Good day and thank you for standing by. Welcome to the First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Helen Gurholt. Ma'am, please go ahead.

Thank you, Catherine. Good morning and welcome to the A.O. Smith first quarter conference call. I'm Helen Gurholt, Vice President, Investor Relations and Financial Planning and Analysis. Joining me today are Kevin Wheeler, Chairman and Chief Executive Officer; Chuck Lauber, Chief Financial Officer. In order to provide improved transparency to our operating results, we provide non-GAAP measures. Free cash flow is defined as cash from operations less capital expenditures. We will be using slides as we move through today's call. You can access them on our website at investor.aosmith.com. I will now turn the call over to Kevin to begin our prepared remarks. Please turn to the next slide.

Thank you, Helen, and good morning, everyone. Thank you for joining us today. I'm on Slide Four and our first quarter results. Our team performed extremely well throughout the quarter, despite a turbulent macro environment, and delivered strong sales and EPS performance. First quarter sales improved 27% year-over-year driven by our 2021 inflation-related price increases and the acquisition of Giant factories, along with international volume growth. Excluding acquisitions, first quarter sales grew 23%. Our Rest of World segment performance was strong, with margin improvement over 440 basis points year-over-year, driven by China improving its operating margins to over 11%. We delivered strong results despite supply chain challenges and component shortages throughout the quarter. Weather challenges and Omicron-related labor constraints impacted our North American production in the first half of the quarter. However, shipments improved sequentially in the second half of February and in March, especially our residential water heater production, where we saw supply chain improvement, thus improving our lead times to customers. The acquisition of Giant added $32 million to the quarter's sales and $0.02 to EPS. We are pleased with the performance of the team and the integration is on track. Please turn to Slide Five. Our global A.O. Smith team delivered first quarter 2022 adjusted EPS of $0.77, a 31% increase that was driven in part by a 27% increase in sales compared with the first quarter of 2021. Our strong first quarter performance resulted from our team's outstanding operational and sales execution despite the challenging environment of component shortages, continued materials and transportation cost inflation, weather impacts, and surges in COVID-19. I continue to take pride in how my fellow A.O. Smith employees are working together to overcome these challenges to meet market demand and deliver for our customers. Excluding the impact of Giant, North America water heater sales grew 28% in the first quarter of 2022, due to pricing actions implemented in 2021 in response to rising material and logistic costs. Our full-year outlook for the residential water heater industry remains unchanged as demand continues to track to our expectations. Our full-year outlook for the commercial water heater industry is expected to be flat to slightly down. The commercial industry started the year weaker than expected, primarily due to a regulatory change that temporarily impacted orders of large electric commercial products greater than 55 gallons. Our first quarter commercial sales were also impacted by component shortages for certain gas products. We have seen demand for our large electric product improving since early in the quarter, and we expect component availability to improve in the second quarter. Our North America boiler sales grew 24% in the quarter, primarily driven by price increases to offset higher material and transportation costs, as well as demand for our energy-efficient products. We ended the quarter with a record backlog, largely composed of commercial condensing boilers, and April continues to generate strong order rates for these market-leading energy-efficient boilers, providing confidence in our outlook for the year. Our strategy to focus on innovation and decarbonization contributed to strong demand for our high-efficiency condensing boilers. North America water treatment sales grew 17% in the first quarter, as we continue to pursue additional market share in this attractive market, with a total addressable market value that we estimate to be $2.6 billion. Taking an omnichannel approach, our strategy is to grow our market share through innovation, product development, and acquisition opportunities. Our independent water quality dealers continue to play an important role in our growth by outperforming the market and gaining market share. In China, sales increased 12% in local currency compared to the first quarter of 2021, primarily due to a favorable mix as our new product offerings continue to be well-received, as well as higher sales of commercial water treatment products and replacement filters. During the first quarter, we proactively worked with our distribution to ship product into the market in advance of potential COVID-19 disruptions, which most recently is impacting transportation in certain regions. While our customers have ample inventory in place, our tracking of consumer demand in April across our portfolio and geographies is indicating a year-over-year reduction of 35% to 40%. Our outlook assumes that the COVID-19 related shutdowns in China subside during the second quarter of 2022. Despite the economic headwinds to our business in China, I'm very pleased with the quarterly performance of our China team, who are taking great steps to right-size the business, manage discretionary spend while investing in new product development. On Slide 6, please elect to two of our products in China that demonstrate a continued focus on innovation and product development. At the right top awards ceremony in Tianjin, China, A.O. Smith earned two of the coveted high-end appliance awards for the quiet fresh range hood and soft water heating hot water boiler. Under the guidance of the China Household Electric Appliances Association, our products were among hundreds of products evaluated for the awards each year, focusing on advanced technology, industrial design, market influence, energy conservation, environmental protection, and user experience. We take great pride in this recognition as yet another example of how our products set us apart as an innovative leader in the market. I'll now turn the call over to Chuck to provide more details on our first quarter performance.

Thank you, Kevin. Good morning, everyone. I'm on Slide 7. First quarter sales in the North America segment rose to $730 million, a 32% increase compared to 2021. Pricing actions, largely on water heaters, represented approximately 89% of the increase. Sales in the quarter also benefited from higher volumes of boilers and water treatment products. However, the sales increases were partially offset by lower volumes of commercial water heaters. Giant, acquired on October 19, 2021, added $32 million to North America sales. North America adjusted segment earnings of $154 million increased 21% compared with the same period of 2021. The earnings benefit of inflation-related increases was partially offset by higher material and freight costs and lower commercial volumes. Adjusted segment operating margin of 21.1% declined compared with 2021. Margin performance sequentially improved each month through the quarter as COVID-19-related absenteeism and supply chain constraints eased. North America operating margins exited the quarter at the top end of our full-year margin outlook for North America. Moving to slide eight, the rest of the world segment sales of $256 million increased 15% year-over-year. Favorable mix from new product introductions in the premium segment of the market, particularly our slim-line electric wall-hung water heaters and water treatment products that deliver hot and ambient filtered water, as well as higher sales of commercial water treatment products and water treatment filters contributed to sales gains. As Kevin noted, sales in the first quarter were positively impacted by proactive measures to distribute product into the market in advance of potential COVID-19 disruptions in China. India continues to perform well, and sales grew 36% in the first quarter compared to 2021. We view India as a long-term growth opportunity given its attractive growth characteristics and changes in demographics. Rest of the world segment earnings of $25 million increased significantly over segment earnings in the first quarter of 2021. In China, the benefits from favorable events, higher volumes, and lower advertising and selling expenses drove rest of the world segment margin to 9.7%. Free cash flow of $4 million during the first quarter decreased from the first quarter of 2021 due to higher 2022 earnings that were more than offset by higher incentive payments due to record 2021 sales and earnings and higher cash outlays for higher levels of safety stock on higher-cost inventory. Historically, we generate the majority of our cash in the second half of the year. Our cash balance totaled $579 million at the end of March, and our net cash position was $284 million. Our leverage ratio was 14% as measured by total debt to total capital. Our strong annual free cash flow and solid balance sheet enable us to focus on capital allocation priorities and return cash to shareholders. Earlier this month, our board approved our next quarterly dividend of $0.28 per share, which represents our 82nd consecutive year of dividend payments. We repurchased 1.5 million shares of common stock in the first quarter for a total of $108 million. Let's now turn to Slide 10. In addition to returning capital to shareholders, we see opportunities for organic growth, innovation, and new product development across all of our product lines and geographies. We continue to target strategic acquisitions with a focus on water heating and water treatment assets that meet our financial metrics of accretive earnings in the first year and return our cost of capital in three years. We have a proven track record of developing innovative new technologies and making prudent and focused acquisitions to drive shareholder value. Please turn to Slide 11 and our 2022 full-year earnings guidance and outlook. We reaffirm our 2022 outlook with an expected EPS range of $1.56 to $1.76 per share and our adjusted EPS range of $3.35 to $3.55 per share. Our outlook is based on a number of key assumptions, which include no further significant surges of COVID cases in the US and that COVID-related shutdowns in China subside during the second quarter of 2022 and do not significantly impact our operations, employees, customers, or suppliers. Steel indices began to stabilize at the end of 2021, and steel fell briefly early in the first quarter of 2022. However, due to the international uncertainty on commodities availability and prices, in part due to the conflict in Ukraine, steel market prices have risen again in recent weeks. Our guidance assumes that steel pricing in 2022 on an annual basis will approximate steel market pricing as of mid-April. We continue to see increases in non-steel material and transportation costs. Supply chain challenges persisted in the first quarter. We remain in close contact with suppliers and logistic providers to troubleshoot, manage, and resolve bottlenecks, but the environment remains unpredictable. Our outlook assumes we continue to see the benefit from multiple 2021 price increases compounding to approximately 50% for water heaters and continued resiliency and demand in North America for our water heating product categories, driven by replacement demand and new construction spending. As for other housekeeping assumptions, we expect to generate free cash flow of between $500 million and $525 million. For the year, CapEx should be between $75 million and $80 million, corporate and other expenses are expected to be approximately $55 million. Our effective tax rate is estimated to be between 23.5% to 24%, and we expect to repurchase approximately $400 million worth of shares of our stock, resulting in outstanding diluted shares of $156 million at the end of 2022. Based on these assumptions, the midpoint of our adjusted EPS range represents an increase of 17% compared with 2021. I will now turn the call back over to Kevin, who will provide more color on our key markets and top-line growth outlook and segment expectations for 2022, all while staying on Slide 11.

All right. Thank you, Chuck. We project revenue growth for 2022 of 14% to 16%, which is lower than our outlook in January as a result of volume headwinds in China and a slower start for commercial water heating. Our sales assumptions include approximately 8% growth in each of the last two years, which is well above the historical average growth rate. We estimate that US residential water heater industry unit volumes will be down approximately 2% from last year as industry demand normalizes. While the commercial water heater industry demand has started the year slower than expected, our guidance assumes improvement in the remainder of the year as we project that commercial industry volumes will be flat to slightly down compared to last year. We have reduced our sales growth projection in China from 5% growth in local currency to flat compared to last year as a result of economic headwinds we are experiencing from COVID-related restrictions. We have increased our North America boiler sales growth projection from 10% to 18% to 20% sales growth, driven by increased pricing in response to higher input costs. Our outlook for North America water treatment sales growth of 13% to 14% for 2022 has not changed. Based on these factors, along with the full impact of our 2021 price increases, we expect our North America segment margin to be between 22.5% and 23%, and rest of world segment margins to be approximately 9.5% or 50 to 100 basis points higher than in 2021. Please turn to Slide 12, 2022 continues to present challenges for our global teams and we are meeting them head-on. We believe A.O. Smith is a compelling investment for numerous reasons. We have leading share positions in our major product categories. We estimate that replacement demand represents approximately 80% to 85% of US water heater and boiler volumes. We have a strong premium brand in China, a broad product offering in key product categories, extensive distribution, and a reputation for quality and innovation in that region. We have rationalized the cost structure of our China business, streamlined our stores in tier one and tier two cities, and strengthened and extended our product offering in both the premium and upper mid-price sectors of the markets we serve. We are well-positioned to maximize favorable demographics in China to enhance shareholder value. We continue to be very excited about the opportunities we see in our North America water treatment business. We have strong cash flow and balance sheet supporting our ability to continue to invest for the long term in automation, innovation, new products, as well as acquisitions and return cash to shareholders. We remain focused on serving our customers and continuing to meet their needs. Our strong brands across the portfolio, combined with investing in technology to drive innovation and new product development, will further enhance our market leadership. We are confident in our ability to capitalize on opportunities as we continue to execute our strategy. With that, we conclude our prepared remarks and we are now available for your questions.

We have our first question from Matt Summerville with D.A. Davidson. Please go ahead with your question.

First, could you guys comment on what you think the market actually did from a volume standpoint in the US for residential and commercial water heaters in Q1 and how you feel you performed relative to the market given that you experienced some COVID absenteeism, etc., and I would assume your competitors did as well, but if you could comment on that, that would be helpful and then I have a follow up.

Yeah, Matt, this is Kevin. I'll comment on that. We believe the market is going to be coming in on the residential side around that 2% range, plus 2%. Commercial will be down, I'm thinking somewhere in the 20% range, and there are some reasons for that, as we outlined regarding a regulatory change. So that's how we see the market coming in for the first quarter in the US. As for how we did, we certainly got our fair share of both markets. We performed again, we started out the year again with a lot of COVID and weather. So, as we outlined in our remarks, the first month and a half were pretty tough. We had a really strong finish, particularly our residential teams did very well in the back half, particularly in March. So we feel we did well, maybe a bit better than the market, but overall we certainly got our fair share of both the residential and the commercial business.

And then just a follow-up on China. I think you mentioned sales tracking down 30%, 35% thus far in April. Is your guidance assuming, and well, I guess what assumption do you think is most appropriate for us to be thinking about in Q2? Have you seen that 30% to 35% start to improve, or is it getting worse? I guess I'm trying to think about how to frame up China for the second quarter specifically to get to the full year kind of flat.

Okay. Yeah. Hey Matt, it's Chuck. Yeah, China. So that 35% to 40% down in China, consumer demand, just to kind of frame that, that's April, that's what we're seeing in April, which is sequentially worse than what we saw in the first quarter. The way we think about it is, and by the way, that sector of what we're measuring here is consumers. So that's about 75% of our business. The commercial side does not fall into that metric. It's more the consumer spending that we're referencing there. We haven't really seen a change in that as we look through the month of April; it's been fairly steady at that rate. In the first quarter, it was down by about 10%, so sequentially, it was worse. The way we think about it, there are some pretty heavy lockdowns right now in April. So our assumption or our guidance is that that does subside as we go through the year. That does improve as we get towards the end of the second quarter, and sequentially, maybe the third quarter looks something like the first quarter as far as consumer demand and then gets more back to normal in the fourth quarter. So Q2 will certainly be the lowest quarter of the year for us when you think sequentially, and Q4 once again normally should be the best quarter of the year in China.

Got it. Thank you guys.

And we have our next question from Scott Graham of Loop Capital Markets. You may ask your question.

Hey, good morning. Thanks for taking my question. So I can understand some of the puts and takes here on your Slide 11, and essentially if we were to take out the adjustment for the pension, your guidance is just a little bit lower. That's just the math. And like, if you had to kind of say, what are the larger swing factors in that? Would you essentially say that China and slower starts of the year in North America? Or how would you frame that for us?

Yeah, Scott, I'd say our guidance, our outlook on the adjusted EPS has not changed. So we're kind of staying tracked right on that. Kind of the puts and takes on that is certainly we're seeing the headwind in China. So we've got China where we were saying 5% up in local currency being roughly flat, and China for the first quarter starts out pretty strong. So first quarter, as we mentioned, we proactively put product into the channel. So that is expected to stay in the channel for the majority of the year, just as kind of protection, to ensure product is out there if there are any transportation interruptions. Also, discretionary spending in China ran pretty well. They're able to flex a bit better and be a little more nimble on spending since we've taken some costs out and restructured the business. So we expect that positive SG&A spending to be a lever we can pull going forward. On the volume side, it's really largely China offset by a bit of spend that China can do. In North America, when we look at North America, we improved our margins by 25 basis points. The way we're thinking about that is we're coming out of the quarter at about that run rate in March when residential production kind of hits a better pace when we have components we can perform pretty well. So the puts and takes are China, a little bit of headwind on sales. We got a little bit better margin in North America. Our backlog is still strong on the boiler side. Kevin mentioned the boiler condensing product that's out there, larger product, good margin product. We've got a little bit of ground to make on commercial water heating, so that should help our mix a bit. As you go throughout the year, we would expect that to be a bit of help compared to Q1. And we talk a lot about the water heater pricing, but if you take outside of water heaters in North America and think about kind of the pricing on other product categories, we've got to announce price increases, and I'll just make the range of 2% to 12% out there that becomes effective as we go through the year that helps a bit on the margin side as we go through the back half of the quarter. We still see commodity costs high. We got a little relief on steel, but commodity costs made that up and increased. So our outlook really hasn't changed much on costs. We expected that to go up in our January outlook, and it has, so we're still seeing pressure on the cost side.

I got it. And Chuck, my apologies, I am now looking at the quarter-ago presentation and that pension adjustment is in there. So guidance doesn’t change. You get it. And thank you for that comprehensive response. That was awesome. Let me ask you a little bit about the supply chain, and I know that you're always kind of loathe to comment on price cost, but your wording in North America suggests that you were kind of price-cost positive here. And so if you can confirm that grade, and then secondly, you said the supply chain constraints are getting easier in North America. Can you explain that a little bit?

Let's talk about the supply chain first. As we frame it, it's stable; it has improved. We saw our residential components and so forth improve in the quarter, and we also see some improvement coming in, in the second quarter, on our commercial, on particular components. So, but overall it's been stable. It does improve, particularly on the material side. Components are still a bit unpredictable. So it's getting better, but we still wake up every day and still at times we'll have issues that we have to work through. But again, our teams are working very closely with our suppliers. In fact, I think we know our suppliers better than we ever have now in the last couple of years, so it is moving forward. We're going to have these sporadic issues we have to deal with. But I think that the key takeaway here is we just don't see any major disruptions, and before there's even a follow-up question, I just want to talk about Ukraine. We have no direct suppliers out of there, and we're seeing maybe some transportation issues, a small amount in Europe that we have to deal with. China, I think it's still a little early. We stay very close to China. Of course, we have a decent supply there based on some of our components, but nothing in the early term here that we see any issues with. Maybe some medium breaks down the road, but again, no major disruptions in our supply chain that we can forecast at this time, so getting better, and all factories are running well. That's in China as well, just to follow up on that. We'll continue to work on some of our backlogs. We have large backlogs and boilers; we have large backlog in commercial water heating. We anticipate that the second quarter will be able to make a dent in both of those, and they are certainly upsides for us as we go through the year, as Chuck mentioned.

Again, thank you very much for your comprehensive answers. Both of you. I'll get back in the queue.

And speakers, we have our next question from Susan Maklari of Goldman Sachs. You may ask your question.

Thank you. Good morning, everyone.

Good morning.

I guess just staying on commercial for a bit, can you talk a little bit more about the regulatory changes that came through, and I know you mentioned that you do expect that that’ll incrementally sort of catch up as we move through the next couple of quarters. Can you just give some details on the relative changes that you're making there and how to think about some of those details?

Yeah. Thank you for asking that question. I really think you need some explanation. The regulatory change we're talking about was on the greater 55-gallon electric. Without getting into the details, the change increased the KW wattage and requires a different SKU. What happened though, our industry did anticipate that going into effect. We were anticipating the old regulatory to be carried over and extended into the first part of this year. It wasn't. From our point of view, it caught the industry a bit flat-footed; not so much on the manufacturing side because we were all prepared, but I think from just understanding the regulatory change on the distribution side. So if you look at it, we had to get out there and kind of update our customers on what the new SKUs would be and so forth. We saw January very slow. Where we were working through the regulatory change being implemented in getting to our customers, we saw February improve, and then when I can just speak from our point of view, in March, our run rate on greater than 55-gallon commercial was basically our run rate from prior year. So we look at this as kind of a temporary kind of gap, if you will, that will close itself and normalize as we get through the year. So it was just a situation where the industry had to recover, but the fundamentals of the category and the fundamentals of the business remain strong, and that's why we're looking for the balance of the year for that to stabilize and normalize. So that's a quick snapshot of what happened in that regulatory environment.

Yeah, no, that's very helpful. I appreciate all that color. And then I guess on the residential side with the water heaters, appreciating that this is a bit further removed from you, but any commentary on inventories in the channel and just where those kind of sit given all the moving parts that the industry and yourselves obviously faced in the first quarter?

We don't have great view into the inventories and the channel. So what I'm going to tell you is anecdotal industry experience, that type of thing. On the commercial side, we believe the inventory is still a bit light in the channel. And that's indicated by our backlogs and just the activity that we're seeing there. So inventory in commercial is a bit light; we hope to make that up as we improve our production in the upcoming months and quarters. And I'll just probably add on residential. We probably think it's about where it needs to be. It may be even a bit heavy because I think people are hedging themselves. Customers are hedging themselves in case of any further disruption. So that's our view. Again, residential is probably where it needs to be, a little heavy; commercial has still some room. We'll take care of some production needs and get some products back to our customers' inventories.

Okay, great. Thank you. And good luck with everything.

And our next question from Nathan Jones of Stifel. You may ask your question.

Good morning, everyone.

Good morning.

I'll just start off following up on the residential inventory there. Noted that it might be a bit heavy with safety stock. I think that's going to be one of the questions not just for your business, but for a lot of businesses as we go forward, is, are customers holding safety stock and are they going to continue to hold that safety stock more permanently? Or will it normalize as customers gain more confidence in their supply chains, just interested to hear your opinion on that and what you're thinking about the potential inventory levels more been a long time at your customers?

Well, as I mentioned, I would agree with what you just said, quite frankly. I think as lead times come down and things normalize, now when that is, I'm not going to predict. But right now, yeah, there could be some stock, but again, lead times are going to have to come down. First things are got to be a lot more stable. I don't think it's heavy stock out there, safety stock that we think, but it is a bit higher than maybe normal. But my view, I probably most distributors from my talk to will probably be a bit conservative in making sure they're going to lean in on having product and inventory to service their customers considering the last year or so that what they've gone through and what we've gone through. So that's our view. Again, we can't predict what's going to happen six, 12 months from now, but that's where we're at today.

Thanks for that. Maybe I could just ask, where are your lead times today? Where were they last year, or late 2020 when they were at their highest, and what were they normally before COVID?

Are you talking North America or US right now? Yeah.

Yeah. North America residential water heaters primarily.

Lead times today are about 20 days; that is our goal, and what we have historically targeted is 15 days. When you look back in the tougher times, they were probably 2X or more. We've just been able to bring those down and ramp up production again, as materials and components became more available. On the commercial side and we target really the same type of lead times. Right now, our commercial lead times are at least 2X to 3X.

That's a great call for me. Thank you very much for taking my questions.

And our next question from Andy Kaplowitz of Citigroup. You may ask your question.

Maybe just talk a little bit more about China. Can you give us an update on the inventories in the channel? I know you said you put product in the channel. So, how are you thinking about the channel itself given it was sort of coming off five-year lows and maybe a little more color around your ability to drive self-help in China with new products, growing into those Tier 3 to Tier 6 cities? I think you mentioned SG&A cost out, how much could all that other stuff sort of help you as you go through this uncertain period?

Yeah, so a channel inventory in China. So most of the sales increase for the quarter was putting product into the channel. The level at the end of Q1 is about a month and a half. That's not really out of line compared to it was, certainly higher than your end, which was at kind of a five-year low. Felt it was prudent to do that to make sure we had channel inventory available in case there was transportation interruption. So the way we're thinking about that in our outlook for the year is that most of that inventory will stay in the channel. We're not really bringing it back down to kind of the low level it was as we exited 2021. So we expect it to stay there just due to the uncertainty in COVID potential interruption, even though our outlook projects it will subside a bit as we go through the rest of the year. The levers in SG&A and the amount in the first quarter of SG&A discretionary spend that was mitigated is in the $3 million to $4 million range. So we've taken out a large number of stores in Tier 1 and Tier 2, over 1,000 last year, and that reduces the cost and makes those stores more efficient. It gives us a little more flexibility on how we spend SG&A, so those are kind of the inventory levels and the SG&A side. The progress on tier three through six cities is on track. We continue to see a very low-cost model and continue to have, think of those again, more counter space than storefronts in the Tier 1 and Tier 2 cities. But largely on track to continue to add to those cities.

Appreciate the color. And then maybe just a little more color to the strength you're seeing in terms of your North American boiler business. Obviously, you increased guidance there, but how much of the improved outlook is your customers really focusing on these commercial condensing boilers, given their energy efficiency focus in a higher natural gas price environment, and could you see further inflation as gas prices stay high?

Well, again, this will be anecdotal again. We don't have any great data there, but it just would be natural as energy costs have gone up and a movement for decarbonization and reducing your footprint; that plays really well into our condensing boilers. So we feel there has to be some impact to that. Certainly, the return on investment now on our condensing boilers today versus they were just months ago is significantly better. So it's playing a role, and I think we see that because of just the order rate that we have on our condensing boilers coming in. Our backlog has been high and continues to be high, we're shipping, and doing quite well; that's why we raised the guidance. Activity in the institutional side and activity in the hospitality side, even still activity in the education side is good, and our quoting continues to be good. So overall, I think there's one, the market is maybe making up for lost time in the last couple of years of COVID. But I do think there is a swing towards condensing high-efficiency products for again, paybacks, but just as much for decarbonization.

Appreciate the color.

And speakers, our next question from Damian Karas of UBS. You may ask your question.

Hi, good morning, everyone.

Morning.

Wanted to ask you about pricing. Based on guidance, it doesn't seem like you've taken any further price actions since 2021. But you did mention some of the ongoing freight and other supply chain issues. So just wondering if there's anything else that you have executed or anything on the pricing front that is being planned at the moment?

Yeah, let me kind of frame our outlook on pricing or the way we were thinking about it. Back in January, we projected that our other material costs would continue to go up and they have. So, our assumptions going out in January were that they would, and we really have seen that play out on the other material costs. So, when we speak of that, that's kind of baked in already, and it hasn't changed our outlook much, although we continue to see the pressure on the other material costs, freight, and logistics. The second part of that again, I'm sorry, is that, does that answer your question, or was there a second piece?

Yeah, basically just was trying to get a sense if there's any pricing.

Oh yeah, yeah. We did have other pricing. So, when you just kind of park water heaters for a second and look at the rest of our businesses in North America. So, water treatment, boilers, we've got a range of price increases on different products, and it's a pretty broad range, but in that 2% to 12% price increases that we've announced beyond 2021 that are just coming into effect and will be effective in the back half of the year, it was needed for those other material costs going up. So some of those pricing actions will impact us as we go through the rest of the year.

Okay. Got it. That's helpful. And then, could you maybe just elaborate on the weather impacts that you spoke of, maybe quantify that, and I don't know, it just seems like these adverse weather events are a normal part of the business, thinking about the various floods and tornadoes and other things that have happened over the last few years, but maybe you could just speak to what you experienced.

Yeah. I'll touch on that. Wasn't any pleasant tornadoes, but it really comes down to the cold weather, snow, freezing rain, and it just impacted our plants, particularly in Tennessee. If you look at it, you take a couple, three or four days off because of that; it has a productivity issue for us to move forward. So that's part of it. We had that happen in Q1 of 2021, and it just seemed to spill over into 2022. We managed through that. And really, I would tell you the quarter, the real impact we had from a plant standpoint was we had COVID, and we mentioned that in our January call; we had absenteeism in our factories about 7% in COVID, and that again is a significant amount of people that we had to overcome. Then again, as we got through January, people started to recover and get back to work through February. We got back on track. So weather is part of it, but I would tell you COVID was probably the bigger part.

Understood. Thanks for the color. Best of luck.

Thank you.

And our next question from David MacGregor of Longbow Research. You may ask your question.

Yes. Good morning, everyone. I guess I just want to go back and maybe try and create a little more clarity around the pricing. You had talked about 50% price increase in 2021. Can you just remind us what the carryover price is? I realized there's been some additional pricing initiatives in 2022, but just how much of that 2021 50% carried over into 2022?

Yeah, it's roughly half on the water heating side.

Okay, you get the benefit of that just to be, I'm sorry, go ahead.

Yeah, I guess it's 50/50.

Right. And you get the benefit of that, just to be clear, you get the benefit of that from the beginning of the calendar year through the year.

It's largely in the beginning of the calendar year. The last one was announced effective November 15, 2021. So with lead times, there may be a little spillover into January for the most part; it's running pretty much effective.

Okay, good. Thank you for that. And then just on the North American operating margins, the 21.1, how much of the 200 basis point decline was due to the lower commercial volumes?

About for Q1, it's about 50 basis points. So, we kind of look at Q1 and see that 50 basis points on commercial water heating. It's about 50 basis points on Giant; as we recall in the past, Giant is largely residential product, and so that's a little bit lower margin. So when you add that, that brought down a bit.

There's a hundred basis points between the two. Thank you very much. Great. Thank you.

And we have our next question from Jeff Hammond of Keybanc. You may ask your question.

Hey guys, this is Mitch for Jeff. I was just wondering if you could walk us through your current expectations of margin cadence through the year, given all the moving pieces and if you still have your expectation of one quarter being the trough for margins in 2022. Thanks.

Well, 2022, and this is split into rest of the world separately from North America, and I kind of mentioned earlier, China, Q2 is going to be, we believe in our outlook, the toughest quarter because of kind of where we're starting out in April. So I would say, kind of cadence would be China would be a bit challenged in Q2, kind of start to normalize in or really largely normalize in Q3 and then Q4 be the best quarter. North America, if you think about kind of North America, we've got steel in the first quarter, just to remind everybody, steel was highest in the first quarter that we see throughout the outlook. So a bit of the margin pressure on that 21.1% in North America is a little higher steel. That kind of rolls off slightly as we go into the next quarters, but as I was mentioning, other commodity costs and other costs sort of fill that gap. But margins for the back half of the year, sequentially, Q3 and Q4 are a little bit stronger, and that's typically where we have kind of the strength in our boiler business. The back half of the year, we see the cadence of the year playing out fairly normal for the boiler side of the business being Q3 and Q4 a little stronger than the first half.

Okay, great. That's helpful. And then just on supply chain, I was wondering if you could give us some color on areas where you're seeing supply chain get better, and if there's any differences in commercial versus residential and NA versus the rest of the world? Thanks.

Yeah, right now we see our supply chain on the residential side improving, and that's really on the material side of it, and commercially, we expect Q2 to improve. We do have some really nice line of sight right now into some of the components that have been causing us some production issues, and they look like they will be resolved, at least in Q2, as we go forward. So overall again, I step back on our supply chain; it is unpredictable, but our teams managed it really well, reaching out to the organizations and the companies that deliver to us, and then even our suppliers stepping up and doing the things they have. So we're getting better because our suppliers are getting better. Again, we'll work through some of the Ukraine issues and so forth that we talked about. But overall, I don't see supply chain being an issue for our business as we go forward, particularly in the second quarter, just by kind of the view that I've had from our procurement and supply chain group. We've managed through most of those challenges, and again, anything's unpredictable that we can change, but we feel pretty good at where we're at. We don't see any of the supply chain issues disrupting our production or causing any issues throughout the year.

Okay, great. Thanks for taking the questions.

And speakers, there are no more questions on queue. You may proceed.

Thank you, Catherine, and thank you all for joining us today. Let me conclude by reminding you that our global A.O. Smith team delivered strong sales and earnings in the first quarter despite many challenges. We look forward to updating you on our progress in the quarters to come. In addition, please mark your calendars to join our presentations at six conferences in the second quarter, Oppenheimer on May 4, Goldman Sachs on May 10, Keybanc on June 1, Loop Capital on June 2, William Blair on June 7, and UBS on June 8. Thank you and enjoy the rest of your day.

This concludes today's conference call. Thank you all for joining. You may now disconnect.