Title

Presentation

A. O. Smith Corporation misses on earnings expectations. Reported EPS is $0.85 EPS, expectations were $0.94.

Operator: Good day, and thank you for standing by. Welcome to the A. O. Smith Corporation First Quarter 2026 Earnings Conference Call. [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, ma’am.

Helen Gurholt: 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. 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-GAAP measures. Free cash flow is defined as cash from operations less 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.

Those risks include matters that we described in this morning’s press release, among others. [Operator Instructions] 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.

Stephen Shafer: 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. 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 first quarter of 2026 financial performance.

Please turn to Slide 4. 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, a decrease of 2%. Our EPS was $0.85, a decrease of 11% due to lower volumes 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 the first quarter, 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.

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 on the future of our customers and employees 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. 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.

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 the first quarter, while recognizing there is still work to be done with more improvement 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 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. 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. 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 the first quarter of 2026, led by strong performance in the Valve’s business. We exited the quarter with a strong backlog, and 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 first quarter performance.

Charles Lauber: Thank you, Steve, and 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 first quarter by approximately $0.04 per share. 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.

North America segment first quarter sales of $753 million increased 1% against the tough comp. Carryover pricing benefits and 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 first quarter 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. 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 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. 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. We generated strong free cash flow of $119 million in the first 3 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.

Our cash balance totaled $204 million at the end of March, and our net debt position was $412 million. Our leverage ratio was 24.7%, as the 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 the development of innovative product offerings and productivity through operational excellence, 2 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. 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 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 the second quarter. 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 million and $80 million. 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 the first quarter.

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. 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 9. Steve?

Stephen 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 October 6 commercial regulatory change, we revised our outlook and now expect less prebuy activity in the quarters leading up to the original transition date. We now project that U.S. 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, with increases varying by product, but ranging from approximately 4% to 7%.

We have seen some cost increases already leading into the second quarter, particularly within transportation. 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. 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. 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. 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 time frame. We are looking to provide greater clarity within the next few months. 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 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. 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 strength 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.

We expect to recognize a restructuring charge of approximately $20 million in the second quarter and have 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 2 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 the first quarter. 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.

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.

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Operator: [Operator Instructions] And our first question will come from the line of Susan Maklari with Goldman Sachs.

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 into the second quarter? And how we should think of the flow-through in the next couple of quarters as a result of that?

Charles Lauber: 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. Just 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.

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

Charles Lauber: Yes, not meaningful. The price increase that we have is effective mid-May, roughly. So it’s pretty early days.

Susan Maklari: Okay. All right. That’s helpful. And then 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?

Stephen Shafer: Sure, Susan. So 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, but it is pending and waiting to see if the Supreme Court will review it. 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 6 date, they issued in essence a letter that they would not be enforcing the rule until October of 2027. 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.

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 buy ahead because of that announcement.

Operator: Our next question will come from the line of Matt Summerville with D.A. Davidson.

Matt Summerville: 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, 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?

Charles Lauber: Yes. 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. 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. So 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 of hundred basis points. So think of it as just kind of the next step in moving that profitability up.

Matt Summerville: And then 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 assumingly 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, that process has taken to unfold?

Stephen Shafer: Yes. 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 has kind of run its course. Still, there’s a low level of consumer confidence. So it was a challenging first quarter, I’d say, across the market, at least in the categories that we participate in. 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. I think it is probably the driver to why the assessment is taking a bit longer than we had hoped. It’s — there’s still a lot of really positive things coming out of the assessment for us.

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. 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. 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. So that’s all been very positive. But we are doing it in the backdrop of a very challenging market environment. And any time 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 and it makes the length — 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. They’re maturing, and I’m hoping that in the coming months, we’ll be able to get clarity on our path forward.

Operator: Our next question comes from the line of Tomohiko Sano with JPMorgan.

Tomohiko Sano: 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?

Stephen Shafer: 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. We think we’re kind of holding our own in a challenging market. Within the U.S., as we mentioned, in 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, and we’re happy with the progress we’ve made there, but there’s still more work to be done 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. So at this point, nothing meaningful, but it’s a big focus for us is to continue to maintain our share position in the markets where we…

Tomohiko Sano: And just a 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?

Stephen Shafer: 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. 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. Most of our opportunity we see as 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, and it’s been very well received. So we’re pleased with the progress so far.

Operator: Our next question will come from the line of David MacGregor with Longbow Research.

Joseph Nolan: This is Joe Nolan on for David. I just wanted to focus on the margin and price/cost outlook over the remainder of the year. 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. So can you just walk through kind of margin cadence over the remaining quarters of the year?

Charles Lauber: Sure. I’m happy to do that. So I — we were happy with our price/cost relationship in Q1, pricing overcame the cost that we incurred plus a little bit of margin. So we’re walking into the second quarter in a good position for the costs that were behind us. However, we are seeing incremental cost in the second quarter. So we’re seeing costs raise up on transportation. Diesel fuel is up. We’ve seen cost on steel continue up, and we have the announced price increase. So the announced price increase would come into effect in the third quarter. So we’re going to see a little pressure, cost, before we see pricing in the second quarter. We’ll see a little pressure in the second quarter. That will be overcome in the third and fourth quarter with the pricing that we expect to have in place.

So we feel pretty comfortable with where we’re positioned right now, and — but we’re watching costs closely, right? Because some of those costs related to oil seem to be pretty persistent.

Joseph Nolan: 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?

Stephen Shafer: Yes. That’s the biggest driver for the change in our outlook.

Operator: Our next question comes from the line of Mike Halloran with Baird.

Michael Halloran: Would you help put all this in context on how you expect the earnings to cadence through the year here? Obviously, the $0.03 from Leonard goes away, 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. The timing around some of these other headwinds, demand dynamics, do you get a catch-up in 2Q from the weather? How does that cadence through the year? 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?

Charles Lauber: Sure. Happy to. Yes, there’s a couple of moving parts since our last guidance outlook, right? So — let me start with China and start with maybe Steve’s comment on China in Q2 being down. We believe it will be down roughly 15% from Q1, and think of that in terms of decremental margins, 35% to 40%. So we expect a difficult quarter in China. We expect that we will 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’s just we’d like to be a little bit leaner in this environment. 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.

And 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 with 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 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. 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 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.

So we do expect a solid performance in North America in the second quarter based on a little bit of pull forward. 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. 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. 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 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 cost, some real headwinds in China and a little bit more normalization in the back half.

Michael Halloran: 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 4% to 7% price increases you’re pushing through here? 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?

Stephen Shafer: Yes. 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. 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 around operationally how we serve those transitions. 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. 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.

Operator: Our next question will come from the line of Jeff Hammond with KeyBanc Capital Markets.

Jeffrey Hammond: Maybe just to go at the guide a little bit different. It seems like you’re just cutting EPS $0.15, but a lot of the macro assumptions are kind of moving the wrong way. 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 that would kind of mitigate the EPS impact?

Charles Lauber: Yes. We 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. I think as you kind of look at the year, really from last guidance, the big change was what we saw in China and then this Department of Energy policy statement. So 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 going to have to really watch cost. I mean, costs are pretty volatile right now with the oil up — with oil up in transportation. But that’s probably the biggest drivers of keeping an eye on cost.

Stephen Shafer: Yes. I mean, look, 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. And I mentioned a little bit of some of the tools we’re putting to work there. And I think — the time frame 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. 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.

Jeffrey Hammond: Okay. Great. And then just on, I guess, 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? And just any kind of changes you’re seeing in that wholesale channel, which has been pretty competitive?

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

Operator: Our next question will come from the line of Nathan Jones with Stifel.

Adam Farley: This is Adam Farley on for Nathan. 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? And then maybe more broadly, just update us on capacity plans for this year and into next year.

Stephen Shafer: 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 most — 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.

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

Stephen Shafer: Yes. I mean, we saw some relief on the IEEPA 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, but then kind of overshadowed by some of these other costs that we see in front of us related to oil, diesel fuel going up, transportation. 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.

Operator: Our next question comes from the line of Andrew Kaplowitz with Citi.

Natalia Bak: This is Natalia on behalf of Andy Kaplowitz. First question, I’ll start with, you have 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. But specifically, how much of that is volume versus pricing?

Stephen Shafer: Our growth for the year as a big price component is the carryover pricing from last year. I think Q1 was a little bit softer on commercial, which was we highlighted. 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% growth forecast. Commercial is the one that I think is — we see from the order book is catching up, but price is still a big component of that growth.

Natalia Bak: 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?

Stephen Shafer: Yes. 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 7, 8 years. 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. 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.

Operator: 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.

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 4 conferences this quarter: Oppenheimer on May 5, KeyBanc 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.

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