Q1 2025 A.O. Smith Corp Earnings Call
To begin our prepared remarks, please turn to the next slide.
Speaker Change: Thank you Tony and good morning, before we review our first quarter performance I'd like to take a moment to highlight our recent announcement that Steve will assume the role of President and Chief Executive Officer effective July one.
Tony: Over the past year, Steve has worked closely with me and our leadership team to deepen his understanding of our business and identify opportunities to enhance performance and drive growth.
Speaker Change: I have full confidence in his ability to lead a O Smith and advance our position as a global water technology leader.
Speaker Change: As we have throughout this process, we will continue to ensure a smooth CEO transition over the next two months.
Speaker Change: I will remain actively engaged as executive chairman of the board continuing to support the company's strategic direction.
Speaker Change: Now turning to slide four and our financial performance.
Our team delivered a solid performance in the first quarter with volumes tracking our expectations I am pleased with our sequential quarter over quarter improvement.
Speaker Change: As anticipated North America segment sales declined by 2% as higher boiler sales were more than offset by lower water heater volumes.
Speaker Change: As a reminder, we had a very strong first quarter in 2024 for water heater, creating a challenging year over year comparison.
Speaker Change: Rest of World sales were essentially flat compared to last year in China third party sales declined 4% local currency, reflecting ongoing economic weakness and soft consumer demand.
Speaker Change: In the quarter, we repurchased $121 million of our shares Frontloading a portion of our full year 2025 repurchase outlook of $400 million.
Speaker Change: Please turn to slide five.
Speaker Change: North America water heater sales declined 4% in the first quarter driven by lower volumes.
Speaker Change: First quarter 2024 shipments benefited from pre buy related volumes ahead of an announced price increase a favorable commercial gas mix.
Speaker Change: In contrast, 2025 volumes reflect a more normalized annual cadence.
Speaker Change: One of our key initiatives for 2025 is to level load production across the year to ensure optimal plant efficiencies.
We are maintaining our planned production schedule. Despite stronger recent order rates, which appear to be in response to our announced price increases.
Speaker Change: Working closely with our customers we are managing orders based on historical order rates have adjusted lead times Accordingly.
Speaker Change: We are continuing to monitor the situation closely.
Speaker Change: Our North America boiler sales increased by 10% compared to the first quarter of 2024 as our high efficiency commercial boilers continue to outperform the market.
Speaker Change: North America water treatment sales increased slightly in the first quarter as growth in our priority channels e-commerce dealer and direct to consumer offset retail declines as we intentionally shift focus away from that channel.
Speaker Change: We are pleased with first quarter profitability, which is tracking in line with the full year 250 basis point improvement we discussed during January call.
Speaker Change: In China first quarter third party sales decreased 4% in local currency.
Speaker Change: Sales of electric water heaters, and commercial water treatment products were more than offset by lower volumes of residential water treatment products and gas water heaters.
Speaker Change: <unk> improved by 200 basis points in the quarter driven by ongoing cost control efforts and benefits from our 2020 for restructuring initiatives.
Speaker Change: I'll now turn the call over to Chuck who will provide more details on our first quarter performance. Thank you Kevin Good morning, everyone. We delivered sales of $964 million in the first quarter of 2025, a decrease of 2% year over year and earnings were <unk> 95 per share a decrease of 5%.
Speaker Change: Compared to the prior period, please turn to slide six.
Speaker Change: First quarter sales in the North America segment were $749 million decreased 2% compared to a tough comp last year higher boiler sales were more than offset by lower volumes of water heaters.
Speaker Change: North America segment earnings of $185 million decreased 7% compared to last year segment margin was 24, 7% a decrease of 120 basis points year over year.
Speaker Change: The lower segment earnings and segment margin were primarily driven by higher below with boiler sales that were more than offset by lower water heater volumes lower volume related absorption and continued strategic investments including Tankless.
Speaker Change: Moving to slide seven.
Speaker Change: Rest of the World segment sales of $227 million were essentially flat to last year, including sales from the pure acquisition of $12 million.
Speaker Change: China Third party sales decreased 4% on a constant currency basis.
Speaker Change: Lower sales in China were offset by the addition of period.
Speaker Change: Rest of the World segment earnings of $20 million increase.
Speaker Change: Increased 15% compared to segment earnings in 2024 as expense management offset lower sales in China.
Speaker Change: Segment operating margin was eight 7% an increase of 110 basis points compared to last year, driven by a strong margin improvement in China.
Speaker Change: Sure It will be a margin headwind in the near term as we focus on integration.
Speaker Change: Turning to slide eight.
Speaker Change: We generated operating cash flow of $39 million in free cash flow of $17 million. During the first three months of 2025, which is lower than the same period in 2024, but is in line with historical first quarter cash flow, which typically is our lowest cash generating quarter.
Speaker Change: <unk>.
Speaker Change: The decrease was primarily due to lower accounts receivable collections as a result of higher sales in the first quarter of 2025 compared to the fourth quarter of 2024, as well as lower year over year earnings.
Speaker Change: Our cash balance totaled $200 million at the end of March and our net debt position was $70 million.
Speaker Change: Our leverage ratio ratio was 12, 7% as measured by total debt to total capital.
Speaker Change: Let's turn to slide nine.
Speaker Change: Earlier this month, our board approved our next quarterly dividend of 34 per share.
Speaker Change: We repurchased approximately one 8 million shares of common stock in the first three months of 2025 for a total of $121 million an increase over the same period last year as we increased our planned repurchase intentions from $306 million in the full year of 2024.
Speaker Change: <unk> to approximately $400 million of shares for the full year of 2025.
Speaker Change: We also weighted our share repurchases more heavily in the first quarter.
Speaker Change: Relative to our full year outlook as we Opportunistically bought shares during the quarter.
Speaker Change: We continue to cultivate an active acquisition pipeline and have adequate dry powder available for the right acquisition.
Speaker Change: As always we remain focused on transactions that meet our financial metrics and expand shareholder value.
Speaker Change: Please turn to slide 10, and our 22025 earnings guidance and outlook.
Speaker Change: We maintain our 2025 EPS outlook with an expected range of $3 60, and $3 90 per share.
Speaker Change: The midpoint of our EPS range is slightly higher than our 2024 adjusted EPS.
Speaker Change: We maintain our outlook on what has been a backdrop of uncertainty and tariff related cost increases to our business. The tariff related impacts that we considered and maintaining our outlook are based on what has been announced as of today.
Speaker Change: While our manufacturing footprint support so in country for country business model, our supply chain costs are impacted by now not only our direct import.
Speaker Change: <unk> of components, but also our suppliers footprint than import strategies.
Speaker Change: We have confidence in our manufacturing and supply chain strategy and execution as well as our suppliers' ability to manage in uncertain times.
Speaker Change: In a moment, Steve will discuss the actions, we have taken to mitigate the tariff impact, including pricing and expense management.
Speaker Change: <unk> chain and manufacturing initiatives.
Speaker Change: We have included the following key assumptions in our outlook.
Speaker Change: Due to the uncertainty of the tariff environment, we have considered within maintaining EPS guidance.
Speaker Change: Excluded from our sales guidance, the impact of announced tariffs and related offsetting actions.
Speaker Change: Based on the current announced tariffs, which could change in the future.
Speaker Change: We estimate that annual impact could increase our total cost of goods sold by approximately 6% to 8% exclusive of mitigation efforts.
Speaker Change: Our guidance assumes that our annual steel and other input costs exclusive of tariffs will be similar to last year. This includes our projection that steel will increase in the second half of the year.
Speaker Change: We estimate that our 2025 capex will be between 90 and $100 million as we continue to invest in engineering capability and prepare for the upcoming regulatory changes.
Speaker Change: We expect to generate free cash flow of between $500 million and $550 million.
Speaker Change: Interest expense is projected to be between $15 million and $20 million Corp.
Speaker Change: Corporate and other expenses are expected to be approximately $75 million.
Speaker Change: Our effective tax rate is estimated to be between 24 to 24, 5%.
Speaker Change: And we project our outstanding diluted shares would be $142 million at the end of 2025.
Speaker Change: I'll now turn the call over to Steve who will provide more color around tariffs or key markets in topline growth outlook and segment expectations for 2025 on slides 10 and 11 Steve.
Steve: Thank you Chuck and good morning, everyone.
Speaker Change: First of all I would like to take a brief moment to let you all know how honored I am to be announced as the next CEO of a O Smith effective July one.
Speaker Change: It is a real privilege to be able to work with my dedicated and capable colleagues to help lead this iconic company into the future.
Speaker Change: I would also like to thank Kevin and his leadership and commitment to the company over the last 30 plus years and so the trust and confidence that both you and the board have quickly.
As Chuck mentioned, there is still uncertainty around tariffs and while we are largely in country for country or business is impacted by the changing tariff environment. As we are certain components that are globally sourced.
Speaker Change: We have mobilized cross functional tariff response teams across our businesses to identify tariffs and supply chain related risks and to develop action plans to mitigate those risks.
Speaker Change: These teams meet regularly to address the evolving tariff impacts on each of our businesses to ensure that we continue meeting the needs of our customers, while taking action to mitigate tariff related costs.
Speaker Change: In North America in response to tariff cost increases as well as higher steel and other input costs, we have announced price increases of an average range of 6% to 9% on most of our water heater products.
Speaker Change: We have also announced price increases on our other product categories.
Speaker Change: Because of the uncertainty of the tariff environment, we have not included in our announced pricing in our topline guidance.
Speaker Change: In addition to pricing other mitigating actions include footprint optimization strategic sourcing and other cost containment measures.
Speaker Change: Assuming the current tariffs go into effect as announced we expect to begin seeing the benefits of our pricing actions by the end of the second quarter.
Speaker Change: While we are already experiencing tariff impacts as we enter the second quarter.
Speaker Change: In North America, the majority of our residential water heaters and all of our boilers and commercial water heaters are manufactured in the United States.
Speaker Change: Approximately 15% of our residential tank water heaters are produced in our Juarez, Mexico facility and our U S MCA compliant.
Speaker Change: As previously planned the production of our recently launched gas Tankless products is being transitioned from our China facility to our recently completed Tankless facility in Juarez.
Speaker Change: We are taking action to accelerate the transition given the current tariff environment.
Speaker Change: Key assumptions in top line.
Speaker Change: Your line outlook include the following.
Speaker Change: Our projection of 2025 residential and commercial industry unit volumes will be approximately flat to last year, which is unchanged.
Speaker Change: In China, we believe the economy remains challenged with low consumer confidence and a weak real estate market.
Speaker Change: While we see the stimulus programs is positive we expect the program to act more as a stabilizer in the market as opposed to a meaningful catalyst for growth.
Speaker Change: We have not changed our full year 2025 outlook and continue to project that our sales in China will decrease 5% to 8% in local currency.
Speaker Change: Our forecast assumes that the currency translation impacts will be minimal in 2025.
Speaker Change: We anticipate that our restructuring program in China will be substantially complete by the end of the second quarter and we continue to expect to realize annual savings of approximately $15 million.
Speaker Change: As a result, China operating margin is projected to be in the 8% to 10% range for 2025, even with lower volumes.
Speaker Change: I feel confident that our restructuring actions position us well for the market today and also to realize the benefits when the Chinese economy improves.
Speaker Change: We remain cautious about the near term market outlook, including a level of sustainable impact from the appliance discount traded program, but.
Speaker Change: But we are pleased with how our China team continues to manage the challenging environment and maintain our premium brand position.
Speaker Change: We project, our North American boiler sales will increase between 3% and 5% in 2025.
Speaker Change: While we are very pleased with our first quarter growth of 10%.
Speaker Change: We believe we may have benefited from a minimal amount of pre buy from price increases to be implemented in the second quarter.
Speaker Change: We are also cautious around the back half of the year and are monitoring the commercial market closely.
Speaker Change: We have not changed our guidance that North America water treatment sales will decline approximately 5% in 2025, as we deemphasize less profitable.
Speaker Change: <unk> retail channel.
Speaker Change: We are pleased to see the strong start to the year and our priority channels and are looking to build on that momentum.
Speaker Change: We continue to projected operating margin expansion of approximately 250 basis points in 2025 for the North American water treatment business.
Speaker Change: We expect the addition of pure it will add approximately $50 million in the sales in 2025, and we will not have a significant bottom line contribution this year as we work through the integration of this business.
Speaker Change: As I have noted based on the significant volatility in the tariff landscape, we maintain our sales growth expectation of a range of flat to up 2% pending further clarification on tariffs as we move through 2025.
Speaker Change: We expect our North America segment margin to be between 24% and 24, 5% and rest of world segment margin to be between eight and 9%.
Speaker Change: Please turn to slide 12.
Speaker Change: While we expect 2025 to be a year of muted bottom line growth as we navigate the volatile tariff landscape and continued to support our long term strategic investments as Kevin noted we are pleased with our team's first quarter performance.
Speaker Change: I was particularly pleased with the following.
Speaker Change: Our manufacturing execution as well as the steps taken to level load production and work with customers to manage order fluctuation caused by pricing actions.
Speaker Change: Our cost containment actions, which resulted in nearly flat SG&A spend in the first quarter compared to first quarter last year that.
Speaker Change: That included increased SG&A expenses as a result of inflation and our <unk> acquisition.
Speaker Change: Our boiler sales growth of 10% in the quarter the fourth consecutive quarter of growth for this category.
Speaker Change: Encouraging north American water heater sales, which while lower relative to a tough comp last year grew over 10% compared to the previous quarter.
Speaker Change: Both North America water treatment and China's profit improvement actions, we are on track to meet margin improvement goals through cost management and the benefits of restructuring.
Speaker Change: During the quarter, we also cut the ribbon and opened our world class commercial R&D testing lab facility in Lebanon, Tennessee.
Speaker Change: This Phil this facility Leverages, our product development and engineering talent in one location focused on continuing to drive our leadership in commercial water heating employers.
Speaker Change: And lastly, but very important to us for the second year in a row a O Smith was recognized as one of the world's most ethical companies by Ethisphere.
Speaker Change: A global leader in defining and advancing the standards of ethical business practices.
Speaker Change: Living our values and doing business. The right way is always front and center to how we operate and it is great validation to be recognized by Ethisphere.
Speaker Change: We have confidence in our ability to navigate the volatile 2025 macro environment.
Speaker Change: Our leadership position in all the markets that we serve the stable recurring revenue provided by our core water heater and boiler businesses and our strong balance sheet allow us to continue to invest in ourselves make attractive strategic acquisitions and maximize shareholder return even in times of uncertainty.
Speaker Change: As always we are in close communication with our suppliers customers and other stakeholders as we navigate the challenging environment.
Speaker Change: We are deploying diligent cost management actions across our businesses to ensure that we maximize profitability. During this time of cost volatility.
Speaker Change: We are committed to leading the industry forward and are confident that we will continue to build on our long history of innovation and proven ability to drive profitable growth.
Speaker Change: With that we conclude our prepared remarks, and we are now available for your questions.
Speaker Change: Certainly and as a reminder, ladies and gentlemen, we ask that you. Please limit yourself to one question and one follow up you may get back into the queue. As time allows our first question for today comes from the line of Jeff Hammond from Keybanc capital markets. Your question. Please.
Jeff Hammond: Hey, good morning, everyone.
Speaker Change: Kevin Congrats on.
Jeff Hammond: On a great run and Steve.
Jeff Hammond: For your promotion.
Jeff Hammond: Wanted to wanted to start here with.
Speaker Change: I guess, you're not really changing anything in the assumptions, but I am just wondering where you think you might see some demand destruction around.
Speaker Change: Incremental pricing actions and just the general uncertainty out there and then just on.
Speaker Change: On the price increases would you expect to get margin on that price or just cover.
Speaker Change: The incremental inflation. Thanks.
Speaker Change: Hey, Geoff let me start out on the margin question. So our assumption in 2025 is really EPS neutral.
Speaker Change: We're expecting to have pricing to cover costs.
Speaker Change: Laid it out that way.
Speaker Change: If you kind of look at our pricing, we will have probably a little bit of headwind in Q2, as we start incurring those costs before we have the pricing actions in place and I would say a little bit of headwind relative to Q1, we're really pleased with 24, 7% North America North American margins in Q1.
Speaker Change: With regard to demand destruction.
Speaker Change: We're really fortunate to have a replacement stable business with recurring revenue on the water heating side between that 80%, 85%. So that that certainly does stabilize our business.
Speaker Change: Our boiler business performed very well in the first quarter at 10% up as Steve noted there may be a little bit of pricing pull forward there, but we're watching the commercial markets as we go through the year and have not increased our boiler guidance based on that.
Speaker Change: From our perspective and it's early.
Speaker Change: Certainly early in the year, but we haven't seen any negative.
Speaker Change: Activities of orders and quoting has been pretty stable on the commercial side of the business, but again, it's pretty early in the year.
Speaker Change: Okay, Great and then you mentioned that the tariff exposure, 60% of cost of goods. So I'm. Just wondering if you could just unpack that a little bit.
Speaker Change: How much of that is <unk>.
Speaker Change: Steel inflation or steel tariffs and then any other kind of bigger buckets as you think about it.
Speaker Change: Our direct or indirect or.
Speaker Change: Purchase components.
Speaker Change: Yes.
Speaker Change: Carve out steel separately, when we think about tariffs, even though there is steel tariffs we've had those before it is in our outlook and we've got back half steel increases in our outlook. The tariff themselves that I would say are more direct and more near term and announced as of today and that.
Speaker Change: 6% to 8% that's an annual number.
Speaker Change: So we're looking at kind of annual volumes in the 6% to 8% the largest component of that is bringing in product either through our suppliers or directly including our tankless.
Speaker Change: From the China market.
We've talked a little bit about mitigating that through accelerating our tankless production as we've always planned to move from China to Mexico to mitigate that in the future, but China is our largest piece of that.
Mike Halloran: Thank you and our next question comes from the line of Mike Halloran from Baird. Your question. Please.
Mike Halloran: Hey, just a clarification there Chuck I'm sorry.
Mike Halloran: Did that include and so youre, saying the 6% to 8% does not include the steel inflation and is simply the tariff piece.
Mike Halloran: Our outlook includes the scale piece, but that 6% to 8% got it alright perfect yeah.
Mike Halloran: Got it.
Mike Halloran: The tariffs.
Mike Halloran: Yes, no no no I appreciate that.
Mike Halloran: Good morning, everyone, sorry about that and congrats to.
Mike Halloran: Everyone on the changes coming up.
Mike Halloran: So could you just talk to how you think about that sequentially as you work through the year I understand the steel comments into the back half of the year, but from a demand perspective.
As you sit here today, it's just kind of relatively normal seasonality as you work through the year or are there any other nuances I should think about.
Mike Halloran: No I mean, you think about it in terms of what we talked about in January 50, 149% in residential product in the front half back half.
Mike Halloran: Orders have been falling quite that way Steve.
Speaker Change: Steve talked about our initiatives to level load. The plant we could have pushed out more shipments. If we had wanted to but we really are working and very focused on manner.
Speaker Change: Managing the orders that have come in and because of that we would expect the cadence of the year to be much more normalized even though we have some announced pricing out there. So think of it in terms of a fairly normal years, we lay it out and we're working to try to do that so that we're most efficient as possible.
Speaker Change: Mike maybe another just a bit of a color on that we've done quite a bit of inventory checks with our channel partners.
Mike Halloran: So right now we're in pretty good shape. Most channel partners are relatively flat to last year, even slightly down so it's a little bit different environment than we had last year as we exited Q1 of 2024.
Speaker Change: No that makes sense and then follow up just me.
Speaker Change: Maybe talk about the rebalancing or how much you feel like you need to rebalance some of the sourcing or some of the footprint for these changes obviously the tankless coming over this way over the course of this year and into next year that that was well telegraphed, but maybe any of the other changes as you look at the network and how important that.
Speaker Change: Is all else equal.
Speaker Change: Competitively or however, you want to frame it.
Speaker Change: Yes.
Speaker Change: Ill take it as we had mentioned the teams we've got that are working on this since.
Speaker Change: There is there is shorter term actions you can take relative to working with your suppliers, where they have facilities that you can take advantage of.
Speaker Change: Mentioned, even in within our own supply chain network of getting Tankless into Mexico faster. So the teams are working on those things that there are longer term.
Speaker Change: Items, as well where there might be.
Speaker Change: Either a change in supplier of re qualification requirements. So we're studying those and some of them are harder than others and obviously some of them will be dependent upon what plays out in the year relative to tariffs. So we have an understanding if things stay the way. They are certain actions. We are working on and we would take if they move it might.
Speaker Change: It might change those actions so it's a pretty fluid state and that's why we've got kind of these task force set up so that it's not just executing our plan at the world today, but it is helping us.
Speaker Change: Realign our supply chain as new information becomes available.
Speaker Change: Thank you and our next question comes from the line of sorry, Alright, Thanks, Keith from Jefferies. Your question. Please.
Speaker Change: Hi, Thanks for taking my questions and congratulations to Kevin Steve on the new roles.
Speaker Change: You talked about pre buy impact come from wire here last year on kind of a list price increase I was just curious on the pre buy and expectations given expected pricing actions in response to tariffs I think you mentioned a difference in orders for staffing level, so you'd be delivering on lower price products to more of the year.
Speaker Change: Thanks.
Speaker Change: While we.
Speaker Change: So.
Speaker Change: We've really been managing production did not pull in orders in the first quarter, we expect pricing to come into play later in the second quarter.
Speaker Change: So the order rate from a price pull forward, we would expect to be pretty smooth from first to second quarter.
Speaker Change: Rounding out the $51 49 perspective on units being shipped.
Speaker Change: And I would just say we work really closely with our customers on this so one of the ways. We handle this as we slowed our lead times as we get orders coming in we work with our customers in terms of an allocation of how to work through those orders. So that we can actually provide some clarity around when the price transition occurs but it.
Speaker Change: It's something we work closely with our customers on and I think we're handling that through this year and with the price changes and the uncertainty around tariff costs.
Speaker Change: Very very.
Speaker Change: Very effectively.
Speaker Change: To serve our customers well, but also to run our planned submission.
Speaker Change: Maybe one other comment there the whole key is we're just not pulling in a bunch of overtime in Q1 that pulled into Q1, but we're trying to be a bit more systematic about it and that may that's not going to change within the quarter, how we're going to ship and so what we expect.
Speaker Change: To be as we've said to be through.
Speaker Change: Shipping through the quarter, and then start to benefit from the back half of Q1 with the pricing. So it's just a little bit of timing, but its narrow, but it makes a big difference to our factories and it makes a big difference to our customers to make sure that they can order on a regular basis and have the stock in handling their contractors need it.
Speaker Change: I appreciate the additional color and then I'm sorry. If this is just leaving confused that you have announced price actions, but I believe you've not included some guidance. So I guess would you expect those price increases to not go into the SaaS. If tariffs are not implemented in the current form and then what would sales guidance.
Speaker Change: Assuming the announced price increases go into effect. Thanks.
Speaker Change: Tariffs are so volatile right now and unpredictable.
Speaker Change: We felt it was prudent to not include top line assumption of what may or may not be held them to.
Speaker Change: Going forward cost or tariffs so.
Speaker Change: EPS were very <unk>.
Speaker Change: Conscious of the tariffs that are in place today, and the mitigating actions that Steve outlined one of which includes pricing so where we.
Speaker Change: We're comfortable with our EPS outlook.
Speaker Change: Just where we fall within that $363 90, but we haven't decided we just felt it was prudent to not try to put a topline assumption out there yeah I would tell you that.
Speaker Change: So those can go either way I think we know where we're at today, we wanted to make sure you understood that we have taken action.
And that we're confident in how we're going to maintain EPS in our guidance on sales, but it's just really early because the equation changes sometimes literally every day. So I think when we get a nice.
Speaker Change: Better view of this but I think the takeaway here is were prepared not only with our pricing, but all the other actions we've taken with regards to cost controls and so forth and optimizing our manufacturing that we're in good position to navigate through these tariffs regardless of where they end up.
Speaker Change: Thank you and our next question comes from the line of Bryan Blair from Oppenheimer. Your question. Please.
Speaker Change: Thanks, Good morning, everyone.
Speaker Change: Echo the sentiments, Kevin and Steve.
Speaker Change: Congrats to you Bob.
Speaker Change: I wanted to.
Speaker Change: Just make sure that I'm understanding that 6% to 8%.
Speaker Change: Of Cogs.
Speaker Change: <unk> tariff exposure.
Speaker Change: Does that does include the full.
Speaker Change: A full run rate impact of Tankless imports from China correct.
Speaker Change: And an extension of that.
Speaker Change: The pro forma figure being.
Speaker Change: Assuming the full transition to wireless production.
Speaker Change: Yes, there's a lot of moving parts to a pro forma number, particularly with us accelerating manufacturing from China to Mexico, meaning there'll be some trailing tariffs on components, because we're probably going to have some components go in to Mexico.
Speaker Change: We've been probably focus more on moving those to local sourcing. So it's kind of it's going to take a little bit of working through to kind of come up with that number and we're certainly looking to mitigate it.
Speaker Change: The $8 eight 6% to 8% includes includes Tankless. It includes Tankless added volume in 2024.
Speaker Change: I think I've talked about on the last call, we have a meaningful amount of take less inventory in place.
Speaker Change: So that may not be quite that number in 2025, but.
Speaker Change: No.
Speaker Change: From a full year perspective.
Speaker Change: Tankless is the largest component single component within.
Speaker Change: China import costs.
Speaker Change: Understood I appreciate that detail and high level, and then just with regards to competitive positioning and strategy.
Speaker Change: Aside.
Speaker Change: Near term price cost for the moment.
Speaker Change: Maybe offer some color about how your team is thinking about the risks versus opportunities presented by.
Speaker Change: All of the uncertainties.
Speaker Change: No.
Speaker Change: Around tariffs trade policy et cetera.
Speaker Change: Well I would say anytime there is uncertainty.
Speaker Change: It's an opportunity to find a way to respond faster.
Speaker Change: After than your competitors navigate it more successfully.
Speaker Change: Than others in the marketplace and I think I feel confident in our team's ability the way we've rallied behind this the way we've understood.
Speaker Change: The dynamics, we've got our supply chain data pulled together.
Speaker Change: We've got experts within our organization that I think.
Speaker Change: Understand the dynamics well.
Speaker Change: I think we're very plugged in terms of understanding some of the policies policy decisions that are out there today as well and I think.
From my standpoint, I am confident that we can respond better than most because of the capabilities. We've put in place I think we just put.
Speaker Change: One of the things we're in country for country.
Speaker Change: And that's on a global basis so.
Speaker Change: Being able to navigate this with our local teams I think is just.
Speaker Change: An opportunity where maybe other companies don't have that luxury but again not being this low cost producer and moving things around being in country for country with local management I think is going to make.
Speaker Change: Could make a difference for us as this thing plays out.
Thank you and our next question comes from the line of Scott Graham from Seaport Research Partners. Your question. Please.
Speaker Change: Hey, Thank you good morning, Kevin it's been a true pleasure working with you.
He spent some great time together and thank you for that and Steve and I wish you.
Speaker Change: All the luck in the World and look forward to working with you.
Speaker Change: My questions are really.
Speaker Change: Around.
Speaker Change: The residential water heater shipments assumption and then China.
Speaker Change: The residential macros to date have really not been.
Speaker Change: Overly optimistic overly positive.
Speaker Change: And when you consider inflation impacting some of them I was just wondering what is your assumption for proactive this year within the industry on a year over year basis.
Speaker Change: Are you assuming proactive is flat maybe even down.
Scott: You know what's been interesting Scott.
Scott: We track this I think we've talked about it many times for over a decade and we've just got to recent data last night quite frankly to be honest with you and right now the proactive and University replacement is still tracking at that level that we came out of COVID-19.
Scott: <unk> talked about maybe this is just an embedded change in the industry. So.
Scott: As we see it right now.
Scott: We see proactive and the replacement, which is going to be 80, 885% of our business to be rather stable and resilient.
Scott: Okay. Thank you for that and then.
Speaker Change: When you look at China, I know, obviously with the stimulus over there targeting helping consumers. This do you need a broader improvement in housing there to kind of get that business going what are the things.
Scott: Things that you're looking for for that business to start to improve again.
Scott: I would characterize it Scott is more we're looking for consumer confidence to build in China, and I think with consumer confidence.
Scott: Some of that is connected to the housing market right because there's a lot of wealth tied up for the Chinese middle class in their real estate, but with that consumer confidence you get both the benefit of.
Scott: How folks will invest in their real estate <unk> invest and upgrade of their homes and with the upgrade of homes you see the premium position of Av.
Scott: <unk> kitchen updates that we can take advantage of so I'd characterize it more as consumer confidence and housing market the housing market in China.
Scott: Got a ways to go I think to really recover but it's that close connection to consumer confidence that we're watching.
Speaker Change: Thank you and our next question comes from the line of Andrew Kaplowitz from Citi. Your question. Please.
Andrew Kaplowitz: Good morning, everyone, Kevin Steve Congratulations.
Scott: Thanks.
Scott: Chuck I'm, just trying to understand the EPS cadence a little bit more for the year and tariff versus pricing. If we think that the 68% of annualized cost of tariffs is going to be the headwind do you see full impact in Q2 without much help from pricing yet so we need to forecast that in Q2 and then.
Scott: Do you end up covering more than more than the tariffs in the second half of the year and the transition costs from Tankless late in the year like how does that cadence work.
Scott: Yes.
Scott: Let me start with we're very pleased with North American margins in Q1 at 24, 7%.
Scott: Cost containment measures and some of the other actions to level load. The plan. That's been very helpful to that margin. A reminder, our full year guidance is 24% to 24 and a half. So Q1 was a little bit better than our full year guidance, we haven't changed our full year guidance.
Scott: From an EPS standpoint.
Scott: From a margin profile standpoint, but from a north American margins, we would expect to be slightly down in Q2, because we are starting to see cost on tariffs.
Scott: We're working to mitigate those cost as Steve mentioned working with our suppliers.
Scott: Through the quarter and.
Speaker Change: We will see pricing come in in June so there'll be a little bit of a headwind and we haven't changed our full year guidance, 24% to 24 and a half so a lot to play out yet in the rest of the year Q2, probably a little bit on North American margin headwind, but for the full year, we're comfortable that EPS is kind of on track.
Speaker Change: Very helpful. And then maybe just a follow up on China for Kevin or Steve you saw.
Speaker Change: I'll start out only down 4%, which I think was slightly better than Q4 that stimulus help at all can you give us some more color on sort of what you see there and I I know, you're continuing to think about China as strategically important but has it become it all more difficult to do business in China recently, given what's going on.
Speaker Change: Yes regarding the start to the year I think we're starting out kind of as we had expected to start the year end.
Speaker Change: We're cautious I think we're cautious about how the euro play out the economic conditions in China.
Speaker Change: So we're watching it closely but as we've said, we're still think that the market recovery will take some time, there and so I think that's reflected in our guidance.
Speaker Change: How we proceed forward and our focus really is making sure that we can make.
Speaker Change: Maintain our competitiveness in China maintained our premium brand position in China, and that's what the team has been.
Speaker Change: <unk> been focused on while at the same time right sizing the organization I think to the new market reality. So I think we're off to a good start there, but we're very cautious as it relates to how the year will play out.
Speaker Change: Regarding whether we are seeing a major shift in dynamic I would say the trends are very consistent to what we've seen over the last few years.
Speaker Change: A challenging macro environment.
Speaker Change: As we talked about consumer confidence is not where it needs to be to sort of drive growth.
Speaker Change: The.
Speaker Change: Trade in program is stabilizing, but not really driving growth for us in the marketplace.
Speaker Change: And so right now we're looking to competing on obviously, we have local competitors there that.
Speaker Change: That means we've got to be really on our game and so I think those conditions haven't changed we haven't really seen a big shift relative to consumer sentiment around our products. We're in China for China, and we are well respected and we have a great brand there and I think we still see that as the way in which we are.
Speaker Change: We're competing and seen in the marketplace.
Speaker Change: Thank you and our next question comes from the line of David Macgregor from Longbow Research. Your question. Please.
David Macgregor: Yes, good morning, everyone and congratulations to Kevin.
David Macgregor: I guess I wanted to start off by just asking you about capacity available to you in the United States and specifically, maybe how much excess capacity do you have in your Tennessee, Kentucky component plants, and your ability to repatriate manufacturing to the U S and I guess as part of that how does an increase in the tariffs affect your thinking around vertical integration.
David Macgregor: Follow up after that thanks.
David Macgregor: Well, maybe I'll touch on that.
David Macgregor: And the water heater side, we're very vertically integrated already.
David Macgregor: So again, we're in country for country. So.
David Macgregor: Repatriating I don't think Thats an issue because we don't we don't have many products that come in from outside.
David Macgregor: Added states.
David Macgregor: That's played out well for us.
David Macgregor: It continues to play out well for us.
David Macgregor: So I just don't see that being a major challenge for us from a capacity standpoint.
David Macgregor: We do have as capacity, we structure, our plans to appropriately like we have been talking about and making sure that we have the right run rate. So if we can optimize our efficiencies and we have the ability and we have three large residential plants, we have the ability to shift things around and boomers more optimal for our customers.
Speaker Change: Lois for a O Smith from.
David Macgregor: From a margin standpoint so.
David Macgregor: <unk>.
David Macgregor: No big plans to repatriate because we don't do that and I think our teams are working well together with Steven and the operating groups to make sure we're positioning ourselves well to kind of navigate this situation, but thats where were at and again.
David Macgregor: Playing out well our strategy friend country per country is playing out pretty well on a global basis, considering the uncertainty and volatility in the market today.
Speaker Change: Okay. Okay. Thanks for that I guess secondly, just given all the changes that are taking place at the administration level in this country.
David Macgregor: Wanted to ask you about the 2026 change in regulatory requirements around.
The elimination of low efficiency commercial gas product are you seeing anything at the federal level that would suggest that this might be delayed or would be reduced in scope I think at one point you thought the changes would impact about 55% of units sold.
David Macgregor: Yes, I would tell you I am just going to take there is two major.
David Macgregor: We will make keeps out there one is on the commercial rulemaking, which is October 26, and Thats the reason.
David Macgregor: From not condition to condensing product in the commercial segment and then of course, there's will be referred to as <unk>, four which is a little bit further round thats going to be in 2029.
David Macgregor: What I'll start with this both of these have gone through Congress and they are law.
Speaker Change: Okay, so it's going to be difficult to change.
Speaker Change: Any of those standards that we have there. So what we're doing is we're simply preparing for that and the first step is going to be on the commercial side and that will be mainly in our Mac b.
Speaker Change: Commercial facility, which we are taking steps there there is a lot of.
Speaker Change: Chatter out there with regards to this and regulatory but.
Speaker Change: We're proceeding until we see something really meaningful we're proceeding as both of these we will make gains will go into effect at the appropriate time.
Speaker Change: If they don't we're pretty nimble company and we can make adjustments, but as of right now again, they're law and we're proceeding as if theyre going to go into effect as scheduled.
Speaker Change: Thank you and our next question comes from the line of Damian Karas from UBS. Your question. Please.
Damian Karas: Hey, good morning, everyone.
Damian Karas: Hopping on late here, so apologies for any repetition morning morning.
Damian Karas: Yes, I was just wondering if you could elaborate on the up.
Damian Karas: Pricing actions for North America water heaters again, sorry, if I missed this but.
Damian Karas: Have you.
Damian Karas: $6 six to nine 6% to 8%.
Is this kind of like already executed like round of increases or are there sort of some pending rounds of price changes that are going to take effect in and I'm also just curious.
Damian Karas: Thinking about the past right.
Damian Karas: And the North American industry.
Damian Karas:
Damian Karas: <unk> like <unk> price.
Damian Karas: Price increases have typically been.
Similar happening at the same time, whether it was steel inflation or supply chain bottlenecks. At this time is a little bit different just because of the.
Damian Karas: The very specific tariff.
Speaker Change: Factors and the fact that you have a different footprint from some of your peers. So just curious if like your price action, if youre seeing anything.
Damian Karas: Different in the market out there.
Damian Karas: So first off on the pricing.
Damian Karas: Announcements they haven't been made and they're out in the marketplace and we've been communicating with our customers around that so that is a step we have already taken.
Damian Karas: You are correct in that this is a little bit of a different dynamic as you think about tariffs versus other inflationary pressures that we've worked through in the past and tariff sort of have defined dates in and supply chains, and we're all impacted a little bit differently.
Damian Karas: Cross the different companies, but I would say it comes down to we have really good relationships with our customers. We work through these things right. Now obviously, we have to move forward with what we know and the best information, we have available to us and I think as that information changes what might be different as we will continue to work with our customers around the implications that has.
Damian Karas: In terms of our pricing.
Damian Karas: Okay understood.
Damian Karas: And I was wondering if you could maybe update us.
Damian Karas: To the status of the Mexico capacity ramp.
And I'm curious.
Damian Karas: I think on the Tankless side of tariffs might actually present, an opportunity to kind of accelerate your your.
Damian Karas: Our position in North American Tankless My understanding is that a lot of the north American market is still coming from overseas ex Mexico.
Damian Karas: We are looking to accelerate our ramp up in Juarez.
Damian Karas: We have our premium condensing at that product that is launched there already we have two more products that we were planning to launch through the course of this year to be ready for next year with the full portfolio and we are looking to accelerate those efforts. So that we can get our products producing out of our Juarez, Mexico facility and.
Damian Karas: Part of that acceleration is the economic case presented from the tariffs.
Damian Karas: Yes, Damian it's always been our intent to start production in China and move into warheads and it just accelerates the ability for us to start production in whereas versus in the last two products startup production in China.
Thank you and this does conclude the question and answer session of today's program I'd like to hand, the program back to Helen <unk> for any further remarks.
Helen: Thank you everyone for joining us today, let me conclude by reminding you that we are pleased with our quarter over quarter movement, even in a challenging environment. We look forward to updating you on our progress in quarters to come.
Helen: In addition, please mark your calendars to join our presentations at four conferences.
Speaker Change: Quarter Oppenheimer on May 5th Northcoast Amit.
Helen: Keybanc on May 28.
Helen: On June 3rd Thank you and enjoy the rest of your day.
Helen: Thank you, ladies and gentlemen for your participation in today's conference.
Helen: The program you may now disconnect good day.
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