Q2 2025 A. O. Smith Corp Earnings Call
You will then hear an automated message. Advising that your hand is raised to withdraw your question. Please press star 1 1 again, please be advised. That today's conference is being recorded. I would now like to hand the conference over to your speaker today. Helen Gerhold, please begin.
Good morning and welcome to the AO Smith. Second quarter conference call. I'm Helen Gerhold by vice president investor relations and financial planning and Analysis.
Today I'm joined by Steve Schaffer chief executive officer and Chuck Robert Chief Financial Officer.
Within today's presentation we have provided non-gaap measures free cash. Flows is defined as cash from operations plus Capital expenditures.
Reconciliations from gaap measures to non-gaap measures are provided in the appendix at the end of this presentation and on our website.
A friendly reminder that some of our comments and answers during this conference call will be forward-looking statements that are subject to risk 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 1 question and 1, follow-up per turn.
If you have multiple questions, please rejoin the queue.
We will be using slides. As we move through today's call, you can access them on our website at investor aosmith.com.
I will now turn the call over to Steve to begin our prepared remarks
Steve Schaffer: Thank you, Helen and good morning everyone.
We Believe AO Smith has an outstanding foundation for profitable growth, as a global Water technology leader.
Speaker Change: I am both honored and excited to build on this Foundation as the company's new CEO and then confident in our company's future.
Speaker Change: This future will be powered by the many dedicated and capable aosmith colleague. I have started to get to know over the past year and a half and I look forward to the journey we have in front of us together.
Speaker Change: Later in our prepared remarks, I will share some of my early thoughts on priorities going forward, but I believe will be most impactful in delivering that bright future for us.
Speaker Change: But first I would like to go through our second quarter performance.
Speaker Change: Our updated guidance for the year in the announcement, regarding our China business.
Speaker Change: Now, turning to slide 4 and our financial performance in the quarter.
Speaker Change: North America water heater sales decreased 2% in the second quarter driven by lower volume.
shipments in the first half of 20124 benefited from pre by related volumes ahead of an announced price increase
Speaker Change: This year, we believe the industry. Once again bought ahead of price increases and tariff risks.
We decided to take a more proactive approach by working closely with our customers to better. Align order rates to our strategy of smoothing production schedules in order to do greater operational efficiency.
Speaker Change: Like the overall industry, we still benefited in the quarter from a demand pull forward.
Speaker Change: However, our 2025 full forward impact was less pronounced compared to the demand pull forward. We experienced in 2024
Speaker Change: And we expect to gain operational efficiencies through the year because of these actions.
Speaker Change: Our North America boiler sales increased by 6% compared to the second quarter of 2024, led by higher volumes of our high efficiency commercial boilers.
Speaker Change: North America, water treatment sales increased slightly in the second quarter as growth in our priority channels, e-commerce dealer and direct to Consumer continued to offset, expected, retail declines.
Speaker Change: In addition to the growth in these priority channels we are pleased with the improved profitability and provided which helps contribute to North America segment. Operating margin expansion in the quarter.
In China second quarter sales, decreased 11% in local currency as the ongoing economic challenges and limited availability of government, subsidy programs outside of Tier 1 and 2 cities resulted in lower volumes.
Speaker Change: We maintained our operating margin year-over-year despite lower sales, due to our 2024 restructuring initiatives and other cost control measures.
Speaker Change: In addition to announcing our Q2 performance in China, we are also announcing today that we are initiating a process to further, assess our China business, in an effort to ensure that it is best positioned to compete and succeed in the future.
Speaker Change: We intend to evaluate a broad range of options in addition to further business Improvement.
Including strategic Partnerships and other alternatives.
Speaker Change: From China and reduced costs to better position the business for the future.
These initiatives are already, delivering positive results.
Speaker Change: We are on track to achieve 15 million dollars in annual benefits which have resulted in sequential margin Improvement quarter over quarter.
Speaker Change: Despite the current macroeconomic challenges, we believe the China Market has substantial long-term potential.
Speaker Change: Our China business also has many competitive strengths.
Speaker Change: Including a premium brand position. Differentiated Innovation capabilities.
Speaker Change: A well-established distribution Network and a talented, local team.
Speaker Change: We are committed to realizing the full potential inherent in our China business, for our company, and our shareholders.
Speaker Change: While benefiting our employees valuable partners and customers.
Speaker Change: We believe that the assessment announced today will allow us to properly understand the potential options available to realize the full potential of the business.
As the review progresses, we will continue to deliver best-in-class products and service just as we always have.
Speaker Change: Please turn to slide 5.
Speaker Change: I would now like to take a moment to discuss Innovation at AO Smith.
Speaker Change: As a water, technology leader, we continue to invest in and launch new to the world differentiated products.
Speaker Change: And I would like to highlight a few of those offerings today.
Speaker Change: We recently introduced the second product in our adapt gas tankless line.
Speaker Change: The adapt SD.
Speaker Change: Which is our standard condensing product featuring industry. First integrated scale? Prevention technology.
Speaker Change: this product is positioned in the high volume segment of the tankless market and is the latest proof point in our commitment to become the North American leader in tankless technology,
Speaker Change: We have also just launched our Home Shield, full house, water filter which is certified to reduce pfas for less than 4 parts per trillion for 500,000 gallons of water.
Speaker Change: In addition to taking whole house, P pass reduction performance to a new level.
Speaker Change: It is also easier to install and provides both economic and ecological benefits for the homeowner.
Speaker Change: Next month, we will introduce the Cyclones Flex the next generation of our industry-leading, commercial water heater. That is smarter more efficient and more flexible than ever.
Stay in the industry. Leader means never standing still. And this product is a continuation of our long history of cyclone enhancements and will help. Ensure we are best positioned for the 2026 regulatory change in the commercial Market.
Speaker Change: And remain the industry's number 1 specified yet. Commercial gas water heater.
Speaker Change: These are just a few examples of the exciting pipeline of new products. We are bringing to Market. That has us confident in our future.
Chuck Robert: I'll now turn the call over to Chuck who will provide more details on our second quarter performance.
Chuck Robert: Thank you, Steve and good morning everyone.
Chuck Robert: we delivered sales of 1 billion dollars in the second quarter of 2025, a decrease of 1% year-over-year,
Chuck Robert: Earnings were $17 per share a 1%, increase compared to the prior period.
Chuck Robert: Please turn to slide 6.
Second quarter sales in the North America segment of 779 million decreased 1% compared to a difficult year-over-year comp.
Chuck Robert: Higher boiler sales were more than offset by lower volumes of water heaters.
Chuck Robert: North America, segment earnings of 198 million were essentially flat last year segment, operating margin was 24 255.4, an increase of 30 basis points year-over-year primarily due to mixed benefits from our water treatment priority channel strategy, as well as growth in high efficiency water heaters.
Chuck Robert: Moving to slide 7.
Chuck Robert: Rest of the world segment sales of 20040 million dollars, decreased 2% compared to last year.
Chuck Robert: And included 16 million dollars of sales from the period acquisition.
Chuck Robert: Sales in our Legacy India, business grew 19% in local currency.
Chuck Robert: China, third-party sales, decreased 11% uh, constant currency basis.
Rest of the world segment earnings of 25 million were essentially flat year-over-year. As continued expense management, offset, lower sales in China.
Chuck Robert: 6% in the prior period.
Chuck Robert: The period acquisition is progressing. Well however we'll be margin headwind in the near term as we focus on the integration.
Chuck Robert: Please turn to slide 8.
Chuck Robert: We generated operating cash flow of 178 million and free cash flow of 140 million. During the first 6 months of 2025 higher than the same period last year primarily due to lower cash outlays for 2025 working capital needs. That were partially offset by lower current year earnings.
Chuck Robert: Our cash balance totaled 178 million at the end of June and our net debt position was 126 million.
Chuck Robert: Our leverage ratio was 14.1% as measured by total debt to Total capital.
Chuck Robert: Let's now turn to slide 9.
Chuck Robert: Earlier this month, our board approved our next quarterly dividend of 34 cents per share.
Chuck Robert: We repurchased the approximately 3.8 million shares of common stock in the first 6 months of 2025 for a total of 251 million.
Chuck Robert: An increase over the same period last year as we increased our plan to pull your repurchase intentions from 306 million in 2024 to approximately 400 million dollars of shares for 2025.
Chuck Robert: We also opportunistically bought shares during the first half of the year.
Chuck Robert: We are actively assessing strategic opportunities and have sufficient dry powder for suitable acquisitions.
Chuck Robert: Our priority is on deals that strengthen our core business or help us build New Growth platforms.
Chuck Robert: Please turn to slide 10 in our 202025 earnings guidance and Outlook.
Chuck Robert: We are raising the midpoint of our 2025 EPS Outlook from a range of between 3 dollars and 6060 cents and $3.90 per share.
Chuck Robert: To a narrow range of between $3.70 and $3.90 per share.
Chuck Robert: The midpoint of our revised EPS range is an increase of 2% compared to our 2024 adjusted eps.
Chuck Robert: We have included the following key assumptions in our Outlook.
Our guidance, asui assumes, an approximate 15 to 20% increase in the cost of seal, in the back half of the year, as well as the full impact of currently announced tariffs, which minimally impacted the first half of the year.
Other input costs, outside of Steel, and tariffs are slightly higher than 2024 and rattled for the year.
Chuck Robert: Rates as well as the mitigation efforts we have implemented.
Chuck Robert: Our mitigation strategies include footprint optimization.
Chuck Robert: Strategic sourcing and other cost controls.
Chuck Robert: We estimate that 2025 capex will be between 90 and 100 million as we continue to invest in engineering capabilities and prepare for the upcoming regulatory changes.
Chuck Robert: We expect to generate free cash flow of between 500 and 525. Million interest expense is projected to be between 15 and 20 million dollars.
Corporate and other expenses are expected to be approximately 75 million.
Chuck Robert: Our effective tax rate is estimated to be between 24 and to 24.5%.
Chuck Robert: And we project our outstanding diluted shares will be 142 million at the end of 2025.
Chuck Robert: I'll now turn the call back over to Steve who will provide more color around our key markets.
Chuck Robert: Topline growth Outlook and segment expectations for 2025 remaining on slide 10.
Thanks Chuck.
Chuck Robert: Key assumptions in our Top Line, Outlook include the following.
Chuck Robert: We project a 2025 residential and Commercial industry. Unit volumes will be approximately flat to last year which is unchanged.
Chuck Robert: As we expected, we believe that there will be some pressure on our market share.
Chuck Robert: In the first half of the year as we managed, our production levels, despite the strong order rates, we saw in response to tariff announcements and ahead of our maid pricing increases.
Chuck Robert: We anticipate a market share recovery in the second half of the year as we work through our backlog and our customers return to more normalized order patterns.
Chuck Robert: In China we believe the economy remains challenged and we continue to project that our sales in China will decrease 5 to 8% in local currencies.
Chuck Robert: While the stimulus programs benefited sales, in Tier 1 and 2 cities where we saw relatively flat sales compared to last year. Stimulus programs were inconsistently applied in other regions particularly particularly in smaller cities.
Chuck Robert: Additionally, many regions have not yet resumed subsidies in the second half of the year.
Chuck Robert: Our forecast assumes that the currency translation impact will be minimal in 2025.
Chuck Robert: We continue to expect to realize annual Savings of approximately, 15 million dollars from our 2024, restructuring actions. And as a result, China operating margin is projected to be in the 8 to 10% range for 2025.
Speaker Change: Even with roller bars.
We remain cautious about the near-term Market Outlook, including the impact, from The Appliance Discount trade-in program.
Speaker Change: However, we are pleased with how our China team continues to manage the challenging environment.
Speaker Change: We have raised our 2025. North America boiler sales, projection from an increase of between 3 and 5% to an increase of between 4 and 6% compared to 2024.
Speaker Change: We are very pleased with our growth in the first half of the year.
Speaker Change: However, we believe we may have benefited from a minimal amount of pre-b. Buy related to price increases implemented in the second quarter.
Speaker Change: We continue to monitor the commercial markets closely.
Speaker Change: We have not changed our guidance that North America water, treatment sales will decline approximately 5% in 2025, as we de-emphasize, the less profitable retail Channel.
We are pleased with the momentum. We are seeing in our priority channels where we are seeing double-digit growth.
Speaker Change: We continue to project an operating margin expansion of approximately 250 basis points in 2020 2025 for the North America water treatment system.
Speaker Change: Lastly, we continue to expect the addition of pureit will add approximately 50 million dollars in sales and 2025 and will not have a significant bottom line contribution this year as we work through integration,
based on our confidence in our ability to manage tariffs and other cost pressures.
Speaker Change: Our expected improved relative market share performance in the back half of the year.
Speaker Change: and our strong boiler sales in the first half of 2025,
Speaker Change: we have raised our full year sales Outlook from Flat to 2%.
Speaker Change: To an increase of 1 to 3%, compared to last year.
And rest of world segment margin will be between 8 and 9%.
Speaker Change: Please turn to slide 11.
Speaker Change: As I reflect on my last 16 months, there were several things that led me to join the company in March 2024.
Speaker Change: And I found that those first impressions have proven to be accurate.
Speaker Change: First the company's dedication to its foundational values and doing business the right way. The Smith weigh,
Speaker Change: Strongly resonates with me.
Speaker Change: Second, the genuine commitment of the entire Global team to a strong culture of collaboration and innovation.
Speaker Change: Third, the quality of our businesses where we are a leader in the markets that we serve with strong, trusted and enduring customer relationships.
Speaker Change: Our core, North America water heater and boiler businesses. Provide a resilient base with stable 80 to 85% replacement rates.
Speaker Change: Strong cash generation and attractive regulation driven growth Tailwinds.
Speaker Change: And forth an amazing set of strategic opportunities that we can lean into to build our bright future.
Speaker Change: As I now step into the CEO role, I'd like to highlight a few areas that my leadership team and I are focused on that. I believe will play an important role in creating value at AO Smith as we go forward.
Speaker Change: First operational excellence.
Speaker Change: We will, we will remain focused on accelerating productivity and the elimination of waste through the expansion of our AOS operating system.
Speaker Change: While AO Smith already has a great foundational culture of continuous Improvement on the plant floor. I believe we can benefit from A Renewed focus on the application of lean principles, not only to our manufacturing processes but to other processes as well.
Speaker Change: I have personal experience both in deploying and running a number of operating systems in my career.
Speaker Change: And I believe the opportunity to expand our thinking of end-to-end processes and waste elimination. Can even further improve the operational and working capital efficiencies of our company.
Speaker Change: an example of our focus on this operational discipline is our initiative this year to work with our customers to smooth our production schedules, in our plans, which we discussed earlier,
Speaker Change: I also see technology playing a big role in helping us achieve new levels of productivity going forward.
Speaker Change: Both leveraging those technology Investments we have already made more effectively.
And investing in new technologies to help us Advance the way we work.
Speaker Change: We are also going to build Upon Our great legacy of innovation at AO Smith.
Speaker Change: Our pipeline of innovative products is strong and we've made a number of major Investments to prepare for the future. Both in terms of regulatory and Technology shifts.
Speaker Change: Included in this investment is the recent commissioning of our brand new product development center in Lebanon, Tennessee.
Speaker Change: Earlier, I shared some of the exciting new products we are introducing this year as examples of our powerful Innovation capability.
Speaker Change: There is still much more we can do and I look forward to the opportunity to advance aosmith Innovation capability to the next level.
Speaker Change: I am pleased to announce that Dr. Mingcheng joined the company earlier this month as our next chief technology officer.
Speaker Change: I work with him for over 10 years at 3M and developed. Great respect for his leadership business sense.
Speaker Change: Technical expertise in great curiosity.
Speaker Change: All important attributes for an innovation leader.
Speaker Change: I'm confident that Ming will help us achieve this next level of innovation capability.
Speaker Change: The third Focus area, I would like to mention is portfolio management. Making sure that AO Smith is positioned well, with a portfolio of businesses and products for future success.
Speaker Change: The assessment of the China business, as well as the restructuring actions, we took in China and North America water treatment last year, our consistent with my commitment to continually evaluate our portfolio and take the actions necessary to position them. Well for profitable growth.
M&a and strategic Partnerships to build out, our business platforms, will likely be a critical level to enable the portfolio work.
Speaker Change: And we have ample Drive Powder and management Focus to help deploy it for the right target.
I look forward to sharing more information about these priorities as we lean into them and drive them forward to great value for AOS Smith.
Speaker Change: Moving to slide 12.
Speaker Change: I am pleased with our team's second quarter performance.
Speaker Change: we executed, well,
Speaker Change: Both responding to a number of Uncertain factors in North America with agility and discipline.
Speaker Change: And resetting the business in China to address the ongoing challenging Market environment.
Speaker Change: These actions have allowed us to continue to make sequential margin improvements in both the North America and rest of world segments.
Speaker Change: We continue to see strong growth momentum in areas where we are expecting growth performance, including the North America boiler. And India businesses, as well as the prioritized channels in the North America water treatment.
Speaker Change: In both our margin Improvement and growth efforts. I would like to thank all my aosmith colleagues for your dedication and delivery.
Speaker Change: We also believe that strategic actions. We are taking are positioning us. Well, for the future.
Leveraging. The AOS operating system, re-energizing innovation.
Speaker Change: And driving our portfolio forward, will be keys to Our Success.
Speaker Change: And I am pleased to see our leadership team rallying around these priorities.
Speaker Change: Our strong Market leadership.
Speaker Change: Recurring revenue from our core water heater and boiler businesses.
Speaker Change: And our solid balance sheet enable us to invest strategically and maximize shareholder return even in the face of uncertainty.
Speaker Change: We are confident in our future and our proven ability to achieve profitable growth.
Speaker Change: With that, we conclude our prepared remarks, and we are now available for your questions.
Speaker Change: Certainly, as a reminder to ask a question. Please press star, 1 1 1 on your telephone, and wait, for your name to be announced.
Speaker Change: To withdraw your question. Please press star. 1 1 again, please limit yourselves to 1 question and a follow-up.
Speaker Change: And 1 moment for our first question.
Speaker Change: Our first question will be coming from Mike howerin. A beard, your line is open mic.
Speaker Change: Hi, my name is everyone.
Speaker Change: Morning. Mike morning, Mike. Hey, we can we just start with the why? Now, on, on the China side, what, what was it? You know, obviously Steve you you taking over the the rains? It's maybe part of the Catalyst. But why is this the right opportunity to start thinking about alternatives for China? Um, how far are you in the process and just kind of any incremental comp. Um,
Speaker Change: context and maybe alternatives to the wrong word but just
Speaker Change: trying to figure out what the next steps for that region are
Speaker Change: Yeah, I think Mike, we we've um, we remain, you know, uh, excited about the future potential of the market there. And and as you know, we've been working through some changes within the business, uh, taking some restructuring actions, uh, making sure that we're positioning the business to compete and, and perform as the market goes, goes through this challenging environment. I think we're just at the point where we want to just broaden the Horizon of options to explore. Our focus is completely and remains on. How do we make this business most successful going forward?
And so I think it was uh, it came time where we wanted to open the aperture. Look at other options and make sure that we're fully informed about. What's the right path forward for the business.
Speaker Change: So second can can you help me with margins as we get to the back half of the year? And we kind of have a 2-fold question 1. Um implied margins for rest of the world down, back of the half of the Year. Normally they seem to be up back at half the year. Maybe just talk to them and moving pieces there and then secondarily just a discussion at Price costs in North America. Um and how you see that playing out for the rest of the year?
Speaker Change: Yeah, Mike. Um, rest of the world, I'll, I'll take that. So, you know, we talked a bit about our China volumes, this quarter being down, 11% in local currency and
Speaker Change: Whole year being 5 to 8% down. So, as we look at the back half of the year we expect, there'll be some continued headwinds in China, and our cost reduction actions are working. Well, we, we do expect to realize that full annual Savings of 15 million. However, the pressures, we feel that will see with some inconsistencies within the application of the government subsidy program, we expect to continue a bit through the back half of the year. So we're not quite as bullish on the fourth quarter, as we typically are from a seasonal Cadence. Um, but we are very pleased with the restructuring, uh, results. We expect China will be in that 8 to 9% operating margin for the year.
Speaker Change: On the North America side and price costs. I mean, I think I I think the way we think about that is really 2 halves of the year.
Speaker Change: Active tariffs, you know tariffs will be about 5% for the full year. So, you know, tariffs were somewhat minimal in the second quarter as we work with kind of our key suppliers, and good, partners on that side. So we have direct impact and then you have indirect through suppliers and some of those were coming in a little bit slower than what we expected. But we expect a full impact in the back half of the year. So,
Speaker Change: you know, when you take those 2 cost drivers together and then pricing that we've implemented effective May 4th but generally will impact us in a positive way in the back half. You know, we're able to offset those costs but the the net, if you look at our full year guidance, um, pretty strong front, half North American, margins very, very pleased with where we are at in North America margin. But we'll see a little headwind on that North American margin in the back half because of those extra costs coming in.
We also, we also will see volume shift a bit in the back half of the year. So
Speaker Change: Typically, you know, the water heater Cadence. As you know, is about 51% in the front half and 409% in the back half on the residential side.
Speaker Change: Um we see the industry this year playing out very similar to last year. Um last year the Cadence for the industry was about 53% front half and 47% back half.
Speaker Change: And what we would expect for our performance, this year would be, you know, somewhere in between. It's kind of a normal year and somewhere in between the price pulled for because we did benefit from pricing full for in the front half of the year. So if you take a look at all those Mike a long answer to, you know what we're looking at for margins, in North America and price cost relationship in the back half.
Speaker Change: And our next question will be coming from cere bidsy.
Speaker Change: Of Jeffrey.
Speaker Change: Your line is open.
Speaker Change: Hi, thanks for the question. Could you just talk through what you saw in resi in commercial water? Heater shipments in June and into July. Um, obviously, it seems like industry shipments were running ahead of what maybe you saw due to market share. So, any other color on the impact of the market share that you experienced in the first half and how that plays out as we go to the second half of the year as well? Thank you.
Speaker Change: You know, I'll just I'll just follow up to the re on that. Um, kind of piggybacking off what I just. Um, just mentioned. I'm kind of the Cadence for the year.
Speaker Change: So you know, we would expect that our share performance would be a bit better in the back, half of the year due to the smoothing and the working with our customers. We did on order Management in the front half of the Year. Certainly we benefit uh a bit on the price increase, pull forward in the first half of the year, but we believe ours is a bit muted. So as we go into the back half of the year as Steve
Speaker Change: And we would expect to pick up a bit of share in the back half of the year.
Um, order rates as you would expect in June and July are very typical and have right where we expect them to be after a price increase, pull forward. Like we experienced early May
Speaker Change: Appreciate the color. And then, you know I know you don't usually say much on pricing but just the impact of price in the quarter and how much of the price increase. Did you realize in 2 Q versus the remainder of the year.
Speaker Change: Yeah, I was just talk about water heating because, you know, water heating prices increase with our backlog and then you have kind of the lead times and it was implemented in May. So it is a bit of pricing, but very little that came in, in into into the into the second quarter. We had pricing in all of our businesses, so there was some pricing benefits, but price, cost relationship for the quarter. Um, from a tariff perspective, I'll just kind of stay with the Tariff perspective. Um, we we roughly Offset, you know, the increase cost in tariffs for the quarter.
Speaker Change: And our next question will be coming from Damian Carz of UBS. Your line is open Damian.
Damian Carz: Hey, good morning everyone. Hey, good morning morning. Jamie
Damian Carz: I wanted to ask you about the uh North America water heater business and the the volumes uh you saw in the in the second quarter, could you give us a sense you know relative to
Damian Carz: Last year, um, where the, where the volumes came in, uh, that you shipped and and how much of a prey headwind? Are you expecting now in the third quarter? Um, as a result, a little bit of the prey
The year relative to kind of the industry performance.
Damian Carz: Um, pull forward percentage, you know, it's hard to tell kind of how how it fell into the front half of the Year versus what we'll experience in the back. But we we do know, we do know we had a a benefit in the in the first half and in the second quarter for pull forward. Um we you know like I mentioned orders are still a bit muted so it's a bit you know hard to tell exactly how much that is. Um I'll frame it. You know, typically like I said before, the industry is 5149 um the industry this year, we project will be 5347 and we're going to be somewhere in between kind of that 5349 in the in the in the 5140 I'm sorry 50 5347 and and the 5149
Speaker Change: Okay, that's helpful.
Speaker Change: And then I wanted to ask you about the China water heater business, appreciate that. Uh, you are taking a look at, uh, options, uh, on what to, uh, do with that business going forward. Um, but just looking at, I think where some of the uh you know some of the industry peers have been seeing their domestic shipments. It feels like you've been uh underperforming um and maybe experiencing greater headwinds than the broader industry. Could you just help us to understand a little bit why that might be, you know, does it come down to, you know, your your Regional cost?
Concentration maybe being more in the Tier 1 or tier 2. Um you know are you still seeing peers maybe priced more aggressively anything that could just help us understand? Um,
Speaker Change: Why you're maybe trailing a little bit in in that market and the exchange program?
Speaker Change: Yeah. So I mean obviously we we we have
Speaker Change: Um, many decades of really strong performance in China. We're viewed as a market leader, uh, great brand or known for our innovation, in China. And I would say, all of that is still the case, um, on the ground, we we, we're, we're an aspirational premium product, um, and that's that's backed up by our ability to continue to put great products in the Marketplace, Drive Innovation, and, and support it with the service, that people come to expect from AO Smith in China. And I think that that's still healthy in a very challenging market. And we see that through, you know, in the premium positions, where where we continue to be able to, you know, hold our own and and maintain share
Speaker Change: Obviously, what's changed recently, and the market dynamics are more challenging. The consumer confidence is, is remains very low in China. And that is also highly connected to, um, to retail or sorry, um, property values in China. And so we're all working through that together. The other thing that's changed is local competitors have gotten much better. So the, the Gap in performance, the Gap in Innovation isn't what it used to be. So that's making it a more.
Speaker Change: You know, mature and challenging Marketplace.
Speaker Change: And, you know, and I think that that that's starting to play out in part to share either either, you know, down, uh, down Market. There's also shifts happening in terms of how people buy in the channels where we have very strong. Um, you know, uh, distribution Network, more more of that moving to online that also serves as a headwind, especially as we try to get our more premium Innovative message out there. So, uh, you know, on the ground, we're we're pivoting on those things. We're we're responding. Um, we're, we're getting more active in digital, uh, we're getting more active as the market also, uh, gets into more connected and intelligent devices, and we've made Investments to be able to ride that wave as well. So we're going through a transition and and some of those transitions um, relative to competition. Some of those transitions relative to go to market models are things. We have to work through. And that's a lot of the work we've been doing, um, that, you know, been a challenge for the business, the last few years. But 1
Speaker Change: That we're continuing to navigate through.
Speaker Change: And our next question will be coming from Susan maclari.
Speaker Change: Of Goldman Sachs, your line is open.
Susan maclari: Thank you. Good morning everyone.
Speaker Change: My first question.
Speaker Change: The efforts that you mentioned to help better manage the pull forward of volumes in the first half, can you just give a bit more detail on how you approached that what was different relative to the past and how you're thinking about efforts to continue to perhaps maintain that going forward?
Speaker Change: Is uh, look to buy ahead and get in front of that. And we saw that last year with the price changes, we saw that this year again, with price changes and tariff announcements. And um, you know, the impact that has on our operations is uh, when you get all a lot of orders that come in and you look to serve all those orders right away as you're you're investing in your operations, to to crew up at shifts, run overtime to meet that demand. And then once the inventory is out there in the channel, it takes time to work off, I believe through and and and obviously then the the consequences of that on our manufacturing operations is, we have plants that become underutilized. So it's a pretty lumpy and inefficient way to run our manufacturing operations. We experience that last year. And this year, we wanted to kind of get ahead of that. We we worked really closely with our customers. It it's not an exact science. It's a little bit of of of Art and Science to work with our customers around. Making sure they're getting the product they need and expect.
But at the same time, doing it, the way that doesn't uh doesn't drive unnecessarily, unnecessary, inefficiencies through the entire supply chain and so as we work with our customers through that, yes we do still have, you know, some poll ahead that we that we've expected that we've seen in Q2 but also, I think we've got a better way of actually managing our operations and we work with our customers to make sure that they're they're still getting the product they need and when they need it, but also, but the way we're able to smooth out how our plants run. So that
We're not investing in overtime, upfront and then underutilization on the back half.
Speaker Change: The business, Stephen you come into this new role. Can you talk a bit about other areas that maybe also non-core or, or things that you look like to be emphasized and any areas or agencies that you're interested in building into and your thoughts on perhaps m&a or organic initiatives in those areas?
Speaker Change: Yeah. Uh hi priority for me as I mentioned is portfolio management. I think that's always continuing to review the portfolio. We have today and making sure you know where where the right owner the best owner for the business and we'll continue to always evaluate that and keep that top of mind just as we always have I think it's also very important as we think about our Capital deployment priorities. You know, we're going to continue to invest in our core businesses to make sure we maintain leadership positions, which we generally have today, but also to actually build out new business platforms. I think that's an important for us to uh get into growth of your spaces. I think m&a is a core component for how we're going to do that. And we've got a real focused effort on thinking about where we go having our strategies right on that having conviction about where we go next and then executing and following through uh the pipeline.
Speaker Change: Thank you. And our next question will be coming from Matt Somerville of Da Davidson, Matt, your line is open.
Matt Somerville: Thanks, um, 2 questions first, uh, on the more recent point you made about building new business platforms, can you provide, uh, a deeper assessment or maybe initial assessment on the actionability and quality of AOS, Smith's current m&a Pipeline and then I will follow up.
Matt Somerville: Yeah, I mean it it's 1, that's that's active and and moving and I think we have a few spaces where pretty excited about and there's spaces where we think we can step in and and be good owners of businesses and and and run them in the AO, Smith way. So we're excited about a few areas. Um, actionability of those targets can, you know, can vary it? It's never a certain thing. But I think we've uh, we're excited that a few assets that we think could be really good fit uh maybe maybe actionable, um, in the coming year. But but we can't commit to anything and we don't know. And as always, we'll be disciplined about how we step into those opportunities.
Speaker Change: Um, just as a follow-up. Um, are you, are you willing to consider something more transformational? Maybe add another leg to the stool, so to speak. And then just a quick 1 on the boiler business guide, 4 to 6, I think in q1 Europe, 10 Q, Europe 6. So, help me understand what that's implying about the back half of the Year specifically to boilers. Thank you.
Speaker Change: More transformational, but I think our our view of where we want to go next is we want to build out new business platforms and ones that are great fits for our company and what we do well. So uh, not rolled out. But obviously those things, uh, oftentimes take time and to, to build towards
Speaker Change: As it relates to the boiler business, I think we're just we're being cautious about the back half of the year. Um certainly we we like the the growth performance that we saw first half of of 2025, um, we've got a good healthy backlog so I think we're we're entering the second half of the year in a strong position and that's why we're really watching the commercial Market closely uh difficult to know for sure how much pull ahead. We potentially had in the first half, that's part of that. That's part of the reason for the cautiousness. And then also just what happens with projects and how those play out. By the time we get to the end of the year.
Thank you, and that were next question, will be coming from Brian Blair of Oppenheimer, Brian, your line is open.
Thank you. Good morning everyone.
Speaker Change: Good morning.
Speaker Change: Uh, quick question on the assessment of of a Smith China. Um,
Speaker Change: As you're thinking about, you know, the varying opportunities at hand, um, for potential opportunities.
Speaker Change: Is this specific to, you know, or exclusive to have Smith China or could your, you know, faster growing India business be included as as you're looking, you know, more so on the side of you know, strategic opportunities or Partnerships other alternatives.
Speaker Change: Yeah, the the announcement today is specific to China and just looking at options for our China business.
Speaker Change: Okay, understood. Thank you.
Speaker Change: and as far as I missed this detail uh, with North American Water Treatment, are you still tracking toward the 250 basis points margin expansion, you had outlined before and
Speaker Change: Then I guess see and more importantly with mixed progressing. You know toward your um you know targeted more favorable mix. How should we think about incremental margins as you last the retail declines and get back to growth
Speaker Change: Yeah, I you know we we are tracking to our Target of 250 to 300 basis points, improvements that that the business has performed well through the front half of the year and you know on the on the Shelf retail transition it was a pretty clean transition. So we we saw a nice increase in the first quarter which carry through to the second quarter just based on the channel strategy to de-emphasize on the Shelf retail. So we're we're comfortable with that 250 to 300 basis points.
Speaker Change: To increase and would expect you know, that to to pretty much be um, carrying forward for the rest of the year.
Speaker Change: I I would add to just kind of going forward in addition to some of those go to market prioritization decisions. We've made, we're also taking actions to take advantage of the integration work of the different Acquisitions. We've brought together to build that business and we have opportunities there to also both Drive growth and and continue margin performance through through those levers, which is, which is goes above and beyond, just the, the prioritization work we've done,
Jeff Hammond: Thank you. Our next question, will be coming from Jeff Hammond of keybanc. Capital markets. Your line is open Jeff.
Jeff Hammond: Hey, good morning, everyone.
Good morning, Jeff morning.
Speaker Change: Hey, um, just wanted to clarify the, the market share comment, you know, weaker per staff better second half is, is that just simply that your competitors?
You know, didn't limit pre-b buy and maybe they sell more pre-b buy, so that levels out and then just more broadly on competitive landscape. Maybe just speak to, you know, kind of the new
Player in the market and the JB partnership. And then, you know, it seems like some Distributors are opening up to multiple sourcing for water heater. So just talked about, you know, competitive landscape, you know, more broadly.
Sure. Just maybe on the on the first point around how do we think you know our actions relative to the industry? We do think the industry maybe took a more aggressive posture of fulfilling order demand than than what we did. That's that's really what's behind our commentary around market share. Uh, both first half of the year compared to second half and why we do believe we will have a, an uptick in market share on the back half as we manage some of those orders, um, back through, kind of what we'll play out in the second half. So that that's the drive Road, you know, there's a lot to still play out for the second half of the year, uh, to, to validate this. But that's our, that's our assumption.
Speaker Change: Um,
Speaker Change: Yeah, um yeah, you know, I think there's obviously over the last few years there's been a number of announcements and, and new entrance looking to get into the space. And, and, and those always get our attention, right? We're the market leader and we're mindful of when there's new people looking to participate in in the North America water heater space, but but I would say to really be successful, uh, in in in this market, you have to have real conviction.
Speaker Change: And I think that conviction requires you to have the full breadth of portfolio. Uh, you got to have that portfolio available at a moment's notice. Especially when you got 80 85%, that's replacement people don't really like to take a cold shower twice. So you have that portfolio available through the channel partners that can reach the contractors on a moment's notice.
Speaker Change: And and and that's the types of Investments we make. And that's the kind of conviction level we have for this market. And I think it's also why it's it's proven to be pretty challenging relative to new entrance coming into the space. Uh and and then on top of that it's actually a pretty complicated landscape as you as you go forward, especially on the regulatory front where there's a lot of uncertainty uh you got to have the right Technologies available in the right space at the right time with those changes. And that's the advantage we have as the market leader, right? We we helped lead the industry through those types of changes. So I think it's challenging for a new entrance to come in. We don't take it lightly, we take it, seriously, we're always thinking,
About making sure that we continue to serve the market. Well, um, so that there's not need for for Alternatives. And I think as we've said before, too, as it relates to, to channel and and share shifts and channel. And and even how that plays out across the Big 3, you know, that's something we always have had to deal with. Um, we navigate it through, I think we've always been able to find a way to make that work out well for us working closely with our Channel partners and we'll continue to to do that going forward.
Speaker Change: And our next question will be coming from Scott. Graham of cport research Partners, your line is open. Scott
Scott Graham: Yes. Hey um, good morning. I I wanted to
Um follow up on Mike's question of. You know why? Now I don't think anyone would debate the strength of your China business. It's been around forever. You're a market leader, the whole thing. Um but obviously sales are you know off peak margin is well off peak. So is this more of an announcement? Maybe that it's
Scott Graham: A a look at the business to see which portions of it need to be paired a major restructuring, because it just seems like a digest today would not be prudent. Could you talk to what some of the may, maybe more looked upon favorably, a a, you know, a
Investments within, you know the options that you're talking about here, could it just be a major restructuring of the business?
Scott Graham: Yeah, I mean our announcement today is is is not a is not an output of any decision made on the business. We're, we're still very early and we're just sort of at this point announcing that we're initiating this assessment. And, um, you know, actions we could take within the business. Those are ones we consider and think about and evaluate, um, ongoing and will continue to do that for sure. I think, you know, the, the why now is, I think we, we, we want to explore what our full set of alternatives are.
Right. And um, we're not sitting here today committing to a deer of the business. What we're talking about is we would like to understand and be well, informed around what the full potential options are for the business going forward to make sure we actually do what we can to position the business, and this great asset that we have in China for success, and to be able to compete and win in the future. And, and we think we know what we're doing, as broadening the aperture of that, of of what potential options could look like and and any strategic Partnerships or anything else, we would explore our, our primary goal would be, how does it make? How does it make the business better? How does it make the business? And I have a better chance of success going forward. And that's the lens. We're going to take to it.
Scott Graham: I'd have to believe that some people, you know, might be looking for some type of roll back given that the tariffs were rolled back.
No, we're we're not. Um, Scott what, what we're trying to, uh, indicate is for the second quarter. It was not a meaningful impact, because of some of the timing of, when the terrorists came in, we did see some offsetting and pricing, but in the back half, we'll have the full impact of tariffs. We'll have the full impact of 15 to 20% steel costs going up. Um, so you know, we're you know, the, the, the announcement was effective in May and as you know, we, you know, we don't really realize the benefits of any pricing, um, until you work through the backlog in lead times, which takes us to the very end of June. Um, so it, you know, that that portion of it, that really doesn't roll in until almost as we start into the third quarter.
Speaker Change: Understood. Well, thank you and nice execution, around the operations in 2 Q.
Scott Graham: Thanks Scott. Thanks Scott.
Speaker Change: And our next question will be coming from Nathan Jones of stifel your line is open.
Nathan Jones: Good morning, everyone.
Nathan Jones: Uh I guess I'll follow up I'll follow up on that last question around parish and pricing. I think you guys said on the last call you'd announced pricing to the market that was going to be 6 to 9% across the majority of
The North American Business. And I think you talked about 5% impact to cogs on this call, maybe that was across cogs for the whole business and and not cogs just in North America, but it would seem that, you know, maybe there's some margin upside there from from Price versus what you're seeing from tariffs.
Nathan Jones: uh or or maybe that 5% is is spread across all of cogs, rather than just North America any comments you can make their
Nathan Jones: Yeah, thank you for the clarification. On that Nathan. It is 5% across all of the business and our tariff impact is largely North America business. That we have the cost impact. So, um, 5% across the business, but it's predominantly focused within North America.
Speaker Change: Okay, so the cogs number in North America is a bit higher and maybe in that 6 to 9% range, so it's off, they're more bit more offsetting.
Um, I guess the other question, I guess the other question I wanted to ask is around the, the operational excellence. Um,
Speaker Change: Kind of priority state that you set.
Maybe just any comments around that it sounded a little bit to me like lean outside. The 4 Walls is somewhere that you see an opportunity. Um,
Speaker Change: just maybe any color around that and any specific places that you see opportunities,
To improve the, the operational performance of the business.
Speaker Change: Yeah, I I wouldn't characterize it as as lean outside, the 4 Walls as much as uh you know, referencing is lean in our end to end processes. And and I think where the AOS operating system today is on a really nice job of focusing. On the plant floor with model lines, and engaging, our Workforce around continuous Improvement. And we yield yield with some good results from that. Expanding it to really think about end to end processes. And, and obviously, many of our processes run through our plants, which is why I wouldn't characterize it as outside the manufacturing walls. But you know, leveraging our Erp systems to get more you know, discipline around our processes. And and and and as we do that realizing more efficiencies
Speaker Change: Is that second question? Yep.
Speaker Change: Thank you. And our next question will be coming from David MacGregor?
Of Longbow research. Your line is open, David?
Speaker Change: Joe, 01 on for David.
Speaker Change: Um you mentioned steel costs up 15 to 20%. I was just hoping you could talk about what you're seeing with some of the other input costs and how those are moving directionally into the second half of the year.
Yeah. Year-over-year. Other input cost outside of Steel and tariffs. Of course. Um, you know, there are up slightly year-over-year but pretty radical for the year. We don't necessarily see those moving up in a great deal in the back half again. That's
Speaker Change: Not, you know, cost not associated with the Tariff impact.
Speaker Change: Okay.
Speaker Change: And then the water treatment business had a good quarter overall. It sounds like retail business might still be a little weak there. Can you just talk a bit more about your outlook into the second and a half for that business?
To help the businesses, get healthier and stronger. And, you know, it's a growth platform for us. And, you know, we had a bit of a reset to go through, um, you know, kind of last year and into this year, relative to positioning the business, uh, to to, you know, be be more competitive. And I think where we are now is we like the positioning of where we're at and, and now it's time to get back to growth.
Speaker Change: And your comments you know around kind of the weakness in the retail Channel. It it it's really a proactive strategy that we took to DM a size on the Shelf retail. Um so it's intentional um that we've moved that channel and it's it's helped our margin profile as we step into the year.
Our next question.
From Sam Snider.
Of North Coast research, your line is open, Sam.
Hi, thanks for taking the call. Um, I have a couple questions. Thanks for getting me in, uh, at the end of the call but wanted to know, like what has changed, uh, from a quarter ago with the China business. I know, I mean, maybe I'll ask you a different way, but what's on the table now that wasn't on the table before. Um, in terms of strategic actions, uh maybe help us imagine
You know what? Not a sale outright but something, uh, something else. I like a partnership. Like, what could that look like? And I have a follow-up on, you know, on Innovation and maybe more long term if we can get to it.
Speaker Change: Yeah, I mean we we've obviously been working on a closely with our China team around how to improve the competitiveness and the success of our China business. You know. You know, I think what changes we want to just think about a full range of options of, what's the best way to do that?
Right. And, you know, I think it's an evolution of, of our thinking. As we think about, how do we set up our China businesses, we've got a great asset with many competitive strengths, and, as I mentioned, it's a market, we think there's got a lot of potential in. And so, what we want to do is say What's the best way to do that? And we think it could involve working with strategic partners and, and thinking, about options Beyond, just some of the things we've been doing to the state and, and we want to we we're starting this process, right? So what we want to do is we want to be fully informed and ultimately at the end of the day, make sure that we set this business up for the best passport.
Speaker Change: The most most successful.
Speaker Change: Okay, so thanks and then just real quick. If I get it in on Innovation. Uh like what do you see when when you think about Innovation, whether it's US market or, or rest of the world, um, maybe illustrate some
Speaker Change: Some of the things you're talking about.
Speaker Change: Yeah. I mean I am I'm a big believer that Innovation for industrial companies is is core to how you you you drive, um, you you drive organic growth and how you maintain uh outsized profitability. You have to be able to bring things to the world uh that are differentiated and that and that solve real problems. So for me, it's it's fundamental to a really successful industrial business. Um, I got to see that up and close at 3M. It's 1 of the more, you know, successful Innovation, industrial companies out there and, uh, and I think it's, it's an important part of our future. And, and also, what's really nice is, it's been a huge part of our past, right? We have innovated and, and, and really, uh, to totally change markets as we stepped into them over our 150 year history. And I think it's a big part of our 150 year future and you know it it includes Innovation processes that you allow you to launch products successfully and on time meeting customer needs.
Speaker Change: It, it's a culture, uh, and and, and making sure that we continue to embrace and and energize the culture of innovation, which includes, you know, being able to um, experiment be curious.
Speaker Change: You know, take risks as you step into doing new things to the world um and and it's really understanding the finding the technologies that are going to be relevant to the Future.
Speaker Change: So those are the types of things that that we're we're focusing on and as I mentioned our new CTO I think is going to be a great boost to to helping us get to the next level.
Speaker Change: And 1 moment for our last question, which will be coming from Andrew kaplowitz?
Speaker Change: Of Citigroup. Your line is open, Andrew.
Andrew Kaplowitz: Good morning everyone. Thanks for sending me in
Speaker Change: Good morning morning.
Matt Somerville: Steve. I know you said you'll consider all Alternatives when you're using your balance sheet moving forward. But ALS has been sitting with what I, I think some would call and underlever balance sheet for some time. As, as you assess just overall Capital allocation, do you think the company could get a bit more aggressive in general, using its balance sheet, or, or how do you think about that?
Speaker Change: Yeah, I mean I I think it's important.
Matt Somerville: For our future.
Matt Somerville: And we're going to look to.
Matt Somerville: You know, continue to find.
Matt Somerville: Attractive, growth platforms for us.
Matt Somerville: Focus for us, I think.
Matt Somerville: You know, we obviously need to protect and run and and drive performance in our core businesses, because that's what helps fund, you know, cash and maintain a strong balance sheet. So we're going to do that. But I do think it's going to be it's going to be a big Focus for me. Uh, going forward is figuring out. How do we, how do we transform our portfolio over time? How we put that balance sheet to work? Well, obviously be determined by some of the strategies we pursue and then some of the actionability of
Some of the m&a targets the out there, but look, I think we're in a, we're in a great position because we do have a strong balance sheet. Uh, and I think, uh, we do have some core capabilities that I think we can stretch into uh, new areas that will uh, will be able to create a lot of value. And so, um, you know, it's going to be a big Focus for us.
Speaker Change: Helpful and then you obviously raised your boiler forecast. I know you answered a previous question that you want to be conservative in the second half but is your improvements just continue traction on your high efficiency, boilers present any change in the market? How would you rate the health of your commercial customers right now?
Speaker Change: No, I I, I think, um, the business performs. Well, I think, you know, like I said that we, we we have great. Um,
Speaker Change: Great interaction with our customers who who are still looking for high efficiency products. So uh that's where our our business and our lock and our business particular really plays well and and is meeting the market needs. So we see the business performing well uh in the marketplace as well as as what it's delivering in terms of growth financially for the company. Yeah. This is this is Chuck. You know, we we are, you know, when you look at our guide, 4 to 6% and Steve said it earlier kind of protecting ourselves on the prey because we did experience some inventory in the channel and boilers a couple years ago which unwind a bit and we would expect there's a little bit of pull forward, but uh, we're very, very pleased with kind of how we're performing in the market.
Speaker Change: And I'm showing no further questions. I would now like to turn the conference back to Helen Gerhold for closing remarks.
Speaker Change: Thank you for joining us today. Let me conclude by reminding you that we are pleased with our EPS growth in the quarter. We look forward to updating you on our progress, in the quarters to come
Speaker Change: in addition, please, mark your calendars to join our presentations at 3 conferences in the quarter.
Speaker Change: Seaport on August 18th Jefferies on September 3rd, and da Davidson on September 18th, thank you. And have a great day.
Speaker Change: And this is today's conference call. Thank you for participating. You may now disconnect