion projects.

Charles T. Lauber: Our cash balance totaled $233 million at the end of June and our net cash position was $93 million our leverage ratio was six 8% as measured by total debt to total capital.

Scott Graham: Thanks for that. And then, as a follow-up on the boiler business, you guided it to up eight to 10% for the year. What's a great way to think about how profitability compares with last year and what you may have in your Well, volumes being up certainly helps us. You know, when you look at the boiler business, it's largely commercial product that we're talking about being increased eight to 10%. So, you know, it's an improvement when you've got growth in that segment, or in that product category.

Charles T. Lauber: Now, let's turn to slide 10.

Scott Graham: Thank you, one, one, for our next question. Our next question comes from a line from Scott Graham of Seaport Research Partners. Your line is now open. Hey, good morning. Thanks for taking the questions. Bring it up.

Charles T. Lauber: 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.

Kevin J. Wheeler: Okay, so the no change in the U.S. Resi water heater industry thinking flat. You know, I know we talked about in past quarters past, a couple quarters, that second half comparisons get a little bit tougher, so you want to be careful with that number. You know, the first half year to date is up in Resi, maybe even a little unexpectedly, certainly from this point of view. Is your thinking on flat now, maybe a little bit more leaning into the idea that the market is, in fact, weakening, given your last couple of months' sales volumes? Or are you kind of going to hold the course with flat feet because the comps are tougher and you're not trying to message any?

Charles T. Lauber: As Kevin mentioned earlier, we signed an agreement last week to acquire Pyrrhic from Unilever for $120 million pure offers a broad range of residential water purification solutions and has annual sales of approximately $60 million primarily in India.

Kevin: The addition of pure it strengthens our leadership position as a global supplier of premium water treatment products, and we will double our market penetration in South Asia.

Kevin: The acquisition will also support our corporate strategy by enhancing our premium product portfolio and distribution footprint.

Kevin: Please turn to slide 11, and our 2024 earnings guidance and outlook.

Kevin: We narrowed our 2024 EPS outlook to an expected range of <unk>.

Kevin: <unk> 95 to $4 10 per share.

Kevin: The midpoint of our EPS range has not changed and it represents an increase of 6% compared with 2023 adjusted EPS.

Kevin: Our outlook is based on a number of key assumptions, including.

Kevin: Our guidance assumes that our steel costs and the full year 2024 will be roughly flat to 2023, our outlook assumes non steel material costs are similar in 2024 as they were in 2023.

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

Kevin: We began shipping our internally designed and manufactured gas tankless product in the second quarter. These products are being manufactured in our China facility until our North American capacity is completed in 2025.

Kevin: Associated import tariffs and other launch costs will impact North American margins by approximately approximately 50 basis points in 2020 for the tariff will be eliminated when production moves to whereas Mexico.

Kevin: For the year Capex should be between $105 million to $115 million an increase over the last several years due to our capacity expansion projects, including our gas Tankless facility in Juarez.

Kevin: The expansion of our engineering capabilities in Lebanon, Tennessee, and adding high efficiency commercial water heating manufacturing capacity ahead of the 2026 regulatory changes.

Kevin: We expect to generate free cash flow of between 525 and $575 million Corp.

Kevin: Corporate and other expenses are expected to be approximately $65 million.

Kevin: Our effective tax rate is estimated to be approximately 24%.

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

Kevin J. Wheeler: Yeah, I don't think we're really trying to message it. We've always thought we came off a pretty strong year last year. And, and going forward, if you look, you look at our, our mercery replacement, which is always going to stay the same proactive new construction, again, whether it's new, single family or multi family, we felt that was going to be relatively flat, you know, interest rates would probably keep it flat. So, We saw that the pre-buy, we were a little surprised when the 4% pulled forward a bit more than we had thought, but when you step back now and you kind of look at how we started the year, kind of a trending down to maybe give some back, and then you look forward the next five months, We're just very comfortable as a flat year with, you know, strong growth in gas tank lists, and we're going to see some good growth in heat pump, both residential and maybe even some commercial as well. So just trying to get back on track where we really think the market is, and we're very comfortable with that flat residential outlook, just based coming off a very strong year. Thank you, Kevin. So.

Kevin: I'll now turn the call back over to Kevin who will provide more color on our key markets and topline growth outlook and segment expectations for 2024, while staying on slide 11, Kevin.

Scott Graham: Similar question. On the North American segment margin, you kind of, you didn't change that either, yet you're kind of calling for some spot weakness here in the third quarter, no pun intended. I'm just wondering, is it that there is no change in that margin because maybe you left some wiggle room in there, and or that you're actually seeing things that are making you more bullish on the fourth quarter margin, and if so, why? No, I wouldn't say we're more bullish.

Kevin: Thank you Chuck we reaffirm our outlook, that's 2024 sales will grow.

Kevin: 3% to 5% compared to 2023, which includes the following assumptions.

Kevin: Our outlook includes previously announced price increases in North America water heating of 4% or more.

Kevin: Our water heater products.

Kevin: This release for heat pump products is 8% we.

Kevin: We began to see realization of the price increases in the second quarter.

Kevin: We believe that a pre buy ahead of the price increases pulled forward some demand in the first half of the year for both residential and commercial water heaters.

Speaker Change #129: <unk> seen some softness in our orders in July.

Speaker Change #129: Due to normal seasonality and the pre buy we maintain our projection that 2024 U S. Residential industry unit volumes will be flat to last year, and our projections that U S. Commercial water heater industry volumes will increase low single digits. In 2024 is also unchanged.

Speaker Change #129: Our outlook assumes that new residential home construction and proactive replacement where he may.

Speaker Change #129: At level similar to last year.

Speaker Change #129: In China, we believe the economy and consumer confidence remain weak we continue to see headwinds in consumer demand.

Speaker Change #130: While we are cautious about the second half of the year, we maintain our 2020 for third party sales growth guidance to be between zero and 3% in local currency.

Speaker Change #130: Our forecast assumes a negative currency translation impact of approximately 2% for the year.

Speaker Change #130: We reaffirm that we expect our boiler sales to grow 8% to 10% over last year or.

Our sales growth guidance for North America water treatment of an increase of 8% to 10% is also unchanged.

Kevin J. Wheeler: I mean, we still believe 25% is going to be, you know, where we're at, well, where we'll end up. We were about at that in Q2 on some really nice volumes. So, you know, Q3 will be a little more challenging on that because we will get back some of the volumes, at least in our outlook, and then back to volumes that, you know, would drop to the bottom line, a little lower still than our last assumption.

Speaker Change #130: Based on our 2024 assumptions, we expect our North America segment margin to be approximately 25%.

Speaker Change #130: And the rest of the World Third party segment margin to be approximately 10%.

Speaker Change #130: Please turn to slide 12.

Speaker Change #130: We are pleased with our performance in the first half of 2024.

Speaker Change #130: Saw strong growth in water heaters in the first half of the year, which we believe was partially driven by the pre buy.

Speaker Change #130: We are pleased to see a return to growth in our North America boiler business as channel inventory levels normalize and we continue to benefit from the transition to higher energy efficiency boilers, particularly in commercial applications.

Speaker Change #130: Our three capital expansion projects that will add capacity for key product categories. In North America are on track and will position us well for long term growth.

Speaker Change #130: India remains on track for another year of projected double digit sales growth and.

Speaker Change #130: And we're excited to complete the pure acquisition later this year.

Speaker Change #130: Which will double our sales in the South Asia region.

Speaker Change #131: <unk> strong brand and strength in the E Commerce channel will complement our premium brand will make us the number three residential water treatment company in India.

Speaker Change #132: Even as we celebrate our 150 <unk> anniversary and our rich history of innovation with employees customers and partners. We remain focused on meeting the needs of our customers and executing our key strategic priorities to advance our leadership position in heating and treating water around the globe.

Charles T. Lauber: So, you know, there is a little bit of opportunity on the steel side when we look at kind of our guidance from a quarter ago, but we're still feeling 25% is kind of, The Bulletproof Executive 2013, Thank you. One moment, for our next question. Again, as a reminder to ask a question, you'll need to press star 1-1 on your telephone. Our next question comes from the line of Damian Karas of UBS. Your line is now open. Hi, good morning, everyone.

Speaker Change #133: That concludes our prepared remarks, and we are now available for your questions.

Speaker Change #134: Thank you at this time, we will conduct a question and answer session.

Speaker Change #135: To ask a question you will need to press star one on your telephone and wait for your name to be announced to the <unk>. Your question. Please press star one again, please standby, while we compile the Q&A roster.

Damian Karas: I was wondering if you might be able to give us a little bit of an update on what you're seeing for the Heat Pump Water Heater.

Our first question comes from the line of Matt Summerville of D. A Davidson your line is now open.

Kevin J. Wheeler: You know, I think we've seen states like New York and some others finalize their IRA allocations. A lot of those are really ramping up. So could you tell us what you've been seeing with the heat pump product, how it's been trending, and kind of expectations through the rest of the year into next year? Yeah, I would tell you that one, I always want to start with, is just to calibrate. It's still 2% of the market, but it is a growing category. And it's very specific.

Speaker Change #135: Thanks.

Matt J. Summerville: Couple of questions I was hoping maybe you could sudden moment, Chuck kind of talking about.

Matt J. Summerville: Should we be thinking about the margin cadence in both North America and rest of world in the back half of the year given some of the pluses and minuses you were describing.

Kevin J. Wheeler: You just mentioned New York, California, other parts that are really promoting it. That continues to grow pretty nicely. I mean, we've kind of forecasted, you know, a 25 to 30% growth over the next several years, but we were north of that in Q2. So it's still getting momentum.

Kevin J. Wheeler: We have a great product line. We're having more and more distributors and retailers stock it in a broader variety, so that's a good thing.

Charles T. Lauber: Yes, good morning that happy too.

Kevin J. Wheeler: Availability is everything. Overall, the category continues to grow, albeit in certain states, but again, well above the growth that we've had, and we see it continuing. It's a great product. We have a great product line. It has a nice payback story.

Kevin J. Wheeler: It's just one that needs to be planned. And so far, in the markets that are subsidizing it and putting money up front and helping with the purchase, it's growing quite well. So again, 25-30% going forward for the next several years, and we had a nice Q2 that was several points above. Great, that's good to hear. And then maybe we could touch back just on the North American tank list.

Speaker Change #137: If you look at the cadence for the back half of the year clearly we had a strong first six months.

Speaker Change #136: We mentioned a bit of what.

Speaker Change #136: We believe to be a pre buy in the north American market a market with our price increase so as you're kind of looking at volumes North America look at Q3 as being a bit challenged because of some of that pre buy and then Q4, probably looking very similar to Q2, so a little bit of headwind.

Damian Karas: Congratulations on getting that product rolled out. Now I know a lot of your wholesale distributors across the country for your tank products have relied on other manufacturers such as Renae, Navi, and Rheem for tankless in the past.

Kevin J. Wheeler: Could you just talk a little bit more about what you're seeing and hearing from your distributors? Are they, you know, kind of interested in your product? Or is it sort of more of an, you know, an all or none type of thing? Page PAGE of NUMPAGES www.verbalink.com Page PAGE of NUMPAGES, Well, I will tell you, you described the market pretty well. And so I think what we're hearing from our distributors, they've got some options, and they would like to buy from us.

Kevin J. Wheeler: When you look at the commitments we have and the long-term relationships that we have with our distribution and be able to sell not only tank type and commercial but also put tankless on there, I think it is really important. We still have to meet the market and be competitive and so forth, and we are. So you know, overall, do I expect every one of our distributors to drop their current product lines? The answer is no.

Speaker Change #136: The volumes in Q3, and a little bit of return back to where we were in Q2 in the fourth quarter.

Kevin J. Wheeler: But I do look forward to adding a very competitive gas tankless product line to their inventory and then letting us compete in the market. And I think we're going to do very well. It's going to take us several years to move that forward. But again, we control our own destiny.

Kevin J. Wheeler: Now, we have great support from our distributors, and I look forward to what's going to happen with our gas tank. This line is, you know, the next few years kind of developing. Thank you. I'm not showing any further questions at this time. I would now like to turn it back to Helen Gurholt for closing remarks. Thank you, everyone, for joining us today.

Helen E. Gurholt: Let me conclude by reminding you that our global A. O. Smith team delivered record sales and strong EPS in the second 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 three conferences: Seaport on August 20th, Steeple on September 4th, and D. A. Davidson on September 19th.

Operator: Thank you and have a great day. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? Good day.

Speaker Change #136: With continued momentum on the Tankless gas Tankless product.

Speaker Change #136: Margins will follow the margin cadence in the third quarter will be challenged by the volume headwind in the third quarter.

Speaker Change #136: In China.

We're coming off what I would say a solid first half of the year.

Speaker Change #136: Still see weakness in the economy as Kevin mentioned.

Speaker Change #136: As always our fourth quarter is expected to be the strongest as we go into the back half of this year third quarter also will be a big challenge on the volume side, we believe.

Kevin: We've seen a bit of weakness July orders both on China.

Kevin: In both.

Speaker Change #138: I'm, sorry, within China, and in North America, So a little bit of a slow start to the third quarter and that will probably translate into volume headwinds and it will leave a little bit of an impact on the on the margin.

Speaker Change #136: Got it and then.

Speaker Change #139: As a follow up could you maybe comment on what the channel inventory picture it looks like in China, and I think in your prepared remarks, there was a mention about maybe seen a little bit more price competition in the mid price point category can you elaborate on that a bit.

Speaker Change #139: Yes, Hi, this is Kevin I'll touch base on inventories are are pretty much where we expect them to be in that four to six week range. So nothing that meaningful there is ups and downs as we go forward.

Speaker Change #139: What we mentioned is.

Speaker Change #139: It's a very competitive market consumer demand is weaker than it's been and so the consumers are a bit cautious so we're seeing a bit more.

Speaker Change #139: I would say promotional activities, we saw it in Q1, and that's kind of carried over into Q2 as well I think our teams managing it really well again, we don't Chase every order were very selective in how we go to market and if you look at it overall growing 2% in <unk>.

Speaker Change #139: In local currency in a very competitive market and have some consumer headwinds I think our team's done a really nice job of balancing.

Speaker Change #139: Those competitive dynamics also want to remind people that we also have some areas.

Speaker Change #139: In China that are growing well look.

Speaker Change #140: We look at our kitchen products are doing well, our commercial water treatment is doing well.

Speaker Change #140: And so was our HVAC part of the business so being.

Speaker Change #140: Diversified as we are on the water heating side of water treatment, but also having the other adjacencies has helped them. It made a difference in this difficult market. So overall I'm very pleased that we were in China, and we'll keep manage it in the back half of the year.

Operator: Thank you for standing by. Welcome to the 2024 Second Quarter A. O. Smith Earnings Call. At this time, all participants are in listen-only mode.

Speaker Change #140: Thank you Mahmud for next question.

Speaker Change #141: Our next question comes from the line of Jeff Hammond of Keybanc capital markets. Your line is now open.

Helen E. Gurholt: 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 first speaker today, Helen Gurholt.

Helen E. Gurholt: Thank you, Marvin. Good morning, and welcome to the A.O. Smith second 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 provide non-gap measures. Free cash flow is defined as cash from operations plus capital expenditures, adjusted earnings, adjusted earnings per share, adjusted segment earnings, and adjusted corporate expenses, which exclude the impact of pension settlement income and restructuring and impairment. Reconciliations from GAAP measures to non-GAAP measures are provided in the appendix at the end of this presentation and on our website.

Jeffrey David Hammond: Hey, good morning.

Jeffrey David Hammond: Good morning.

Jeffrey David Hammond: Maybe just to start on the acquisition just give us a sense of.

Speaker Change #142: Kind of profitability of the business or opportunity from a profitability standpoint.

Speaker Change #143: And kind of what the growth rate spend for the business in the last five years.

Speaker Change #144: Well I'll take the first part of it and just to talk about the acquisition in General first I want to go back to our Indian business is performing really well we have a terrific management team has been executing for quarter after quarter and we're looking to scale that business, both organically and inorganically.

Kevin J. Wheeler: I'm on slide four with our second quarter results. I'm very pleased with our second quarter performance and how we are tracking for the year. In the second quarter, our global A. O. Smith team delivered record quarterly sales of $1 billion and an EPS of $1.06, a 5% increase over 2023 adjusted EPS. North American Water Heater and Boiler Sales increased 10% due to higher volumes and pricing action. China third-party sales grew 2% in local currency, and he achieved double-digit growth in local currency for the 10th consecutive quarter.

Speaker Change #144: Please plays a nice role in that business.

Speaker Change #144: It's a solid brand in the market it compliments, our India business that we have today, they're stronger in e-commerce have nice retail president.

Speaker Change #144: Presence that also dovetails with our general trade in our retail presence. So overall the business is doing well, it's a premium brand.

Speaker Change #145: We're not we do overlap we're not exactly.

Speaker Change #145: We have products positioned right next to each other so if you look at the overall the brand the product positioning we're excited about bringing the team on and <unk>.

Doubling our business is going to make a big difference, it's going to make a difference in our scale. We're also going to be able to leverage our infrastructure.

Speaker Change #145: That we have on the ground there whether it be logistics manufacturing you name. It so doubling our businesses, we're excited and dealing with a premium company like period and a premium brand really sets up nicely as we go forward after the close.

Speaker Change #146: And then from a financial profile it looks very similar to our India business today, I mean period business as the majority is in India, but it's also in Bangladesh and some shipments.

Speaker Change #146: Outside of the Sri Lanka, and Vietnam, but in total of roughly same same sizes, our business around $60 million profitability wise very similar to what our India business has experienced.

Speaker Change #146: The last couple of years, meaning low low low to mid single digit profitability growth wise.

Speaker Change #146: As a premium brand they've seen also very good growth in the region Kevin mentioned.

Kevin: 10 consecutive quarters of 15 plus percent growth and.

Kevin: I believe they've seen very similar growth rates. So we're pleased with the way the financial profile matches up and as Kevin said coming together, we would hope to continue that growth momentum on a larger base and look for opportunities to leverage the bottom line as we go forward.

Speaker Change #147: Okay, and then just on working capital it seems like much.

Speaker Change #148: A much bigger working capital build in the first half versus maybe.

Maybe the last couple of years.

Speaker Change #149: Is that just timing.

Speaker Change #150: Do you expect to get a lot of that back in the second half, yes, we expect to get it back in the second half its timing and its a little bit of Tankless water heater inventory being built up with for the large part of its timing.

Speaker Change #151: Thank you one moment for our next question.

Speaker Change #151: Yes.

Speaker Change #152: Our next question comes from the line of Susan Macquarie of Goldman Sachs. Your line is now open.

Speaker Change #153: Thank you good morning, everyone.

Susan Marie Maklari: Thanks, Susan.

Susan Marie Maklari: My first question is you mentioned that boilers.

Speaker Change #155: Awesome growth.

Speaker Change #156: Reverted back to growth in the quarter can you talk about whats driving that and the sustainability of it just any comments on the comps that you face in the back half and how youre thinking about the path from here.

Speaker Change #157: Well if you look at it it's mainly on the commercial side of our business Susan.

Kevin J. Wheeler: In addition, our commitment to innovation and energy management has resulted in our Nanjing plant in China being selected as one of the 2024 Nanjing Environment Protection Model Enterprises in recognition of our waste and emission reduction efforts. We also received a 2024 Energy Star Sustained Excellence Partner of the Year Award from the EPA for the sixth year in a row for our long-term commitment to energy management through our product. In addition, we were named the 2024 U.S. News Best Companies to Work for in Manufacturing by U.S. News and World Report. But the reward is the satisfaction our team receives for doing the right thing and living our values.

Speaker Change #158: We came off of a pretty difficult quarter last year, but still our quota has been active.

Speaker Change #159: That transition from.

Speaker Change #159: Kind of standard models to high efficiency continues.

Speaker Change #159: Overall.

Speaker Change #159: We're about where we thought we would be our new products are doing well the crest boiler has always done well, but you had the healthcare technology on top of that and Thats, just being really well received in the market.

Speaker Change #159: Order rates have been good they continue to be good backlog is as strong. So overall I just think the commercial segment is doing well the overall industry slightly up we're doing better than the industry and even on the residential side of the business. That's also a positive so again.

Tim: Tim coming off some.

Tim: Some easier comps, but the overall macro environment.

Tim: Is good and it plays really well into lochinvar and our high efficiency, our focus that we've had over the years and we're seeing some some real benefits from that.

Tim: And just to comment on cadence on the comps we were up 8% this quarter, but the comps get easier quarter over quarter, when we get to the third and fourth quarters. So we feel very comfortable with the 8% to 10% growth.

Doug: Okay Doug.

Doug: Helpful and then.

Speaker Change #162: Turning to steel, we've seen that come down quite a bit recently, how do you think about the slow through of that to the business.

Doug: Perhaps any impact there to north America over the coming quarters, and just overall the trend for pricing.

Charles T. Lauber: These honors validate our values as a differentiator for our employees and stakeholders. I'll now turn the call over to Chuck, who will provide more details on our second quarter performance. Thank you, Kevin. And good morning, everyone. I'm on slide seven.

Speaker Change #163: Yes, I mean, the steel has come down a little bit by the way boilers grew at 10% I said, 8% of this correct that it's a 10% growth for the second quarter.

Charles T. Lauber: Second quarter sales in the North America segment were $791 million, a 9% increase compared with 2023, driven by higher water heater and boiler volumes, as well as year over year pricing. North America segment earnings of $198 million increased 2% compared with 2023 adjusted earnings. The higher segment earnings were primarily driven by increased volumes and pricing that were partially offset by higher steel costs and higher selling expenses to support our growth, including the launch of our gas tankless product. Segment margin was 25.1%, a decrease of 180 basis points year over year.

Charles T. Lauber: The lower segment margin was due to the reasons I reviewed with regard to segment earnings, which more than offset higher volumes in the quarter. Moving to slide 8, Rest of the world segment sales of $245 million were essentially flat to last year and included unfavorable currency translation of approximately $7 million, primarily related to China, as well as inter-segment sales associated with recently launched tankless water heaters. Third party sales increased 3% on a constant currency basis.

Charles T. Lauber: The increase was partially driven by higher sales of kitchen and HVAC products, partially offset by lower sales of residential water treatment products in China. India sales grew 16% in local currency in the quarter, driven by growth in both water heater and water treatment categories, with particular strength in our e-commerce, retail, and commercial markets. Rest of the world segment earnings of $26 million decreased slightly compared to segment earnings in 2023, primarily due to the unfavorable product mix and sales promotions. Third party segment operating margin was 11.5%, slightly lower than segment margin in 2023. Please turn the slide back.

Charles T. Lauber: We generated free cash flow of $119 million during the first half of 2024, a decrease from the same period last year, primarily as a result of higher inventory and accounts receivable balances, as well as higher incentive payments associated with record sales and profits last year, which more than offset higher earnings and higher trade payable balance. Capital expenditures increased $21 million year-over-year driven by our expansion project. Our cash balance totaled $233 million at the end of June, and our net cash position was $93 million.

Charles T. Lauber: Their leverage ratio is 6.8% as measured by total debt to total capital. Now, let's start slide 10. 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. As Kevin mentioned earlier, we signed an agreement last week to acquire Purit from Unilever for $120 million. Purit offers a broad range of residential water purification solutions and has annual sales of approximately $60 million US dollars, primarily in India.

Charles T. Lauber: The addition of PURET strengthens our leadership position as a global supplier of premium water treatment products and will double our market penetration in South Asia. The acquisition will also support our corporate strategy by enhancing our premium product portfolio and distribution footprint. Please turn to slide 11 in our 2024 Earnings Guidance and Outlook. We have narrowed our 2024 EPS outlook to an expected range of $3.95 to $4.10 per share.

Speaker Change #164: As we look at steel, we're thinking our outlook as steel roughly flat year over year.

Speaker Change #165: As we mentioned steel went up in the second quarter compared to first quarter by about 20%. It was about 25% higher than Q2 last year. So.

Speaker Change #165: There was a bit of a ramp up we've seen some softening in steel as you recall, our lag is 90 to 120 days.

Speaker Change #165: As we kind of look at the back half of the year, we see quarter over quarter Q2 to Q3, a little bit of a little bit of relief and then as we look into the fourth quarter.

Speaker Change #165: With that lag.

Speaker Change #165: We haven't baked in all of our indexes because they haven't all been issued.

Speaker Change #167: No. It's a monthly index that sets the.

Speaker Change #167: The pricing as you look 90 to 120 days out so we do expect a little bit of relief in the fourth quarter and if peg kind of our outlook very similar to what the index was issued for the month of June.

Speaker Change #168: Thank you our next question.

Saree Emily Boroditsky: Our next question comes from the line of Saree <unk> of Jefferies. Your line is now open.

Saree Emily Boroditsky: Good morning, and thanks for taking our question.

Speaker Change #166: Davidson softer orders in July on the water heater side can you quantify.

Quantify this at all and then does your guidance assume that demand stays in line with the stock takes a high rate.

Speaker Change #169: Yes, just mentioned, we always give you an outlook for the for the month were in on the call, but if you look at we talked about a pre buy we do believe there was some pull ahead and we started to see a bit of softness in meaning maybe may and June and July but I think July is also one of our weaker months.

Speaker Change #169: And really the third quarter's one of our weaker must because of the summer and the heat and so forth. So that's why.

Speaker Change #169: We do think it's going to.

Speaker Change #169: Return as we get into August and September and Thats, why we are holding a flat rate.

Speaker Change #170: The U S residential tanks.

Speaker Change #170: Tank type market through the balance of the year. So it's a temporary lull, but I think just gets us back to where our forecast has been for the entire year.

Charles T. Lauber: The midpoint of our EPS range has not changed and 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 for the full year 2024 will be roughly flat to 2023. Our outlook assumes non-steel material costs will be similar in 2024 as they were in 2013. Our guidance also assumes a relatively stable supply chain environment, similar to what we experienced throughout 2023. We began shipping our internally designed and manufactured gas tankless products in the second quarter.

Bryan Francis Blair: Thank you and then turning to Tim Blair to starting to ship some of the second quarter. What are you seeing from a demand perspective, there and then just on the modeling what is the impact from Congress to China sales. This year and it does create a challenging segment comp when you do shift production to North America next year.

Speaker Change #172: Well I would tell you again, we're coming from a.

Low kind of a mid single digit market share. So we've had a very good launch and I don't want to give you numbers because they would sounds really higher than they are for us. We're very pleased with the adoption by our customers.

Speaker Change #172: And again, we launched the high end condensing model, our first and Thats been well received by a number of customers and it's easily hitting our expectations as we as we start to launch this product going forward again, we will have two more products coming in by the end of the year, which.

Speaker Change #172: We'll complete the line and then our factory in Juarez is on track maybe a bit ahead of schedule and we will start to do some assembly to manufacturing towards Q4, and get ready and 2025, maybe ill touch Chuck touch on that but.

Speaker Change #173: All positive and we move to more as we relieve ourselves at the 25% tariff we take away the long logistics lead time, and some of the costs associated with bringing the product all the way back to North America from China.

Speaker Change #173: So we're really viewing when we when we start up production in <unk>.

Speaker Change #173: Very positive upside to our Tankless category.

Speaker Change #174: Thank you gentlemen for next question.

Speaker Change #174: Our next question comes from the line of Andy Kaplowitz with Citigroup. Your line is now open.

Kevin J. Wheeler: We began to see realization of the price increases in the second quarter. We believe that a pre-buy ahead of the price increases pulled forward some demand in the first half of the year for both residential and commercial water heaters. We have seen some softness in our orders in July. Due to normal seasonality in the pre-buy, we maintain our projection that 2024 U.S. residential industry unit volumes will be flat to last year, and our projection that U.S. commercial water heater industry volumes will increase low single digits in 2024 is also unchanged. Our outlook assumes that new residential home construction and proactive replacement will remain at levels similar to last year. In China, we believe the economy and consumer confidence will remain weak.

Andrew Alec Kaplowitz: Good morning, everyone.

Andrew Alec Kaplowitz: Good morning.

Andrew Alec Kaplowitz: So you mentioned the lingering pricing promotion pressure in China, I think you talked about margin a little bit, but you obviously kept your guidance for rest of world margin, 10%. So my question is how difficult is it is to maintain that margin guidance moving forward.

Speaker Change #175: Cost actions or anything else that you're doing to sort of offset lingering price pressure.

Kevin J. Wheeler: We continue to see headwinds in consumer demand. While we are cautious about the second half of the year, we maintain our 2024 third-party sales growth guidance of between zero and 3% in local currency. Our forecast assumes a negative currency translation impact of approximately 2% for the year.

I'll touch on that first and then maybe Chuck will jump in.

Charles T. Lauber: Balancing it again, we're a premium brand so we.

Charles T. Lauber: It's not going to be easy, but we're confident in our China management that they can navigate their way through the second half of the year.

Charles T. Lauber: Yes, we took quite a few cost actions over.

Charles T. Lauber: Within the Covid timeframe in China.

Charles T. Lauber: Like Kevin said to change some of our cost structure to more variable to take cost out of the business.

Charles T. Lauber: <unk> closed some very.

Less profitable store store footprints.

Kevin: Feel pretty good about our position to be flexible as volumes challenges a bit.

Speaker Change #176: So we'll continue to watch it right now I think we've got China is about 11% for the year very similar to last year.

Speaker Change #176: We anticipate being able to kind of work through it and continue to focus on cost and be at that percentage.

Speaker Change #176: We'll introduce a funeral products in the back half of the year. Chuck had mentioned Q4 is our strongest quarter and again, we are building some momentum and commercial water treatment. We're building momentum in our HVAC side, so again, putting that combination together challenging, but we think it's very doable.

Speaker Change #177: Got it and then I just wanted to maybe ask the same question on North America again like in terms of the margin Mike Let me sure I understand it so.

Speaker Change #178: Steel slightly better.

Speaker Change #179: Saying flattish versus a modest headwind I think is what you previously said, but you also talked about Q3 may be being a little light or lighter in sort of volume and I guess, that's the incremental margin headwind holding you back is there anything else like launch costs investments a little higher than expected I know you said the 50 basis points.

Speaker Change #180: Any color would be helpful.

Speaker Change #181: I mean, nothing nothing new I don't think that we've talked to that we haven't talked about before.

Speaker Change #182: I'll just mention that the Tankless launch.

Speaker Change #182: Does cause some pressure on margins at 50 basis points is sort of spread to the full year margin projection of 25%. So clearly as we launch it is heavier weighted into Q2, three and four so that's probably the only other area of a little bit of headwind on margins that I would.

Speaker Change #182: Let's say to take into account as you're thinking about the back half of the year.

Speaker Change #183: Thank you one more for next question.

Speaker Change #184: Our next question comes from the line of David Macgregor of Longbow Research. Your line is now open.

David Sutherland MacGregor: Yes, good morning, everyone and thanks for taking my questions I guess I wanted to.

David Sutherland MacGregor: Focusing on the increased selling expenses in North America can you all talk about how that north American selling expense compared year over year, when you exclude the gas tankless rollout.

David Sutherland MacGregor: Also I guess, how we should be modeling out to second half.

David Sutherland MacGregor: Yes.

Speaker Change #185: It really tracks closely with volumes right. So our cost structure and selling expense is largely based on a commission basis. So as we sell more product we're going to have a higher selling expense. We also.

Speaker Change #185: Emphasize different products.

Speaker Change #185: With a different commission level to drive initiatives from time to time so.

Speaker Change #185: Somewhat variable I think is the best way to look at it and tracks closer to volumes than than it does just kind of flat out expenses. We do mentioned the launch of tangibles products. So we've got some initiatives within launching the tankless products, that's driving that number just a little bit higher.

Speaker Change #186: Yes, I'll just add I mean.

Speaker Change #186: We're excited about our tankless offering that is internally designed is going to be manufactured in North America.

Speaker Change #186: And we're going to.

Speaker Change #186: We're going to own the category from a.

Speaker Change #187: From our own perspective, rather than from a partnering with somebody so we're going to expend some.

Speaker Change #187: We are going to promote this product for the first part of the year make sure we can get.

Speaker Change #187: Everybody to understand what the product does training on some promotional activities all of those are really important for us.

Speaker Change #187: To get that product in the market make sure people understand the features and benefits and how they really can benefit them going forward and how we can compete long term in this category. So.

Speaker Change #187: This is a.

Speaker Change #187: Onetime expense, but it's one that we're going to kind of lean into to make sure that we get the product cost and off to a good start.

Speaker Change #188: Got it thanks for that and then as a follow up on the boiler business and you've guided to up 8% to 10% for the year.

Kevin J. Wheeler: India remains on track for another year of projected double-digit sales growth, and we're excited to complete the PURIT acquisition later this year, which will double our sales in the South Asia region. Pure's strong brand and strength in the e-commerce channel will complement our premium brand and make us the No. 3 residential water treatment company in India.

Speaker Change #189: What's the right way to think about how profitability compares with last year.

Speaker Change #190: What you may have in your guidance.

Speaker Change #191: Well volumes being up certainly helps us when you look at the boiler business is largely commercial product that we're talking about being increased 8% to 10%.

Speaker Change #200: So it's an improvement when you've got growth in <unk>.

Speaker Change #193: In that segment or in that product category.

Kevin J. Wheeler: Even as we celebrate our 150th anniversary and a rich history of innovation with employees, customers, and partners, we remain focused on meeting the needs of our customers and executing our key strategic priorities to advance our leadership position in heating and treating water around the globe. That concludes our prepared remarks, and we are now available for your questions. Thank you. At this time, we'll conduct the question and answer session. As a reminder, to ask a question, you'll need to press star 1-1 on your telephone and wait for your name to be announced.

Speaker Change #192: Thank you <unk> for next question.

Operator: To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Matt Summerville of D.A. Devison.

Our next question comes from the line of Scott Graham of Seaport Research Partners. Your line is now open.

Matt J. Summerville: The line is now open. Thanks. A couple of questions. I was hoping maybe you could spend a moment, Chuck, kind of talking about how we should be thinking about the margin cadence in both North America and the rest of the world in the back half of the year, given some of the pluses and minuses you were describing. Yeah, good morning, Matt. Happy to.

Scott Graham: Hey, good morning, Thanks for taking the questions.

Speaker Change #191: Okay.

Rajeev: No change in the U S rajeev water heater industry thinking up flat.

Speaker Change #194: I know, we talked about in quarters past couple of quarters that come second.

Speaker Change #195: Second half comparisons get a little bit tougher so you want to be careful with that number.

Charles T. Lauber: You know, the margin cadence in the third quarter will be challenged by the volume headwind in the third quarter. In China, you know, we're coming off what I would say a solid first half of the year, but we still see weakness in the economy, as Kevin mentioned. As always, our fourth quarter is expected to be the strongest as we go into the back half of this year. However, the third quarter will also be a bit challenged on the volume side, we believe.

Speaker Change #198: First half year to date is up in resi maybe.

Speaker Change #195: Maybe even a little unexpectedly certainly from this point.

Speaker Change #195: Interview.

Is your thinking on flat now, maybe a little bit more leaning into that.

Charles T. Lauber: We've seen a bit of weakness in July orders, both in China and both within, I'm sorry, within China and in North America. So a little bit of a slow start to the third quarter, and that'll probably translate into volume headwinds, and it'll leave a little bit of an impact on the. And then, as a follow-up, could you maybe comment on what the channel inventory picture looks like in China? And I think in your prepared remarks, there was a mention about maybe seeing a little bit more price competition in the mid price point category. Can you elaborate on that a bit? Yeah, hi, this is Kevin.

Speaker Change #204: Maybe the market is in fact weakening.

Speaker Change #196: Given your.

Speaker Change #197: Last couple of months sales volumes.

Kevin J. Wheeler: Maybe I'll touch base on inventories being pretty much where we expect them to be in that four to six weeks range. So nothing that meaningful, you know; there are ups and downs as we go forward. What we mentioned is that it's a very competitive market, consumer demand is weaker than it's been, and so consumers are a bit cautious. So we're seeing a bit more, I would say promotional activities. We saw that in Q1. And that's kind of carried over into Q2 as well.

Speaker Change #201: Or are you kind of get us hold the course with flat because the comps are tougher and this is really trying to message anything.

Speaker Change #203: Yes, I don't think we are really trying to message.

Speaker Change #199: First thought we came off a pretty strong year last year.

Speaker Change #202: And going forward. If you look you look at our our Mercury replacement, which is always going to stay the same proactive new construction again, whether its nuclear single family or multifamily. We felt that was going to be relatively flat interest rates would probably keep it flat so.

Speaker Change #202: We saw that the pre buy were a little surprised on the 4% pull forward a bit more than we had thought but when you step back now and you kind of look at how we started the year kind of a.

Speaker Change #202: Trending down to maybe give some back in May you look forward. The next five months.

Kevin J. Wheeler: I think our team's managing it really well. Again, we don't chase every order; we're very selective in how we go to market. And if you look at overall, growing 2% in local currency in a very competitive market, it has some consumer headwinds. I think our team's done a really nice job of balancing those competitive dynamics. I also want to remind people that we also have some areas in China that are growing well.

Speaker Change #202: We're just very comfortable as a flat year with <unk>.

Speaker Change #202: Strong growth in gas Tankless, and we're going to see some good growth in heat pump book residential and maybe even some commercial as well. So just trying to get back on track, where we really think the market is and we're very comfortable with that flat residential outlook, just based coming off a very strong year.

Kevin J. Wheeler: You know, our kitchen products are doing well, commercial water treatment is doing well, and so is our HVAC part of the business. So being diversified as we are, you know, in the water heating side of water treatment but also having the other adjacencies has helped and made a difference in this difficult market. So overall, I'm very pleased that we're out in China, and we'll keep managing the back half of the year. Thank you.

Kevin: Thanks for that Kevin So.

Speaker Change #205: Similar question on the North American segment margin and kind of you didnt change that either you're kind of calling for some.

Kevin: Some spot weakness here in the third quarter no pun intended.

Speaker Change #206: I'm just wondering is that that is the no change in that margin because maybe you left some wiggle room in there and or that Youre actually seeing things that are making you more bullish on the fourth quarter margin and if so why.

Speaker Change #207: No I would say, we're more bullish I mean, we still believe 25%.

Speaker Change #207: Where we're at where we'll end up we're about at that in Q2 on some really nice volumes.

Speaker Change #207: So Q3 will be a little more challenge on that because we will give back some on the volumes at least in our outlook and then back to.

Speaker Change #207: Volumes at.

Speaker Change #207: Drop to the Bottomline, a little lower steel.

Speaker Change #207: And then our last assumption so.

Speaker Change #207: There is a little bit of opportunity on the steel side, when we look at kind of our guidance from a quarter ago.

Speaker Change #207: But.

We are still feeling 25% is kind of.

Speaker Change #207: The midpoint of where we think we'll end up.

Jeffrey David Hammond: One moment for our next question. Our next question comes from the line of Jeff Hammond of KeyPink Capital Markets. Your line is now open. Hey, good morning. Good morning.

Speaker Change #208: Thank you one moment for our next question.

Speaker Change #209: Again as a reminder to ask a question you will need to press star one on your telephone.

Speaker Change #209: Our next question comes from the line of Damian Karas of UBS. Your line is now open.

Kevin J. Wheeler: Maybe just to start on the acquisition, just give us a sense of, you know, kind of profitability, the business or opportunity, you know, from a profitability standpoint, and kind of what the growth rates have been for the business, you know, over the last five years. Well, I'll take the first part of it. And just to talk about the acquisition in general. First, I want to go back to our Indian business, which is performing really well. We have a terrific management team that's been executing quarter after quarter, and we're looking to scale that business both organically and inorganically. And Purit plays a nice role in that business.

Damian Karas: Hi, good morning, everyone.

Damian Karas: Good morning.

Kevin J. Wheeler: It's a solid brand in the market. It complements our India business that we have today. They're stronger in e-commerce and have a nice retail presence.

Damian Karas: I was wondering if you might be able to give us a little bit of an update on what youre seeing for.

Speaker Change #210: Heat pump water heaters.

Speaker Change #211: I think we've seen states like New York, and some others finalize their IRI allocation a lot of those.

Speaker Change #212: Kind of really.

Speaker Change #212: Ramping up.

Kevin J. Wheeler: Presidents That also dovetails with our general trade and our retail presence. So overall, the business is doing well; it's a premium brand. We're not, we do overlap, but we're not exactly, have products positioned right next to each other.

Kevin J. Wheeler: So if you look at the overall brand, the product positioning, we're excited about bringing the team on board. And doubling our business is going to make a big difference. It's going to make a difference in our scale. We're also going to be able to leverage our infrastructure and what we have on the ground there, whether it be logistics, manufacturing, you name it. So doubling our businesses, we're excited about doing with a premium company like Purit and a premium brand, really sets up nicely as we go forward after the close.

Speaker Change #213: Could you tell us.

Speaker Change #213: What <unk> been seeing with the heat pump product, how it's been trending and kind of expectations.

Speaker Change #214: Through the rest of the year into next year.

Kevin J. Wheeler: And from a financial profile, it looks very similar to our India business today. I mean, pure business is the majority is in India, but it's also in Bangladesh and some shipments outside of Sri Lanka and Vietnam, but in total, roughly the same size as our business, around 60 million.

Charles T. Lauber: Profitability wise, very similar to what our India business has experienced in the last couple years, meaning, you know, low to mid-single digit profitability. Growth wise, as a premium brand, they've also seen very good growth in the region. Kevin mentioned 10 consecutive quarters of 15 plus percent growth, and, you know, I believe they've seen very similar growth rates. So we're pleased with the way the financial profile matches up, and as Kevin said, coming together, we would hope, you know, to continue that growth momentum on a larger base and look for opportunities to leverage the bottom line. Okay, and then just on working capital, it seems like you had a much bigger working capital buildup in the first half versus, you know, maybe the last couple years. Is that just timing?

Speaker Change #216: Yes, I would tell you that one I just wanted to start with is just to calibrate its still 2% of the market, but it is a growing category and it's very specific can you just mentioned New York, California. Other parts that are really promoting it that continues to grow.

Speaker Change #215: Pretty nicely.

Speaker Change #217: We had kind of forecasted 25% to 30% growth over the next several years, but we were north of that in Q2. So it still gets momentum we have a great product line, we're having more and more distributors and retailers stock it in a broader variety of so that's a good thing availabilities everything so overall the cat.

Speaker Change #218: <unk> continues to grow.

Speaker Change #217: Albeit in certain states, but again.

Speaker Change #217: Well above our growth of.

Speaker Change #217: That we've had and we see it continuing we did so to great.

Speaker Change #217: Product, we have a great product line.

Speaker Change #217: It has a nice payback story, it's just one that needs to be planned in and so far in the markets that are subsidizing it putting money upfront in helping with the purchase is growing quite well. So again, 25%, 30% going forward next several years and we had a nice Q2, there was several points above that.

Charles T. Lauber: Do we expect to get a lot of that back in the second half? Yeah, we expect to get it back in the second half. It's timing; there is a little bit of tankless water heater inventory being built up, but for the large part, it's timing. Thank you. One moment for our next question. Our next question comes from the line of Susan Maklari of Goldman Sachs. Your line is now open. Thank you. Good morning, everyone. Good morning, Susan.

Speaker Change #219: Alright, thats good to hear.

Speaker Change #220: And then if we could touch back just on the North American Tankless.

Speaker Change #221: Congrats on getting that product rolled out now I know a lot of your wholesale distributors across the country for your your tank products have relied on.

Speaker Change #222: Other manufacturers such as benign regime for tankers in the past.

Speaker Change #224: Can you just talk a little bit more about what youre seeing and hearing from your distributors.

Speaker Change #223: Are they.

Speaker Change #225: Kind of sampling in your product or is it sort of more of an.

Speaker Change #226: In all our non type of.

Speaker Change #226: Switch that they would have to make.

Speaker Change #227: Any any color you can give us just kind of on the receptivity and whats your conversations at that mine.

Susan Marie Maklari: My first question is, you know, you mentioned that Boilers saw some growth and reverted back to growth in the quarter. Can you talk about what's driving that and the sustainability of it? Just any comments on the comps that you face in the back half and how you're thinking about the path from here?

Speaker Change #228: I would tell you you described the market pretty well and so.

Speaker Change #229: I think what we're hearing from our distributors, they're like some optionality and they'd like to buy from US when you look at.

Speaker Change #230: The commitments, we have and the long term relationships that we have with our distribution and be able to sell not only tank typing commercial but also with tankless on there I think is really important we still have to meet the market and be competitive and so forth and we are.

Speaker Change #230: So overall do I expect every one of our distributors to drop their current product lines. The answer is no, but I do look forward to adding a very competitive gas tankless product line.

Speaker Change #230: To their to their inventory and then let us compete in the market and I think we're going to do very well, it's going to take us several years to to move that forward, but again, we control our own destiny now we have great support from our distributors and I look forward to what's going to happen with our gas Tankless line is next.

Speaker Change #230: Our next few years kind of develop.

Speaker Change #231: Thank you I'm showing no further questions at this time I would now like to kind of.

Speaker Change #231: Back to <unk> for closing remarks.

Kevin J. Wheeler: Order rates have been good, they continue to be good, and backlog is strong. So, you know, overall, I just think the commercial segment is doing well, the overall industry is slightly up, and we're doing better than the industry. And even on the residential side of the business, that's also a positive. So, again, 8 to 10 coming off some easier comps, but the overall macro environment is good. And it plays really well into the lock and bar and our high efficiency focus that we've had over the years, and we're seeing some real benefits from that. And just to comment on the cadence on the comps.

Speaker Change #232: Thank you everyone for joining us today, let me conclude by reminding you that our global team delivered record sales and strong EPS in the second 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 three conferences this quarter key part on August <unk>.

Kevin J. Wheeler: So I mean, we're up 8% this quarter, but the comps get easier quarter over quarter when we get to the third and fourth quarter. So we feel very comfortable with the 8 to 10%. Okay, that's helpful.

Kevin J. Wheeler: And then turning to steel, we've seen that come down quite a bit recently. How do you think about the flow through of that to the business? You know, perhaps any impact there in North America over the coming quarters and just, you know, overall, the trend for pricing? Yeah, I mean, steel has come down a little bit. By the way, boilers grew at 10%. I said 8%.

Kevin J. Wheeler: As you know, it's a monthly index that sets the pricing as you look 90 to 120 days out. So we do expect a little bit of relief in the fourth quarter and have had kind of our outlook very similar to what the index was issued for the month of June. Thank you. Our next question comes from the line of Saree Boroditsky on behalf of Jeff Brees.

Saree Emily Boroditsky: Your line is now open. Good morning. Thanks for taking our question. Um, you know, you cited some softer orders in July on the water heater side. Could you please quantify this at all?

Kevin J. Wheeler: And then does your guidance assume that demand stays in line with this softer July? Yeah, just to mention, we always give you an outlook, you know, for the month we're in on the call. But if you look at, we talked about a pre-buy, we do believe there was a pull ahead, and we started to see a bit of softness, you know, in May and June and into July. But I think, you know, July is also one of our weaker months, and really, the third quarter is one of our weaker months because of the summer and the heat and so forth.

Kevin J. Wheeler: Well, I would tell you again, we're coming from a low kind of mid single-digit market share. So we've had a very good launch. And I don't want to give you the numbers, because they would sound, you know, really high.

Kevin J. Wheeler: And they are for us; we're very pleased with the adoption by our customers. Then, and again, we launched the high-end condensing model first. And that's been well received by a number of customers, and it's easily meeting our expectations as we start to launch this product going forward. Again, we'll have two more products coming in by the end of the year, which will complete the line. And then our factory in Juarez is on track, maybe a bit ahead of schedule, and we'll start to do some assembly to manufacturing towards Q4 and get ready in 2025. Maybe I'll have Chuck touch on that.

Charles T. Lauber: But, you know, having the tariff go away at the start of 2025 is going to make a big difference in how we view this from a margin perspective. Going forward, yes. I mean, Siri, from a comp perspective, you know, it's all positive.

Charles T. Lauber: And when we move to Juarez, we relieve ourselves of the 25% tariff, we take away the long logistics lead time, and some of the costs associated with bringing the product all the way back to North America from China. So we're really viewing when we start up production in Juarez as a very positive upside to our tankless category. Thank you.

Andrew Alec Kaplowitz: One moment for our next question. Our next question comes from the line of Andy Kaplowitz of Citigroup. Your line is now open. Good morning, everyone. Good morning, Indy.

Kevin J. Wheeler: Morning. So you mentioned lingering pricing promotion pressure in China. I think you talked about margin there a little bit, but you obviously kept your guidance for the rest of the world at 10%. So my question is, how difficult is it to maintain that margin sort of guidance moving forward? What cost actions or anything else are you doing to sort of offset lingering price? Yeah, I'll touch on it first and then maybe Chuck will jump in.

Kevin J. Wheeler: Again, we're a premium brand, so we're in a different part of the market with a different clientele. But overall, it's still a tough environment.

Charles T. Lauber: And most of the pressures that we're receiving are kind of in that mid to upper mid level, not on the higher level. And our team is evaluating it. Again, I think we're taking a targeted approach. It's not going to be easy, but we're confident in our Chinese management that they can navigate the way through the second half of the year. Yeah, we took quite a few cost actions within the COVID time frame in China.

Kevin J. Wheeler: 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 three conferences: Seaport on August 20th, Steeple on September 4th, and D. A. Davidson on September 19th.

Charles T. Lauber: And like Kevin said, to change some of our cost structure to be more variable, take costs out of the business, close some very, you know, less profitable store footprints, and feel pretty good about our position to be flexible as volumes challenge a bit. So, you know, we'll continue to watch it right now.

Kevin J. Wheeler: I think we've got China at about 11% for the year, very similar to last year. We anticipate being able to kind of work through it and continue to focus on cost and be at that. Yeah, and we'll introduce a few new products in the back half of the year. Chuck had mentioned Q4 is our strongest quarter. And again, we're building some momentum in commercial water treatment. We're building momentum in our HVAC site.

Speaker Change #232: 20th Stifel at September 4th in da Davidson September 19, Thank you and have a great day.

Kevin J. Wheeler: So again, putting the combination together is challenging, but we think it's very doable. I just want to maybe ask the same question about North America again, like, in terms of the margin, just to make sure I understand it.

Andrew Alec Kaplowitz: So you feel slightly better, you're saying flattish versus a modest headwind, which I think is what you previously said. But you also talked about Q3, maybe being a little lighter or lighter in sort of volume. And I guess that's the incremental margin headwind holding you back. Is there anything else, like launch costs or investments a little higher than expected? I know you said the 50 days one, so any color would be helpful.

Charles T. Lauber: I mean, nothing, nothing new. I don't think that we've talked about that we haven't talked about before. We will, I'll just mention that the tankless launch does cause some pressure on margins, 50 basis points is sort of spread to the full year margin projection of 25%. So clearly, as we launch it, it's heavier weighted into Q2, 3, and 4. So that's probably the only other area of a little bit of headwind on margins that I would say to take into account as you're thinking about the back half of the year. Thank you. One more for our next question, which comes from the line of David MacGregor of Lombard Research. Your line is now open. Yes, good morning, everyone.

David Sutherland MacGregor: And thanks for taking my questions. I guess I wanted to focus in on the increased selling expense in North America. Can you all talk about how that North American selling expense compared year over year when you exclude the gas tank? Okay. And also, I guess how we should be modeling that too, in a second. Yeah, I mean, it really tracks closely with volumes, right?

Helen E. Gurholt: Thank you, and have a great day. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Charles T. Lauber: So our cost structure for selling expenses is largely based on a commission basis. So as we sell, you know, more product, we're going to have a higher selling expense. We also emphasize different products, you know, with a different commission level to drive initiatives from time to time. So, somewhat variable, I think, is the best way to look at it and tracks closer to volumes than it does just kind of flat out expenses.

Kevin J. Wheeler: So we're going to spend some, you know, we're going to promote this product for the first part of the year, make sure we get everybody to understand what the product does, training, some promotional activities, all those are really important for us to get that product in the market, make sure people understand the features and benefits and how they can really benefit them going forward and how we can compete long term in this category. You know, this is a one-time expense, but it's one that we're going to kind of lean into to make sure that we get the product off and off to a good start. I got it.

Kevin J. Wheeler: Thanks for that. And then, as a follow-up on the boiler business, you guided it to up eight to 10% for the year. What's the right way to think about how profitability compares with last year? And what you may have in your Well, volumes being up certainly helps us, you know, when you look at the boiler business, it's largely commercial product that we're talking about being increased eight to 10%. So, you know, it's an improvement when you've got growth in that segment or in that product category. Thank you, one, one, for our next question. Our next question comes from the line of Scott Graham of Seaport Research Partners. Your line is now open. Hey, good morning.

Speaker Change #232: Okay.

Scott Graham: Thanks for taking the questions. Very good. Thank you. Okay, so there is no change in the U.S. Resi water heater industry thinking of flat. You know, I know we talked about in past quarters, a couple quarters, that second half comparisons get a little bit tougher, so you want to be careful with that number. You know, the first half year to date is up in Resi, maybe even a little unexpectedly, certainly from this point of view. So are you thinking flat now, maybe a little bit more leaning into the, And maybe the market is, in fact, And there are really, and you're not trying to message any.

Speaker Change #233: Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

Kevin J. Wheeler: Yeah, I don't think we're really trying to message we've always thought we came off a pretty strong year last year. And, and going forward, if you look, you look at our, our emergency replacement, which is always going to stay the same proactive new construction, again, whether it's new, single family or multifamily, we felt that was going to be relatively flat, you know, interest rates would probably keep it flat. So, We saw that the pre-buy, we were a little surprised when the 4% pulled forward a bit more than we had thought, but when you step back now and you kind of look at how we started the year, kind of a trending down to maybe give some back, and then you look forward the next five months, We're just very comfortable as a flat year with, you know, strong growth in gas tank lists, and we're going to see some good growth in heat pump, both residential and maybe even some commercial as well.

Kevin J. Wheeler: So just trying to get back on track where we really think the market is, and we're very comfortable with that flat residential outlook, just based on coming off a very strong year. Thank you, Kevin.

Kevin J. Wheeler: On the North American segment margin, you kind of, you didn't change that either, yet you're kind of calling for some spot weakness here in the third quarter, no pun intended. I'm just wondering, is it that there was no change in that margin because maybe you left some wiggle room in there, and or that you're actually seeing things that are making you more bullish on the fourth quarter margin, and if so, why? No, I wouldn't say we're more bullish.

Kevin J. Wheeler: So, you know, there is a little bit of opportunity on the steel side when we look at our guidance from a quarter ago. But we're still feeling 25% is kind of the midpoint of where we think we'll end up. Thank you one moment for our next question. Again, as a reminder to ask a question, you'll need to press star 1-1 on your telephone. Our next question comes from the line of Damian Karas of UBS. Your line is now open. Hi, good morning, everyone. Morning. Good morning. I was wondering if you might be able to give us a little bit of an update on what you're seeing for the Heat Pump Water Heater.

Damian Karas: You know, I think we've seen states like New York and some others finalize their IRA allocations, a lot of those kind of really ramping up. So could you tell us what you've been seeing with the heat pump product, how it's been trending, and kind of expectations through the rest of the year into next year? Yeah, I would tell you that one I always want to start with is just to calibrate. It's still 2% of the market, but it is a growing category. And it's very specific.

Kevin J. Wheeler: We have a great product line. We're having more and more distributors and retailers stock it in a broader variety, so that's a good thing.

Kevin J. Wheeler: Availability is everything. So overall, the category continues to grow, albeit in certain states. But again, it's well above the growth that we've had, and we see it continuing.

Kevin J. Wheeler: It's a great product. We have a great product line. It has a nice payback story.

Damian Karas: Congratulations on getting that product rolled out. Now I know a lot of your wholesale distributors across the country for your tank products have relied on it. Other manufacturers, such as Renai, Navi, and Rheem, were tankless in the past. Could you just talk a little bit more about what you're seeing and hearing from your distributors? Are they, you know, kind of sampling in your product? Or is it sort of more of an, you know, an all or none type of thing? Transcripts provided by Transcription Outsourcing, LLC.

Kevin J. Wheeler: Well, I would tell you you described the market pretty well. And so I think what we're hearing from our distributors, they have some optionality, and they would like to buy from us. When you look at the commitments we have and the long-term relationships that we have with our distributors, and be able to sell not only tank type and commercial but also put tankless on there, I think it is really important.

Kevin J. Wheeler: We still have to meet the market and be competitive and so forth. And we are. So you know, overall, do I expect every one of our distributors to drop their current product lines? The answer is no.

Kevin J. Wheeler: Now, we have great support from our distributors. I look forward to what's going to happen with our gas tank. This line is, you know, the next few years kind of developing. Thank you. I'm showing no further questions at this time. I would now like to turn it back to Helen Gurholt for closing remarks. Thank you everyone for joining us today. Let me conclude by reminding you that our global A. O. Smith team delivered record sales and strong EPS in the second quarter.

Q2 2024 A. O. Smith Corp Earnings Call

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