A. O. Smith raises 2025 EPS guidance to $3.70–$3.90 and signals China business strategic review amid cost and market headwinds

Earnings Call Insights: A. O. Smith Corporation (AOS) Q2 2025

Management View

Stephen M. Shafer, newly appointed CEO, emphasized, “We believe A. O. Smith has an outstanding foundation for profitable growth as a global water technology leader. I am both honored and excited to build on this foundation as the company’s new CEO, and I’m confident in our company’s future.” He highlighted a proactive approach to smoothing production schedules in North America to achieve operational efficiencies and noted that a pull-forward impact in 2025 was less pronounced compared to 2024.
Shafer announced an assessment process for the China business, stating, “We are also announcing today that we are initiating a process to further assess our China business in an effort to ensure that it is best positioned to compete and succeed in the future. We intend to evaluate a broad range of options… including strategic partnerships and other alternatives.”
Product innovation was highlighted, including the launch of the Adapt SC gas tankless water heater and the HomeShield Whole House Water Filter. Shafer described the upcoming Cyclone Flex commercial water heater as a key product for regulatory changes in 2026.
Charles T. Lauber, CFO, reported, “We delivered sales of $1 billion in the second quarter of 2025, a decrease of 1% year-over-year. Earnings were $1.07 per share, a 1% increase compared to the prior period.” He noted an increased share repurchase plan for 2025 and continued focus on acquisitions that strengthen the core business.

Outlook

The company raised the midpoint of its 2025 EPS outlook to a range of $3.70 to $3.90 per share, with the midpoint representing a 2% increase over 2024 adjusted EPS. Guidance assumes a 15% to 20% increase in steel costs and a 5% rise in cost of goods sold from tariffs for the full year, with mitigation strategies including footprint optimization and strategic sourcing.
Projected 2025 residential and commercial industry unit volumes are approximately flat to last year, unchanged from prior guidance. China sales are expected to decrease 5% to 8% in local currency, and North America boiler sales growth is forecasted at 4% to 6% for 2025 (up from 3% to 5%). North America water treatment sales are still forecasted to decline 5%, with a projected 250 basis point margin expansion.
The addition of Pureit is expected to add $50 million in 2025 sales, with limited bottom line contribution as integration continues.
Full year sales outlook was raised from flat to 2% to now an increase of 1% to 3% compared to last year.

Financial Results

North America segment sales were $779 million, down 1% versus the prior year, with higher boiler sales offset by lower water heater volumes. Segment operating margin increased by 30 basis points year-over-year to 25.4%.
Rest of the World segment sales were $240 million, down 2% year-over-year, including $16 million from Pureit. The legacy India business grew 19% in local currency, while China sales decreased 11% (constant currency). Segment operating margin was 10.5%.
Operating cash flow for the first six months was $178 million, with free cash flow at $140 million. Net debt stood at $126 million and the leverage ratio was 14.1%.
The company repurchased 3.8 million shares for $251 million in the first half, raising planned full-year repurchases to about $400 million.

Q&A

Michael Halloran, Baird, asked about the timing and rationale for the China business assessment. Shafer responded, “We’re just at the point where we want to just broaden the horizon of options to explore… it came time where we wanted to open the aperture, look at other options and make sure that we’re fully informed about what’s the right path forward for the business.”
Saree Boroditsky, Jefferies, queried water heater shipments and market share dynamics. Lauber replied, “We would expect that our share performance would be a bit better in the back half of the year due to the smoothing and the working with our customers we did on order management in the front half of the year.”
Damian Karas, UBS, discussed volumes and competitive dynamics in China. Shafer explained, “Consumer confidence remains very low in China, and that is also highly connected to retail — or sorry, property values in China… local competitors have gotten much better.”
Susan Maklari, Goldman Sachs, probed efforts to manage volume pull-forward and strategic portfolio management. Shafer described ongoing portfolio evaluation and capital deployment for new platforms, with M&A as a core component.

Sentiment Analysis

Analyst questions featured a cautious and probing tone, especially regarding China strategy, margin outlook, and tariff mitigation, as well as the sustainability of market share and pricing actions.
Management maintained a confident stance in prepared remarks, with Shafer stating, “We are confident in our future and our proven ability to achieve profitable growth,” but displayed caution and openness to strategic alternatives during Q&A, particularly when discussing China and cost headwinds. Lauber exhibited detail-oriented and measured responses regarding margins and operational adjustments.
Compared to the previous quarter, both analysts and management showed increased focus on China strategy and cost headwinds, with a slightly more cautious tone overall.

Quarter-over-Quarter Comparison

Guidance for 2025 EPS was narrowed and raised at the midpoint compared to Q1, reflecting increased confidence despite persistent cost and market challenges.
Strategic focus shifted more publicly to evaluating the China business, with the current quarter initiating a formal assessment of strategic options, including partnerships or other alternatives.
Analysts in both quarters pressed on tariffs, pricing, and China, but Q2 saw more detailed exploration of the potential for structural changes in China and the impact of cost inflation.
Key metrics such as North America boiler sales growth guidance were increased, while water treatment and China sales guidance remained consistent.
Management’s tone shifted from transition and operational stability in Q1 to a more forward-looking, strategic, and cautious approach in Q2, especially regarding international exposure.

Risks and Concerns

Ongoing headwinds in China, including economic challenges, limited stimulus outside Tier 1 and 2 cities, and intensifying local competition.
Expected 15% to 20% steel cost inflation and a 5% increase in cost of goods sold from tariffs, with full impact in the back half of the year.
Margin pressures expected in the Rest of World segment due to persistent weakness in China.
Potential for continued muted demand and prebuy effects in North America water heaters.
Management mitigation strategies cited include cost controls, restructuring, footprint optimization, and proactive customer engagement to smooth production.

Final Takeaway

A. O. Smith’s Q2 2025 call underscored a sharpened focus on operational efficiency, product innovation, and portfolio management under new CEO Stephen Shafer. The company raised its full-year EPS guidance despite persistent inflation and tariff headwinds, while launching a strategic review of its China business to address prolonged market weakness. Management remains confident in the company’s ability to achieve profitable growth, supported by strong performance in North America boilers and disciplined capital allocation, but acknowledges the need to adapt to shifting global challenges and competitive pressures.

Read the full Earnings Call Transcript