Good morning. The company that makes a large share of the water heaters you install just showed, in one line of its own release, what happens when a price increase and a material cost increase meet.
Top story — Priced up, margin down
A. O. Smith reported second-quarter net sales of $1,004.3 million, down 1 percent against $1,011.3 million a year earlier. Net earnings were $124.9 million against $152.2 million, and diluted earnings per share were $0.91 against $1.07 (A. O. Smith Corporation, second quarter 2026 results, 30 July 2026).
North America — the segment your supply house buys from — did better than the group. Sales rose 5 percent to $820.5 million, driven by 21 percent boiler sales growth, carryover pricing, and a $16 million contribution from Leonard Valve, acquired in January 2026. Working against all of that: lower residential water heater volumes. Excluding the acquisition, organic sales grew 3 percent (A. O. Smith).
Now the margin. North America segment margin was 21.6 percent against 25.4 percent a year earlier. Adjusted for $22.6 million of restructuring and impairment in the water treatment business, adjusted segment margin was 24.4 percent. The company’s own explanation for the adjusted decline: “higher steel and other input costs largely offsetting realized pricing in the quarter” (A. O. Smith).
Read that again. They put prices up. They got the increase. Steel took it.
Quick hits
They trimmed the year. Full-year 2026 sales growth guidance was narrowed to 2 to 3 percent from 2 to 4 percent, and adjusted EPS to $3.70-$3.85 from $3.70-$4.00, citing “continued softness in residential water heater industry volumes” (A. O. Smith).
Boilers are carrying the segment. Boiler sales grew 21 percent while residential water heater volumes fell (A. O. Smith).
China is a different weather system. Rest of World sales fell 19 percent, with China down 28 percent in local currency (A. O. Smith). It is not your market, but it is why the group number looks worse than the North American one.
The Tip — Reprice off this month’s invoices, not last year’s
A price increase that a material cost increase cancels out is not a price increase. It is a paperwork exercise that makes the profit and loss look busy.
Here is the check, and it takes about twenty minutes. Pick your five highest-volume material lines — tanks, copper, fittings, valves, whatever moves. Find what you actually paid for each of them this month, and what you paid twelve months ago. Then find the markup you are currently applying, and see whether it is a percentage of the old cost or the new one.
Most shops set a markup once, against a cost that has since moved, and never revisit it. If your supplier’s own margin is being squeezed by steel, some of that is arriving in your invoices whether or not anyone rang to tell you.
The second half of the check is your quote validity period. If your quotes are open for 30 days on materials whose cost is moving, you are carrying the supplier’s risk for free.
Tool watch — [Not sponsored]
If residential replacement work is soft where you are, A. O. Smith’s split is the hint: the growth was in boilers, not houses. Worth asking whether you hold the certifications to quote the commercial side of the same work you already do.
That’s the callout. See you next time.
The Callout — the business brief for the trades. We label every commercial placement: [Sponsor], [Affiliate], or [Not sponsored]. Today’s Tool watch is our own honest read — no one paid for it. 231J Ramparts Road, Te Anau 9600, New Zealand · Unsubscribe anytime.
Sources: A. O. Smith Corporation — “A. O. Smith Reports Second Quarter 2026 Results,” 30 July 2026, Exhibit 99.1 to Form 8-K filed with the U.S. Securities and Exchange Commission.