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    AOS
    Earnings call· Jun 2026(Q2 FY26)

    SMITH A O Q2 FY26 earnings call AOS

    Jul 30, 2026 Source

    Executive summary

    A. O. Smith Q2 FY26 — North America Growth and Increased Share Repurchase Offset China Weakness

    A. O. Smith delivered solid Q2 FY26 results driven by strong North America performance, particularly in boilers, and robust free cash flow generation, enabling a significant increase in share repurchase authorization. These positives were tempered by continued weakness in China and softer residential water heater demand, leading to a narrowed full-year guidance range. The company is actively managing cost pressures and evaluating the strategic path forward for its China business.

    Highlights

    4

    • North America sales increased 5% to $821 million, with organic growth of 3%.

    • Boiler business sales increased 21% in the quarter, contributing to 12% growth in the first half of the year.

    • Free cash flow increased 67% in H1 2026 to $233 million.

    • The 2026 share repurchase target was increased 50% to $300 million.

    Concerns

    4

    • China sales decreased 28% in local currency due to continued weak consumer demand.

    • North America adjusted segment margin decreased 100 basis points to 24.4% due to higher steel and other input costs.

    • Residential water heater industry demand remained softer than anticipated, now expected down low single digits for the full year.

    • Steel inflation and tariffs are expected to be a headwind in the second half, leading to Q3 EPS being lower than both Q2 and Q4.

    Guidance & targets

    11
    CategoryTargetConfidence
    Full year sales growth
    approximately 2% to 3%
    high materiality
    High
    Adjusted EPS
    $3.70 to $3.85 per share
    high materiality
    High
    U.S. residential water heaters industry outlook
    down low single digits
    medium materiality
    High
    U.S. commercial water heater industry volumes
    approximately flat with last year
    medium materiality
    High
    North America boiler sales growth
    6% to 8%
    medium materiality
    High
    North America water treatment sales growth
    5% to 6%
    medium materiality
    High
    Leonard Valve sales
    approximately $70 million
    medium materiality
    High
    China sales decline
    low double-digit rate in local currency
    medium materiality
    High
    Full year steel costs
    approximately 15% higher than 2025 levels
    medium materiality
    High
    New tariffs cost impact
    modestly higher cost impact than the tariffs they replace
    medium materiality
    Medium
    Q3 segment margins (North America and Rest of World)
    generally consistent with the margins reported in Q1
    medium materiality
    High

    Segment performance

    2
    SegmentRevenueYoYQoQMargin
    North America
    Reported sales growth includes Leonard Valve acquisition. Organic growth driven by boiler sales and carryover pricing, partially offset by lower residential water heater volumes. Adjusted segment margin decreased 100 bps due to higher steel and other input costs.
    Organic sales growth: 3%Water heater sales: +2%Boiler sales: +21%Water treatment sales: -2%Leonard Valve sales: $16 millionAdjusted segment earnings: $200 million
    		$821 million5%—24.4%
    Rest of the World
    Sales decrease primarily due to continued weak consumer demand in China, partially offset by favorable foreign currency translation. Lower segment earnings and margins are a direct result of lower sales volumes in China, partially offset by cost management.
    China sales decline in local currency: 28%Segment earnings: $10 million
    		$195 million-19%—5.2%

    Operational metrics

    14
    Cash and cash equivalents
    $181 millionas of quarter end
    Q2 2026

    Ended the quarter with this cash balance.

    Net debt
    $456 millionas of quarter end
    Q2 2026

    Ended the quarter with this net debt position.

    Total debt to total capital
    25.7%as of quarter end
    Q2 2026

    Reflects the financing associated with the Leonard Valve acquisition.

    Quarterly dividend per share
    $0.36approved
    Q3 2026

    Board approved the next quarterly dividend.

    Shares repurchased
    2.6 million
    H1 2026

    Repurchased during the first half of the year.

    Share repurchase amount
    $162 million
    H1 2026

    Total amount for shares repurchased during the first half of the year.

    Share repurchase target
    $300 millionincreased 50% from $200 million
    FY 2026

    Increased due to strong cash flow performance and confidence in the business.

    North America organic growth
    3%
    Q2 2026

    Excludes the impact of Leonard Valve.

    Steel cost increase
    20%YoY
    Q2 2026

    Steel costs rose year-over-year in Q2.

    Water heater and boiler pricing actions
    4% to 7%
    Q3 2026

    Announced price increases on both water heater and boiler products.

    IEPA refunds impact
    minimal
    Q2 2026

    About $0.01 impact in the quarter, not material.

    Annual savings from water treatment optimization
    $6 million to $8 million
    Annual

    Expected from actions to optimize footprint and streamline brand portfolio.

    Residential water heater replacement market share
    80% to 85%
    Ongoing

    The replacement market continues to represent a significant portion of industry demand.

    Proactive residential water heater replacement activity
    30%
    Ongoing

    This activity is more sensitive to consumer spending behavior.

    Industry KPIs

    2
    MetricValueDetails
    Price cost4% to 7%%
    Orders bookings growth by vertical21%%

    Deals & partnerships

    1
    Leonard ValveAcquisition to expand water management and digital control capabilities.

    The acquisition was completed earlier this year and was financed, impacting the company's leverage ratio.

    Risks & headwinds

    5
    Continued weak consumer demand in ChinaQ2 2026 and ongoing

    China sales decreased 28% in local currency in Q2 2026.

    Mitigation: Managing the business thoughtfully while completing a strategic assessment to determine the best path forward.

    Softer residential water heater industry demandFY 2026

    Full year industry outlook narrowed to down low single digits for 2026.

    Mitigation: Confident in long-term strength, strong market position, and continued progress in stabilizing market share in a competitive environment.

    Higher steel and other input costsQ2 2026 and H2 2026

    Steel costs rose 20% YoY in Q2 2026. Steel inflation in H2 expected to be somewhat higher than H1. Non-steel material inflation and tariffs expected to remain a headwind.

    Mitigation: Implementing pricing actions (4-7% in Q3), focused on operational execution and cost management, monitoring and managing the dynamic material cost environment closely.

    Impact of new tariffsH2 2026

    New tariffs (Section 301 replacing Section 122) expected to have a modestly higher cost impact than the tariffs they replace.

    Mitigation: Evaluating changes, working to mitigate and manage costs, and leveraging experience in navigating tariff uncertainty.

    Less favorable Q3 earnings profileQ3 2026

    Q3 EPS expected to be lower than both Q2 and Q4.

    Mitigation: Management attributes this to demand pull-forward from pre-buy activity into Q2, higher steel costs in H2, and only partial realization of price increases in Q3.

    What to watch in Q3 FY26

    4

    China strategic assessment

    by next quarterly earnings call
    CurrentNearing completion, all outcomes on table
    TargetConclusion shared

    Why it matters

    Determines best path for long-term value creation and addresses market challenges🌐.

    We expect to share our conclusion on that assessment by our next quarterly earnings call and remain focused on identifying the best path forward to support long-term value creation.

    Q&A highlights

    7

    Given weak industry data and unchanged macro, what gives confidence in residential water heater demand stabilization in the coming months?

    Management explained that prior years had stronger H1 pull-forward due to price increases, making H2 comps easier this year. H1 2026 volume was 51% vs. 52-53% in prior years, implying less pull-forward impact.

    “Yes, Bryan, when we kind of look at the way the industry rolls out, just recall that in '24 and in '25, we really had also price increases in the first half of the year, pulling volume into the first half, so some of the comps that we're seeing industry data, kind of through May are comping against a pretty strong front half of the year. The way we have the year laid out, the last couple of years, has been in the 52%, 53% in the front half. And this year, we have it about 51% in the front half. So we don't have quite as much pull forward in the overall outlook, and we have a little easier comps as we go into the back half of the year.”

    asked by Bryan Blair · answered by Stephen Shafer

    2 min read6 chapters

    Detailed Narrative

    01

    CFO Transition

    Steve Shafer recognized Chuck Lauber's many years of service and contributions as CFO, wishing him well in retirement. Concurrently, Carrie Anderson was welcomed as the new Chief Financial Officer, bringing extensive financial leadership experience from complex global manufacturing organizations. This transition is highlighted as another planned and orderly leadership change, reflecting the strength of the broader leadership team.

    02

    China Strategic Assessment

    The strategic assessment of the China business is nearing completion, with all potential outcomes still under consideration. Management expects to share its conclusions by the next quarterly earnings call, aiming to determine the best path forward for long-term value creation. The process has involved extensive conversations with potential parties and has provided clarity on necessary changes, regardless of whether they are executed internally, through partnership, or by another entity.

    03

    North America Water Treatment Optimization

    A. O. Smith has advanced actions to optimize its footprint and streamline the brand portfolio within the North America water treatment business. These initiatives are expected to generate annual savings of approximately $6 million to $8 million, beginning in 2027. The goal is to position the business for more efficient operations and accelerate profitable growth over time⏳.

    04

    Price Increase Dynamics

    The company announced price increases of 4% to 7% on its water heater and boiler products, which are expected to be realized midway through the third quarter. These increases were delayed by approximately one month to maintain competitiveness. Customer pre-buy activity ahead of these announced price changes accelerated a portion of expected Q3 demand into Q2, impacting the quarterly earnings profile.

    05

    AI Integration and Productivity

    A. O. Smith is actively deploying and experimenting with AI tools across various functions, including order management, warranty processing, and technical service. While still in early stages, the company anticipates AI will have a meaningful impact on both customer experience and internal productivity. Management notes the rapid evolution of AI and expects its use cases to expand, contributing to more efficient operations and improved customer service.

    06

    Water Treatment Business Strategy

    Reflecting on a decade since entering the water treatment space with the Aquasana acquisition, management views it as an attractive market driven by megatrends in water cleanliness. The company has gained significant insights into market dynamics, channels, and products. Current actions involve refining, focusing, and prioritizing efforts to enhance profitability, scale the business, and increase its contribution to the overall portfolio, with a clearer vision for future growth.

    AI-generated summary of the company’s earnings call. Not investment advice.