A. O. Smith Corporation Q3 FY2025 earnings call

• Sustainability commitment: Sustainability is core, with a sustainability progress report to be published, including updates on water conservation, greenhouse gas emissions, and waste reduction goals. Examples include test water recirculation and glass enamel reuse processes. • Dividend and share repurchase: Board approved a 6% increase in quarterly dividend to $0.36 per share, marking 32 consecutive years of dividend increases. Repurchased ~5 million shares for $335 million in the first 9 months of 2025, with planned full-year repurchases ~$400 million. • Strategic assessments: Formal China strategic assessment is ongoing, with a third-party analysis confirming brand strength, need for expansion into smart home categories, and go-to-market opportunities. Also, assessing potential acquisitions to strengthen core business or build new growth platforms. • Operational execution: Strong third quarter execution in North America led by pricing performance and commercial, high-efficiency portfolio, expanding margins through operational discipline.

North America segment sales were $743 million, a 6% increase year-over-year. Segment earnings were $180 million, an 11% increase, and segment operating margin was 24.2%, a 110 basis points increase. Rest of World segment sales were $208 million, slightly down, with legacy India business growing 13% in local currency. China third-party sales decreased 12% in local currency, but achieved 90 basis points of margin expansion. Pureit contributed $17 million in sales for the quarter.

• Narrowed 2025 EPS outlook from $3.70-$3.90 to $3.70-$3.85. • Tariff costs expected to increase into Q4, with annualized tariffs estimated to increase COGS by ~5%. • Material costs flat for the year, with steel costs rising 15%-20% in H2 2025. • 2025 CapEx estimated ~$75 million, free cash flow ~$500 million, interest expense ~$15 million, corporate and other expenses ~$75 million, effective tax rate ~24%. • Lowered China sales outlook to a decline of ~10% in local currency. • North America residential water heater market outlook revised to flat to slightly down; North America boiler sales projection unchanged; North America water treatment sales expected to decline ~5%.

• Economic challenges in China, including reduced government subsidy programs and competitive environment leading to lower volumes. • Tariff uncertainties and increasing costs, which could impact margins. • Softness in the North America residential water heater market due to new home construction completions.

Q: Could you talk about A.O. Smith's performance versus the overall China market and competitive dynamics?

A: The China market has challenges with pull-forward demand from government subsidies and increased competitive intensity. The company is navigating a period of challenging market conditions but has a strong brand and innovative products.

Q: On the North America water treatment priority channel growth, is the organic growth target still in play?

A: The company views the business with long-term organic growth potential, though there is still work and investment needed to build out the platform but feels good about the growth potential.

Q: On the U.S. resi water heater market, how is the industry shipment outlook playing out?

A: The industry outlook is now flat to slightly down due to pressure from new home construction completions on the residential side. The company has seen share recapture as expected through level loading production.

Q: On tariff headwinds and steel pricing, how does this inform pricing actions in 2026?

A: Tariff costs are expected to impact Q4, with full-year tariff impact estimated at ~5%. Steel pricing is expected to rise 15%-20% in H2 2025. The company will continue to evaluate pricing actions to manage costs.

Q: On the China strategic review, has the range of potential outcomes narrowed?

A: The process is still early, and no narrowing of potential outcomes has occurred yet. The company is evaluating various opportunities to improve the China business's performance.

Q: On gas tankless progress, what's the margin impact and market feedback?

A: Margin pressure from gas tankless is ~20 basis points for the quarter, less than historical levels. The product is well-received, but market conditions tied to residential construction remain challenging.

Q: On CapEx guidance and capital allocation, how are priorities balanced?

A: CapEx guidance was lowered with some investments pushed to early 2026 due to regulatory uncertainties. Dividend and buybacks are prioritized, with a focus on maintaining a strong core business and seeking strategic acquisitions.