SMITH A O CORP Q1 FY2025 earnings call

• Steve Shafer will assume the role of President and Chief Executive Officer effective July 1st, with Kevin Wheeler remaining as Executive Chairman.
• Team delivered solid first quarter performance with sequential improvement. North America segment sales had specific changes in water heater and boiler sales. Rest of World and China segments had their respective performance.
• Key initiatives include leveling production, managing orders, tariff response teams, cost containment, and Pureit integration.
• Opened a world-class commercial R&D testing Lab in Lebanon, Tennessee.
• Recognized as one of the “World's Most Ethical Companies” by Ethisphere.

North America segment sales declined by 2%. North America water heater sales decreased 4% due to lower volumes, while boiler sales increased 10%. North America water treatment sales slightly increased. Segment earnings were $185 million with a margin of 24.7%. Rest of World segment sales were essentially flat, with earnings of $20 million, up 15%, and a margin of 8.7%. China third party sales decreased 4% in local currency, but margin improved 200 basis points driven by cost control efforts and restructuring initiatives. Revenue contributions: North America segment was a significant portion, Rest of World and China also contributed.

• Maintained 2025 EPS outlook with an expected range of $3.60 to $3.90 per share.
• CapEx estimated between $90 million and $100 million.
• Expected free cash flow of between $500 million and $550 million.
• Interest expense projected to be between $15 million and $20 million.
• Corporate and other expenses expected to be approximately $75 million.
• Effective tax rate estimated to be between 24% to 24.5%.
• Projected outstanding diluted shares to be $142 million at the end of 2025.

• Uncertainty around tariffs, which could increase total cost of goods sold by approximately 6% to 8% exclusive of mitigation efforts.
• Economic weakness and soft consumer demand in China impacting sales.
• Regulatory changes related to commercial gas products and potential delays or changes in scope.

Q: Hey, good morning everyone. Kevin, congrats on a great run and Steve for your promotion. Wanted to start here with I guess you're not really changing anything in the assumptions, but I'm just wondering where you think you might see some demand destruction around incremental pricing actions and just the general uncertainty out there and then just on the price increases, would you expect to get margin on that price or just cover the incremental inflation?

A: Hey Jeff, let me start out on the margin question. So our assumption in 2025 is really EPS neutral. We're expecting to have pricing cover costs. We've kind of laid it out that way. If you kind of look at our pricing, we'll have probably a little bit of headwind in Q2 as we start incurring those costs before we have the pricing actions in place. And I'd say a little bit of headwind relative to Q1. We're really pleased with 24.7% North America margins in Q1. With regards to demand destruction, we're really fortunate to have a replacement stable business with recurring revenue on the water heating side between that 80% and 85%, so that certainly does stabilize our business. Our boiler business performed very well in the first quarter at 10% up. As Steve noted, there may be a little bit of pricing pull forward there, but we're watching the commercial markets as we go through the year and have not increased our boiler guidance based on that. From our perspective and it's early, there's certainly early in the year, but we haven't seen any negative activity. Orders and quoting have been pretty stable on the commercial side of the business, but again, it's pretty early in the year.

Q: Just a clarification there, Chuck, I'm sorry. Did that include -- so you're saying the 6% to 8% does not include the steel inflation, and it's simply the tariff piece?

A: Our outlook includes the steel piece, but that 6% to 8%, very specific tariffs.

Q: Just talk to how you think about the sequentials as you work through the year? I understand the steel comments into the back half of the year. But from a demand perspective, as you sit here today, is this just kind of relatively normal seasonality as you work through the year or are there any other nuances I should think about?

A: No. I mean you think about it in terms of what we talked about in January, a 51%, 49% of residential product in the front half, back half. Orders haven't fallen in quite that way. Steve talked about our initiatives to level load the plant. We could have pushed out more shipments if we had wanted to, but we really are working and very focused on managing the orders that have come in and because of that, we would expect the cadence of the year to be much more normalized even though we have some announced pricing out there. So think of it in terms of a fairly normal year as we lay it out and we're working to try to do that so that we're most efficient as possible.

Q: Hey, good morning everyone. Echo the sentiment, Kevin and Steve, congrats to you both. I wanted to just make sure that I'm understanding the 6% to 8% of COGS potential tariff exposure. That does include the full run rate impact of tankers imports from China, correct? And an extension of that, what would be pro forma figure being assuming the full transition to Juarez production?

A: Yes. I mean there's a lot of moving parts to our pro forma number, particularly with us accelerating manufacturing from China to Mexico meaning there'll be some trailing tariffs and components because we're probably going to have some components go in to Mexico and prior, we would have been probably focused more on moving those to local sourcing. So it's going to take a little bit of working through to kind of come up with that number, and we're certainly looking to mitigate it. The 6% to 8% includes tankless. It includes tankless at a volume of 2024. I think I talked about it on the last call. We have a meaningful amount of tankless inventory in place. So that may not be quite that number in 2025. But from a full year perspective, tankless is the largest component, single component within the China import costs.