A. O. Smith Earnings Call Highlights Profit Strength

A. O. Smith Corporation ((AOS)) has held its Q4 earnings call. Read on for the main highlights of the call.

A. O. Smith Balances Record Profitability With China Drag in Cautious but Constructive Earnings Call

A. O. Smith’s latest earnings call painted a picture of a company executing strongly on profitability and cash generation while navigating a tougher macro backdrop. Management emphasized record earnings per share, expanding margins in key North American and water treatment businesses, and robust free cash flow that is being returned aggressively to shareholders. At the same time, they acknowledged persistent headwinds, including pronounced weakness in China, pressure in the North American wholesale channel, only modest overall revenue growth, and rising input and financing costs. The tone was confident but not complacent, with leadership framing 2026 as another year of disciplined margin management and strategic investment rather than outsized growth.

Record EPS and Earnings Growth Underscore Profit Focus

A. O. Smith delivered record diluted EPS of $3.85 for 2025, a 6% increase versus adjusted 2024 EPS of $3.73. This result was driven less by strong top-line growth and more by disciplined execution on profitability across segments. Margin expansion in North America and water treatment, coupled with cost control in the Rest of World segment, offset softness in certain end markets. The EPS performance reinforces management’s strategy of prioritizing high-margin products and channels, and shows that the company can grow earnings even when revenue growth is subdued.

Robust Free Cash Flow Fuels Shareholder Returns

Cash generation remained a major highlight. Free cash flow reached $546 million in 2025, up 15% from 2024, with a strong 100% conversion rate from earnings. Management put this cash to work for investors, returning $597 million to shareholders through dividends and buybacks, including roughly $401 million spent repurchasing 5.9 million shares. The quarterly dividend of $0.36 was maintained, and the company signaled continued capital return with plans for an additional $200 million of share repurchases in 2026. This combination of strong cash flow and active capital allocation supports the investment case even in a slower growth environment.

North America Delivers Margin Expansion Amid Mixed Volume Trends

The North America segment remained the company’s earnings engine. Full-year sales of about $3.0 billion were only slightly higher year over year, but segment earnings rose 2% to $728 million and margins expanded 20 basis points to 24.4%. Product mix and pricing discipline were key tailwinds. Within the portfolio, boiler sales were a standout, growing 8% in 2025, while water heater sales edged up around 1%. The performance shows that A. O. Smith continues to gain traction in higher-value categories like boilers while maintaining its core water heater franchise, even as parts of the residential market soften.

Water Treatment Shifts Channels and Lifts Profitability

North America water treatment posted a mixed top-line but strong margin story. Sales declined 2% as the company continued a strategic shift away from lower-margin channels. However, the targeted priority channels—dealer-direct and e-commerce—grew a healthy 10%. This pivot helped operating margin expand by roughly 400 basis points to nearly 13% in 2025. Management sees more runway, calling for another approximately 200 basis points of margin improvement in 2026. For investors, this business is evolving from a growth-only story into a structurally higher-margin platform with expanding digital and direct-to-consumer reach.

Rest of World Margins Hold Up Despite China Weakness

Outside North America, profitability held up better than revenue. The Rest of World segment’s full-year margin improved 40 basis points to 8.7%, with segment earnings roughly flat year over year. This is notable given the sharp slowdown in China, as restructuring efforts and cost controls helped offset lower volumes. Management highlighted that ongoing efficiency measures are helping stabilize earnings even when sales are under pressure. Still, investors should view this margin resilience as partly cyclical and partly structural, with future performance heavily dependent on how China demand evolves.

Leonard Valve Acquisition Adds Digital and Growth Engine

The acquisition of Leonard Valve marks a strategic move into more advanced water management and connected solutions. Leonard is expected to contribute about $70 million of sales in 2026, with roughly 30% of its revenue coming from connected or digital products and a track record of low double-digit revenue growth. The deal broadens A. O. Smith’s exposure to higher-value, technology-enabled applications, potentially improving the overall growth and margin profile of its portfolio. While the acquisition brings added leverage and interest expense, management clearly views Leonard as an accretive growth platform that strengthens the company’s long-term competitive positioning.

India and PURIT Drive International Growth Counterweight

India continues to be a bright spot within the international portfolio. The legacy India business delivered about 13% sales growth in 2025, and management expects the combined India business, including the PURIT acquisition, to grow around 10% in 2026. The integration of PURIT is expanding scale and product breadth in a market where demand remains structurally strong. This momentum in India serves as a critical counterweight to China weakness, providing a growing profit pool and reinforcing the company’s emerging-market diversification strategy.

China Demand Slump Weighs on Rest of World Performance

China was the most significant drag in the Rest of World segment. Full-year third-party China sales fell 12% in local currency in 2025, pressured by macroeconomic softness, subdued consumer demand and the discontinuation of government subsidy programs. Management guided to mid-single-digit declines in China sales for 2026, with particular pressure in the first half and only a gradual recovery expected later in the year. While restructuring actions have improved margins, China remains a material overhang, limiting regional growth and injecting volatility into results.

Rest of World Sales and Q4 Highlight Vulnerability to China

Full-year Rest of World sales declined 4% to $880 million, and the fourth quarter underscored ongoing challenges. Q4 sales fell 13% year over year to $206 million, and segment margin compressed to 7.8% from 8.1% a year earlier. The quarter reflected the acute impact of China’s downturn, partially offset by growth in India and continued cost management. The Q4 performance illustrates the sensitivity of this segment to China and suggests that, absent a stronger rebound there, Rest of World will likely remain more of a margin-defense story than a growth engine in the near term.

Wholesale Residential Channel Faces Pressure in North America

Not all North American end markets are firing. Wholesale residential water heater volumes came under pressure due to a slowdown in new construction and retailers moving more aggressively into servicing professional contractors, intensifying competitive dynamics. A. O. Smith is planning targeted actions with customers in 2026 to defend share and profitability, but the company still expects U.S. residential industry unit volumes to be flat to down in 2026. This creates a more challenging backdrop for growth in the core residential water heater business, emphasizing the importance of mix, pricing and share gains in other categories.

Modest Top-Line Growth Caps Near-Term Upside

Company-wide revenue growth remains constrained. Full-year sales for 2025 came in at $3.8 billion, only slightly higher than the prior year. Management’s 2026 net sales guidance implies modest growth of roughly 2% to 5%. With major end markets like U.S. residential and China either flat or down, the path to stronger top-line acceleration is limited in the near term. A. O. Smith’s strategy is therefore focused on mix upgrade, cost control and select acquisitions rather than aggressive volume-driven expansion.

Rising Input Costs and Higher Interest Expense Tighten the Screws

Cost inflation and financing costs are notable headwinds. The 2026 outlook assumes steel prices will rise about 10% year over year, alongside other material, freight and tariff pressures. In addition, interest expense is projected to climb to $30–$40 million due to roughly $470 million of debt used to fund the Leonard Valve acquisition, pushing leverage higher versus 2025. While the company expects to offset some of these pressures through pricing and productivity, the margin tailwind from cost deflation seen in prior periods is clearly fading, and the balance sheet will carry a bit more weight.

Strategic Uncertainty Persists Around China Operations

Management highlighted an ongoing strategic review of its China business, exploring possible partnerships or other options. While recent restructuring efforts have improved China-related margins by roughly 130 basis points, the future structure and scale of this operation remain uncertain. If the market recovery is slower than anticipated, additional actions may be necessary. For investors, this introduces some medium-term strategic risk but also the possibility that A. O. Smith could reposition its China exposure in a way that improves returns or reduces volatility.

Guidance Points to Steady EPS Growth and Strong Cash Generation

For 2026, A. O. Smith guided to EPS of $3.85–$4.15, with the midpoint about 4% above 2025. The company expects organic top-line growth of roughly 2%–5%, alongside North America margin of 24.0%–24.5% and Rest of World margin of 8%–9%. Key assumptions include flat-to-down U.S. residential water heater units, mid-single-digit growth in U.S. commercial water heaters, 6%–8% growth in North America boiler sales, and 10%–12% growth in North America water treatment. China sales are expected to decline mid-single digits. Free cash flow is pegged at $525–$575 million, supported by disciplined capex of $70–$80 million and a tax rate around 24%–24.5%. The outlook also includes higher interest expense tied to the Leonard acquisition and plans for additional share repurchases, reinforcing a steady, if not spectacular, earnings and cash profile.

In sum, A. O. Smith’s earnings call showcased a company leaning on operational discipline, portfolio mix and targeted acquisitions to drive record profitability and robust cash returns in a sluggish demand environment. While China weakness, channel pressures in North American residential markets, and rising costs temper the growth narrative, strong margins, resilient cash flow and a constructive 2026 earnings outlook underpin a cautious but positive stance. For investors, the story is less about rapid top-line acceleration and more about consistent value creation through margin management, international diversification and disciplined capital deployment.