Title

Presentation

A. O. Smith Corporation misses on earnings expectations. Reported EPS is $0.85 EPS, expectations were $0.9.

Operator: Good day, and thank you for standing by. Welcome to the A. O. Smith Corporation Fourth Quarter 2024 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. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Helen Gurholt. Please go ahead.

Helen Gurholt: Good morning, and welcome to the A.O. Smith full year and fourth quarter conference call. I’m Helen Gurholt, Vice President, Investor Relations and Financial Planning and Analysis. Joining me today are Kevin Wheeler, Chairman and Chief Executive Officer; Steve Shafer, President and Chief Operating Officer; and Chuck Lauber, Chief Financial Officer. In order to provide improved transparency into the operating results of our business, we provided non-GAAP measures. Free cash flow is defined as cash from operations less capital expenditures, adjusted earnings, adjusted earnings per share, adjusted segment earnings and adjusted corporate expenses exclude the impact of restructuring and impairment expenses and pension settlement income and 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. Those risks include matters that we described in this morning’s press release, among others. Also, as a courtesy to others in the question queue, please limit yourself to 1 question and 1 follow-up per turn. If you have multiple questions, please rejoin the queue. We will be using slides as we move through today’s call. You can access them on our website at investor.aosmiths.com. I will now turn the call over to Kevin to begin our prepared remarks.

Please turn to the next slide.

Kevin Wheeler: Thank you, Helen, and good morning. First, I’d like to start off by saying that I’m pleased to have Steve Shafer joining us on the call today. Steve joined A.O. Smith in March of last year and has spent the last 10 months getting to know our business, people, customers, and operations. His global leadership experience and strategic acumen have brought a valuable perspective to our business as we continue to create value for our key stakeholders. I’m pleased to have Steve as a member of our leadership team. Turning to Slide 4 and our financial performance. After a record 2023, our sales and earnings decreased in 2024. In North America, sales increased slightly as higher boiler and water treatment sales, as well as water heater pricing benefits were offset by lower heater volumes.

We experienced lower sales in China as a weak economy continued to negatively impact consumer demand which led to a 4% price decrease in our rest of the world segment local currency third-party sales. Our legacy Indian business sales grew 13% in local currency in 2024, which is approximately 2x the market. We closed the Pureit acquisition in the fourth quarter, which had a minimal impact on sales and earnings. With the strong business climate and the addition of Pureit, we continue to be excited about the long-term prospects of our India business. We returned $496 million of capital to shareholders with our dividend and share repurchases. And also in the fourth quarter, we completed construction of our tankless manufacturing facility. We put into action a strategy to improve the margin profile of our North America water treatment business.

We began the process of reorganizing our China business to reduce costs and position us for profitable growth as the economy returns. And we announced our new sustainability goal of a reduction in water usage of 40 million gallons of water by 2030. This goal follows our previously announced and already achieved 10% greenhouse gas emission reduction goal. Please turn to Slide 5. North America water heater sales decreased 1% in 2024, as pricing benefits were more than offset by lower volumes. We saw strong shipments in the first half of the year, which were then balanced out by lower second half as volumes were below our expectations. We project full year residential industry unit volumes were roughly flat to 2023. We are confident in our stable retail and wholesale customer base, strong partnerships, and competitive products.

Based on customer conversations and certain stocking programs that we track, we believe our customers enter 2025 with water heater inventories in a normal to lean position. During 2024, residential new construction and replacement demand will be resilient compared to 2023. We believe commercial industry unit shipments increased marginally year-over-year, driven by growth in commercial electric water heaters greater than 55 gallons. We project industry commercial gas units were down 3% to 4% in 2024. As a reminder, commercial gas has an average selling price of approximately 3x that of commercial electric units, and therefore impacting the results more meaningful than the commercial electric growth. Our North America boiler business performed as expected, and sales increased 8% compared to 2023, led by a CREST commercial boiler with Hellcat technology, as well as our Knight FTXL, one of our commercial boilers that was impacted by the 2023 channel inventory destocking.

We are pleased with our 2024 boiler performance and with our market share growth in that category. North America water treatment sales grew 10% in 2024, largely driven by acquisition-related geographic expansion. We saw growth in our dealer, direct-to-consumer, and eCommerce channel that were partially offset by lower sales in the retail channel. We have taken action to rebalance our product portfolio and improve profitability. In the fourth quarter, we took a restructuring and impairment charge of $6 million to allow us to focus on the more competitive and financially attractive channels of the business. In China, full year third-party sales decreased 6% in local currency as a result of a weaker economy and soft consumer demand, particularly in the second half of the year.

Higher sales of kitchen products were more than offset by lower volumes of our core water heater and water treatment products. In the fourth quarter, we took a restructuring charge of $11 million. The actions taken will reduce costs by optimizing our business structure to better position us for profitable growth when the economy improves. In the fourth quarter, the appliance-trained stimulus program generated increased demand for our products relative to the third quarter. This increased cell demand [ph] helped our customers reduce their inventory levels and improve working capital. I’ll now turn the call over to Chuck, who will provide more details on our full year and fourth quarter performance.

Chuck Lauber: Thank you, Kevin, and good morning, everyone. We delivered sales of $3.8 billion in 2024, a decrease of 1% year-over-year. Higher boiler and water treatment sales and the benefits of pricing actions were more than offset by lower water heater volumes in North America, as well as lower sales in China. 2024 adjusted earnings were $3.73 per share, compared with adjusted earnings of $3.81 per share in 2023. Turning to Slide 6. Full year sales in the North America segment of $3 billion increased slightly compared to 2023. Pricing actions in higher boiler and water treatment sales were offset by lower volumes of water heaters. North America adjusted segment earnings of $714 million decreased 2% compared with 2023. Adjusted segment margin was 24.2%, a decrease of 60 basis points year-over-year.

The lower adjusted segment earnings and adjusted segment margin were primarily driven by pricing benefits and higher boiler and water treatment sales that were more than offset by lower water heater volumes and continued strategic investments. Moving to Slide 7. The Rest of the World segment sales of $919 million decreased 4% year-over-year, including unfavorable currency translation of $13 million, primarily related to China. Segment third-party sales decreased 4% on a constant currency basis. Our sales decrease was primarily driven by higher sales of kitchen products that were more than offset by lower sales of water heater and water treatment products in China. India sales grew 13% in local currency in 2024 due to strong market demand for premium products.

The Rest of the World adjusted segment earnings of $76 million decreased 24% compared to segment earnings in 2023 primarily due to lower sales in China. Adjusted segment margin was 8.3%, a decrease of 210 basis points compared to 2023. Please turn to Slide 8. Turning to fourth quarter performance, we delivered sales of $912 million in the fourth quarter of 2024, a decrease of 8% year-over-year, primarily due to higher boiler and water treatment sales and the benefits of pricing actions that were more than offset by lower water heater volumes in North America and lower sales in China. Adjusted earnings in the fourth quarter were $0.85 per share, compared with adjusted earnings of $0.97 per share in the fourth quarter of 2023. Please turn to Slide 9.

Fourth quarter sales in the North America segment were $690 million, a 7% decrease compared to sales in the fourth quarter of 2023 as a result of higher boiler and water treatment sales as well as benefits of pricing actions that were more than offset by lower water heating costs. North American adjusted segment earnings of $154 million decreased 11% compared to 2023. Adjusted operating margin of 22.4% decreased 110 basis points compared to last year. The lower adjusted segment earnings and adjusted segment margin were primarily due to lower water heater volumes that were partially offset by pricing benefits and lower material costs. Moving to Slide 10. Fourth quarter Rest of the World segment sales of $237 million, decreased 9% year-over-year, primarily driven by lower sales in China.

India’s sales grew 11% in local currency in 2024 compared to 2023. Rest of the world adjusted segment earnings of $19 million and an adjusted segment margin of 8.1% were lower than 2023 adjusted segment earnings and adjusted segment margin of $30 million and 11.5%, respectively. The decreases were primarily due to lower sales in China. Please turn to Slide 11. We generated free cash flow of $474 million during 2024. Lower than 2023, primarily driven by lower earnings and higher inventory balances that were partially offset from lower accounts receivable balances. 2024 free cash flow conversion was 89%. Excluding the impact of the higher capital spending for investments we are making in 2024, our free cash flow conversion was 95%. Our cash balance totaled $276 million at the end of December, and our net cash position was $83 million.

Our leverage ratio was 9.3%, as many of our total debt to total capital. Let’s now turn to Slide 12. In addition to returning capital to shareholders, we see opportunities for organic growth, innovation, and new product development across all of our product lines and geographies. In addition to the strategic acquisitions we made in 2024 to grow our domestic and global water treatment footprint, we also increased investments in our business to ensure that we have the right product portfolio and capacity to continue strengthening our position as a leader across all the markets that we serve and providing the most value for our shareholders. Earlier this month, our Board approved our next quarterly dividend of $0.34 per share. We have increased our dividend for over 30 consecutive years.

We repurchased approximately 3.8 million shares of common stock in 2024 for a total of $306 million. We continue our strong track record of delivering returns to shareholders. Over the last 2 years, we have returned almost $1 billion to shareholders through our dividends and share repurchases. Please turn to Slide 13 and our 2025 earnings guidance and outlook. Our 2025 outlook includes an expected EPS range of $3.60 to $3.90 per share. The midpoint of the EPS range is slightly higher than a 2024 adjusted EPS. Our outlook is based on a number of key assumptions, including our guidance assumes that steel prices in the full year 2025 will be similar to 2024, and that steel costs in the back half of the year will increase from where they are today.

We project that our 2025 non-steel materials and freight costs will be roughly flat to 2024. We project the launch of our tankless products, including tariffs in place today, and higher shipping and other costs will be a headwind of approximately 50 basis points to our North America margins. We estimate that 2025 CapEx will be between $90 million and $100 million, a decrease compared to 2024, but higher than our historical CapEx as we continue to invest in our engineering capabilities and prepare for upcoming regulatory changes. We expect to generate free cash flow of between $500 million and $550 million. Interest expense is projected to be between $15 million and $20 million. Corporate and other expenses are expected to be approximately $75 million.

Our effective tax rate is estimated to be between 24% to 24.5%. Our Board has approved 5 million additional shares of stock for repurchase and we expect to repurchase approximately $400 million of our shares of stock, higher than previous years as we have confidence in our strong free cash flow generation and we believe our shares have been undervalued in recent months. We project our outstanding diluted shares will be 142 million at the end of 2025. Our outlook does not assume a change in tariffs for China, Mexico, or Canada. Potential increase in China tariffs would temporarily negatively impact us with regard to our gas tankless imports from our facility in Nanjing until that production is fully transitioned to Juarez, Mexico. Our North America manufacturing footprint, largely based in the U.S., gives us flexibility to competitively navigate potential future tariffs which may impact trade between the U.S., Mexico, and Canada.

I’ll now turn the call over to Steve, who will provide more color on our key markets and top line growth outlook and segment expectations for 2025, while still staying on Slide 13. Steve?

Stephen Shafer: Thank you, Chuck, and good morning, everyone. Before discussing our outlook on 2025, I wanted to start by briefly sharing some early thoughts on my first 10 months with A.O. Smith. First and foremost, I’ve been impressed with the culture of how we do things at A.O. Smith. We are laser focused on doing business the right way, an ethical way, the Smith way. We also have a strong culture of innovation, collaboration, people development and driving performance that is a great fit to my own personal leadership style. As I’ve gotten to know our business better, we clearly have a portfolio of strong businesses and markets that we know well, with very close customer partnerships and industry-leading products. This positions us well to help lead the industry forward through future changes, disruptions, and opportunities.

I am energized and confident in the opportunities in front of us that first drew me to join this great leadership team. Now, turning to our 2025 guidance. While I’m positive about the future positioning of our business, as Chuck highlighted in our guidance, we expect 2025 to be another year of relatively muted growth on both the top and bottom lines. Our outlook is influenced by a relatively flat industry growth expectation in our core North America water heater and boiler markets, while we expect to continue facing a soft market environment in China. We are also taking some portfolio actions that will reduce growth in North America water treatment in the short-term, but will better position our business going forward. On the bottom line, we anticipate the near-term benefits of our restructuring and realignment actions to be mostly offset in 2025 by the continued strategic investments we are making to launch and scale innovative new products in support of our North America water heating and boiler businesses.

These investments will help ensure profitable growth over the long-term and build upon our market leadership. Our top line outlook includes the following assumptions. We believe that U.S. new home construction remains in a deficit, and that new construction and proactive replacement will be similar to 2024. Based on those factors, we project that 2025 residential industry unit volumes will be approximately flat to last year. We project U.S. commercial water heater industry volumes to also be flat to 2024, as demand for our commercial electric products greater than 55 gallons has returned to pre-2022 levels. In addition, our outlook includes carryover from our March 2024 price increases in North America of 4% on most of our water heater products and 8% on heat pumps.

In China, we believe the economy remains challenged with low consumer confidence and a weak real estate market. While we see the stimulus programs as a positive, we think it will take time to see real, fundamental signs of recovery. As a result, we project that our sales in China will decrease 5% to 8% in local currency in 2025 as the decline in consumer demand that we experienced in the second half of 2024 carries over into 2025. Our forecast assumes that the currency translation impact will be minimal in 2025. We anticipate that our restructuring program in China will be mostly implemented by the second quarter, and we expect to realize annual savings of approximately $15 million. This would result in a recovery of operating margins to the 8% to 10% for 2025, even with lower volumes.

I have worked closely with the team and feel confident the actions being taken will better position us to compete in the more mature and more competitive market environment, while still positioning us well to realize the benefits when the Chinese economy improves. While we are cautious about the near-term market outlook, including the level of sustainable impact from the appliance discount trading program, we remain confident in our team in China. We project our North American boiler sales will grow between 3% to 5% in 2025. We expect to continue benefiting from the transition to higher energy efficient boilers, particularly as commercial buildings look to improve their overall carbon footprint. We expect North American water treatment sales to be between $235 million to $245 million, a decrease of approximately 5% as we execute a reprioritization of our business to more competitive and profitable channels and products supported by our announced restructuring.

We project this shift will drive an operating margin expansion of approximately 250 basis points in 2025 for the North American water treatment business. I am personally excited about the potential of the water treatment space in North America for A.O. Smith and believe the actions being taken by the team to focus on the most attractive opportunities will position us well going forward. We project mid-teen top line growth in our legacy India business as we continue to build out the A.O. Smith water franchise in this attractive market. We expect the addition of Pureit will add approximately $15 million in sales in 2025. We do not expect Pureit to have a significant bottom line contribution in 2025 as we work through the integration of this business.

Based on these 2025 assumptions, we expect top line growth to be flat to up 2%. We expect our North America segment margin to be between 24% and 24.5%, and Rest of World segment margin to be between 8% and 9%. As we exit 2024 and move into 2025, our commitment remains steadfast to lead the industry forward and support our customers. We are confident that our innovation and infrastructure investments position our business for profitable growth. We remain committed to driving the following top investment priorities from 2024 into 2025 to maintain this momentum. Our continued investment in the launch and scale up of the Adapt Gas Tankless Water Heater with X3 Scale Prevention Technology. We are on schedule to introduce two additional tankless products to round out the product line in the first half of 2025.

While there is a headwind to profitability today as we launched with production in China and then transfer production to Juarez, Mexico, we firmly believe that our gas tankless product line sets us up for long-term success in this product category. Also, our near-completed investment in a world-class commercial R&D testing and lab facility in Lebanon, Tennessee. The new center will house our commercial water heater and boiler engineers, where they will focus on the continued innovation of our commercial water heating and boiler portfolio. The collaboration and powerful exchange of ideas coming from this new facility will ensure that we continue to have leading-edge products, including heat pump technology, for today and into the future. And finally, our ongoing manufacturing capacity investments to serve the market as regulatory changes in federal, state and local incentives drive demand higher for specific technologies.

We have increased production of commercial heat pump water heaters and doubled our residential heat pump water heater capacity to meet this growing demand. We are also increasing our capacity to produce high-efficiency condensing water heaters. To sum up, while we expect some of the market challenges in China to continue, and we anticipate growth headwinds in the first half of the year for the North American water heating business as we face tough comps against last year’s order pattern, we remain confident in our future. The investments we are making in our capacity footprint, our engineering capability, and our product portfolio have us positioned well for the environment ahead, including any tariff or regulatory uncertainty. Additionally, the restructuring actions we have announced today will support our future growth and create more space for investments and more attractive space.

A.O. Smith has a long history of managing through many economic cycles and uncertainties, and this proven experience will continue to serve us well. While there are growth headwinds in 2025, our leadership position in all of the markets that we serve, our stable 80% to 85% replacement business in water heaters and boilers, and our strong balance sheet allow us to continue to invest in our business, make attractive strategic acquisitions, and maximize shareholder returns. With that, we conclude our prepared remarks and we are now available for your questions.

Operator: [Operator Instructions] And our first question comes from Mike Halloran of Baird. Your line is open.

Mike Halloran: Hey, good morning, everyone.

Kevin Wheeler: Good morning.

Chuck Lauber: Good morning.

Mike Halloran: Can you just help provide some thoughts on how you think demand cadence is out through the year? I certainly understand some of the remarks you made in the press release about what’s volatile first half to second half of the North America water heater business, but is this a year where it’s returned to relatively normal seasonality, do you think quarter-to-quarter? Any puts and takes we should think about and just kind of how that levels out through the year?

Chuck Lauber: Sure. Mike, this is Chuck. It does, we — our outlook for 2025 on the water heating side does return much more normal to the normal cadence. So, we talk about 51% to 52% in the front half of the year. The way we’ve laid out next year is about 51% in the front half of the year. What to really recall is that in 2024, it didn’t lay out that way. 2024 laid out a bit different. The residential market was up 3% at the end of June. The commercial market was up 8% at the end of June. So in 2024, it was just not a normal cadence. So we’ll have some difficult comps as we go through the first half of the year. Residential being up 3% last year means we’re going to probably see the industry down 3% to 4% in the first half and a little bit stronger on the commercial side.

Plus, we had a bit of tailwind in 2024 in the first half for the commercial mix. So, when you put it all together, 2025, we’ve got the cadence in North America closer to normal, maybe a little bit lighter on the front half of the year, but again, some pretty aggressive first half comps. Now when you look to China, China — we’re talking about volume decrease of 5% to 8%. I would say the first quarter, we’re a little cautious around it. The appliance discount trading program was paused for a bit. Now it’s back in place pretty quickly. And we have the Chinese festival. And as Steve outlined, our restructuring program impacts us more in the back three quarters of the year. So, just a couple comments around that. I think boilers will play out pretty similar.

Third quarter is typically pretty strong. So, the caution I would have is back to closer to normal and just tough comps in the first half.

Mike Halloran: Thanks for that. And then on the North American margins, kind of a two-fold question. One, maybe in the incremental color on what the treatment portfolio moves that you referenced were and then secondarily, when you think about the 50-point drag from the tankless production being China, when that moves to Juarez, does that go away or do you need some scale or any timing around how that should cadence?

Kevin Wheeler: Let me take the tankless headwind for 2025 and I’ll let Steve talk a little bit about water treatment restructuring. So we’ll start transitioning production from Nanjing to Juarez during the early part of the year, introducing two new models in Nanjing and then eventually moving to Juarez. So that’ll be about mid-year. So, we’re going to see a headwind in 2025 of about 50 basis points still, we believe, as we kind of go through the year. We wouldn’t wait that much different than kind of ratably through the year, because we’re going to be in flight on those transitions for the year. And then, for the water treatment, I’ll turn it over to Steve.

Stephen Shafer: I think regarding what we’re doing on the portfolio and water treatment, we’ve been building out this growth platform over the last 7 years, making a number of acquisitions. We’ve taken an approach of kind of an omni-channel go-to-market approach. And I think we’ve learned a lot about the business through that time. And the actions we’re taking now, I think are a natural progression to focusing on the parts of the market that we think are most attractive where we can be most competitive and that are most profitable. And so with that, obviously, the restructuring is helping us to do that repositioning. We’ll be kind of rotating and getting a mixed benefit to moving towards the areas that we think are more profitable, and that we see as getting us about 250 basis points of margin improvement in a year, but I think also just positioning us more successfully for the future going forward about where we’re going to grow and how we’re going to do it.

Operator: Thank you. Our next question comes from Matt Summerville of D.A. Davidson. Your line is open.

Matt Summerville: Thanks. A couple of questions. Does what you’re seeing in China and really what you’ve experienced in China over the last several years, does that change the growth algorithm as you guys sort of presented it last? And are you thinking differently about that business from a strategic standpoint? And then I have a follow-up.

Kevin Wheeler: Yes, I mean, China is a market that has always moved fast and you have to be prepared and ready to respond. And I think as we’ve looked at the market landscape over the last few years, it’s led us to make some strategic decisions about how we think about the business going forward. We’ve talked about launching into additional categories to help support our business and leverage our brand. And I think, going forward, certainly the last few years haven’t met the growth and recovery profile that we had anticipated, but it’s given us a chance to sort of learn a little bit about our market positioning and, again, our restructuring that we’re announcing here today is a chance for us to do some of that and I think really get more competitive.

Now, will the market come back? I think we feel confident it will. The question really is when. And it’s really going to come back to consumer confidence, right. And I think when consumer confidence returns to China, we’ll be able to participate in that recovery and with a stronger portfolio to do so.

Chuck Lauber: Yes, maybe a little bit more onto that. We’ve always said that China was going to need some help from the economy. And quite frankly, we just haven’t seen it materialize. And we were talking about what we outlined was about a 5% or 6% growth in our Investor Day, that first year, obviously, we’re short of that. But I think if you still have 3 or 4 more years to move it forward, there are some real policy changes that are being talked about. But for us, we haven’t given up on the 5% or 6%, but we do need help from the government, some stimulus to get the economy moving. Steve’s right on track with the consumer confidence. It’s critical because that ties into new housing formations, which is a big part of our business, as well as our premium products.

So still some work to do. We saw some really nice benefits from the appliance trading program, but again, we’re moving into 2025 a bit cautious because the scope and scale of these policies still need to be more defined. But we still feel really good about China. We feel good about the long-term of urbanization and growing middle class, but we do need some help from the economy to move this business forward.

Matt Summerville: There’s a follow-up on the water treatment side of the business. Maybe it’s not clear to me what channels you’re maybe deemphasizing a bit versus where you’re placing greater emphasis. And as you get beyond this year, kind of a down mid single digits, what does the 3 to 5-year growth trajectory organically look like in that business? Thank you.

Kevin Wheeler: Yes, it’s the — the places that we’re really focusing on going forward are going to be our direct-to-consumer businesses as well as our dealer and wholesale businesses. And what we’re deemphasizing is on the retail side, and we just believe we can be more competitive and have a better offering and a financially more attractive business there. And I think we still view water treatment as a growth engine for A.O. Smith. As I mentioned in my own comments, I’m excited about the space. I think there’s good mega trend tailwinds there. And I think this is a natural progression of repositioning ourselves. And so, our early estimates of double-digit growth, I think we will get back to that at some point. But I think it’s maybe we’re evolving in terms of exactly how we’ll do that. And that’s part of what our process was all along, is to learn about the space, figure out where we compete, and then focus on it going forward.

Chuck Lauber: And I’ll just add that when we talk about our growth rate in water treatment, we’ve also talked about acquisitions, and that continues to be our focus, to grow, not only grow faster than the market, but also bring into A.O. Smith some additional acquisitions to grow water treatment at an accelerated rate. That’s still our focus.

Operator: Thank you. Our next question comes from Damian Karas of UBS Securities. Your line is open.

Damian Karas: Hi, good morning, everyone. Steve, great to have you on the call.

Stephen Shafer: Thank you.

Damian Karas: I was wondering if you could — I was wondering if perhaps you saw a fall off of in North American water heater shipments in December, because the data that we were privy to the October, November HR shipments, they did seem to show sequential improvement. And I think with the normal seasonality that you see in the industry in December, your North American water heater sales would have likely been at least a few percent higher in the fourth quarter. So could you just maybe talk to the progression that you saw in water heater volumes over the course of the quarter?

Kevin Wheeler: Yes. Let me just talk about that sequence. I’m going to take you back to 2023. That was a record year for our business, and that record was largely driven by our North America water heater business. And so if you go back to, because you’re doing a comparison, you go back to 2023, we had a very strong back half of the year, really outperformed the market. If you remember, we had strong backlogs, kind of lead times were really out there, so our residential selling was strong, our customers were kind of building some inventory to compensate for that, for the lead times. And conversely, now you come to 2024 and our back half, and we entered that back half with our lead times back to normal. We saw, and we talked about this last quarter, we saw our wholesalers and our retailers adjust their order rates and their inventory levels, and we had a lower back half volume.

So to me, it’s about timing, it’s situational with regards to where our customers were on the inventory side. But if you step back here, we have solid customers, base still, strong relationships, no major customer loss there. But just because of that dynamic and that timing, yes, you’re right, we did see lower volumes, but there are some reasons behind it that are more situational than they are ongoing.

Damian Karas: Okay, got it. And then could you just confirm, so you did see positive pricing in North American water heaters in the fourth quarter, or was that comment more of a full year comment? And I’m just curious kind of the industry in general has been pretty disciplined on pricing or if you’re seeing any competitor discounting of note?

Chuck Lauber: Yes, what I’ll tell you is we saw, yes, we had positive pricing, and the pricing that we implemented the first quarter of last year kind of played out the way we expected it and met our expectations. So we had positive pricing across all of our categories in 2024. Now that’s as far as we pretty much will talk about pricing. There’s always situational discounting here in markets. That doesn’t change, but what happens in maybe New York is the same thing that happens in Los Angeles. So I would just tell you we implemented, it played out what we thought. There’s always a little bit of fate, but we had favorable pricing across all our categories as we planned.

Operator: Thank you. Our next question comes from Bryan Blair of Oppenheimer. Your line is open.

Bryan Blair: Thank you. Good morning, everyone.

Kevin Wheeler: Good morning, Bryan.

Helen Gurholt: Good morning.

Bryan Blair: I wanted to follow-up, dig in a little bit more on the shift in your North American water treatment strategy. I know your team has touted the benefits of the omni-channel presence historically. Has there been meaningful change in competitive dynamics, customer dynamics within retail over recent past that drove this decision, or is it simply the sheer mass of focusing more on wholesale dealer network direct-to-consumer, having a much stronger margin profile and then deemphasizing the weaker economics of the retail strength.

Stephen Shafer: This is Steve. I would say there’s definitely different competitive dynamics and market dynamics across those different channels. And part of having the omni-channel approach is to learn about the consumer, learn about these channels, learn about how you compete, learn about the competitors. And I think as we’ve done that over the last few years, we’ve learned where we think our strength, our product portfolio, and our go-to-market model play best. And it’s not that we’re exiting and totally shutting down other channels. We’re still part of the learning process, but I think we’ve got more clarity now on where we want to focus and where we think we can kind of win in the marketplace. And that’s representative of the shift that we’re talking about.

Kevin Wheeler: Yes, I would just say our omni-channel approach is still there, it’s just changing. Where we focus our time and energy, I think early on someone mentioned the word deemphasizing. We’re not exiting any of the channels, but we are deemphasizing one area and really kind of putting more energy and effort into areas where we believe, we have competitive advantage and we can drive greater sales and margin growth. And we’re excited about launching that this year and see what it would bring, but very confident in those parts of our business that really play well to our strengths.

Bryan Blair: Understood. And the margin benefit you’ve cited is notable. You mentioned top line expectations for Pureit. Can you remind us where margins are on a run rate basis and having owned the assets for a little bit now, where you think medium-term profitability should check out?

Chuck Lauber: Yes, I mean, so roughly Pureit is going to contribute in 2025 about $50 million in revenue. The earnings profile is very similar to our India business. Right now we’re really leaning into growth in India, and so the operating margins and around mid single digits, very similar to our business, legacy business in India. I would say, for 2025, we’ve got a real focus on integrating Pureit in a way that will set us up for continued growth in India, and that integration is going on track. It’s been a couple of months, but on track so far. Maybe just to touch base on, we’ve been looking to scale India, and this was a very important component for us to move forward. The Pureit business really complemented where we’re at.

They’re very strong on the eCommerce and retail, and we’re really strong on retail and on our dealer side of the business, or general trade, as they call it. But more importantly, that scale brings us to the number three position in the market. I think that was a nice step up, and as Chuck mentioned, it’s going to take some integration. But when you combine the business, you double the size of it. It gives you some real optionality to continue to grow the business and drive costs and margin improvement.

Operator: Thank you. Our next question comes from Scott Graham of Seaport Research Partners. Your line is open.

Scott Graham: Hey, good morning and welcome, Steve.

Stephen Shafer: Thanks. Good morning, Scott.

Scott Graham: I think, Steve, you said 4% water heater pricing, if I heard you wrong, please correct me. And that that was a carryover number 2025?

Stephen Shafer: In March we went to the marketplace with a 4% water heater price, and that’s March of 2024, of which that will be carrying over into 2025.

Scott Graham: Okay. And then by extension, if you’re expecting steel prices to rise in the second half of the year, like I think most of us are, are we looking at another price increase sometime in the first or second quarter of this year?

Kevin Wheeler: Hey, Scott. Hi, it’s Kevin. Listen, I think the way that we would frame this is that how we manage pricing hasn’t changed for multiple years. And as I mentioned before, one of the things that we try to do with our customers is we have credibility because we take the increases before we pass it on to them. And we also want it to the market very closely so that we know when to take those actions. And so I would just go back to historically, Scott, we’ve been able to offset inflation given time. That’s not going to change going forward. I just don’t want to get into any specifics about hypothetical if steel goes up or doesn’t go up. I think if you just step back and look at our business and how we’ve managed it in the past, we have really the track record of addressing any inflationary pressures, whether it’s steel or any other type of products or components.

Operator: Thank you. Our next question comes from Susan Maklari of Goldman Sachs. Your line is open.

Susan Maklari: Thank you. Good morning, everyone.

Chuck Lauber: Good morning.

Stephen Shafer: Good morning.

Susan Maklari: My first question is going back to the channel inventories and water heaters. How would you generally characterize the tone of the conversations that you’re having with customers? What do you think their appetite is to restock over the course of this year? Are there any key points that you or your customers are watching for to kind of determine maybe the path or the cadence for some of that restock that could come through?

Kevin Wheeler: I just think, I’ll let others comment on this, I just think there’s a backdrop of uncertainty. And so people are going to be pretty close to watching their inventories and the driver is always going to be sellout whether you see the new construction. There’s still some questions about interest rates out there. So I think if — when we’re talking to customers, they’re a bit cautious going in. I think the business is still good. We’ve called it out to be flat on both residential and the commercial side of the business. But I think we’re entering the first part of the year just with a bit cautious and letting us see how things play out. There’s just a lot of moving parts right now and there hasn’t been a lot to find.

But overall, I guess I’d come back to that, particularly in the water heater side and boiler side, 80%, 85% is that replacement. And people just don’t go without it. And the other 15%, I think, is what you’re talking about. We’ll have to — we’ll see how things play out in that first quarter.

Chuck Lauber: And Susan, this is Chuck. I mean, when we track order rates, and we said this on our last call, sequentially our order rates were better in Q4 than Q3. So we did see an increase. So as our customers are probably in a better, normal position, they did increase orders. Then when we look into January of 2025, not as large an increase that we saw Q4 over Q3, but another increase slightly up on a daily order rate, which gives us some confidence that we’re seeing that buy back in. I will note, like I said before, we have some tough comps, so order rates are not back up to 2024, first quarter, or January order rates yet. We probably won’t see that for the quarter, but we are pleased that we saw a bit of an uptick in order rates in January.

Susan Maklari: Okay, all right. That’s helpful. And then, just wondering if you could talk a bit about the North America water treatment side. You got it for about a 5% decline there this year. Talk a bit about what you’re seeing and what’s driving that?

Chuck Lauber: The 5% decline in the top line is primarily driven by the repositioning of the portfolio that we talked about. So as we’re deemphasizing certain products and certain go-to-market models, that will be a headwind to growth, but we are still confident we see growth in the remaining focused areas. So the net of that for 2025, which is a bit of a transition year for us, will be down about that 5%, but we feel confident that with our refocusing, we’ll get back to growth.

Operator: Thank you. Our next question comes from Nathan Jones of Stifel. Your line is open.

Nathan Jones: Good morning, everyone.

Kevin Wheeler: Good morning.

Chuck Lauber: Good morning.

Stephen Shafer: Good morning.

Nathan Jones: Just maybe a question on the China trade-in/stimulus kind of programs over there. I think you said 4Q — that the impact in 4Q was to allow your distributors to reduce some of their inventory, so it doesn’t sound like there was much impact for your business in the fourth quarter. Just any more color you can give us on what you’re expecting from that in 2025, kind of how you’ve addressed that in the guidance of down 5 [ph]. It doesn’t really sound like you’re expecting it to have a lot of impact on the business. So just any color you can give us around your expectations there.

Stephen Shafer: Okay. This is Steve. I’ll start by maybe just getting some character around the Q4. We did see the impact in our market, right? And as we talked about, the channel and the retailers had a good sell-off performance, actually had growth in the quarter, just didn’t flow all the way back to our business. But it is a good indication that the trade-in program did have some demand generation effect. I think we’re entering 2025 just cautious about what that sustainability looks like. It has been extended province by province. The execution of that program still is kind of working itself through. Some provinces, the program is off and running. Some are still working on how it’s going to get executed. Obviously, they’re in a holiday period right now, but we’ll see that in Q1 in terms of just sort of what kind of continued impact it’s having.

We’re cautious right now because we want to understand how much of it is true fundamental demand generation, right. At the end of the day, consumers need to be installing more equipment. There might have been some pent-up demand there as people were waiting for this program, so we’re working through that. It’s encouraging, that the impact it did have on Q4. It’s encouraging that it has been extended through 2025. We’re just cautious and we’re following it very closely to see what that impact will actually look like for us.

Nathan Jones: Is it fair to characterize the approach you’ve taken to guidance from that is that you’re not really including any benefit from it?

Stephen Shafer: Maybe a little bit, but I’d say we’re very cautious, right. It could swing where we see that benefit early parts of the year, later parts of the year. But we really want — what we’re really watching for is at the end of the day is more kitchen remodeling happening. Our people living in the new apartments are people actually investing and upgrading — and when that starts happening, fundamentally at the consumer level, that’s why I think we’ll have more confidence in the long-term health of the business.

Operator: Thank you. Our next question comes from Saree Boroditsky at Jefferies. Your line is open.

Saree Boroditsky: Hi. Good morning. Maybe a little bit longer term growth question. With China down another year, how do you think about your long-term guidance, for I believe 5% to 6% growth through 2028? Like can sales recover stronger than that to make up for the weaker start.

Kevin Wheeler: Yes. I think we talked a bit about that. I mean, it’s the first year in our guidance. Even in our guidance, like I said, we were looking for some recovery — so yes, obviously, you would have to recover at least at a higher rate as we go forward. But part of that also is not just the economy, it’s our mix and our products and how we’re growing our premium categories. So right now, we’re behind the first year. But as we look forward, I mean, I think some of the things that we are seeing are positive. But again, for us to get to that 5% or 6% number — percent number, we just need to see real growth that’s sustainable, and that still needs to play out, as Steve has mentioned.

Chuck Lauber: And I would just add, as you think about 2025 we have two areas of growth for us in water treatment and in China that are going to — we are anticipating right now to be repositioning years. And that’s going to be a drag on our top line. And then I think we are also making investments and have been through last year and will continue this year, which is positioning us well, I think, for growth looking forward, but we’ve got to get through and get those investments executed.

Saree Boroditsky: I appreciate the color. And then I know there’s been a lot of talk on the North America water heater market, but just is one more, maybe just a little bit on the competitive environment. And your position, are you seeing any gains by competitors that are impacting the results and the volatility that we saw this year?

Kevin Wheeler: Well, there’s definitely some volatility out there and probably a little bit more than normal particularly up in the kind of the Northeast, Midwest area. But overall, I’m going to speak from an A.O. Smith perspective. We’ve navigated through that before. And so nothing that I would consider to be new. It’s just some changes, some distributor changes. And anytime there is a change in the market, there’s always some disruption, there’s always opportunity. But overall, we navigated through these in the past, and we’ll continue to do that. And I’ll go back to our customer base is strong no loss of major customers in 2024. And those partnerships are decades long, and I think they’ll continue to benefit both of us going forward. So nothing meaningful to A. O. Smith, but yes, some disruption in the market.

Operator: Thank you. Our next question comes from Jeff Hammond of KeyBanc Capital Markets. Your line is open.

Jeff Hammond: Hi. Good morning.

Helen Gurholt: Good morning.

Chuck Lauber: Hey, Jeff.

Jeff Hammond: Hey. I guess, Steve, good to have you on the call. I think in your prepared remarks, you talked about similar things that early observations and the things that impressed you about A. O. Smith, but just wondering where you see opportunity for change, whether it be commercial or op excellence maybe you take an early look at your tenure here?

Stephen Shafer: Sure. As I said, I’ve been really impressed with the quality of the businesses that A. O. Smith has, market-leading position, market-leading products, really great, deep customer relationships has obviously been a lot of the last 10 months getting to know those better. But — and had a great culture fit for me. So those are some of the positives. I do see opportunities where my experience and background has a chance to bring something new or add some value to A. O. Smith. I think I’d say right now, there’s three areas that I’m kind of leaning into. One is our A. O. Smith operating system, which there’s a great foundation here that we’ve built around a culture of problem solving on the plant floor and I’ve got a personal experience in deploying and running different operating systems.

And I think there’s an opportunity to expand it even further kind of take it to the next level, be more focused on how we’re driving waste elimination. So that’s an area I’m leaning into. Second one is on the IT technology side. We’ve built and deployed our ERP system over the last few years. And that’s also an area I have some experience as a previous employer, I led the implementation of their ERP system. And I think we’re at the phase now about how do we get value out of both the IT investments we’ve made. And then it’s also a space where technology is moving quite quickly. And how do we just position ourselves for where technology is going to be more competitive as a company. And I think initially, that sort of internally, how we run the company and eventually it could be more involved in how it interacts with our products.

And then the third area, I’ve spent a lot of time on is just on the portfolio side. And obviously, some of the restructuring announcements today are an outcome of some of that work, but thinking through how do we get more competitive with our portfolio? How do we drive innovation in the market spaces where we are at. And then taking a big picture about where is the portfolio going in the future. So I’d say those are three areas that I spent a lot of time on. Again, it taps into a little bit of sort of my own experience that I’m bringing into A. O. Smith, and I think there’s a lot of lot of opportunity to build out some good foundation and add more value.

Jeff Hammond: Okay, great. Appreciate the color there. Just a couple of cleanups. One, on the — just the tariff dynamic and Mexico, Canada, can you talk about your footprint versus what you think your peers footprint, does that put yet maybe an advantage, disadvantage in any way should some of them the Mexico-Canada tariffs go in? And then just last one, corporate expense. What’s driving the $10 million increase in 2025 in a tough environment?

Kevin Wheeler: Well, I’m going to have Chuck take the expense side of it, but I’ll take the Mexico and the tariffs and so forth in our positioning. And I’m going to candidate as well because they’re both in play and — what I would tell you that A. O. Smith is positioned pretty well with regards to that. If you look at North America, in Mexico, we do have a facility down there. That’s about maybe 15% of our production. We have two large facilities in North America, which — in the U.S., which gives us some optionality there, if needed. So — and we are positioned well. So have a small footprint, but also having some factories that can — we can lever if we need to is of comfort to us. And I would say you up in Canada, we are the only major water heater company that has a water heater tank plant up in Montreal.

So that gives us, again, some optionality to look at different views of capacity and manufacturing. So if I step back, just from a manufacturing footprint, we are in pretty good shape. I think in some cases, better than most of our competitors because we are not all in, in 1 area, and we have that flexibility with a number of plants and having — Steve talked about the ERP system, but also having standardized products, just allows us to move that around, if necessary. So we feel — listen, we don’t know what it’s going to take, but we feel we are in the a really solid position for A.O. Smith, but also to be competitive long-term.

Chuck Lauber: And then your question on corporate expense, up $10 million, that’s $25 million versus $24 million?

Jeff Hammond: Yes.

Chuck Lauber: Okay. I mean there’s some puts and takes on it, but roughly equally weighted — the two largest pieces are interest income that is less in 2025 as that’s lumped into that category as well as incentives that are at target versus lower than target versus lower than target in 2024.

Operator: Thank you. Our next question comes from Andrew Kaplowitz of Citi. Your line is open.

Andrew Kaplowitz: Hey, good morning, everyone.

Kevin Wheeler: Good morning.

Helen Gurholt: Good morning.

Andrew Kaplowitz: So you obviously have a very strong balance sheet. And Steve, I think you mentioned you’re focused on where the AOS portfolio can go in the future. I know you just closed period, but would you expect AOS to get more aggressive in terms of portfolio management in the future, whether you ramp up an M&A or is something else? Like how do you think about that moving forward?

Stephen Shafer: I think it’s something that we’ve always been looking at. And I think we are a company that is exploring where we should go next in terms of our portfolio and yet at the same time, still being disciplined about that. So in terms of being aggressive or more aggressive or less aggressive, I’d just say it continues to be on our radar screen, and it’s on my radar screen and certainly trying to bring my own sort of lens of how I think we can move that forward. But I think it’s a lever available to us, but we’re going to continue to be disciplined about how we pursue it.

Andrew Kaplowitz: Very helpful. And then if I go about the last quarter, I think you said you saw a modest slowdown including activity in boilers, but your guidance for this year is still for 3% to 5% growth. So any color there on the boiler side still looks like you’re pretty confident about another growth year for that side of the business?

Kevin Wheeler: Yes. I would — this is Kevin. I would say that 3% to 5% that we have out there — the driver for us is always our coating activity. That seems to be really stable. Quite frankly, some of our product categories, the CREST boiler is doing exceptionally well. So — that’s a market that tends to grow 1% to 2% units. We’re going 3% to 5%. And I think a lot of it has to do with our products and also that continuing transition from a non-efficient to a high-efficient product line and 90% of what our boiler business does is sell high-efficient products. So it’s a nice space to be in, and we think we’ll get more than our fair share.

Operator: Thank you. Our next question comes from David MacGregor of Longbow Research. Your line is open.

David MacGregor: Good morning, everyone, and thanks for squeezing me in here. I guess just on China, the restructuring, can you just talk about the timing of the benefits of that restructuring? And when do you expect to see the first signs of success. And then maybe where within that Chinese sort of mix of businesses would we expect to see the greatest impact?

Kevin Wheeler: So we’ve already — we’re already underway with the restructuring. So we’re a bit more than halfway through it already. So we’ll start seeing benefits right now. And then we’ve got more to go. So we’ll finish off the rest of the restructuring over this quarter and the following quarter. And as I mentioned, by the end of Q2, we’ll expect it to be pretty much fully implemented at that point. I would say a lot of it is just getting us more streamlined and better positioned to compete in China. So obviously, our business today is not the same size as it was a few years ago. We have to think differently about how we are organized. So from that standpoint, different than how we characterize water treatment, it may be less about major portfolio ships and more about just getting more competitive and getting more streamlined about what we need to focus on going forward to compete in the China market.

David MacGregor: So if I’m hearing you correctly, are you saying the benefits are more kind of SG&A benefits than COGS benefits?

Kevin Wheeler: Yes, there’s a lot of structural cost. I think I would say we are getting more efficient now.

Chuck Lauber: Yes. I mean that — this is Chuck. But that’s specific to the restructuring. We always have initiatives to reduce costs, productivity improvement, cost out. So that will continue next year also.

Kevin Wheeler: And there is a focus on certain parts of the portfolio that has more work to do there than others, and that’s also well aligned. And I think where we’re focused going forward.

David MacGregor: Got it. And the follow-up question is just on the balance sheet, I guess, inventories. What is kind of the target in terms of days of inventory? What would you like to get that down to?

Chuck Lauber: Yes. We are a little higher than we’d like to be. I mean if you look at our inventories, they’re up about $35 million year-over-year. There’s a couple of reasons. One is we did invest a bit in tankless inventory as we are rolling out those initiatives have a longer lead time. We are also looking at overall, just a little higher inventory as the volume was a little lighter than what we expected during the last quarter of the year, which we’ll take that out. So our initiative on an overall days, when you kind of look at overall days on hand when you take receivables, inventory and payables is to be below that 40-day level and we are targeting to be below that 40-day level as we come into the end of 2025.

Operator: Thank you. I’m showing no further questions at this time. I would now like to turn it back to Helen Gurholt for closing remarks.

Helen Gurholt: Thank you, everyone, for joining us today. Let me conclude by reminding you that our global AOS team continue to invest in ourselves even while navigating many challenges in 2024. We look forward to updating you on our progress in the quarters to come. In addition, please mark your calendars to join our presentations at two conferences this quarter. Citi on February 18 and North Coast on March 6. 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.