A.O. Smith Corporation

Good day and thank you for standing by. Welcome to the AO Smith Corporation fourth quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Helen Gerholt. Please go ahead.

Good morning, and welcome to the A.O. Smith Full Year and Fourth Quarter Conference Call. I'm Helen Gerholt, Vice President, Investor Relations and Financial Planning and Analysis. Joining me today are Kevin Wheeler, Chairman and Chief Executive Officer of Steve Schaefer, 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 this, matters that we described in this morning's press release, amongst others. Also, as a courtesy to others in the question queue, please limit yourself to one question and one 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.aosmith.com. I will now turn the call over to Kevin to begin our prepared remarks. Please turn to the next slide.

Thank you, Helen, and good morning. First, I'd like to start off by saying that I'm pleased to have Steve Schaffer 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 four 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 world segment local currency third-party sales. Our legacy Indian business sales grew 13% in local currency in 2024, which is approximately two times the market. We closed the PURIT acquisition in the fourth quarter, which had a minimal impact on sales and earnings. With the strong business climate and the addition of PURIT, 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 five. 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 entered 2025 with water heater inventories in a normal to lean position. During 2024, residential new construction and replacement demand were 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 three to four percent in 2024. As a reminder, commercial gas has an average selling price of approximately three times that of commercial electric units, and therefore impacting our results more meaningful than the commercial electric growth. Our North America boiler business performed as expected, and sales increased eight percent 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 e-commerce 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, four-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 sales demand 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.

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 six, full year sales in the North America segment of $3 billion increased slightly compared to 2023. Pricing actions and 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 seven. 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. 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 eight. 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 nine. 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 dollars. North America 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 pre-cash flow of $474 million during 2024. Lower than 2023, primarily driven by lower earnings and higher inventory balances that were partially offset by lower accounts receivable balances. 2024 pre-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 measured by 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've 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 two years, we have returned almost $1 billion to shareholders through our dividends and share repurchases. Please turn to slide 13 in 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 our 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 for between $500 million and $550 million. Interest expense is projected to be between $15 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 US, gives us flexibility to competitively navigate potential future tariffs, which may impact trade between the US, 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?

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 business. 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% range 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 America water treatment sales to be between $235 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-teens 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 PURIT will add approximately $15 million in sales in 2025. We do not expect PURIT 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 the 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 spaces. 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.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. And our first question comes from Mike Halloran of Baird. Your line is open.

Good morning, everyone. Good morning. Can you just help provide some thoughts on how you think demand cadence is out through the year? You know, I certainly understand some of the remarks you made in the press release about, you know, less 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?

Sure, Mike. This is Chuck. Our outlook for 2025 on the water heating side does return much more normal to the normal cadence. 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. You know, 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, you know, 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. Then when you look to China, you know, China, we're talking about volume decrease of 5 to 8%. I would say the first quarter, you know, 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.

Thanks for that. And then on the North American margins, kind of a twofold question. One, maybe in the incremental color and with 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?

Let me take the tankless headwind for 2025, and I'll let Steve talk a little bit about water treatment restructuring. 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. That'll be about mid-year. 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. Wouldn't wait that much different than kind of gradually 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.

I think regarding what we're doing on the portfolio in water treatment, we've been building out this growth platform over the last seven 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 is 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.

Thank you.

Our next question comes from Matt Somerville of DA Davidson. Your line is open.

Thanks. A couple questions. Does what you're seeing in China and really what you've experienced in China over the last several years, does that change kind of 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.

Yeah, 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. 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.

Yeah, 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 three or four 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 five or six, 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. 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.

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 de-emphasizing a bit versus where you're placing greater emphasis. And as you get beyond this year, kind of the down mid-single digits, what does the, you know, three- to five-year growth trajectory organically look like in that business? Thank you.

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 de-emphasizing 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 megatrend tailwinds there, and I think this is a natural progression of repositioning ourselves And so, you know, our early estimates of double digit growth, I think we will get back to that at some point, but I think it's maybe, you know, 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.

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 Smith some additional acquisitions to grow water treatment at an accelerated rate. That's still our focus.

Thank you.

Our next question comes from Damian Karras of UBS Securities. Your line is open.

Hi, good morning, everyone. Steve, great to have you on the call. Thank you. I was wondering if perhaps you saw a fall off 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, you know, 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?

Yeah, let me just talk about that sequence. And 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 American water heater business. And so if you go back here, because you're doing a comparison, you go back to 2020, 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 in 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 count 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 sales, strong relationships, no major customer loss there. But just because of that dynamic and that timing, yeah, you're right, we did see lower volumes. there's some reasons behind it that are more situational than they are ongoing.

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, you know, I'm just curious if kind of the industry in general has been pretty disciplined on pricing, or if you're seeing any, you know, competitor discounting of note?

Yeah, 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 have positive pricing across all of our categories in 2024. Yeah, that's as far as we pretty much what we'll talk about pricing. There's always situational discounting here in markets. That doesn't change. But, you know, what happens in maybe Newark isn't 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 fade, but we had favorable pricing across all our categories as we planned.

Thank you.

Our next question comes from Brian Blair of Oppenheimer. Your line is open.

Thank you. Morning, everyone.

Morning, Brian. Morning.

I wanted to follow up, dig in a little bit more on the shift in your North American water treatment strategy. Your team has touted the benefits of the omni-channel kind of presence historically. Has there been a 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 de-emphasizing the weaker market? excuse me, economics of the retail strength.

This is Steve. I would say there's definitely different competitive dynamics and market dynamics across those different channels. And, you know, part of having the M&E 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 strengths, 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. I think 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.

Yeah, I would just say our on-channel approach is still there. It's just changing. Where we focus our time and energy, I think early on someone mentioned the word de-emphasizing. We're not exiting any of the channels, but we are De-emphasizing 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.

Understood. And the margin benefit you've cited is notable. You mentioned top line expectations for PURIT. 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 shake out?

Roughly, PURIT is going to contribute in 2025 about $50 million in revenue. The 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 are around mid-single digits, very similar to our legacy business in India. I would say for 2025, we've got a real focus on integrating Pure 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 months, but on track so far.

Maybe just to touch base on, you know, we've been looking to scale India, and this was a very important component for us to move forward. The Pura business really complemented where we're at. They're very strong on the e-commerce and retail. We're really strong retail 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. And 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 either grow the business and drive cost and margin improvement.

Thank you.

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

Hey, good morning, and welcome, Steve. I think, Steve, you said 4% water heater pricing. If I heard you wrong, please correct me, and that that was a carryover number?

325? In March, we went to the marketplace with a 4% water heater price increase. That's March of 2024, of which that will be carrying over into 2025.

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?

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 hypotheticals 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 a really good track record of addressing any inflationary pressures, whether it's steel or any other type of products or components.

Thank you.

Our next question comes from Susan McLaury of Goldman Sachs. Your line is open.

Thank you. Good morning, everyone.

Good morning.

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? And what do you think their appetite is to restock over the course of this year?

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 i just think i'll let others comment on this i just think there's there's a just 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 sell out 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 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 let's see how things play out. There's just a lot of moving parts right now, and there hasn't been a lot defined. But overall, I guess I'd come back to that, particularly in the water heater side and boiler side, 80%, 85% of that replacement. and people just don't go without it. And the other 15%, I think, is what you're talking about. We'll see how things play out in that first quarter.

And Susan, this is Chuck. I mean, when we track order rates, and we said this on our last call, you know, sequentially our order rates were better in Q4 than Q3, so we did see an increase. So, you know, 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. And we probably won't see that for the quarter, but we will be pleased that we saw a bit of an uptick in order rates in January.

Okay. All right. That's helpful. And then just wondering if you could talk a bit about the North America water treatment side. You guided for about a 5% decline there this year. Talk a bit about what you're seeing and what's driving that.

The 5% decline on the top line is primarily driven by the repositioning of the portfolio that we talked about. So as we're de-emphasizing 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.

Thank you.

Our next question comes from Nathan Jones of Stiefel. Your line is open.

Good morning, everyone. Good morning. Just maybe a question on the China trade-in slash, you know, stimulus kind of programs over there. I think you said 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 five days. 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.

This is Steve. I'll start by maybe just giving 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-out 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 programs 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. 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, 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.

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?

Maybe a little bit, but I'd say we're very cautious. It could swing where we see that benefit early parts of the year, later parts of the year, but we really want it. What we're really watching for is at the end of the day is more kitchen remodeling happening. Are people moving to new apartments? Are people actually investing and upgrading? When that starts happening fundamentally at the consumer level, that's where I think we'll have more confidence in the long-term health of the business.

Thank you.

Our next question comes from Suri Barditsky at Jefferies. Your line is open.

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? Can sales recover stronger than that to make up for the weaker start?

Yeah, 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, yeah, 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 in our products and how we're going in our premium categories. So, you know, right now we're – we're behind the first year, but as we look forward, I mean, I think some of the things that we're seeing are positive, but again, for us to get to that five or six number, percent number, we just need to see real growth that's sustainable, and that still needs to play out, as Steve has mentioned.

And I would just add, you know, as you think about 2025, we have two areas of growth for us in water treatment and in China that are going to, you know, we're anticipating right now to be repositioning years, and that's going to be a drag on our top line. And then I think we're 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.

I appreciate the color. And then I know there's been a lot of talk on the North America water heater market, but just I guess 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?

Well, there's definitely some volatility out there and probably a little bit more than normal, particularly up in 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 any time there's a change in the market, there's always some disruption. There's always opportunity. But overall, we navigated through these in the past and will 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 yeah, some disruption to the market.

Thank you.

Our next question comes from Jeff Hammond of KeyBank Capital Markets. Your line is open.

Hi, good morning.

Hey. Good morning.

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

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. Obviously, spent a lot of the last 10 months getting to know those better. And it's 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 REO 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're at? And then thinking big picture about where's the portfolio going in the future. So I think 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 opportunity to build up some good foundation and add more value.

Okay, great. Appreciate the call there. Just a couple of cleanups. One, on just the tariff dynamic in Mexico, Canada, can you talk about Your footprint versus what you think your peers' footprint, does that put you at maybe an advantage, disadvantage in any way, should some of 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?

Well, I'm going to have Chuck take the expense side of it, but I'll take the... the Mexico and the tariffs and so forth in our positioning. And I'm gonna throw Canada in as well, because they're both in play. And what I would tell you that AS Smith is positioned pretty well with regards to that. If you look at North America and Mexico, we do have a facility down there. That's about maybe 15% of our production. We have two large facilities in North America, or in the US, which gives us some optionality there if needed. And we're positioned well, so having a small footprint, but also having some factories that we can lever if we need to is of comfort to us. And I would tell you, up in Canada, we're the only major water heater company that has a water heater tank plant up in Montreal. So that gives us, again, some optionality to to look at different views of capacity in manufacturing. So if I step back just from a manufacturing footprint, we're in pretty good shape. I think in some cases better than most of our competitors because we're not all in one area and we have that flexibility with a number of plants. And having a, 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're in a really solid position for A.L. Smith, but also to be competitive long-term.

And then your question on corporate expense, $10 million, that's $25 million. versus 24? Yeah? 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 in 2024.

Thank you.

Our next question comes from Andrew Capovitz of Citi. Your line is open.

Good morning, everyone. Good morning. 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 it's an M&A or something else? How do you think about that moving forward?

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 no less aggressive, I 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, 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.

Very helpful. And then if I go back to last quarter, I think you said you saw a modest slowdown in quoting 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?

Yeah, this is Kevin. I would say that 35% that we have out there, the driver for us is always our coding activity. That seems to be really stable. Quite frankly, some of our product categories, the crust boiler is doing exceptionally well. So that's a market that tends to go 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 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.

Thank you.

Our next question comes from David McGregor of Longbow Research. Your line is open.

Good morning, everyone. 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?

So 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, 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 it was a few years ago. We have to think differently about how we're organized. So, you know, from that standpoint, different than how we characterize water treatment, it's maybe less about major portfolio shifts 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.

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

Yeah, there's a lot of structural costs, I think, that would say we're getting more efficient.

Yeah, I mean, this is Chuck, but that's specific to the restructuring. We always... have initiatives to reduce costs, productivity improvement, cost outs, and that will continue next year also.

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

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?

Yeah, we're 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 reasons. One is we did invest a bit in tankless inventory as we're rolling out those initiatives, have a longer lead time. We're also looking at overall just a little higher inventories. The volume is a little lighter than what we expected during the last quarter of the year, which we'll take that out. So You know, our initiative on an overall days, you know, 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're targeting to be below that 40-day level as we come into the end of 2025.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Helen Gerholt for closing remarks.

Thank you everyone for joining us today. Let me conclude by reminding you that our global AOSF 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 18th and North Coast on March 6th. Thank you and enjoy the rest of your day.

This concludes today's conference call. Thank you for participating and you may now disconnect.