Oct 29, 2026 earnings call — China sale and North America-focused shift
Company announced sale of majority of China business (81% of $400 million) and Q3 sales $941 million with EPS $0.93.
Revenue $0.9B (est $1.0B) · EPS $0.93 (est $0.90)
Key quotes
"CPE will acquire 81% of a business valued at $400 million."
"To address these pressures, we recently announced an additional price increase of up to 9.5% on most of our water heater products. Effective in December."
"Organic growth was driven primarily by a 13% increase in boiler sales and 5% growth in water treatment."
Analyst Q&A 10
Guidance change and China removal
Q (Mike Halloran · Baird): Analyst asked how the current guidance compares to the July guidance, what changed on water heaters and boilers, and what changed on price versus cost entering Q4.
A: Management said they removed China from the current guidance because China assumptions changed and results were well below expectations. They said guidance ex China is within the ranges of the July guidance, with boilers stronger and some softness elsewhere. They warned Q4 has more variables and uncertainty, including industry price actions.
"So as you know, we took China out of the current guidance we are not providing a direct walk from the July guidance because the assumptions for China have materially changed since-- even when we had last talked back in July." — Carrie L. Anderson (CFO)
Price vs cost and boiler growth drivers
Q (Bryan Blair · Oppenheimer): Analyst asked what incremental price realization is needed to reach price-cost parity in early 2027 and how much of boiler upside is demand versus share gains.
A: Management said their goal is to offset inflationary cost pressures with a mix of pricing and cost management, and noted time lags for price realization. They said they announced a 9.5% water heater price action and will continue balanced pricing and cost controls. For boilers, management cited three drivers: a strong high-efficiency portfolio, pricing benefits, and share gains partly from competitors exiting the market, and they expect growth to normalize to about 4% to 6% over time.
"I mean, it is. What I would say is we always are looking to price through inflationary cost pressures that we cannot offset ourselves." — Stephen Shafer (CEO)
Tariff refunds and M&A pipeline; replacement demand
Q (Matt Summerville · D. A. Davidson): Analyst asked how much tariff refund was in Q2 and Q3 and expected in Q4, asked about M&A pipeline actionability now that China is being divested, and then asked about replacement market views for 2027.
A: Management said Q2 refunds were a couple of million dollars, Q3 refunds were about $10 million, and they do not expect anything material in Q4. They said the M&A pipeline is strong and focused on core North America, water treatment, and water management, and they remain disciplined. On replacement demand, they said the replacement market is a little soft but relatively stable, with proactive replacement still over 30 percent.
"In the second quarter, was a couple of million dollars, so not material impact to our second quarter results." — Carrie L. Anderson (CFO)
Backlog from production move and new dealers
Q (Susan Maklari · Goldman Sachs): Analyst asked which product categories have elevated backlog exiting the year and how management expects to work that through in 2027, and also asked about the 30 new dealers and what types they are.
A: Management said the backlog is specifically in water treatment after they ceased manufacturing at Groveport and transferred production to two other facilities; they expect to ramp those facilities and work through backlog into 2027. They said new dealers are independent dealers seeking a reliable OEM, and A. O. Smith offers product, service, technical support, and demand-generation help as the value proposition.
"And it relates to the fact that we did cease manufacturing. At our Groveport facility and transferred that production to 2 other facilities, and it is really just associated with the ramp up of production at those at those at those current facilities taking on the additional work." — Carrie L. Anderson (CFO)
Sustainability of cost savings and channel inventory
Q (Nathan Jones · Stifel): Analyst asked whether the $6 million other cost savings is structural or one-time, and asked how channel inventory might finish the year given price increases and pull-forward effects.
A: Management said the cost savings come from their AOS operating system and are intended to be repeatable and sustainable as they expand the program. On channel inventory, they said there is uncertainty in the final months because of recent and announced price changes, holiday timing, and competitor actions, but they will work closely with customers and are ready to serve demand. They also said order lead times remain stable.
"Our AOS operating system that I have talked about, and that is our model for how we go after and eliminate waste and deploy lean across the company." — Stephen Shafer (CEO)
China sale proceeds and royalty; price increase industry view
Q (Jeff Hammond · KeyBanc): Analyst asked what the cash proceeds are from the China deal, how the royalty works and whether there is a plan to exit the 19% stake, and asked about difficulty pushing the 9.5% price increase and competitor responses.
A: Management estimated after-tax proceeds plus repatriated cash of about $350 million to prioritize toward returning cash to shareholders on closing and said the royalty present value was about $100 million, noting a $500 million totality figure. They did not disclose specific royalty rates but said they are consistent with arm's length brand licenses, and they see the 19% retained stake as a way to participate in future upside. They also said they have seen competitor announcements for similar price changes and believe the price change is required for industry profitability.
"I would say right now, we are estimating that the after tax proceeds plus the repatriated cash would give us about $350 million to prioritize towards returning cash to shareholders as that is really what we wanna prioritize when we get it closed." — Carrie L. Anderson (CFO)
Growth profile after China exit
Q (Brendan Shea · JPMorgan): Analyst asked how to think about through-cycle growth for A. O. Smith once China is out of the portfolio and what needs to go right to grow above historical rates.
A: Management reviewed the core North American franchises: boilers (Lochinvar) and commercial water heaters are strong and positioned to grow, with regulatory changes offering long-term opportunities. They said growth will also come from the newer platforms—water treatment and water management—and from M&A and innovation in connectivity as they build those businesses.
"You have seen the growth profile of our boiler business. That is a terrific franchise Our Lochinvar business is a great business. And with the product offering and the value proposition and the technical support we supply." — Stephen Shafer (CEO)
Customer feedback on big price increase
Q (Scott Graham · Seaport Research Partners): Analyst asked what customer feedback has been on the large water heater price increase and whether new entrants could use it to gain territory.
A: Management said the industry has a history of passing through major cost moves, especially when steel is the driver for tank water heaters, and competitors face the same steel-based cost pressure. They said new entrants are taken seriously but success requires a comprehensive model—product portfolio, channel inventory, technical service and brand trust—which makes small-scale entry difficult.
"Well, I would say the industry has had a track record of meaningful price changes, and often the driver it has been steel." — Stephen Shafer (CEO)
Leonard Valve delays and M&A appetite
Q (Andrew Kaplowitz · Citi): Analyst asked for more detail on Leonard Valve project delays and how that business should fare into 2027, and whether to expect more M&A using divestiture cash.
A: Management said Leonard Valve has two parts: mixing valves and boiler controls (heat timer). The mixing valve side continues to perform very well and provides growth, while heat timer is seeing near-term project delays tied to policy and regulatory decisions, which they view as temporary. On M&A, they said repurchases will not preclude growth investments, they remain disciplined, have a robust pipeline, and will act when timing and assets align.
"In terms of the kind of the performance that we talked about today, the mixing valve side of the business continues to perform very well. And as we. As expected and is providing good growth for our business going forward." — Stephen Shafer (CEO)
China cash repatriation timing
Q (Ryan Connors · Northcoast): Analyst asked if the $80 million repatriated is the entirety of China cash and whether the estimated $350 million will be repatriated immediately after closing.
A: Management said there is cash needed to run the China business so the transaction brings back excess cash rather than all cash, and the royalty stream could provide future payments as the business returns to growth. They said their intent is to prioritize around $350 million to share repurchases after closing and that money will come back and be free and clear for repurchases upon closing.
"No. Again, I would I would just say that our intent is prioritize my estimate of around $350 million to share repurchases after closing." — Carrie L. Anderson (CFO)