A. O. Smith Corporation

Second-quarter company sales were approximately $1 billion, and adjusted EPS was $1.03. North America sales rose 5% to $821 million, including $16 million from Leonard Valve; excluding Leonard Valve, organic sales grew 3%. North America adjusted segment earnings were $200 million, with margin of 24.4%, down 100 basis points year over year. Rest of World sales were $195 million, down 19%, and segment earnings were $10 million with margin of 5.2%. In the first half, free cash flow was $233 million, up 67% year over year. For 2026, management now expects full-year sales growth of 2% to 3% and adjusted EPS of $3.70 to $3.85, versus prior guidance of 2% to 4% sales growth and $3.70 to $4.00 EPS. North America boiler sales are still expected to grow 6% to 8%, North America water treatment sales 5% to 6%, Leonard Valve about $70 million of sales, and China sales to decline at a low double-digit rate in local currency.

Steve Shafer said the quarter showed disciplined execution despite very different market conditions across the portfolio. He highlighted traction in North America, especially boilers and Leonard Valve, and said the company remains confident in the long-term strength of its replacement-driven water heater business. He also stressed that the China strategic review is nearing completion, with all options still on the table and an update expected by the next quarterly call.

Carrie Anderson said the outlook was narrowed mainly because U.S. residential water heater demand has been softer than expected, especially in new construction and existing home sales. She noted that Q2 price-cost was slightly positive, but the back half will be more neutral as pricing rolls in and steel, tariffs, and other inflationary costs rise; she also said Q3 North America margins should be similar to Q1 and that the full benefit of pricing should show up in Q4. Chuck Lauber added that North America margin was 24.4% in Q2, steel costs were up about 20% year over year, IEEPA tariff refunds were minimal, cash was $181 million, net debt was $456 million, and leverage was 25.7% of total debt to total capital. He also said the company repurchased about 2.6 million shares for $162 million in the first half and raised the 2026 buyback target to $300 million.

Analysts pressed on why management still expects some stabilization in U.S. residential water heaters despite weak industry data; management pointed to easier comparisons in the back half, less pull-forward than in prior years, and a first-half mix that was only 51% of annual demand versus 52% to 53% in prior years. Questions also focused on pricing, pre-buy, and margins: management said recent price increases of 4% to 7% were delayed about a month to stay competitive, are expected to take effect around mid-third quarter, and have not triggered major price elasticity in the consumer market. On China, management said all options remain open and that the team is close to determining the best path forward, while on tariffs it said the impact is manageable and not expected to be material for the full year.