A. O. Smith Corporation Q4 FY2025 earnings call

• Thanked employees for their dedication in 2025, which helped deliver record EPS. - 2025 sales slightly increased, EPS was $3.85, up 6%. North America segment margin improved 20 basis points, Rest of World segment margin expanded 40 basis points. - Announced acquisition of Leonard Valve in the fourth quarter, which expands water management market reach, digital capabilities, and integrated product portfolio. - Discussed strategic priorities including portfolio management, innovation, and operational excellence. - Highlighted actions taken in North America water treatment, such as prioritizing channels and integrating the business to improve profitability.

North America segment: 2025 sales were $3 billion, slightly up from 2024. Segment earnings were $728 million, up 2% with a margin of 24.4%, an increase of 20 basis points. Fourth-quarter North America sales were $714 million, up 3%, with segment earnings of $165 million, up 7%, and a margin of 23.1%, an increase of 70 basis points. Rest of the World segment: 2025 sales were $880 million, down 4% year over year, primarily due to lower China sales but offset by 13% growth in legacy India business and $54 million in purity sales. Segment earnings were $76 million, flat to 2024, with a margin of 8.7%, an increase of 40 basis points. Fourth-quarter Rest of the World sales were $206 million, down 13% year over year, driven by lower China sales.

• 2026 EPS range is $3.85 to $4.15 per share, midpoint represents 4% growth over 2025 EPS. - Assumes steel prices will increase approximately 10% in 2026 compared to 2025, with other material and freight costs also being a headwind. - 2026 CapEx is expected to be between $70 million and $80 million. - Projected free cash flow is between $525 and $575 million. - Interest expense is projected to be between $30 million and $40 million. - Board approved 5 million additional shares for repurchase, expecting to repurchase approximately $200 million of stock in 2026.

• Material cost increases, including steel prices expected to increase 10% in 2026, and other material and freight costs including carryover impact of tariffs. - China market challenges with continued economic weakness, soft consumer demand, and competitive intensity. - Competitive intensity in the wholesale residential channel due to new construction slowdown and retailers expanding into serving professionals.

Q: Saree Boroditsky asked about the residential guidance and weakness in new home completions.

A: Stephen Shafer said there are three components: resilient emergency replacement, fairly resilient proactive replacement, but pressure in new home completions due to lower interest rates and lack of stimulus.

Q: Saree Boroditsky asked about China's return to growth in the second half.

A: Stephen Shafer said it will be partly due to moving past subsidy phase and focusing on remodel wins and internal actions.

Q: Mike Halloran asked about competitive intensity in the wholesale channel.

A: Stephen Shafer said it's about new home construction pressure affecting the channel, but the company's strong presence in retail balances it.

Q: Jeff Hammond asked about Leonard Valve's go-to-market strategy.

A: Stephen Shafer said it's strong in commercial markets, similar go-to-market model to A. O. Smith's, and growth rate in the 10% range.

Q: Bryan Blair asked about water management platform and TAM expansion.

A: Stephen Shafer said it's an exciting market opportunity with a healthy pipeline, and acquisition strategy is disciplined.

Q: David MacGregor asked about water treatment margin and consumer demand.

A: Stephen Shafer said water treatment margin expanded to 13%, and consumer demand has caution but still sees growth.

Q: Scott Graham asked about competition in wholesale distribution.

A: Stephen Shafer said it's industry dynamics with share shifts, but the company navigates it closely with customers.

Q: Tomohiko Sano asked about India's roadmap and M&A.

A: Stephen Shafer said focus is on leveraging Purit integration, with organic growth priority for now.

Q: Nathan Jones asked about steel prices and Leonard Valve's growth.

A: Charles Lauber said steel prices are expected to be up 10% year over year, and Leonard Valve's growth is driven by digital transition.

Q: Andrew Kaplowitz asked about China restructuring and boiler business.

A: Stephen Shafer said they're evaluating strategic options in China and boiler business is solid with high-efficiency products.