The paragraph is an introduction to the A. O. Smith Corporation's First Quarter 2025 Earnings Conference Call. The operator welcomes participants and explains that the call will include a presentation and a question-and-answer session, with Helen Gurholt from Investor Relations leading the session. Key company executives, including the CEO, COO, and CFO, will also participate. The presentation will use slides available on the company's website, and it will include non-GAAP financial measures with reconciliations provided. The call will include forward-looking statements subject to risks, as outlined in the morning's press release. Participants are asked to limit their questions, and Kevin Wheeler, the CEO, is set to begin the prepared remarks.

The paragraph discusses A.O. Smith's upcoming leadership transition, with Steve taking over as President and CEO on July 1st, while the current CEO, who will become Executive Chairman, supports a smooth transition. It highlights the company's solid financial performance in the first quarter, noting a 2% decline in North America sales due to decreased water heater volumes, despite higher boiler sales. The rest of the world's sales remained steady, but China saw a 4% decrease in local currency due to economic challenges. The company repurchased $121 million of shares as part of its $400 million repurchase plan for 2025. Additionally, North America water heater sales dropped 4% following an atypical 2024 first quarter influenced by pre-buying. For 2025, A.O. Smith aims to level production across the year to enhance plant efficiency.

Despite strong order rates due to announced price increases, the company maintained its production schedule and adjusted lead times in coordination with customers. North American boiler sales rose by 10%, driven by high-efficiency models, while water treatment sales saw slight growth. However, there was a strategic shift away from retail. First-quarter profitability aligned with a projected 250 basis point improvement. In China, sales dropped by 4%, with increases in electric water heaters and commercial products offset by declines in residential and gas products. Margin improved by 200 basis points because of cost control and restructuring efforts. Overall, first-quarter 2025 sales were $964 million, down 2% from the previous year, with earnings per share decreasing by 5%. North America sales specifically fell by 2%, with a segment margin decrease of 120 basis points.

The paragraph discusses the financial performance and strategic activities of a company. It highlights that despite increased boiler sales, overall earnings and margins were impacted by lower water heater volumes and ongoing investments in tankless products. The Rest of the World segment sales remained steady at $227 million with earnings up by 15% due to expense management, despite a 4% sales decline in China, offset by the Pureit acquisition. Operating cash flow for the first quarter of 2025 was $39 million with a free cash flow of $17 million, which is lower compared to 2024 but typical for the first quarter. This decline was mainly due to lower accounts receivable collections and decreased earnings. The cash balance at the end of March was $200 million, with a net debt position of $70 million and a leverage ratio of 12.7%. Additionally, the board approved a quarterly dividend of $0.34 per share.

In the first three months of 2025, the company repurchased approximately 1.8 million shares of common stock for $121 million and increased its planned stock repurchase from $306 million in 2024 to around $400 million for 2025. The company focused on acquisitions to enhance shareholder value and maintained its 2025 EPS outlook at $3.60 to $3.90 per share, despite uncertainty from tariff-related cost increases. They addressed tariff impacts with strategies in pricing, expense management, and supply chain, while excluding these from sales guidance but including them in the EPS guidance.

The paragraph discusses the financial projections and expectations for a company, including a potential increase in the cost of goods sold by 6% to 8% due to tariffs, without considering mitigation efforts. They anticipate similar input costs as the previous year, with a forecasted rise in steel prices in the latter half of the year. Capital expenditures for 2025 are estimated between $90 million and $100 million, while free cash flow is expected to be $500 million to $550 million. Interest expenses are projected between $15 million and $20 million, and other corporate expenses around $75 million. The effective tax rate is estimated to be 24% to 24.5%, with diluted shares at $142 million by the end of 2025. Steve Shafer, set to become the next CEO, acknowledges uncertainties regarding tariffs and appreciates the leadership of his predecessor.

The company has established cross-functional teams to address risks related to tariffs and the supply chain, implementing strategies to mitigate these risks. Due to increased tariff and input costs in North America, they have announced price hikes of 6% to 9% on most water heater products and other categories, although these are not reflected in their top line guidance due to tariff uncertainties. Additional countermeasures include optimizing operations, strategic sourcing, and cost control. They anticipate the benefits of these pricing strategies by the end of the second quarter, while already feeling tariff impacts. Most of their products are manufactured in the US, with some production in Mexico being USMCA compliant. The production of gas tankless products is being moved from China to Mexico. The company expects 2025 industry unit volumes to remain flat compared to the previous year.

The paragraph discusses the economic challenges in China, including low consumer confidence and a weak real estate market. Despite stimulus programs, the company anticipates a 5% to 8% decrease in sales for 2025, assuming minimal currency translation impacts. The restructuring program in China is expected to finish by mid-year, yielding $15 million in annual savings and projecting an operating margin of 8% to 10% despite lower volumes. The company is cautious about the near-term market outlook but remains confident in its premium brand position. In North America, boiler sales are expected to increase by 3% to 5%, although recent growth may be slightly inflated due to prebuying before price hikes. Water treatment sales are projected to decline by 5% as the company shifts focus from the less profitable retail channel but seeks to capitalize on strong early-year performance in more profitable segments.

In the article's ninth paragraph, the company projects a 250 basis point operating margin expansion for its North American water treatment business by 2025, with Pureit's acquisition expected to contribute $50 million in sales that year despite not significantly impacting the bottom line due to integration processes. They anticipate North American segment margins to be between 24% and 24.5%, and rest of the world segment margins to be between 8% and 9%, despite ongoing tariff volatility affecting sales growth projections, which are expected to be flat to up 2%. First-quarter highlights include effective manufacturing execution, stable SG&A spending, consistent boiler sales growth, and promising North American water heater sales. North American Water Treatment and China's cost management and restructuring efforts are on track for margin improvement, and a new commercial R&D testing lab has opened in Lebanon, Tennessee.

The paragraph discusses A.O. Smith's achievements and strategies. The company highlights its commitment to ethical business practices, as recognized by Ethisphere for the second consecutive year. A.O. Smith emphasizes its leadership in the commercial water heating and boiler market, alongside its ability to navigate the volatile 2025 macro environment due to stable recurring revenue, a strong balance sheet, and strategic investments. The company is focused on communication with stakeholders and diligent cost management to maintain profitability. The paragraph concludes with remarks about continuing to lead the industry and an invitation for questions from the audience, starting with Jeff Hammond congratulating Kevin and Steve on their roles.

The paragraph is a discussion between Kevin Wheeler and Jeff Hammond about pricing and demand dynamics in the face of inflation and tariffs. Kevin explains that in 2025, the company plans for pricing to cover costs, making it EPS neutral, though they expect a slight headwind in Q2. North America margins in Q1 were 24.7%, which is positive. Despite general uncertainty, their water heating business, which generates stable recurring revenue, and the boiler business have performed well, with the latter seeing a 10% increase. They have not adjusted boiler guidance despite potential pricing pull-forward. Demand destruction has not been observed, and orders remain stable. Jeff then asks about tariff exposure, which comprises 6% to 8% of the cost of goods sold, seeking clarification on the impact of steel inflation or tariffs and other cost components.

The paragraph is part of a conversation discussing the impact of tariffs and steel price increases on the company's outlook. Kevin Wheeler mentions that steel is considered separately in the context of tariffs and that steel tariffs have been previously factored into their outlook, with expected price increases in the latter half of the year. He explains that the 6% to 8% increase refers specifically to tariffs, particularly those affecting products from China, and that they plan to reduce dependence on China by shifting production to Mexico. Mike Halloran seeks clarification on whether the 6% to 8% increase includes steel inflation, to which Charles Lauber responds that it pertains specifically to tariffs. Lauber also addresses demand, explaining that it is expected to follow a regular seasonal pattern, albeit with some deviations in order patterns, and mentions initiatives to balance production.

The company is focusing on efficiently managing incoming orders and expects a more normalized business year despite some announced pricing changes. Inventory levels with channel partners are stable or slightly down compared to last year. There is an emphasis on rebalancing and optimizing the supply chain, including sourcing and manufacturing locations like moving tankless production to Mexico. The company is also considering longer-term changes involving supply and requalification, which may be influenced by potential tariff developments.

The paragraph discusses how a company is navigating a fluid situation regarding supply chain and pricing, especially in light of tariffs. They have task forces in place to update their strategies with new information. The conversation shifts to questions from Saree Boroditsky about the company's approach to pricing and production given pre-buy impacts and tariffs. Charles Lauber mentions that production management aims to stabilize pricing effects between the first and second quarters. Stephen Shafer adds that the company collaborates closely with customers to manage lead times and transitions in pricing, ensuring efficient plant operations and customer satisfaction despite uncertainties related to tariffs.

In the paragraph, Kevin Wheeler and Charles Lauber discuss their company's approach to managing sales and pricing amid uncertainties, particularly concerning tariffs. Wheeler emphasizes the importance of avoiding excessive overtime in Q1 and ensuring a steady supply chain for their customers. Boroditsky inquires about how announced price increases fit into their guidance, especially if tariffs change. Lauber notes the volatility and unpredictability of tariffs, which led them to exclude potential tariff impacts from their forecasts. They focus on maintaining their EPS outlook despite these uncertainties. Wheeler concludes by expressing confidence in their strategy but acknowledges the ever-changing nature of the situation.

The paragraph discusses the company's preparedness to handle tariff impacts through pricing, cost controls, and optimized manufacturing. A question from Bryan Blair of Oppenheimer seeks clarification on the company's tariff exposure, particularly in relation to tankless imports from China. Charles Lauber explains that the 6% to 8% COGS tariff exposure includes tankless imports at 2024 volumes. He notes that transitioning manufacturing from China to Mexico involves several factors, such as trailing tariffs and adjustments in component sourcing. The current strategy is to mitigate these effects, with tankless imports being a significant portion of costs related to China. Bryan Blair also inquires about the company's competitive positioning and strategy beyond immediate price costs.

In this paragraph, Charles Lauber discusses how his team views uncertainties such as tariff trade policies as opportunities to outperform competitors. He expresses confidence in his team's ability to adapt quickly due to their understanding of market dynamics and strong supply chain management. Kevin Wheeler adds that having local management in various countries gives their company an advantage over competitors who may not have that flexibility. Scott Graham from Seaport Research Partners then addresses Kevin, expressing pleasure in working with him and wishing him luck. He inquires about residential water heater shipment assumptions, noting that the residential market has not shown strong optimism due to inflation pressures.

The paragraph is part of a discussion involving Kevin Wheeler, Scott Graham, and Charles Lauber, focusing on the company's business outlook and the factors influencing it. Kevin Wheeler explains that proactive and mercury placements in their industry remain stable and resilient, similar to post-COVID levels, which is an embedded change. Scott Graham asks about the impact of China's stimulus and housing market on their business. Charles Lauber responds that they are looking for an increase in consumer confidence in China, which is linked to the housing market. As consumer confidence improves, it could lead to investments in real estate and home upgrades, benefiting their business through the premiumization of appliances. The housing market recovery in China may take time, but consumer confidence remains a key focus. Andrew Kaplowitz from Citi is the next participant lined up to ask a question.

The paragraph discusses the financial outlook and performance of a company's earnings per share (EPS) and margins, particularly focusing on tariff impacts and cost containment measures in North America. Charles Lauber expresses satisfaction with North America's Q1 margins of 24.7%, exceeding the full-year guidance of 24% to 24.5%. However, a slight margin decrease is expected in Q2 due to tariff costs. These costs are being managed with suppliers, and some pricing adjustments will occur in June. Overall, the full-year EPS guidance remains unchanged, despite anticipated Q2 headwinds. Additionally, Andrew Kaplowitz inquires about the company's performance in China, noting slightly better sales than expected. Kevin Wheeler reaffirms China's strategic importance but does not elaborate on changes in the business environment there.

The paragraph discusses the company's cautious outlook for the start of the year, particularly concerning the economic conditions in Europe and China. The company is focusing on maintaining its competitiveness and premium brand position in China while adjusting to the new market reality. Despite seeing consistent trends over the past few years, the macro environment remains challenging, with low consumer confidence hindering growth. The trade-in program is stabilizing but not contributing significantly to market growth. The company is committed to competing effectively in China and maintains a strong brand presence there. After this discussion, the operator introduces a question from David MacGregor of Longbow Research.

The paragraph features a conversation between Kevin Wheeler and David MacGregor, discussing the capacity and strategy of A.O. Smith in the U.S., specifically in Tennessee and Kentucky plants. Wheeler states that the company is already very vertically integrated and primarily operates within the country for its supply chain, so repatriating manufacturing is not a concern. The company has sufficient capacity and can optimize production efficiency across its three large residential plants to benefit customers and margins. Wheeler is confident in their global strategy amidst market uncertainties and tariffs. MacGregor then shifts the topic to upcoming 2026 regulatory changes regarding the elimination of low-efficiency commercial gas products.

The paragraph discusses two major regulatory rule-makings affecting commercial products, one set to take effect on October 26 and another in 2029. These rules, which have passed through Congress and become law, are likely to impact about 55% of units sold. Kevin Wheeler mentions that despite regulatory chatter suggesting possible delays or changes, their company is preparing to comply with the rules as planned. They are making adjustments at their Mac B commercial facility in anticipation of these changes. If the regulations do not proceed as expected, the company can adapt. Additionally, Damian Karas from UBS asks about North American water heater pricing actions and whether a 6% to 8% increase has been implemented or if further price changes are pending.

The paragraph discusses pricing strategies in the North American industry amidst unique tariff issues affecting different companies differently. Charles Lauber explains that price announcements have been communicated with customers, highlighting past experiences with inflationary pressures and supply chain bottlenecks. He emphasizes the importance of customer relationships and adapting pricing based on new information. Additionally, Damian Karas inquires about the status of the company's capacity expansion in Mexico and whether tariffs could benefit their market position in North American tankless water heaters. Lauber mentions efforts to accelerate production in Juarez, with premium condensing products already launched there.

The company is planning to launch two more products by the end of the year, aiming for a full portfolio by next year. They are accelerating production efforts at their Juarez, Mexico facility due to economic considerations related to tariffs. Initially intended to start production in China, they now plan to begin in Mexico. The program concludes with Helen Gurholt expressing satisfaction with quarterly improvements and promoting upcoming conference presentations. The conference then ends.

This summary was generated with AI and may contain some inaccuracies.