Kevin Wheeler: Yes, I’ll touch on that, maybe Chuck will jump in on it. We’ve not seen much change on our mix. And I would tell you that we’re, our good is premium good. And I mean, we’re not down in the low end of the market. But throughout even the pandemic and even into the last year, and how we’re looking going into 2024, our premium price products that premium sector of the market has held up. It’s not growing, but it’s holding. And so our mix looks relatively the same as it has over the last several years. And we feel pretty good about that considering the consumers not as engaged as it needs to be. And we look at that as being upside as that consumer confidence grows a bit.
Chuck Lauber: Yes. I just put some numbers to that. So I mean, we define kind of the premium sector of the market, above 3000 RMB for electric water heating, and above 5000 RMB for gas water heating and water treatment, which are our core products in China. And the premium sector of the market that we sell, it’s been in the 60% to 70% range, a little lower on water treatment, right around 50%. But it’s been a nice zip code for quite a while now. So for probably the last couple of years. So we haven’t seen a change, certainly hasn’t decreased, but it’s been pretty steady.
Operator: One moment for our next question. Next question comes from Nathan Jones with Stifel. Your line is open.
Unidentified Analyst: Good morning. This is Adam [indiscernible] on for Nathan. My question relates to your balance sheet is in a very good position, significantly underlevered with a strong net cash position. So what are your plans to optimize the balance sheet? And maybe could you provide an update on your M&A pipeline? I’ll leave it there. Thanks.
Chuck Lauber: Sure. Good morning, Adam. Yes, we are underlevered. We like the position that we’re in going into an opportunity for M&A, which we’ll talk about. We continue to have kind of a balanced approach. I talked a little bit earlier about investing in ourselves, which are some of the three major expansion projects that we have going on with building manufacturing capabilities for gas tankless for investing in commercial high efficiency capacity, and then continue to invest in our R&D facilities in Lebanon, Tennessee. So we continue to make sure we’re doing the right things to invest in ourselves and have three major projects going on. We’re also doing a bid on the share buyback. We’ve got $300 million of share buyback in our outlook for 2024.
We continue to feel that that’s an appropriate component of capital allocation as we’re underlevered. And then we’re reserving firepower for the opportunities within M&A. We look forward to maybe some opportunities this year. It’s always difficult to tell. Certainly investors’ expectations always remain high. We feel like we’re in a great position, though, to continue to kind of look for those opportunities as we go into 2024.
Kevin Wheeler: I would just maybe add on to that. I mean, our pipeline is active, and we continue to look at spaces not only within our core, certainly water treatment, but geographic expansions, and even levering, potentially our customers and footprints that we have in various industries. So a lot of different spots on the board. We’re engaged on a pretty regular basis with a number of companies. And again, just a matter of not it, but when the time comes about. But again, when we look at acquisitions, culture is exceptionally important for us in making sure that we find the right company that fits within A.O. Smith. On top of that, we are going to stay disciplined in making sure that we can return to our shareholders. So putting that all in context, we feel really good about the pipeline, and we’ll see if we can bring some of those home in 2024.
Unidentified Analyst: Thank you.
Operator: One moment for our next question. Our next question comes from Andy Kaplowitz with Citigroup. Your line is open.
Andy Kaplowitz: Good morning, everyone.
Kevin Wheeler: Hey Andy.
Chuck Lauber: Good morning.
Andy Kaplowitz: I just wanted to follow up on the 10% rest of world margin, 11% in China. You obviously spoke about it the investor day, 400 base points of improvement over the next several years. Do you need a better Chinese economy for that margin expansion to kick in, or do you start to dial down your advertising and promotion soon on the new kitchen products, and that will help? How does that work?
Kevin Wheeler: Yes, we need a better economic backdrop to achieve that. I mean, we really are in a situation now where we feel good about the cost we’ve taken out at the level we’re at. Feel like we can leverage growth going forward, but we need to get the economy back. We need to get housing formation kind of reignited so that we’ve got a larger portion of the market that is growing in house formation. As you know, most of the water heaters go in when an individual moves into their home, even if it’s a new construction. We’re pleased we’ve got 60% replacement on the water heating side, so in the meantime, we’re very happy with the resiliency of the business at the levels we’re at, but we will need some economic help to kind of achieve that expansion.
Andy Kaplowitz: It’s helpful color. And then just shifting gears, North American commercial water heater industry had a good year in ’23, so maybe a difficult comparison in ’24, but you’ve dialed in the low single-digit growth. So can you talk about the visibility you have to that end market holding up in ’24?
Chuck Lauber: Yes. It held up, and you have to go primarily back to, and we’ve mentioned a couple times the greater than 55 gallon electrics. We went to a regulatory kind of change, and we had to get the industry had to get its legs underneath, which it did, and we’re starting to benefit from that. But the growth of almost 70% came out of that category, and it’s almost back to where it needs to be, but you look at that low single digits, a large majority of that growth is going to be in that particular category as it gets back to a more normalized level that it exited in 2022. But overall, a commercial business held up well. Our gas business showed some growth. We break it down small electrics versus large. Small electrics had growth, so each category is still growing, and we expect that to continue.
There’s still a very big part. We talk about residential replacement versus discretionary. Still, 85% of that business is replacement market for us, and we have a really nice market share in that particular category. And as restaurants, hotels continue to come back online like they have been, our units are going to get exercises like everybody else’s, and that replacement should continue for the foreseeable future.
Operator: Thank you. [Operator Instructions] Our next question comes from [indiscernible] with UBS. Your line is open.
Unidentified Analyst: Hi. Good morning, guys. I’m on for Damian this morning.
Kevin Wheeler: Good morning.
Unidentified Analyst: Yes. So, a quick question on North America pricing. So, you announced a 4% increase in November and got pushed to March. I wanted to understand what was the reason for pushing the price increase? Did you get some pushback? What’s happening there?
Kevin Wheeler: Yes. Details on pricing are really within our strategy here. We’ve always evaluated each time we bring a price increase to market. And early on, as we discussed, we make sure that we’re addressing costs. We always make sure that we feel the cost before our customers is. And the bottom line we’re at today is what’s going to keep our customers competitive and that’s really all we’re going to say on the pricey side of this.
