Q1 2026 A O Smith Corp Earnings Call

April 30, 2026

Operator: Good day. Thank you for standing by. Welcome to the A. O. Smith Corporation Q1 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Helen Gerholt. Please go ahead, ma'am.

Speaker #1: Good day, and thank you for standing by. Welcome to the A O SMITH Corporation first quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode.

Speaker #1: presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. star 11 again. be advised that today's conference is being recorded. conference over to your speaker today.

Speaker #1: Helen Gurholt, please go ahead, ma'am.

Speaker #2: Good morning, everyone, and welcome to the A O SMITH first quarter conference call. I'm Helen Gurholt, Vice President, Investor Relations, and Financial Planning and Analysis.

Helen Gerholt: Good morning, everyone, and welcome to the A. O. Smith Q1 conference call. I'm Helen Gerholt, Vice President, Investor Relations and Financial Planning and Analysis. Joining me today are Stephen M. Shafer, Chief Executive Officer, and Charles T. Lauber, Chief Financial Officer. In order to provide improved transparency into our operating results of our business, we have provided non-GAAP measures. Free cash flow is defined as cash from operations plus capital expenditures. Adjusted earnings per share excludes the impact of restructuring and impairment expenses. 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 risks that could cause actual results to be materially different.

Helen Gurholt: Good morning, everyone, and welcome to the A. O. Smith Q1 conference call. I'm Helen Gerholt, Vice President, Investor Relations and Financial Planning and Analysis. Joining me today are Stephen M. Shafer, Chief Executive Officer, and Charles T. Lauber, Chief Financial Officer. In order to provide improved transparency into our operating results of our business, we have provided non-GAAP measures. Free cash flow is defined as cash from operations plus capital expenditures. Adjusted earnings per share excludes the impact of restructuring and impairment expenses. 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 risks that could cause actual results to be materially different.

Speaker #2: Joining me today are Steve Shafer, Chief Executive Officer, and Chuck Lauber, Chief Financial Officer. In order to provide improved transparency into our operating results of our business, we have provided non-gap measures.

Speaker #2: Free cash flow is defined as cash from operations plus capital expenditures. Adjusted earnings per share excludes the impact of restructuring and impairment expenses. Reconciliations from gap measures to non-gap measures are provided in the appendix at the end of this presentation and on our website.

Speaker #2: A friendly reminder that some of our comments and answers during this conference call will be forward-looking statements. That are subject to risks that could cause actual results to be materially different.

Speaker #2: Those risks include matters that we described in this morning's press release, among others. Also, as a courtesy to others in the question queue, please limit yourself to one question and one follow-up per turn.

Helen Gerholt: Those risks include matters that we described in this morning's press release, among others. Also, as a courtesy to others in the question queue, please limit yourself to one question and one follow-up per turn. If you have multiple questions, please rejoin the queue. 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. Please turn to the next slide.

Helen Gurholt: Those risks include matters that we described in this morning's press release, among others. Also, as a courtesy to others in the question queue, please limit yourself to one question and one follow-up per turn. If you have multiple questions, please rejoin the queue. 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. Please turn to the next slide.

Speaker #2: 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.

Speaker #2: I will now turn the call over to Steve to begin our prepared remarks. Please turn to the next slide.

Speaker #3: Thank you, Helen, and good morning, everyone. Before I discuss our first quarter results, I want to sincerely thank all A. O. Smith employees for their exceptional dedication and resilience during the first quarter.

Stephen M. Shafer: Thank you, Helen. Good morning, everyone. Before I discuss our Q1 results, I wanna sincerely thank all A. O. Smith employees for their exceptional dedication and resilience during the Q1. In particular, I would like to recognize our North American water heater team for their swift response to weather-related damage at one of our facilities as they acted to ensure the safety of their colleagues, while at the same time finding a way to recover from our production loss and continue to serve our customers well. I remain grateful for your dedication and teamwork, which continue to strengthen our company and our culture. Now, moving on to our Q1 of 2026 financial performance, please turn to slide 4.

Steve Shafer: Thank you, Helen. Good morning, everyone. Before I discuss our Q1 results, I wanna sincerely thank all A. O. Smith employees for their exceptional dedication and resilience during the Q1. In particular, I would like to recognize our North American water heater team for their swift response to weather-related damage at one of our facilities as they acted to ensure the safety of their colleagues, while at the same time finding a way to recover from our production loss and continue to serve our customers well. I remain grateful for your dedication and teamwork, which continue to strengthen our company and our culture. Now, moving on to our Q1 of 2026 financial performance, please turn to slide 4.

Speaker #3: In particular, I would like to recognize our North American water heater team for their swift response to weather-related damage at one of our facilities.

Speaker #3: As they acted to ensure the safety of their colleagues while at the same time finding a way to recover from our production loss, and continue to serve our customers well.

Speaker #3: I remain grateful for your dedication and teamwork, which continue to strengthen our company and our culture. Now, moving on to our first quarter 2026 financial performance, please turn to slide four.

Speaker #3: North America sales increased 1% to $753 million and rest of world sales decreased 11% to $201 million. Resulting in total company first quarter sales of $946 million and a decrease of 2%.

Stephen M. Shafer: North America sales increased 1% to $753 million and rest of world sales decreased 11% to $201 million, resulting in total company Q1 sales of $946 million, a decrease of 2%. Our EPS was $0.85, a decrease of 11% due to lower volume and transaction-related expenses recognized in the quarter for the Leonard Valve acquisition. Despite these headwinds, diligent working capital management helped to drive strong free cash flow performance in the quarter. Our China sales decreased 17% in local currency in Q1, which was in line with our expectations as well as broader market performance. With the discontinuation of most government stimulus programs and continued low consumer confidence, the water heater and water treatment markets remain challenged, especially the premium portion of the market where we compete.

Steve Shafer: North America sales increased 1% to $753 million and rest of world sales decreased 11% to $201 million, resulting in total company Q1 sales of $946 million, a decrease of 2%. Our EPS was $0.85, a decrease of 11% due to lower volume and transaction-related expenses recognized in the quarter for the Leonard Valve acquisition. Despite these headwinds, diligent working capital management helped to drive strong free cash flow performance in the quarter. Our China sales decreased 17% in local currency in Q1, which was in line with our expectations as well as broader market performance. With the discontinuation of most government stimulus programs and continued low consumer confidence, the water heater and water treatment markets remain challenged, especially the premium portion of the market where we compete.

Speaker #3: Our EPS was 85 cents, a decrease of 11% due to lower volumes, and transaction-related expenses recognized in the quarter for the Leonard Valve acquisition.

Speaker #3: Despite these headwinds, diligent working capital management helped to drive strong free cash flow performance in the quarter. Our China sales decreased 17% in local currency in the first quarter, which was in line with our expectations as well as broader market performance.

Speaker #3: With the discontinuation of most government stimulus programs and continued low consumer confidence, the water heater and water treatment markets remain challenged—especially the premium portion of the market where we compete.

Speaker #3: We expect this softness to persist. We also believe that our ongoing strategic assessment has created some uncertainty in the market, and is delayed certain investments, putting further pressure on our business.

Stephen M. Shafer: We expect this softness to persist. We also believe that our ongoing strategic assessment has created some uncertainty in the market and has delayed certain investments, putting further pressure on our business. We continue to make progress with our assessment and are moving with urgency to provide greater clarity for the future of our customers and employees, with the goal of defining a clear path forward in the coming months. I would like to share some additional color on our North America businesses. North America water heater sales decreased 2% year over year. Production and shipping constraints caused by adverse weather, most notably at our Ashland City, Tennessee facility, combined with softer than anticipated residential industry demand early in the year, negatively impacted the quarter.

Steve Shafer: We expect this softness to persist. We also believe that our ongoing strategic assessment has created some uncertainty in the market and has delayed certain investments, putting further pressure on our business. We continue to make progress with our assessment and are moving with urgency to provide greater clarity for the future of our customers and employees, with the goal of defining a clear path forward in the coming months. I would like to share some additional color on our North America businesses. North America water heater sales decreased 2% year over year. Production and shipping constraints caused by adverse weather, most notably at our Ashland City, Tennessee facility, combined with softer than anticipated residential industry demand early in the year, negatively impacted the quarter.

Speaker #3: We continue to make progress with our assessment, and are moving with urgency to provide greater clarity on the future of our customers and employees.

Speaker #3: With the goal of defining a clear path forward in the coming months. Now I would like to share some additional color on our North America businesses.

Speaker #3: North America water heater sales decreased 2% year over year. Production and shipping constraints caused by adverse weather most notably at our Ashland City, Tennessee facility, combined with softer than anticipated residential industry demand early in the year, negatively impacted the quarter.

Speaker #3: As we discussed on our January earnings call, the wholesale residential channel continues to face challenges. Including a soft market in new construction, and continued initiatives by retailers to expand into serving the professional.

Stephen M. Shafer: As we discussed on our January earnings call, the wholesale residential channel continues to face challenges, including a soft market in new construction and continued initiatives by retailers to expand into serving the professional. Despite these pressures, we are encouraged by the stabilization of our market share in the wholesale channel in Q1, while recognizing there is still work to be done with more improvements to come. Additionally, we are pleased with our share performance within the retail channel and the strength of our retail partnerships. Our strong market leadership and balanced presence across both channels provide us with clear visibility into market trends, supported by robust data, analytics, and deep customer relationships. I'm encouraged by the positive momentum we have going into Q2.

Steve Shafer: As we discussed on our January earnings call, the wholesale residential channel continues to face challenges, including a soft market in new construction and continued initiatives by retailers to expand into serving the professional. Despite these pressures, we are encouraged by the stabilization of our market share in the wholesale channel in Q1, while recognizing there is still work to be done with more improvements to come. Additionally, we are pleased with our share performance within the retail channel and the strength of our retail partnerships. Our strong market leadership and balanced presence across both channels provide us with clear visibility into market trends, supported by robust data, analytics, and deep customer relationships. I'm encouraged by the positive momentum we have going into Q2.

Speaker #3: Despite these pressures, we are encouraged by the stabilization of our market share in the wholesale channel in the first quarter. While recognizing there is still work to be done, with more improvement to come.

Speaker #3: Additionally, we are pleased with our share performance within the retail channel, and the strength of our retail partnerships. Our strong market leadership and balanced presence across both channels provide us with clear visibility into market trends, supported by robust data, analytics, and deep customer relationships.

Speaker #3: I'm encouraged by the positive momentum we have going into the second quarter. Our North America boiler sales grew 2% compared to 2025, as residential boiler volume growth and carryover pricing benefits more than offset lower commercial volumes.

Stephen M. Shafer: Our North America boiler sales grew 2% compared to 2025 as residential boiler volume growth and carryover pricing benefits more than offset lower commercial volumes. North America water treatment sales increased 1% in Q1. 10% growth in our priority dealer channel was largely offset by softness in the specialty plumbing wholesale channel. A cautious consumer environment led to flat growth in our more consumer-facing channels with a general trend towards a trade down to lower priced products. We expanded operating margin by almost 100 basis points despite the slower start to the year as we continue to work on improving the profitability of this platform. Leonard Valve contributed $16 million to sales in Q1 of 2026, led by strong performance in the valve business.

Steve Shafer: Our North America boiler sales grew 2% compared to 2025 as residential boiler volume growth and carryover pricing benefits more than offset lower commercial volumes. North America water treatment sales increased 1% in Q1. 10% growth in our priority dealer channel was largely offset by softness in the specialty plumbing wholesale channel. A cautious consumer environment led to flat growth in our more consumer-facing channels with a general trend towards a trade down to lower priced products. We expanded operating margin by almost 100 basis points despite the slower start to the year as we continue to work on improving the profitability of this platform. Leonard Valve contributed $16 million to sales in Q1 of 2026, led by strong performance in the valve business.

Speaker #3: North America water treatment sales increased 1% in the first quarter. 10% growth in our priority dealer channel was largely offset by softness in the specialty plumbing wholesale channel.

Speaker #3: A cautious consumer environment led to flat growth in our more consumer-facing channels, with a general trend towards a trade down to lower priced products.

Speaker #3: We expanded operating margin by almost 100 basis points, despite this lower start to the year, as we continue to work on improving the profitability of this platform.

Speaker #3: Leonard Valve contributed $16 million to sales in the first quarter of 2026, led by strong performance in the valve business. We exited the quarter with a strong backlog, and Leonard remains on track to achieve another year of double-digit growth.

Stephen M. Shafer: We exited the quarter with a strong backlog. Leonard remains on track to achieve another year of double-digit growth. I'll now turn the call over to Chuck, who will provide more details on our Q1 performance.

Steve Shafer: We exited the quarter with a strong backlog. Leonard remains on track to achieve another year of double-digit growth. I'll now turn the call over to Chuck, who will provide more details on our Q1 performance.

Speaker #3: I'll now turn the call over to Chuck, who will provide more details on our first quarter performance.

Speaker #4: Thank you, Steve, and good morning, everyone. Please turn to slide five. First, I'd like to highlight two items impacting the quarter. As Steve noted, we had weather-related headwinds in the quarter, including damage to a portion of our roof at our Ashland City manufacturing facility.

Charles T. Lauber: Thank you, Steve. Good morning, everyone. Please turn to slide 5. First, I'd like to highlight 2 items impacting the quarter. As Steve noted, we had weather-related headwinds in the quarter, including damage to a portion of our roof at our Ashland City manufacturing facility. Because of our team's swift response and our insurance coverage, we project minimal impact to our full year performance. However, we estimate that production and shipping constraints offset by insurance coverage on direct costs negatively impacted our Q1 by approximately $0.04 per share. In addition, we acquired Leonard Valve on 6 January, and as a result, recognized $0.03 of transaction-related expenses in corporate expense for the quarter. North America segment Q1 sales of $753 million increased 1% against the top comp.

Chuck Lauber: Thank you, Steve. Good morning, everyone. Please turn to slide 5. First, I'd like to highlight 2 items impacting the quarter. As Steve noted, we had weather-related headwinds in the quarter, including damage to a portion of our roof at our Ashland City manufacturing facility. Because of our team's swift response and our insurance coverage, we project minimal impact to our full year performance. However, we estimate that production and shipping constraints offset by insurance coverage on direct costs negatively impacted our Q1 by approximately $0.04 per share. In addition, we acquired Leonard Valve on 6 January, and as a result, recognized $0.03 of transaction-related expenses in corporate expense for the quarter. North America segment Q1 sales of $753 million increased 1% against the top comp.

Speaker #4: Because of our team's swift response and our insurance coverage, we project minimal impact to our full-year performance. However, we estimate that production and shipping constraints offset by insurance coverage on direct costs negatively impacted our first quarter by approximately 4 cents per share.

Speaker #4: In addition, we acquired Leonard Valve on January 6, and as a result, recognized $0.03 of transaction-related expenses in corporate expense for the quarter.

Speaker #4: North America segment first quarter sales of $753 million increased 1% against the top comp. Carryover pricing benefits in Leonard Valve sales contributions were largely offset by lower residential water heater volumes and weather-related production and shipping constraints.

Charles T. Lauber: Carryover pricing benefits in Leonard Valve sales contributions were largely offset by lower residential water heater volumes and weather-related production and shipping constraints. North America segment earnings of $175 million and segment margin of 23.3% decreased by $10 million and 140 basis points respectively versus the prior year period. The lower segment earnings and segment margin were primarily the result of lower residential water heater volumes and more than offset the earnings contribution from Leonard Valve. Carryover pricing benefits more than offset cost inflation in the quarter. The Q1 of 2025 benefited from pull-forward demand ahead of an announced price increase and a stronger mix towards higher efficiency products. Moving to slide 6.

Chuck Lauber: Carryover pricing benefits in Leonard Valve sales contributions were largely offset by lower residential water heater volumes and weather-related production and shipping constraints. North America segment earnings of $175 million and segment margin of 23.3% decreased by $10 million and 140 basis points respectively versus the prior year period. The lower segment earnings and segment margin were primarily the result of lower residential water heater volumes and more than offset the earnings contribution from Leonard Valve. Carryover pricing benefits more than offset cost inflation in the quarter. The Q1 of 2025 benefited from pull-forward demand ahead of an announced price increase and a stronger mix towards higher efficiency products. Moving to slide 6.

Speaker #4: North America segment earnings of $175 million and segment margin of 23.3% decreased by $10 million and $140 basis points, respectively, versus the prior year period.

Speaker #4: The lower segment earnings and segment margin were primarily the result of lower residential water heater volumes and more than offset the earnings contribution from Leonard Valve.

Speaker #4: Carryover pricing benefits more than offset cost inflation in the quarter. The first quarter of 2025 benefited from full-forward demand ahead of an announced price increase and a stronger mix towards higher efficiency products.

Speaker #4: Moving to slide six, Rest of World segment sales of $201 million decreased 11% year over year, due to continued weak consumer demand in China driving lower sales.

Charles T. Lauber: Rest of the World segment sales of $201 million decreased 11% year over year due to continued weak consumer demand in China driving lower sales, which was partially offset by favorable foreign currency exchange. Rest of the World Q1 2026 segment earnings of $12 million and segment margin of 6.2% decreased by $8 million and 250 basis points, respectively, versus the prior year period. The lower segment earnings and segment margin in 2026 were primarily due to lower sales volumes, which were partially offset by continued cost management in China. Please turn to slide 7.

Chuck Lauber: Rest of the World segment sales of $201 million decreased 11% year over year due to continued weak consumer demand in China driving lower sales, which was partially offset by favorable foreign currency exchange. Rest of the World Q1 2026 segment earnings of $12 million and segment margin of 6.2% decreased by $8 million and 250 basis points, respectively, versus the prior year period. The lower segment earnings and segment margin in 2026 were primarily due to lower sales volumes, which were partially offset by continued cost management in China. Please turn to slide 7.

Speaker #4: Which was partially offset by favorable foreign currency exchange. Rest of World first quarter 2026 segment earnings of $12 million and segment margin of 6.2% decreased by $8 million and 250 basis points, respectively, versus the prior-year period.

Speaker #4: The lower segment earnings and segment margin in 2026 were primarily due to lower sales volumes, which were partially offset by continued cost management in China.

Speaker #4: Please turn to slide seven. We generated strong free cash flow of $119 million in the first three months of 2026. A significant increase over 2025, primarily driven by diligent working capital management and the timing of customer payments that more than offset lower earnings.

Charles T. Lauber: We generated strong free cash flow of $119 million in Q1 2026, a significant increase over 2025, primarily driven by diligent working capital management and the timing of customer payments that more than offset lower earnings. Our cash balance totaled $204 million at the end of March, and our net debt position was $412 million. Our leverage ratio was 24 term loan used to acquire Leonard Valve. We continue to have significant available capacity for future acquisitions. Turning to slide 8. In addition to returning capital to shareholders, we continue to drive organic growth through development of innovative product offerings and productivity through operational excellence, two of our key strategic priorities. Earlier this month, our board approved our next quarterly dividend of $0.36 per share.

Chuck Lauber: We generated strong free cash flow of $119 million in Q1 2026, a significant increase over 2025, primarily driven by diligent working capital management and the timing of customer payments that more than offset lower earnings. Our cash balance totaled $204 million at the end of March, and our net debt position was $412 million. Our leverage ratio was 24 term loan used to acquire Leonard Valve. We continue to have significant available capacity for future acquisitions. Turning to slide 8. In addition to returning capital to shareholders, we continue to drive organic growth through development of innovative product offerings and productivity through operational excellence, two of our key strategic priorities. Earlier this month, our board approved our next quarterly dividend of $0.36 per share.

Speaker #4: Our cash balance totaled $204 million at the end of March, and our net debt position was $412 million. Our leverage ratio was 2.4. We used a term loan to acquire Leonard Valve.

Speaker #4: We continue to have significant available capacity for future acquisitions. Turning to slide eight. In addition to returning capital to shareholders, we continue to drive organic growth through the development of innovative product offerings and productivity through operational excellence.

Speaker #4: Two of our key strategic priorities. Earlier this month, our board approved our next quarterly dividend of $0.36 per share. We repurchased approximately $700,000 shares of common stock in the first quarter for a total of $51 million.

Charles T. Lauber: We repurchased approximately 700,000 shares of common stock in Q1 for a total of $51 million. We expect to repurchase $200 million of our shares during the full year 2026. Consistent with our focus on portfolio management, we continue to actively assess M&A opportunities that meet our strategic and financial criteria. Please turn to slide 9 for our 2026 earnings guidance and outlook. Our revised 2026 outlook includes an adjusted EPS range of $3.70 to $4.00 per share. This excludes a relatively net cash neutral North America water treatment restructuring and impairment charge of approximately $20 million that we expect to recognize in Q2.

Chuck Lauber: We repurchased approximately 700,000 shares of common stock in Q1 for a total of $51 million. We expect to repurchase $200 million of our shares during the full year 2026. Consistent with our focus on portfolio management, we continue to actively assess M&A opportunities that meet our strategic and financial criteria. Please turn to slide 9 for our 2026 earnings guidance and outlook. Our revised 2026 outlook includes an adjusted EPS range of $3.70 to $4.00 per share. This excludes a relatively net cash neutral North America water treatment restructuring and impairment charge of approximately $20 million that we expect to recognize in Q2.

Speaker #4: We expect to repurchase $200 million of our shares during the full year 2026. Consistent with our focus on portfolio management, we continue to actively assess M&A opportunities that meet our strategic and financial criteria.

Speaker #4: Please turn to slide nine for our 2026 earnings guidance and outlook. Our revised 2026 outlook includes an adjusted EPS range of $3.70 to $4 per share.

Speaker #4: This excludes a relatively net cash neutral North America water treatment restructuring and impairment charge of approximately $20 million that we expect to recognize in the second quarter.

Charles T. Lauber: Key assumptions within our outlook include: Steel costs have steadily risen throughout the first quarter, leading us to increase our full year 2026 steel cost assumption to be a year-over-year increase of approximately 15% compared to 2025. In addition, due to recent oil price volatility, our transportation and certain material cost assumptions have also increased since our previous guidance. We now project that freight, non-steel material costs, and tariffs will increase our overall total company cost of goods sold by approximately 3% in 2026. Our guidance assumes oil prices and tariff levels will remain at a similar level to where they are today. We continue to monitor the situation. We maintain our estimate that CapEx 2026 will be between $70 to 80 million.

Chuck Lauber: Key assumptions within our outlook include: Steel costs have steadily risen throughout the Q1, leading us to increase our full year 2026 steel cost assumption to be a year-over-year increase of approximately 15% compared to 2025. In addition, due to recent oil price volatility, our transportation and certain material cost assumptions have also increased since our previous guidance. We now project that freight, non-steel material costs, and tariffs will increase our overall total company cost of goods sold by approximately 3% in 2026. Our guidance assumes oil prices and tariff levels will remain at a similar level to where they are today. We continue to monitor the situation. We maintain our estimate that CapEx 2026 will be between $70 to 80 million.

Speaker #4: Key assumptions within our outlook include steel costs have steadily risen throughout the first quarter, leading us to increase our full-year 2026 steel cost assumption to be a year-over-year increase of approximately 15% compared to 2025.

Speaker #4: In addition, due to recent oil price volatility, our transportation and certain material cost assumptions have also increased since our previous guidance. We now project that freight, non-steel material costs, and tariffs will increase our overall total company cost of goods sold by approximately 3% in 2026.

Speaker #4: Our guidance assumes oil prices and tariff levels will remain at a similar level to where they are today. We continue to monitor the situation.

Speaker #4: We maintain our estimate that CapEx 2026 will be between $70 and $80 million. We continue to expect strong free cash flow of between $525 and $575 million.

Charles T. Lauber: We continue to expect strong free cash flow of between $525 million and $575 million. Interest expense is projected to be between $30 million and $40 million, an increase over previous years due to the $470 million of additional debt incurred to acquire Leonard Valve. Corporate and other expenses are expected to be between $80 million and $85 million, and includes $6 million of transaction expenses associated with the Leonard Valve acquisition recognized in Q1. Our effective tax rate is estimated to be between 24% and 24.5%. We project our outstanding diluted shares will be 138 million at the end of 2026.

Chuck Lauber: We continue to expect strong free cash flow of between $525 million and $575 million. Interest expense is projected to be between $30 million and $40 million, an increase over previous years due to the $470 million of additional debt incurred to acquire Leonard Valve. Corporate and other expenses are expected to be between $80 million and $85 million, and includes $6 million of transaction expenses associated with the Leonard Valve acquisition recognized in Q1. Our effective tax rate is estimated to be between 24% and 24.5%. We project our outstanding diluted shares will be 138 million at the end of 2026.

Speaker #4: Interest expense is projected to be between 30 and $40 million, an increase over previous years due to the $700, the $470 million of additional debt incurred to acquire Leonard Valve.

Speaker #4: Corporate and other expenses are expected to be between $80 and $85 million. And includes $6 million of transaction expenses associated with the Leonard Valve acquisition recognized in the first quarter.

Speaker #4: Our effective tax rate is estimated to be between 24 and 24.5%. And we project our outstanding diluted shares will be $138 million at the end of 2026.

Speaker #4: I'll now turn the call back over to Steve to expand on our key markets and our 2026 top-line growth outlook for each business, staying on slide nine.

Charles T. Lauber: I'll now turn the call back over to Steve to expand on our key markets and our 2026 top line growth outlook for each business, staying on slide nine. Steve?

Chuck Lauber: I'll now turn the call back over to Steve to expand on our key markets and our 2026 top line growth outlook for each business, staying on slide nine. Steve?

Speaker #4: Steve?

Speaker #3: Thank you, Chuck. Within North America, our top-line outlook includes the following assumptions. While the residential water heater industry had a slower-than-expected start to the year, we maintain our view that full-year 2026 industry shipments will be flat to down, as softness in new construction persists, and proactive replacement remains steady.

Stephen M. Shafer: Thank you, Chuck. Within North America, our top-line outlook includes the following assumptions. While the residential water heater industry had a slower than expected start to the year, we maintain our view that full year 2026 industry shipments will be flat to down as softness in new construction persists and proactive replacement remains steady. Due to a recent statement from the Department of Energy indicating a 1-year enforcement delay of the 6 October commercial regulatory change, we revised our outlook and now expect less pre-buy activity in the quarters leading up to the original transition date. We now project that US commercial industry volumes will be similar to last year.

Steve Shafer: Thank you, Chuck. Within North America, our top-line outlook includes the following assumptions. While the residential water heater industry had a slower than expected start to the year, we maintain our view that full year 2026 industry shipments will be flat to down as softness in new construction persists and proactive replacement remains steady. Due to a recent statement from the Department of Energy indicating a 1-year enforcement delay of the 6 October commercial regulatory change, we revised our outlook and now expect less pre-buy activity in the quarters leading up to the original transition date. We now project that US commercial industry volumes will be similar to last year.

Speaker #3: Due to a recent statement from the Department of Energy, indicating a one-year enforcement delay of the October 6th commercial regulatory change, we revised our outlook and now expect less pre-buy activity in the quarters leading up to the original transition date.

Speaker #3: We now project that US commercial industry volumes will be similar to last year. In response to rising steel, freight, and other input cost inflation, we have announced price increases for most of our water heater and boiler products in North America.

Stephen M. Shafer: In response to rising steel, freight, and other input cost inflation, we have announced price increases for most of our water heater and boiler products in North America, with increases varying by product, but ranging from approximately 4% to 7%. We have seen some cost increases already leading into Q2, particularly within transportation. We expect to begin realizing the benefit of these announced price increases beginning in Q3. As always, we are maintaining ongoing communication with our suppliers, customers, and stakeholders as we address current market challenges while also implementing diligent cost management strategies. We continue to project our North America boiler sales to grow between 6% to 8% in 2026 due to pricing benefits and a strengthening backlog in commercial and residential boilers.

Steve Shafer: In response to rising steel, freight, and other input cost inflation, we have announced price increases for most of our water heater and boiler products in North America, with increases varying by product, but ranging from approximately 4% to 7%. We have seen some cost increases already leading into Q2, particularly within transportation. We expect to begin realizing the benefit of these announced price increases beginning in Q3. As always, we are maintaining ongoing communication with our suppliers, customers, and stakeholders as we address current market challenges while also implementing diligent cost management strategies. We continue to project our North America boiler sales to grow between 6% to 8% in 2026 due to pricing benefits and a strengthening backlog in commercial and residential boilers.

Speaker #3: With increases varying by product, but ranging from approximately 4 to 7 percent. We have seen some cost increases already leading into the second quarter, particularly within transportation.

Speaker #3: We expect to begin realizing the benefit of these announced price increases beginning in the third quarter. As always, we are maintaining ongoing communication with our suppliers, customers, and stakeholders as we address current market challenges while also implementing diligent cost management strategies.

Speaker #3: We continue to project our North America boiler sales to grow between 6% to 8% in 2026 due to pricing benefits and a strengthening backlog in commercial and residential boilers.

Speaker #3: We have reduced our 2026 sales guidance for North America water treatment to growth of 5 to 6 percent. The decrease in our outlook reflects the impact of cautious consumer behavior in our consumer-facing channels, which is approximately half of our business.

Stephen M. Shafer: We have reduced our 2026 sales guidance for North America water treatment to growth of 5% to 6%. The decrease in our outlook reflects the impact of cautious consumer behavior in our consumer-facing channels, which is approximately half of our business, where we have experienced soft demand as well as a shift toward lower-priced products. We are pleased with the progress of our priority dealer network expansion efforts and expect sales in that channel to achieve double-digit growth in 2026. Our guidance that Leonard Valve will achieve double-digit growth and contribute approximately $70 million in sales in 2026 is unchanged. Integration efforts are on track, and we are pleased with the reception we are receiving as we explore ways to go to market together. Moving to our rest of world outlook and assumptions.

Steve Shafer: We have reduced our 2026 sales guidance for North America water treatment to growth of 5% to 6%. The decrease in our outlook reflects the impact of cautious consumer behavior in our consumer-facing channels, which is approximately half of our business, where we have experienced soft demand as well as a shift toward lower-priced products. We are pleased with the progress of our priority dealer network expansion efforts and expect sales in that channel to achieve double-digit growth in 2026. Our guidance that Leonard Valve will achieve double-digit growth and contribute approximately $70 million in sales in 2026 is unchanged. Integration efforts are on track, and we are pleased with the reception we are receiving as we explore ways to go to market together. Moving to our rest of world outlook and assumptions.

Speaker #3: We have experienced soft demand as well as a shift toward lower-priced products. We are pleased with the progress of our priority dealer network expansion efforts and expect sales in that channel to achieve double-digit growth in 2026.

Speaker #3: Our guidance at Leonard Valve will achieve double-digit growth and contribute approximately $70 million in sales in 2026 is unchanged. Integration efforts are on track, and we are pleased with the reception we are receiving as we explore ways to go to market together.

Speaker #3: Moving to our rest of the world outlook and assumptions. We have updated our full-year guides for China sales, which we now expect to be down low double digits in local currency compared to last year, with sales in Q2 down approximately 15% compared to Q1 as we balance channel inventories to the current environment.

Stephen M. Shafer: We have updated our full year guidance for China sales, which we now expect to be down low double digits in local currency compared to last year, with sales in Q2 down approximately 15% compared to Q1 as we balance channel inventories to the current environment. This revised guidance reflects our updated view of the China market, where we expect persistent headwinds throughout the year due to continued low consumer demand, severely limited government stimulus, and ongoing competitive pressures. We continue to advance our China assessment, evaluating strategic alternatives to strengthen our long-term competitive position. The valuation is providing valuable insights into both the advantages and challenges facing our business. Many actions we've identified to improve the performance of our China business are pending the conclusion of our assessment, which is impacting our expected recovery timeframe. We are looking to provide greater clarity within the next few months.

Steve Shafer: We have updated our full year guidance for China sales, which we now expect to be down low double digits in local currency compared to last year, with sales in Q2 down approximately 15% compared to Q1 as we balance channel inventories to the current environment. This revised guidance reflects our updated view of the China market, where we expect persistent headwinds throughout the year due to continued low consumer demand, severely limited government stimulus, and ongoing competitive pressures. We continue to advance our China assessment, evaluating strategic alternatives to strengthen our long-term competitive position. The valuation is providing valuable insights into both the advantages and challenges facing our business. Many actions we've identified to improve the performance of our China business are pending the conclusion of our assessment, which is impacting our expected recovery timeframe. We are looking to provide greater clarity within the next few months.

Speaker #3: This revised guidance reflects our updated view of the China market, where we expect persistent headwinds throughout the year due to continued low consumer demand, severely limited government stimulus, and ongoing competitive pressures.

Speaker #3: We continue to advance our China assessment, evaluating strategic alternatives to strengthen our long-term competitive position. The valuation is providing valuable insights into both the advantages and challenges facing our business.

Speaker #3: Many actions we've identified to improve the performance of our China business are pending the conclusion of our assessment, which is impacting our expected recovery timeframe.

Speaker #3: We are looking to provide greater clarity within the next few months. We project our India business inclusive of Hewlett will have top-line growth of approximately 10% and is unchanged.

Stephen M. Shafer: We project our India business, inclusive of Pureit, will have top line growth of approximately 10% and is unchanged. Based on these 2026 assumptions, we expect total top line growth of approximately 2% to 4%. We expect our North America segment margin to be approximately 24% and Rest of World segment margin to be between 6% and 7%. Please turn to slide 10. This morning, I'd like to provide additional color on our operational excellence value creation opportunities. Our focus is to provide sustainable margin improvement in mid-cycle markets and protect our profitable growth in times of less market certainty. Over many years, we have looked to drive continuous improvement throughout our operations with our A. O. Smith Operating System. Today, we are building on that foundation with new tools and making more strategic moves to help prioritize around our strengths and drive improved profitability.

Steve Shafer: We project our India business, inclusive of Pureit, will have top line growth of approximately 10% and is unchanged. Based on these 2026 assumptions, we expect total top line growth of approximately 2% to 4%. We expect our North America segment margin to be approximately 24% and Rest of World segment margin to be between 6% and 7%. Please turn to slide 10. This morning, I'd like to provide additional color on our operational excellence value creation opportunities. Our focus is to provide sustainable margin improvement in mid-cycle markets and protect our profitable growth in times of less market certainty. Over many years, we have looked to drive continuous improvement throughout our operations with our A. O. Smith Operating System. Today, we are building on that foundation with new tools and making more strategic moves to help prioritize around our strengths and drive improved profitability.

Speaker #3: Based on these 2026 assumptions, we expect total top-line growth of approximately 2 to 4 percent. We expect our North America segment margin to be approximately 24%, and rest of the world segment margin to be between 6 and 7 percent.

Speaker #3: Please turn to slide 10. This morning, I'd like to provide additional color on our operational excellence value creation opportunities. Our focus is to provide sustainable margin improvement in mid-cycle markets and protect our profitable growth in times of less market certainty.

Speaker #3: Over many years, we have looked to drive continuous improvement throughout our operations with our AOS operating system. Today, we are building on that foundation with new tools and making more strategic moves to help prioritize around our strengths and drive improved profitability.

Speaker #3: The tool sets we are now bringing to our operations include an enhanced ability for process intelligence and AI capabilities to drive better customer experiences at greater levels of productivity.

Stephen M. Shafer: The tool sets we are now bringing to our operations include an enhanced ability for process intelligence and AI capabilities to drive better customer experiences at greater levels of productivity. Initial application examples include order management, warranty claims processing, and technical service support, where we are identifying opportunities, developing process improvements, and using AI agents to drive that improvement. Still early days, but we are excited by the potential of what we see. The streamlining of our North America water treatment business is an example of focusing on our strengths to drive more profitable growth. As we announced this morning, we are taking actions to continue improving our profitability and accelerate long-term growth through footprint optimization and brand rationalization. These steps are part of our ongoing water treatment strategy evolution and allow us to further focus on the areas where we expect to be most competitive going forward.

Steve Shafer: The tool sets we are now bringing to our operations include an enhanced ability for process intelligence and AI capabilities to drive better customer experiences at greater levels of productivity. Initial application examples include order management, warranty claims processing, and technical service support, where we are identifying opportunities, developing process improvements, and using AI agents to drive that improvement. Still early days, but we are excited by the potential of what we see. The streamlining of our North America water treatment business is an example of focusing on our strengths to drive more profitable growth. As we announced this morning, we are taking actions to continue improving our profitability and accelerate long-term growth through footprint optimization and brand rationalization. These steps are part of our ongoing water treatment strategy evolution and allow us to further focus on the areas where we expect to be most competitive going forward.

Speaker #3: Initial application examples include order management, warranty claims processing, and technical service support, where we are identifying opportunities developing process improvements and using AI agents to drive that improvement.

Speaker #3: Still early days, but we are excited by the potential of what we see. The streamlining of our North America water treatment business is an example of focusing on our strengths to drive more profitable growth.

Speaker #3: As we announced this morning, we are taking actions to continue improving our profitability and accelerate long-term growth through footprint optimization and brand rationalization. These steps are part of our ongoing water treatment strategy evolution and allow us to further focus on the areas where we expect to be most competitive going forward.

Speaker #3: We expect to recognize a restructuring charge of approximately $20 million in the second quarter, and a projected annual savings of between 6 and 8 million dollars beginning in 2027.

Stephen M. Shafer: We expect to recognize a restructuring charge of approximately $20 million in Q2 and a projected annual savings of between $6 million and $8 million beginning in 2027. These exciting new tools that help us reimagine our operating processes and our continued strategic focus on prioritizing around our strengths are two ways in which we are bringing operational excellence to life at A. O. Smith. I look forward to sharing more details as this focus area for us matures going forward. Moving to slide 11. Our team responded well faced with pressure in several of our key markets in Q1. I am pleased with the market share improvement we saw in residential water heating, the double-digit valve sales growth that Leonard Valve contributed to the quarter, and the strong free cash flow achieved through diligent working capital management.

Steve Shafer: We expect to recognize a restructuring charge of approximately $20 million in Q2 and a projected annual savings of between $6 million and $8 million beginning in 2027. These exciting new tools that help us reimagine our operating processes and our continued strategic focus on prioritizing around our strengths are two ways in which we are bringing operational excellence to life at A. O. Smith. I look forward to sharing more details as this focus area for us matures going forward. Moving to slide 11. Our team responded well faced with pressure in several of our key markets in Q1. I am pleased with the market share improvement we saw in residential water heating, the double-digit valve sales growth that Leonard Valve contributed to the quarter, and the strong free cash flow achieved through diligent working capital management.

Speaker #3: These exciting new tools that help us reimagine our operating processes and our continued strategic focus on prioritizing around our strengths are two ways in which we are bringing operational excellence to life at AO SMITH.

Speaker #3: I look forward to sharing more details as this focus area for us matures going forward. Moving to slide 11. Our team responded well faced with pressure in several of our key markets in the first quarter.

Speaker #3: I am pleased with the market share improvement we saw in residential water heating. The double-digit valve sales growth that Leonard Valve contributed to the quarter and the strong free cash flow achieved through diligent working capital management.

Speaker #3: With the strategic actions that we are taking, supported by our consistent operational discipline, I believe AO SMITH will continue to strengthen its leadership position and be well-equipped to capitalize on future opportunities.

Stephen M. Shafer: With the strategic actions that we are taking, supported by our consistent operational discipline, I believe A. O. Smith will continue to strengthen its leadership position and be well equipped to capitalize on future opportunities. With that, we conclude our prepared remarks, and we are now available for your questions.

Steve Shafer: With the strategic actions that we are taking, supported by our consistent operational discipline, I believe A. O. Smith will continue to strengthen its leadership position and be well equipped to capitalize on future opportunities. With that, we conclude our prepared remarks, and we are now available for your questions.

Speaker #3: With that, we conclude our prepared remarks, and we are now available for your questions.

Speaker #1: Thank you. As a reminder, to ask a question, please press *11 on your telephone and wait for your name to be announced. To withdraw your question, please press *11 again.

Operator: Thank you. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. We ask that you please limit yourself to 1 question and 1 follow-up. If you have additional questions, please reenter the queue. 1 moment for our first question. Our first question will come from the line of Susan McClary with Goldman Sachs. Your line is open. Please go ahead.

Speaker #1: We ask that you please limit yourself to one question and one follow-up. If you have additional questions, please re-enter enter the queue. One moment for our first question.

Speaker #1: And our first question will come from the line of Susan McCleary with Goldman Sachs. Your line is open. Please go ahead.

Speaker #2: Thank you. Good morning, everyone. Thanks for taking the questions.

Susan McClary: Thank you. Good morning, everyone. Thanks for taking the questions.

Susan Maklari: Thank you. Good morning, everyone. Thanks for taking the questions.

Speaker #3: Good morning.

Stephen M. Shafer: Good morning.

Steve Shafer: Good morning.

Speaker #4: Good morning.

Susan McClary: My first question is on the channel inventories in residential. You mentioned that you did have some pull forward around the pricing that you announced. Can you talk a bit more about how much you're seeing in there and how you're thinking about the channel going to Q2 and how we should think of the flow through in the next couple quarters as a result of that?

Susan Maklari: My first question is on the channel inventories in residential. You mentioned that you did have some pull forward around the pricing that you announced. Can you talk a bit more about how much you're seeing in there and how you're thinking about the channel going to Q2 and how we should think of the flow through in the next couple quarters as a result of that?

Speaker #2: My first question is on the channel inventories in residential. You mentioned that you did have some pull forward around the pricing that you announced.

Speaker #2: Can you talk a bit more about how much you're seeing in there and how you're thinking about the channel going into the second quarter and how we should think of the flow-through in the next couple of quarters as a result of that?

Speaker #3: Oh, yeah. Good morning, Susan. This is Chuck. The reference that I made to pull forward in the first quarter was to last year. So we really haven't seen any pull forward in Q1 of 2026.

Charles T. Lauber: Yeah. Good morning, Susan. This is Chuck. You know, the reference that I made to pull forward in Q1 was to last year. We really haven't seen any pull forward in Q1 of 2026. It is kind of thinking about the quarters. By the way, the channel inventories we think are kind of in line with what we would expect coming out of Q1.

Chuck Lauber: Yeah. Good morning, Susan. This is Chuck. You know, the reference that I made to pull forward in Q1 was to last year. We really haven't seen any pull forward in Q1 of 2026. It is kind of thinking about the quarters. By the way, the channel inventories we think are kind of in line with what we would expect coming out of Q1.

Speaker #3: This kind of thinking about the quarters so, by the way, the channel inventories we think are kind of in line with what we would expect coming out of the first quarter.

Speaker #2: Okay. Okay. So you haven't seen anything from the pricing you announced this year yet?

Susan McClary: Okay. Okay, you haven't seen anything from the pricing you announced this year yet?

Susan Maklari: Okay. Okay, you haven't seen anything from the pricing you announced this year yet?

Speaker #3: Yeah. Not meaningful. I mean, the price increase that we have is effective mid-May, roughly. So it's pretty early days.

Charles T. Lauber: Yeah, not meaningful. I mean, the price increase that we have is effective mid-May, roughly. It's pretty early days.

Chuck Lauber: Yeah, not meaningful. I mean, the price increase that we have is effective mid-May, roughly. It's pretty early days.

Speaker #2: Okay. All right. That's you mentioned that that regulatory change got pushed out for a year. Can you just give us more color on what drove that and how you're thinking about the demand there now for the balance of this year and then even into next year as the channel positions for that?

Susan McClary: Okay. All right. That's helpful. You know, turning to commercial, you mentioned that that regulatory change got pushed out for a year. Can you just give us more color on what drove that and how you're thinking about the demand there now for the balance of this year and then even into next year as the channel positions for that?

Susan Maklari: Okay. All right. That's helpful. You know, turning to commercial, you mentioned that that regulatory change got pushed out for a year. Can you just give us more color on what drove that and how you're thinking about the demand there now for the balance of this year and then even into next year as the channel positions for that?

Speaker #3: Sure, Susan. So the regulatory DOE commercial rule that was set to take effect in October of this year has been challenged through the court system, and it's been held up so far through the court system, but it is pending and we're waiting to see if the Supreme Court will review it.

Stephen M. Shafer: Sure, Susan. You know, the regulatory DOE commercial rule that was set to take effect in October of this year, that's been being challenged through the court system, and it's been held up so far through the court system. It is pending and waiting to see if the Supreme Court will review it. We don't know whether the Supreme Court will take on that challenge or not. What the DOE issued late last week was because of that uncertainty around what would happen through the legal system, and because we're obviously getting closer and closer to the October 6th date, they issued, in essence, a letter that they would not be enforcing the rule until October of 2027.

Steve Shafer: Sure, Susan. You know, the regulatory DOE commercial rule that was set to take effect in October of this year, that's been being challenged through the court system, and it's been held up so far through the court system. It is pending and waiting to see if the Supreme Court will review it. We don't know whether the Supreme Court will take on that challenge or not. What the DOE issued late last week was because of that uncertainty around what would happen through the legal system, and because we're obviously getting closer and closer to the October 6th date, they issued, in essence, a letter that they would not be enforcing the rule until October of 2027.

Speaker #3: So we don't know whether the Supreme Court will take on that challenge or not. But what the DOE issued late last week was because of that uncertainty around what would happen through the legal system and because we're obviously getting closer and closer to the October 6th date, they issued in essence a letter that they would not be enforcing the rule until October of 2027.

Speaker #3: However, that might also change as things play out both in the court system as well as how DOE thinks about the rule going forward.

Stephen M. Shafer: However, that might also change as things play out, both in the court system as well as how DOE thinks about the rule going forward. That was new information as of last week. There's still a lot of uncertainty out there, both on the legal front as well as the DOE positioning, but it has us feeling like it was a more prudent thing to do to think that the industry may do less buy ahead because of that announcement.

Steve Shafer: However, that might also change as things play out, both in the court system as well as how DOE thinks about the rule going forward. That was new information as of last week. There's still a lot of uncertainty out there, both on the legal front as well as the DOE positioning, but it has us feeling like it was a more prudent thing to do to think that the industry may do less buy ahead because of that announcement.

Speaker #3: So that was new information as of last week. There's still a lot of uncertainty out there, both on the legal front as well as the DOE positioning, but it has us feeling like it was a more prudent thing to do to think that the industry may do less by ahead because of that announcement.

Speaker #1: Thank you. And one moment for our next question. Our next question will come from the line of Matt Somerville with DA Davidson. Your line is open.

Operator: Thank you. One moment for our next question. Our next question will come from the line of Matt Summerville with D.A. Davidson. Your line is open. Please go ahead.

Speaker #1: Please go ahead.

Speaker #5: Thanks. A couple of questions. On the water treatment side of things, I guess I was under the impression that getting out of the retail or big box channel was the reset sort of recipe for that business.

Matt Summerville: Thanks. A couple questions. On the water treatment side of things, I guess I was under the impression that getting out of the retail or big box channel was the reset sort of recipe for that business, and it sounds like you're initiating yet another reset in water treatment. Remind us how big that business is and just help us understand a little bit more around how we should be thinking about that looking ahead.

Speaker #5: And it sounds like you're initiating yet another reset in water treatment. Remind us how big that business is and just help us understand a little bit more around how we should be thinking about that looking ahead.

Speaker #3: Yeah. Well, good morning, Matt. The business, the water treatment business, is just over 250 million roughly. I'd say last time we talked about a reset was the exiting of on-the-shelf retail.

Stephen M. Shafer: Yeah. Well, good morning, Matt. You know, the business, the water treatment business is just over $250 million roughly. I'd say last time we talked about a reset was the exiting of on-the-shelf retail, and that I'll call that ingredient one of the reset. This is kind of the next step of focus, and it's really a step into focusing on leveraging our brands, focusing on our A. O. Smith brand more than some of the brands that we acquired, and then rationalizing our manufacturing footprint. You know, think of it in terms of in 2026, we're looking to expand 200 basis points in our margins to move about 15% operating margins in North America water treatment. We would expect in 2027, with this next restructuring, an incremental couple hundred basis points.

Chuck Lauber: Yeah. Well, good morning, Matt. You know, the business, the water treatment business is just over $250 million roughly. I'd say last time we talked about a reset was the exiting of on-the-shelf retail, and that I'll call that ingredient one of the reset. This is kind of the next step of focus, and it's really a step into focusing on leveraging our brands, focusing on our A. O. Smith brand more than some of the brands that we acquired, and then rationalizing our manufacturing footprint. You know, think of it in terms of in 2026, we're looking to expand 200 basis points in our margins to move about 15% operating margins in North America water treatment. We would expect in 2027, with this next restructuring, an incremental couple hundred basis points.

Speaker #3: And I'll call that ingredient one of the reset business, kind of the next step of focus. And it's really a step into focusing on leveraging our brands focusing on our AO SMITH brand more than some of the brands that we acquired.

Speaker #3: And then, rationalizing our manufacturing footprint. So, think of it in terms of, in 2026, we're looking to expand 200 basis points in our margins to move to about 15% operating margins in North America water treatment.

Speaker #3: We would expect in 2027 with this next restructuring in incremental couple hundred basis points. So think of it as just kind of the next step in moving that profitability up.

Stephen M. Shafer: you know, think of it as just kind of the next step in moving that profitability up.

Chuck Lauber: you know, think of it as just kind of the next step in moving that profitability up.

Matt Summerville: As a follow-up, if I think I heard you right, you expect your China business to now be down low double digits. How does that sort of sync up to what is actually happening in the market? Are you seemingly losing share? I guess, how do you sort of justify the length of this review process with the potential that you're continuing to kind of bleed share in that business because of how long that process has taken to unfold? Thank you.

Speaker #5: Then is the follow-up, if I think I heard you right, you expect your channel business to now be down low double digits. How does that sort of sync up to what is actually happening in the market?

Speaker #5: Are you seemingly losing share? I guess how do you sort of justify the length of this review process with the potential that you're continuing to kind of bleed share in that business because of how long that process has taken to unfold?

Speaker #5: Thank you.

Speaker #3: Yeah. I mean, first off, regarding the market environment and our performance in it, in the first quarter, I think the whole market saw a lot of the challenges and many of the things that we highlighted in our prepared remarks around the stimulus is kind of run its course.

Stephen M. Shafer: Yeah. I mean, first off, regarding the market environment and our performance in it, you know, in Q1, I think the whole market saw a lot of the challenges and many of the things that we highlighted in our prepared remarks around the stimulus has kind of, you know, run its course. Still there's a low level of consumer confidence. It was a challenging Q1, I'd say, across the market, at least in the categories that we participate in. From the third-party data we tracked, we didn't lose a lot of share. I think we actually maintained our share in Q1, but it was certainly a down market condition.

Steve Shafer: Yeah. I mean, first off, regarding the market environment and our performance in it, you know, in Q1, I think the whole market saw a lot of the challenges and many of the things that we highlighted in our prepared remarks around the stimulus has kind of, you know, run its course. Still there's a low level of consumer confidence. It was a challenging Q1, I'd say, across the market, at least in the categories that we participate in. From the third-party data we tracked, we didn't lose a lot of share. I think we actually maintained our share in Q1, but it was certainly a down market condition.

Speaker #3: Still, there's low-level consumer confidence. So it was a challenging first quarter. I'd say across the market, at least in the categories that we participate in.

Speaker #3: From the third-party data we track, we didn't lose a lot of share. I think we actually maintained our share in the first quarter. But it was certainly a down market condition.

Speaker #3: I think it is probably the biggest driver to why the assessment is taking a bit longer than we had hoped. There's still a lot of really positive things coming out of the assessment for us.

Stephen M. Shafer: I think it is probably the biggest driver to why the assessment is taking a bit longer than we had hoped. You know, there's still a lot of really positive things coming out of the assessment for us. Just as context, I go back to we've done some third-party assessments on our business in China, and our brand is just very strong. Our pricing power is very strong. That has been sort of validated also with the partners that we're talking to. There's a lot of interest in the A. O. Smith business in terms of, you know, partnering with us.

Steve Shafer: I think it is probably the biggest driver to why the assessment is taking a bit longer than we had hoped. You know, there's still a lot of really positive things coming out of the assessment for us. Just as context, I go back to we've done some third-party assessments on our business in China, and our brand is just very strong. Our pricing power is very strong. That has been sort of validated also with the partners that we're talking to. There's a lot of interest in the A. O. Smith business in terms of, you know, partnering with us.

Speaker #3: And just as context, I go back to we've done some third-party assessments on our business in China and our brand is just very strong.

Speaker #3: Our pricing power is very strong. That has been sort of validated also with the partners that we're talking to. There's a lot of interest in the A. O. Smith business in terms of partnering with us.

Stephen M. Shafer: It's been a process and an assessment that's had, you know, there's a lot of interest and lots of competition in terms of people who have thoughts and ideas of how they could work with us to strengthen the business going forward. That's all been very positive, but we are doing it in the backdrop of a very challenging market environment. Anytime you're having those kinds of conversations with partners and we're all being challenged, you know, by the current context of the environment, it gets tough and it makes the dialogue take a little bit longer. I think that's what we're going through right now. As I mentioned, we've been having these conversations now for quite some time.

Steve Shafer: It's been a process and an assessment that's had, you know, there's a lot of interest and lots of competition in terms of people who have thoughts and ideas of how they could work with us to strengthen the business going forward. That's all been very positive, but we are doing it in the backdrop of a very challenging market environment. Anytime you're having those kinds of conversations with partners and we're all being challenged, you know, by the current context of the environment, it gets tough and it makes the dialogue take a little bit longer. I think that's what we're going through right now. As I mentioned, we've been having these conversations now for quite some time.

Speaker #3: So it's been a process and an assessment that's had there's a lot of interest and lots of competition in terms of people who have thoughts and ideas of how they could work with us to strengthen the business going forward.

Speaker #3: So that's all been very positive. But we are doing it in the backdrop of a very challenging market environment. And anytime you're having those kinds of conversations, with partners and we're all being challenged, by the current context of the environment, it gets tough.

Speaker #3: And it makes the dialogue take a little bit longer. And I think that's what we're going through right now. But as I mentioned, we've been having these conversations now for quite some time.

Stephen M. Shafer: They're maturing, and I'm hoping that in the coming months we'll be able to get clarity on our path forward.

Steve Shafer: They're maturing, and I'm hoping that in the coming months we'll be able to get clarity on our path forward.

Speaker #3: They're maturing, and I'm hoping that in the coming months, we'll be able to get clarity on our path forward.

Speaker #1: Thank you. And one moment for our next question. Our next question comes from the line of Tomohiko Sano with JPMorgan. Your line is open.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Tomohiko Sano with J.P. Morgan. Your line is open. Please go ahead.

Speaker #1: Please go ahead.

Speaker #6: Hi. Good morning, everyone.

Tomohiko Sano: Hi. Good morning, everyone.

Speaker #3: Good morning. Good morning.

Stephen M. Shafer: Good morning.

Chuck Lauber: Good morning.

Speaker #6: Thank you. We understand the guidance and revision was mainly driven by external factors in China and North America in this challenging environment. Have you observed any changes in your market share across key regions?

Operator: Good morning.

Stephen M. Shafer: Good morning.

Operator: Good morning.

Steve Shafer: Good morning.

Tomohiko Sano: Thank you. We understand the guidance revision was mainly driven by external factors in China and North America. In this challenging environment, have you observed any changes in your market share across key regions?

Speaker #3: Well, as I mentioned, in China, in the last few years, there's been some market share loss. But I'd say as it is right now in Q1, we don't see any meaningful market share loss.

Stephen M. Shafer: Well, as I mentioned, in China, you know, in the last few years, there's been some market share loss. I'd say as it is right now in Q1, we don't see any meaningful market share loss. We think we're kind of holding our own in a challenging market. Within the US, we mentioned that, you know, within the water heater side, we've stabilized our share position in the wholesale side of the channel. That was a big focus for us over the last quarter, we're happy with the progress we've made there's still more work to be done in terms of share.

Steve Shafer: Well, as I mentioned, in China, you know, in the last few years, there's been some market share loss. I'd say as it is right now in Q1, we don't see any meaningful market share loss. We think we're kind of holding our own in a challenging market. Within the US, we mentioned that, you know, within the water heater side, we've stabilized our share position in the wholesale side of the channel. That was a big focus for us over the last quarter, we're happy with the progress we've made there's still more work to be done in terms of share.

Speaker #3: We think we're kind of holding our own in a challenging market. Within the US, as we mentioned, in the water heater side, we've stabilized our share position in the wholesale side of the channel.

Speaker #3: That was a big focus for us over the last quarter. And we're happy with the progress we've made there. But there's still more work to be done.

Speaker #3: In terms of share. And then on the retail side, we're very pleased with the share position we have and the strength we have with our partnerships on the retail side.

Stephen M. Shafer: On the retail side, we're very pleased with the share position we have and the strength we have with our partnerships on the retail side. you know, nothing meaningful, but it's a big focus for us is to continue to maintain our share position in the markets where we-

Steve Shafer: On the retail side, we're very pleased with the share position we have and the strength we have with our partnerships on the retail side. you know, nothing meaningful, but it's a big focus for us is to continue to maintain our share position in the markets where we-

Speaker #3: So, at this point, nothing meaningful. But it's a big focus for us to continue to maintain our share position in the markets where we lead.

Speaker #6: Thank you. And just follow up on the Leonard Valve. And how is the integrations of the Leonard progressing? And are you on track to realize the expected synergies?

Tomohiko Sano: Thank you. Just follow up on the Leonard Valve, and how is the integration of the Leonard progressing, and are you on track to realize the expected synergies?

Speaker #3: Yes. We're very pleased with our first quarter in with Leonard Valve. We think it's a great fit with our portfolio. Serves as the foundation for our water management strategy going forward.

Charles T. Lauber: Yes, we're very pleased with the with our Q1 in with Leonard Valve. We think it's a great fit with our portfolio, serves as the foundation for our water management strategy going forward. More work to be done there more broadly. In terms of Leonard Valve and the integration, we think, we're working well. We're on track with the plan that we have. Most of our opportunity we see is ways to go to market together, and that's been a big focus for us. We've been out talking to customers in the market, and it's been very well received. We're, we're pleased with the progress so far.

Steve Shafer: Yes, we're very pleased with the with our Q1 in with Leonard Valve. We think it's a great fit with our portfolio, serves as the foundation for our water management strategy going forward. More work to be done there more broadly. In terms of Leonard Valve and the integration, we think, we're working well. We're on track with the plan that we have. Most of our opportunity we see is ways to go to market together, and that's been a big focus for us. We've been out talking to customers in the market, and it's been very well received. We're, we're pleased with the progress so far.

Speaker #3: More work to be done there, more broadly. But in terms of Leonard Valve and the integration, we think we're working well. We're on track with the plan that we have.

Speaker #3: Most of our opportunity, we see, is ways to go to market together. And that's been a big focus for us. And so we've been out talking to customers in the market.

Speaker #3: It's been very well received. So we're pleased with the progress so far.

Speaker #1: Thank you. And one moment for our next question. Our next question will come from the line of David McGregor with Longbow Research. Your line is open.

Operator: Thank you. One moment for our next question. Our next question will come from the line of David MacGregor with Longbow Research. Your line is open. Please go ahead.

Speaker #1: Please go ahead.

Speaker #5: Hey. Good morning. This is Joe Nolan. I'm for David. I just hey, guys. I just wanted to focus on the margin and price-cost outlook over the remainder of the year.

Joe Nolan: Hey, good morning. This is Joe Nolan on for David.

Charles T. Lauber: Hi, Joe.

Chuck Lauber: Hi, Joe.

Joe Nolan: Hey, guys. I just wanted to focus on the margin and price cost outlook over the remainder of the year. Just in Q2, you'll be feeling the impact of higher steel and freight costs, but it sounds like you're not expecting to get price benefit until Q3. Could you just walk through kind of margin cadence over the remaining quarters of the year?

Speaker #5: So just in the second quarter, you'll be feeling the impact of higher steel and freight costs. But it sounds like you're not expecting to get price benefit until 3Q.

Speaker #5: So could you just walk through kind of margin cadence over the remaining quarters of the year?

Speaker #3: Sure. I'm happy to do that. So we were happy with our price-cost relationship in Q1. Pricing overcame the cost that we incurred plus a little bit of margin.

Charles T. Lauber: Sure, I'm happy to do that. You know, we were happy with our price cost relationship in Q1. You know, pricing overcame the cost that we incurred, plus a little bit of margin. We're walking into Q2 in a good position for the cost that we're behind us. However, you know, we are seeing incremental cost in Q2. We're seeing costs raise up on transportation, diesel fuel's up. We've seen costs on steel continue up, and we have the announced price increase. The announced price increase would come into effect in Q3. You know, we're gonna see a little pressure cost before we see pricing in Q2. We'll see a little pressure in Q2.

Chuck Lauber: Sure, I'm happy to do that. You know, we were happy with our price cost relationship in Q1. You know, pricing overcame the cost that we incurred, plus a little bit of margin. We're walking into Q2 in a good position for the cost that we're behind us. However, you know, we are seeing incremental cost in Q2. We're seeing costs raise up on transportation, diesel fuel's up. We've seen costs on steel continue up, and we have the announced price increase. The announced price increase would come into effect in Q3. You know, we're gonna see a little pressure cost before we see pricing in Q2. We'll see a little pressure in Q2.

Speaker #3: So we're walking into the second quarter in a good position for the costs that were behind us. However, we are seeing incremental costs in the second quarter.

Speaker #3: So we're seeing costs raise up on transportation, diesel fuels up. We've seen costs on steel continue up. And we have the announced price increase.

Speaker #3: So the announced price increase would come into effect in the third quarter. So we're going to see a little pressure. Costs before we see pricing in the second quarter.

Speaker #3: We'll see a little pressure in the second quarter. That'll be overcome in the third and fourth quarter with the pricing that we expect to have in place.

Charles T. Lauber: That'll be overcome in the Q3 and Q4 with the pricing that we expect to have in place. You know, we feel pretty comfortable with where we're positioned right now. But we're watching costs closely, right? Because, you know, some of those costs related to oil seem to be pretty persistent.

Chuck Lauber: That'll be overcome in the Q3 and Q4 with the pricing that we expect to have in place. You know, we feel pretty comfortable with where we're positioned right now. But we're watching costs closely, right? Because, you know, some of those costs related to oil seem to be pretty persistent.

Speaker #3: So we feel pretty comfortable with where we're positioned right now. But we're watching costs closely, right? Because some of those costs related to oil seem to be pretty persistent.

Speaker #5: Got it. That's helpful. And then another one, just a clarification question. On the commercial water heater industry outlook coming down to flat now, is that really just a reflection of the regulatory change, or is there any other moving pieces within that?

Joe Nolan: Got it. That's helpful. Another one, just a clarification question. On the commercial water heater industry outlook coming down to flat now, is that really just a reflection of the regulatory change, or is there any other moving pieces within that?

Speaker #3: Yeah. That's the biggest driver for the change in our outlook.

Charles T. Lauber: Yeah, that's the biggest driver for the change in our outlook.

Steve Shafer: Yeah, that's the biggest driver for the change in our outlook.

Speaker #1: Thank you. And one moment as we move on to our next question. Our next question comes from the line of Mike Halloran with Baird.

Operator: Thank you. One moment as we move on to our next question. Our next question comes from the line of Michael Halloran with Baird. Your line is open. Please go ahead.

Speaker #1: Your line is open. Please go ahead.

Speaker #4: Hey. Good morning, everyone.

Michael Halloran: Hey, good morning, everyone.

Speaker #3: Good morning.

Charles T. Lauber: Hey, Michael.

Chuck Lauber: Hey, Michael.

Tomohiko Sano: Good morning.

Operator: Good morning.

Speaker #6: Good morning.

Tomohiko Sano: Could you help put all this in context on how you expect the earnings to cadence through the year here? Obviously, the $0.02 from Leonard goes away, but, you know, maybe the price cost dynamics in Q2, as you just referenced, are a little less favorable, more favorable in the H2 of the year. You know, the timing around, you know, some of these other headwinds, demand dynamics. Do you get a catch-up in Q2 from the weather? How does that cadence through the year? I guess, could you just put it together and put the cadencing in line with maybe how it looks normally versus this year and any other nuances we should think about?

Michael Halloran: Could you help put all this in context on how you expect the earnings to cadence through the year here? Obviously, the $0.02 from Leonard goes away, but, you know, maybe the price cost dynamics in Q2, as you just referenced, are a little less favorable, more favorable in the H2 of the year. You know, the timing around, you know, some of these other headwinds, demand dynamics. Do you get a catch-up in Q2 from the weather? How does that cadence through the year? I guess, could you just put it together and put the cadencing in line with maybe how it looks normally versus this year and any other nuances we should think about?

Speaker #4: Can you help put all this in context on how you expect the earnings to cadence through the year here? Obviously, the 3 cents from Leonard goes away.

Speaker #4: But maybe the price-cost dynamics in 2Q, as you just referenced, are a little less favorable, more favorable in the back half of the year.

Speaker #4: The timing around some of these other headwind demand dynamics, do you get a catch-up in 2Q from the weather? How does that cadence through the year?

Speaker #4: So I guess, could you just put it together and put the cadencing in line with maybe how it looks normally versus this year and any other nuances we should think about?

Speaker #3: Sure. Happy to. Yeah. There's a couple of moving parts in a couple of moving parts since our last guidance outlook, right? So let me start with China.

Charles T. Lauber: Sure. Happy to. Yeah, there's a couple moving parts and a couple moving parts since our last guidance outlook, right? You know, let me start with China and start with maybe Steve's comments on China in Q2 being down. We believe it'll be down roughly 15% from Q1, and think of that in terms of decremental margins, 35% to 40%. We expect a difficult quarter in China. We expect that we'll come out of that quarter though, with a little bit better balancing of the inventories in the channel. The inventories in the channel are relatively the same as last year. It just, we'd like to be a little bit leaner in this environment.

Chuck Lauber: Sure. Happy to. Yeah, there's a couple moving parts and a couple moving parts since our last guidance outlook, right? You know, let me start with China and start with maybe Steve's comments on China in Q2 being down. We believe it'll be down roughly 15% from Q1, and think of that in terms of decremental margins, 35% to 40%. We expect a difficult quarter in China. We expect that we'll come out of that quarter though, with a little bit better balancing of the inventories in the channel. The inventories in the channel are relatively the same as last year. It just, we'd like to be a little bit leaner in this environment.

Speaker #3: And start with maybe Steve's comments on China in Q2 being down. We believe it'll be down roughly 15% from Q1. And think of that in terms of decremental margins, 35 to 40 percent.

Speaker #3: So we expect a difficult quarter in China. We expect that we'll come out of that quarter with a little bit better balancing of the inventories in the channel.

Speaker #3: The inventories in the channel are relatively the same as last year. It's just we'd like to be a little bit leaner in this environment.

Charles T. Lauber: In North America, you're right, we have costs kind of ahead of us in Q2 before we see pricing in Q3. That's a bit of a headwind to the margin in Q2. We also on the DOE, you know, if you look at what we're thinking about for the regulatory change for the Department of Energy policy statement, previously we would have expected a meaningful amount of pull forward in Q2 and Q3. We've just softened that a bit. We may have some, but we would not expect to have the same amount in Q2 and Q3 as what we had before. That kind of level sets to a flat commercial volume year over year, and that cadence would be pretty similar to other years.

Speaker #3: In North America, you're right. We have costs kind of ahead of us in the second quarter before we see pricing in the third quarter.

Chuck Lauber: In North America, you're right, we have costs kind of ahead of us in Q2 before we see pricing in Q3. That's a bit of a headwind to the margin in Q2. We also on the DOE, you know, if you look at what we're thinking about for the regulatory change for the Department of Energy policy statement, previously we would have expected a meaningful amount of pull forward in Q2 and Q3. We've just softened that a bit. We may have some, but we would not expect to have the same amount in Q2 and Q3 as what we had before. That kind of level sets to a flat commercial volume year over year, and that cadence would be pretty similar to other years.

Speaker #3: So that's a bit of a headwind to the margin in the second quarter. We also on the DOE, so if you look at what we're thinking about for the regulatory change for the Department of Energy policy statement, previously, we would have expected a meaningful amount of pull forward in Q2 and Q3.

Speaker #3: We've just softened that a bit. We may have some, but we would not expect to have the same amount in Q2 and Q3 as what we had before.

Speaker #3: So that kind of level sets to a flat commercial volume year over year and that cadence would be pretty similar to other years. On the so I mean, when you kind of look at Mike on Q2, overall Q2, EPS, it's expected to be roughly 25% of our full-year guidance midpoint.

Charles T. Lauber: On the, I mean, when you kind of look at Mike on Q2, you know, overall Q2 EPS is expected to be roughly 25% of our full year guidance midpoint. That's with a little bit of help in Q2, I would say from some pricing pull forward. We do expect a solid performance in North America in Q2 based on a little bit of pull forward. Our overall industry, we have, you know, pretty weak on Q1, but coming back decently in Q2 with that price pull forward. H2, a little stronger on, I'll call it, the boiler part of the business. Q3 is always stronger. We have China. If you think about China's normal cadence, Q4 is typically the strongest.

Chuck Lauber: On the, I mean, when you kind of look at Mike on Q2, you know, overall Q2 EPS is expected to be roughly 25% of our full year guidance midpoint. That's with a little bit of help in Q2, I would say from some pricing pull forward. We do expect a solid performance in North America in Q2 based on a little bit of pull forward. Our overall industry, we have, you know, pretty weak on Q1, but coming back decently in Q2 with that price pull forward. H2, a little stronger on, I'll call it, the boiler part of the business. Q3 is always stronger. We have China. If you think about China's normal cadence, Q4 is typically the strongest.

Speaker #3: That's with a little bit of help in Q2. I would say from some pricing pull forward. So we do expect a solid performance in North America in the second quarter based on a little bit of pull forward.

Speaker #3: Our overall industry, we have pretty weak on the first quarter. But coming back decently in the second quarter with that price pull forward. The back half of the year, a little stronger on, I'll call it the boiler part of the business, third quarter is always stronger.

Speaker #3: And we have China if you think about China as normal cadence, the fourth quarter is typically the strongest. So China had a fairly muted first quarter.

Charles T. Lauber: China, you know, had a fairly muted Q1. We're happy with the performance in China and 7% operating margins in Q1. Q2 and Q3, we expect to be a little bit challenged and then bounce back a bit in Q4 like normal seasonality happens in China. Overall, a little stronger Q2 on the top line, some headwinds on cost, some real headwinds in China and a little bit more normalization in the H2.

Chuck Lauber: China, you know, had a fairly muted Q1. We're happy with the performance in China and 7% operating margins in Q1. Q2 and Q3, we expect to be a little bit challenged and then bounce back a bit in Q4 like normal seasonality happens in China. Overall, a little stronger Q2 on the top line, some headwinds on cost, some real headwinds in China and a little bit more normalization in the H2.

Speaker #3: We're happy with the performance in China at 7% operating margins in Q1. But Q2 and Q3, we expect to be a little bit challenged.

Speaker #3: And then bounce back a bit in Q4 like normally normal seasonality happens in China. So overall, a little stronger Q2 on the top line, some headwinds on costs, some real headwinds in China.

Speaker #3: And a little bit more normalization in the back half.

Speaker #4: Thanks for that. And then a question on the pricing side of things. Maybe a twofold question here. One, are you expecting any pull forward of demand ahead of the 47% price increase as you're pushing through here?

Michael Halloran: Thanks for that. A question on the pricing side of things. Maybe a two-fold question here. One, are you expecting any pull forward of demand ahead of the 4% to 7% price increases you're pushing through here? Secondarily, how do you think the acceptance is going to go on the channel, given some of the moving pieces that are happening in the water heater space in general right now?

Speaker #4: And then secondarily, how do you think the acceptance is going to go in the channel given some of the moving pieces that are happening in the water heater space in general right now?

Speaker #3: Yeah. I mean, we'll see regarding kind of pull ahead, Mike. I think there's always a little bit of that. But we work closely with our customers.

Charles T. Lauber: Yeah. I mean, we'll see regarding, you know, kind of pull ahead, Mike. I think, you know, there's always a little bit of that, but we work closely with our customers. As we've talked about in the past, we navigate through those transitions. We always look to serve our customers well as we go through the price changes and also look to make sure we're being smart around operationally, how we serve those transitions. We'll see, but we'll stay close to our customers as we step through that in the Q2. You know, in terms of going forward, you know, we'll see, you know, how the market plays out.

Steve Shafer: Yeah. I mean, we'll see regarding, you know, kind of pull ahead, Mike. I think, you know, there's always a little bit of that, but we work closely with our customers. As we've talked about in the past, we navigate through those transitions. We always look to serve our customers well as we go through the price changes and also look to make sure we're being smart around operationally, how we serve those transitions. We'll see, but we'll stay close to our customers as we step through that in the Q2. You know, in terms of going forward, you know, we'll see, you know, how the market plays out.

Speaker #3: And as we've talked about in the past, we navigate through those transitions. We always look to serve our customers well as we go through the price changes, and also look to make sure we're being smart, operationally, in how we serve those transitions.

Speaker #3: So we'll see. But we'll stay close to our customers as we step through that in the second quarter. In terms of going forward, we'll see how the market plays out.

Charles T. Lauber: I think ultimately, at the end of the day, we remain committed to keep our customers competitive, and we'll continue to do that. Also, we know we're in an environment of a lot of uncertainty and a lot of cost pressures.

Speaker #3: I think ultimately, at the end of the day, we remain committed to keep our customers competitive. And we'll continue to do that. But also we know we're in an environment of a lot of uncertainty and a lot of cost pressures.

Steve Shafer: I think ultimately, at the end of the day, we remain committed to keep our customers competitive, and we'll continue to do that. Also, we know we're in an environment of a lot of uncertainty and a lot of cost pressures.

Speaker #1: Thank you. And one moment for our next question. Our next question will come from the line of Jeff Hammond with KeyBank Capital Markets. Your line is open.

Operator: Thank you. One moment for our next question. Our next question will come from the line of Jeff Hammond with KeyBanc Capital Markets. Your line is open. Please go ahead.

Speaker #1: Please go ahead.

Speaker #5: Hey. Good morning.

Jeff Hammond: Hey, good morning.

Speaker #3: Good morning. Hey, Jeff.

Charles T. Lauber: Good morning.

Chuck Lauber: Good morning.

Stephen M. Shafer: Good morning.

Steve Shafer: Good morning.

Charles T. Lauber: Hey, Jess.

Chuck Lauber: Hey, Jess.

Jeff Hammond: Maybe just to go at the guide a little bit different. You know, it seems like you're just cutting EPS $0.15, but, you know, a lot of the macro assumptions are kind of moving the wrong way. Can you just talk about, you know, offsets to that? I mean, I know you're now expecting some price, but any other offsets around, you know, restructuring savings or, you know, catch up from this, you know, plant issue that would kind of mitigate the EPS impact?

Speaker #5: Maybe just to go at the guide a little bit different. It seems like you're just cutting EPS 15 cents. But a lot of the macro assumptions are kind of moving the wrong way.

Speaker #5: Can you just talk about offsets to that? I mean, I know you're now expecting some price. But any other offsets around restructuring savings or catch-up from this plant issue?

Speaker #5: That would kind of mitigate the EPS impact.

Speaker #3: Yeah. We've had a little bit of catch-up on the plant issues, not a lot. But that would help us a bit in the second quarter.

Charles T. Lauber: We had a little bit of catch up on the plants issues. Not a lot, but that would help us a bit in Q2. I think as you kind of look at the year, I, you know, really from last guidance, the big change was what we saw in China and then this Department of Energy policy statement. You know, other opportunities, the teams continue to look at cost management like we have in China and continue to do that in North America as we watch kind of the market mature throughout the rest of the year. On the cost side, we're just gonna have to really watch costs. I mean, costs are pretty volatile right now with oil up and transportation. That's probably the biggest driver is keeping an eye on costs.

Chuck Lauber: We had a little bit of catch up on the plants issues. Not a lot, but that would help us a bit in Q2. I think as you kind of look at the year, I, you know, really from last guidance, the big change was what we saw in China and then this Department of Energy policy statement. You know, other opportunities, the teams continue to look at cost management like we have in China and continue to do that in North America as we watch kind of the market mature throughout the rest of the year. On the cost side, we're just gonna have to really watch costs. I mean, costs are pretty volatile right now with oil up and transportation. That's probably the biggest driver is keeping an eye on costs.

Speaker #3: I think as you kind of look at the year, we've really from last guidance, the big change was what we saw in China. And then this Department of Energy policy statement.

Speaker #3: So other opportunities, the teams continue to look at cost management. We have in China and continue to do that in North America as we watch kind of the market mature throughout the rest of the year.

Speaker #3: On the cost side, we're just going to have to really watch cost. I mean, costs are pretty volatile right now with the oil up, with oil up, and transportation.

Speaker #3: But that's probably the biggest driver is us keeping an eye on costs.

Speaker #4: Yeah. I mean, the cost control is sort of the near-term lever. A little bit longer term, but obviously, the lever we're going to continue to look at pulling is operational excellence.

Stephen M. Shafer: Yeah. I mean, the cost control is the sort of the near term lever. A little bit longer term, but obviously the lever we're gonna continue to look at pulling is operational excellence. I mentioned a little bit of some of the tools we're putting to work there. I think the timeframe of when that will kind of play out in terms of giving us some productivity space is still, we're still trying to get our head around and understand. I think that's another area where we're investing significant time and focus, is to figure out how do we get our operations even more productive with some of those tool sets.

Steve Shafer: Yeah. I mean, the cost control is the sort of the near term lever. A little bit longer term, but obviously the lever we're gonna continue to look at pulling is operational excellence. I mentioned a little bit of some of the tools we're putting to work there. I think the timeframe of when that will kind of play out in terms of giving us some productivity space is still, we're still trying to get our head around and understand. I think that's another area where we're investing significant time and focus, is to figure out how do we get our operations even more productive with some of those tool sets.

Speaker #4: And I mentioned a little bit of some of the tools we're putting to work there. And I think the timeframe of when that will kind of play out in terms of giving us some productivity space, it's still we're still trying to get our head around and understand.

Speaker #4: But I think that's another area where we're investing significant time and focus is to figure out how do we get our operations even more productive with some of those tool sets.

Speaker #5: Okay, great. And then just on, I guess, the competitive dynamics between wholesale, retail, and kind of this price increase—one, have you seen the other players in the water heater space announce similar pricing around steel, fuel, inflation?

Jeff Hammond: Okay, great. Then, just on, you know, I guess, competitive dynamics between wholesale, retail, and kind of this price increase, have you seen the other players in the water heater space announce similar pricing around, you know, steel, you know, fuel inflation, and just any kinda changes you're seeing, you know, in that wholesale channel, which has been pretty competitive? Thanks.

Speaker #5: And just any kind of changes you're seeing in that wholesale channel which has been pretty competitive? Thanks.

Speaker #3: Yeah. I mean, we won't comment on competitor pricing. But we kind of looked backwards on our historical performance and how successful we've been to offset costs.

Charles T. Lauber: Yeah. I mean, we won't comment on competitor pricing. But we kind of look backwards on our historical performance and how successful we've been to offset costs. We feel good about our positioning and point to history on that, our ability to be able to cover costs over time. It remains a competitive environment. We would expect the whole industry to be experiencing very similar cost inputs. As Steve said a little earlier, our commitment is to make sure we keep our customers competitive.

Chuck Lauber: Yeah. I mean, we won't comment on competitor pricing. But we kind of look backwards on our historical performance and how successful we've been to offset costs. We feel good about our positioning and point to history on that, our ability to be able to cover costs over time. It remains a competitive environment. We would expect the whole industry to be experiencing very similar cost inputs. As Steve said a little earlier, our commitment is to make sure we keep our customers competitive.

Speaker #3: So we feel good about our positioning and point to history on that, our ability to be able to cover costs over time. It remains a competitive environment.

Speaker #3: We would expect our the whole industry to be experiencing very similar cost inputs. And as Steve said a little earlier, our commitment is to make sure we keep our customers competitive.

Speaker #1: Thank you. And one moment for our next question. Our next question will come from the line of Nathan Jones with Stifel. Your line is open.

Operator: Thank you. One moment for our next question. Our next question will come from the line of Nathan Jones with Stifel. Your line is open. Please go ahead.

Speaker #1: Please go ahead.

Speaker #6: Yeah. Good morning. This is Adam Farley on for Nathan.

Adam Farley: Yeah, good morning. This is Adam Farley on for Nathan.

Charles T. Lauber: Good morning, Adam.

Chuck Lauber: Good morning, Adam.

Speaker #3: Yeah.

Adam Farley: Following up on. Hey, good morning. Following up on the commercial water heating regulatory impact, does that change how you guys are planning to ramp capacity for that commercial water heating change? Maybe more broadly, just update us on, you know, capacity plans for this year and into next year.

Speaker #7: Hi, Adam.

Speaker #6: I'm following up on hey, good morning. Following up on the commercial water heating regulatory impact. Does that change how you guys are planning to ramp capacity for that commercial water heating change?

Speaker #6: And then maybe more broadly, just update us on capacity plans for this year and next year.

Speaker #3: Well, we were prepared for the transition from a capacity standpoint. And we made a bit of the investments to get ready for that. And I think at this point, if the demand is pushed out and customers delay their orders and, in fact, the regulatory rule goes into effect later, we'll be ready with those investments that many of them made and some of them we're still in front of us and we're delaying until we have the certainty of the need for the demand.

Stephen M. Shafer: Well, you know, we were prepared for the transition from a capacity standpoint. We made a bit of the investments to get ready for that. I think at this point, if the demand is pushed out, and customers delay their orders and in fact, the regulatory rule goes into effect later, we'll be ready with those investments that many of them made, and some of them were still in front of us, and we're delaying until we have the certainty of the need for the demand.

Steve Shafer: Well, you know, we were prepared for the transition from a capacity standpoint. We made a bit of the investments to get ready for that. I think at this point, if the demand is pushed out, and customers delay their orders and in fact, the regulatory rule goes into effect later, we'll be ready with those investments that many of them made, and some of them were still in front of us, and we're delaying until we have the certainty of the need for the demand.

Speaker #4: Okay. Fair enough. And then maybe on tariffs, was there any incremental change to the gross tariff impact with the recent changes to some of the rules?

Adam Farley: Okay. Fair enough. Then maybe on tariffs, you know, was there any incremental change to the gross tariff impact with the recent changes to some of the rules? Then, you know, what is maybe contemplated in guide on tariffs? Thank you.

Speaker #4: And then, what has maybe been contemplated in the guide on tariffs? Thank you.

Speaker #3: Yeah. I mean, we saw some relief on the IEPA tariffs. And then other tariffs came in. So I mean, overall, kind of the tariff outlook, maybe a little net neutral, maybe a little favorable.

Stephen M. Shafer: Yeah, we saw some relief on the IEEPA tariffs. Other tariffs came in. I mean, overall kind of the tariff outlook may be a little net neutral, maybe a little favorable, kind of overshadowed by some of these other costs that we see in front of us relating to oil. You know, diesel fuel going up, transportation. We've seen steel be very resilient. Net, net, it's just a bit of a headwind on our costs and that's why we have pricing out there.

Chuck Lauber: Yeah, we saw some relief on the IEEPA tariffs. Other tariffs came in. I mean, overall kind of the tariff outlook may be a little net neutral, maybe a little favorable, kind of overshadowed by some of these other costs that we see in front of us relating to oil. You know, diesel fuel going up, transportation. We've seen steel be very resilient. Net, net, it's just a bit of a headwind on our costs and that's why we have pricing out there.

Speaker #3: But then kind of overshadowed by some of these other costs that we see in front of us relating to oil. Diesel fuel going up, transportation.

Speaker #3: We've seen steel be very resilient. So net, net, it's just a bit of a headwind on our costs. And that's why we have pricing out there.

Speaker #1: Thank you. And one moment for our next question. Our next question comes from the line of Andrew Kaplowitz with Citi. Your line is open.

Operator: Thank you. 1 moment for our next question. Our next question comes from the line of Andrew Kaplowitz with Citi. Your line is open. Please go ahead.

Speaker #1: Please go ahead.

Speaker #8: Hi. Good morning. This is Natalia on behalf of Andy Kaplowitz.

Natalia: Hi. Good morning. This is Natalia on behalf of Andy Kaplowitz.

[Analyst] (Citi): Hi. Good morning. This is Natalia on behalf of Andy Kaplowitz.

Speaker #3: Good morning.

Stephen M. Shafer: Good morning.

Steve Shafer: Good morning.

Operator: Good morning.

Speaker #7: Good morning.

Natalia: First question I'll start with, you held the outlook for boilers despite lowering expectations across most other product categories. Can you maybe just unpack what you're seeing in underlying demand? I know you mentioned earlier on the call you're seeing strength in commercial and residential, specifically how much of that is volume versus pricing?

Speaker #8: First question I'll start with: You held the outlook for boilers despite lowering expectations across most other product categories. Can you maybe just unpack what you're seeing in underlying demand?

[Analyst] (Citi): First question I'll start with, you held the outlook for boilers despite lowering expectations across most other product categories. Can you maybe just unpack what you're seeing in underlying demand? I know you mentioned earlier on the call you're seeing strength in commercial and residential, specifically how much of that is volume versus pricing?

Speaker #8: I know you mentioned earlier on the call you're seeing strength in commercial and residential. But specifically, how much of that is volume versus pricing?

Stephen M. Shafer: Our growth for the year, it has a big price component into it, the carryover pricing from last year. I think, you know Q1 was a little bit softer on commercial, we highlighted. We see those orders coming up, and this is a typical seasonality too for that business. We still remain, you know, confident in that 6% to 8% growth forecast. Commercial is the one that I think is, we see from the order book is catching up. Price is still a big component of that growth guide.

Speaker #3: Our growth for the year has a big price component in it—the carryover pricing from last year. I think Q1 was a little bit softer on commercial, which we highlighted.

Steve Shafer: Our growth for the year, it has a big price component into it, the carryover pricing from last year. I think, you know Q1 was a little bit softer on commercial, we highlighted. We see those orders coming up, and this is a typical seasonality too for that business. We still remain, you know, confident in that 6% to 8% growth forecast. Commercial is the one that I think is, we see from the order book is catching up. Price is still a big component of that growth guide.

Speaker #3: But we see those orders coming up. And this is a typical seasonality too for that business. So we still remain confident in that 6 to 8 percent growth forecast.

Speaker #3: Commercial is the one that's, I think, is we see from the order book is catching up. But price is still a big component of that growth guide.

Speaker #8: Got it. That's helpful color. And then my second question. As you think about capital deployment, how are you viewing the current M&A pipeline, particularly in terms of opportunities within your core business versus adjacency areas?

Natalia: Got it. That's helpful color. My second question, as you think about capital deployment, how are you viewing the current M&A pipeline, particularly in terms of opportunities within your core business or adjacency areas?

[Analyst] (Citi): Got it. That's helpful color. My second question, as you think about capital deployment, how are you viewing the current M&A pipeline, particularly in terms of opportunities within your core business or adjacency areas?

Speaker #3: Yeah. I mean, there are a few opportunities to strengthen our core as it relates to M&A. But there's also a lot of organic investment we do to make sure we maintain our leadership position there.

Stephen M. Shafer: Yeah, I mean, I think there are a few opportunities to strengthen our core as it relates to M&A, but there's also a lot of organic investment we do to make sure we maintain our leadership position there. I think getting scale and profitability in our water treatment platform, that's been a big focus for us on the M&A side over the last seven, eight years, and there's still a few opportunities for us to strengthen that business through M&A. Then a big focus for us is on the water management platform. Leonard Valve was a business that we closed on in January that we put into that category, and we think that's probably the richest area for us from an M&A standpoint is how do we build out and expand in that water management category.

Steve Shafer: Yeah, I mean, I think there are a few opportunities to strengthen our core as it relates to M&A, but there's also a lot of organic investment we do to make sure we maintain our leadership position there. I think getting scale and profitability in our water treatment platform, that's been a big focus for us on the M&A side over the last seven, eight years, and there's still a few opportunities for us to strengthen that business through M&A. Then a big focus for us is on the water management platform. Leonard Valve was a business that we closed on in January that we put into that category, and we think that's probably the richest area for us from an M&A standpoint is how do we build out and expand in that water management category.

Speaker #3: I think getting scale and profitability in our water treatment platform, that's been a big focus for us on the M&A side over the last seven, eight years.

Speaker #3: And there's still a few opportunities for us to strengthen that business through M&A. And then a big focus for us is on the water management platform.

Speaker #3: And Leonard Valve was a business that we closed on in January, that we put into that category. And we think that's probably the richest area for us from an M&A standpoint is how do we build out and expand in that water management category.

Speaker #1: Thank you. And I'm showing no further questions. And I would like to hand the conference back over to Helen Gurholt for closing remarks.

Operator: Thank you. I am showing no further questions. I would like to hand the conference back over to Helen Gerholt for closing remarks.

Speaker #9: Thank you for joining us today. We look forward to updating you on our progress in the quarters to come. In addition, please mark your calendars to join us at four conferences this quarter.

Helen Gerholt: Thank you for joining us today. We look forward to updating you on our progress in the quarters to come. In addition, please mark your calendars to join us at four conferences this quarter, Oppenheimer on 5 May, KeyBanc on 27 May, Stifel on 2 June, and Wells Fargo on 9 June. Thank you and enjoy the rest of your day.

Helen Gurholt: Thank you for joining us today. We look forward to updating you on our progress in the quarters to come. In addition, please mark your calendars to join us at four conferences this quarter, Oppenheimer on 5 May, KeyBanc on 27 May, Stifel on 2 June, and Wells Fargo on 9 June. Thank you and enjoy the rest of your day.

Speaker #9: Oppenheimer on May 5, KeyBank on May 27, Stifel on June 2, and Wells Fargo on June 9. Thank you, and enjoy the rest of your day.

Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.

Q1 2026 A O Smith Corp Earnings Call

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