A. O. Smith China Demand Outlook and 2026 Performance Expectations

China: current demand and backlog signals

1) Demand is weak and expected to remain weak through 2026

• Q1 China sales fell 17% (local currency), which management said was in line with expectations and tied to discontinued “most government stimulus programs” plus continued low consumer confidence, leaving water heater and water treatment markets challenged (especially the premium portion). ¹
• For the full-year outlook, management updated China guidance to be down low double digits in local currency vs. last year, and said headwinds are expected to persist throughout the year due to continued low consumer demand, severely limited government stimulus, and ongoing competitive pressures. ²
• On a quarter-by-quarter basis, management indicated Q2 is expected to be down ~15% from Q1 with the company balancing channel inventories (i.e., not simply “selling through” existing inventory), and also projecting incremental channel inventory tightening with the goal to be leaner. ³

Backlog signal implied by channel behavior: while the excerpts do not provide a formal “China backlog” number, the need to balance and reduce channel inventories is typically a demand signal that the company is not counting on a near-term backlog build coming out of China; rather, the near-term sales trajectory is being managed through inventory normalization. ³

2) Market share stability is a positive offset, but it’s not the same as strong demand

• Management stated that third-party data showed A. O. Smith did not lose meaningful share and that it maintained share in Q1 even though the market itself was down. ⁴
• They also characterized China as a down market condition and said the assessment timing is taking longer, with the challenging market backdrop described as the biggest driver of the delay. ⁴

Interpretation: share maintenance suggests the company is not “losing the customer base,” but it does not remove the fundamental issue that category demand is weak, and it supports a view that organic volume recovery is constrained absent market improvement or a material channel/inventory normalization cycle. ⁴

3) The company’s strategic assessment is delaying certain investments (a risk to medium-term momentum)

• Management said its ongoing strategic assessment has created some uncertainty in the market and delayed certain investments, adding further pressure on the business in the near term. ¹
• They further indicated that actions identified to improve China performance are pending the conclusion of the assessment, which is impacting the expected recovery timeframe, while also hoping to provide greater clarity in the next few months. ²

Impact on backlog/demand: delayed investment can reduce the speed at which the company responds to competitive conditions (channel tactics, product/marketing spend), which can lengthen the period before demand stabilizes—again implying limited near-term backlog improvement. ²

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How China demand/backlog signals impact A. O. Smith’s 2026 outlook

1) China weakness is explicitly embedded in 2026 sales and segment margin expectations

• The company’s revised full-year outlook for China sales is down low double digits in local currency with Q2 down ~15% vs Q1, reflecting persistent headwinds throughout the year. ²
• In the quarter, the Rest of World segment (which includes China) reported Q1 2026 segment sales down 11% year over year due to continued weak consumer demand in China, partially offset by favorable FX. ⁵
• Segment margin pressure is also visible: Rest of World segment margin was 6.2% in Q1 2026 vs. 250 bps lower year over year. ⁵

2) China softness is a meaningful reason the company lowered 2026 expectations in consumer-facing channels

• Management described that the water heater and water treatment markets in China remain challenged due to policy/stimulus discontinuation and consumer confidence, and it also expected the softness to persist. ¹
• For the broader “consumer-facing” exposure (about half of its business), management stated there is soft demand and a shift toward lower-priced products, which contributed to reduced 2026 guidance for North America water treatment growth to 5%–6%. ⁶
  • While this specific excerpt is North America water treatment, the logic is consistent with how management is thinking about demand quality (premium vs. value mix) and consumer behavior under low-confidence conditions—an important backdrop that also characterizes China’s environment. ¹⁶

3) Overall company 2026 outlook includes these headwinds; EPS range reduced

• Management set a revised 2026 adjusted EPS range of $3.70 to $4.00 per share, explicitly excluding a ~$20 million restructuring/impairment charge expected in Q2. ⁷
• They also guided that total top-line growth is approximately 2% to 4% for 2026 based on these assumptions. ²
• The China environment—weak demand and delayed recovery due to assessment/investment timing—is directly part of those assumptions, since the company stated many actions pending assessment conclusion affect the expected recovery timeframe. ²

4) Timing: China is expected to be especially weak early, while management expects relative improvement later only after inventory normalization and seasonality

• The company expects Q2 to be ~15% down from Q1 in China and expects to come out of Q2 with better balance of channel inventories (leaner). ³
• Management also stated that China typically has its strongest quarter in Q4 after a muted Q1. ³

Net effect on outlook: China’s demand/backlog equivalent (channel demand and inventory-backed sales) points to subdued near-term revenue and margin pressure, with a more constructive seasonal profile later (not a rapid rebound, but a better 2H shape). ³

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Bottom-line conclusion

• Demand signal (China): clearly negative/soft—Q1 sales down 17% (local currency), and full-year China sales expected down low double digits with persistent headwinds from low consumer confidence, limited stimulus, and competitive pressure. ¹²
• Backlog signal (China): the excerpts do not cite a China backlog figure, but management’s emphasis on channel inventory balancing (Q2 down ~15% vs. Q1 with an intent to be “leaner”) suggests no meaningful backlog build is being relied upon to offset weakness immediately. ³
• Impact on 2026 outlook: these China conditions are incorporated into a low-single-digit-to-mid-single-digit company growth framework (2%–4% total top-line growth) and support a cautious EPS outlook (adjusted EPS $3.70–$4.00). ²⁷ Near-term performance is expected to be pressured, while Q4 seasonality offers the best chance for improvement after a weak first half. ³