A. O. Smith reported a solid third quarter of fiscal 2025 with sales of $943 million (up 4%) and EPS of $0.94 (up 15%), led by North America, where segment sales rose 6% to $743 million and operating margin expanded 110 basis points to 24.2% on pricing actions and strong commercial water heater and boiler volumes. Rest-of-world results were mixed: China third-party sales fell 12% in local currency amid economic weakness, discontinued government subsidies, and rising competition, though India grew 13% and cost actions lifted the segment margin 90 basis points to 7.4%. Cash generation was a highlight, with nine-month operating cash flow up 21% to $434 million and free cash flow up 35% to $381 million, funding a 6% dividend increase (32nd straight year) and roughly $335 million of buybacks against a raised ~$400 million full-year plan. Management narrowed and lowered the top end of full-year EPS guidance to $3.70-$3.85 and cut the sales growth outlook to flat-to-up-1%, driven by the weaker China (now down ~10%) and softening U.S. residential water heater markets, while raising the commercial water heater volume outlook. Strategically, the quarter centered on the ongoing China strategic assessment, an active M&A pipeline backed by dry powder, and a renewed focus on operational excellence and innovation reinforced by new digital and technology leadership, even as tariffs and rising steel costs pressure near-term margins.
Good morning, and welcome to the A. O. Smith Third Quarter Conference Call. I'm Helen Gurholt, Vice President, Investor Relations and Financial Planning and Analysis. Today, I'm joined by Stephen Shafer, Chief Executive Officer, and Charles Lauber, Chief Financial Officer. Within today's presentation, we have provided non-GAAP measures. Free cash flow is defined as cash from operations plus capital expenditures. Reconciliations from GAAP measures to non-GAAP measures are provided in the appendix at the end of this presentation and on our website. A friendly reminder that some of our comments and answers during this conference call will be forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include matters that we described in this morning's press release, among others. Also, as a courtesy to others in the question queue, please limit yourself to one question and one follow-up per turn.
If you have multiple questions, please rejoin the queue. We will be using slides as we move through today's call. You can access them on our website at investor.aosmith.com. I'll now turn the call over to Steve to begin our prepared remarks.
Thank you, Helen, and good morning, everyone. I would like to start by briefly thanking the many dedicated A. O. Smith employees and broader set of partners and customers in our ecosystem for another quarter of helping to make clean, hot, and safe water available to millions of people. We appreciate all you do to make that happen. Please turn to slide four, and I will now review our financial performance in the quarter. Our global A. O. Smith team delivered third-quarter sales oi f $943 million, a year-over-year increase of 4%, and EPS of $0.94, a 15% increase over 2024. North America sales grew 6%, primarily as a result of our pricing actions and strong commercial water heater and boiler volumes. We achieved North America segment margin expansion of 110 basis points and rest of world segment margin expansion of 90 basis points.
Continued economic challenges and more limited availability of government stimulus programs led to a 12% decrease in local currency sales in China. Pureit contributed $17 million of sales in the quarter, and our legacy India business continued its strong double-digit growth trajectory by delivering 13% growth in local currency. North America water heater sales increased 6% in the third quarter, driven by pricing actions taken in response to higher tariffs and other input costs, as well as higher commercial water heater volumes. Our market-leading high-efficiency condensing gas and heat pump products continue to have a compelling payback story in commercial applications. Our residential water heater volumes were also positive, but we believe that Q3 industry volumes declined year-over-year.
As we expected, we believe we outperformed the residential and commercial markets in the quarter, in part due to our production efficiency initiative that limited the pre-buy impact on our sales in the first half of the year. Our North America boiler sales increased by 10% compared to the third quarter of 2024, led by the benefits of pricing actions and higher volumes of our high-efficiency boilers. North America water treatment sales decreased 5% in the third quarter, as continued growth in our priority channels was more than offset by an expected decrease from the retail channel. Our priority dealer, e-commerce, and direct-to-consumer channels grew 11% in the quarter. In China, third-quarter sales decreased 12% in local currency as the ongoing economic challenges and reduced availability of government subsidy programs, along with an increasingly competitive environment, led to lower volumes.
Despite these challenges and the resulting volume pressure, we achieved 90 basis points of margin expansion compared to last year through the restructuring initiatives we undertook in 2024 and other cost-saving measures. Please turn to slide five. I would now like to take a moment and talk about our commitment to sustainability. For us, sustainability is not just a goal, but a core part of who we are and what we do every day. We are committed to not only developing and bringing to market innovative, high-efficiency products, but we are also dedicated to sustainability in our facilities and manufacturing processes. Later this week, we will publish our sustainability progress report, which will include our sustainability scorecard and an update on our water conservation, greenhouse gas emissions, and waste reduction goals.
What the report will show is that we are meeting or exceeding the goals that we set out for ourselves. The outcome of these efforts is providing both sustainability and bottom-line results. Example initiatives we have undertaken to support these goals include the test water recirculation system, which recycles water used during our product testing processes, and our glass enamel reuse process, which captures waste glass enamel for reuse in our tank manufacturing process. These are examples of how we seamlessly integrate sustainability into two of our priority areas, operational excellence and innovation. We remain dedicated to finding better ways of doing things, including how to improve our business while protecting our planet. I'll now turn the call over to Charles, who will provide more details on our third-quarter performance.
Thank you, Steve, and good morning, everyone. Please turn to slide six. Third-quarter sales in the North America segment of $743 million increased 6% compared to the same period last year, primarily due to benefits of pricing actions, as well as higher commercial water heater and boiler volumes. North America segment earnings were $180 million, an 11% increase over the third quarter of 2024. Segment operating margin was 24.2%, an increase of 110 basis points year-over-year, primarily due to pricing actions and higher volumes, more than offsetting higher material and other input costs. Moving to slide seven, rest of the world segment sales of $208 million decreased slightly compared to last year and included $17 million of sales from the Pureit acquisition. Sales in our legacy India business grew 13% in local currency. China third-party sales decreased 12% on a constant currency basis.
Rest of the world segment earnings of $15 million increased year-over-year as continued expense management and the benefits of restructuring actions more than offset lower volumes in China. Segment operating margin was 7.4%, an increase of 90 basis points compared to the prior period. Pureit will continue to be a headwind in the near term as we focus on integration, which is progressing well. Please turn to slide eight. Operating cash flow grew 21% to $434 million, and free cash flow grew 35% to $381 million during the first nine months of 2025 compared to the same period last year, primarily due to lower inventory balances that were partially offset by other working capital outlays, including lower customer deposits in China. Our cash balance totaled $173 million at the end of September, and our net debt position was $13 million.
Our leverage ratio was 9.2% as measured by total debt to total capital. Let's now turn to slide nine. Earlier this month, our board approved a 6% increase in our quarterly dividend to $0.36 per share, making 2025 the 32nd consecutive year that A. O. Smith has raised its dividends. We repurchased approximately 5 million shares of common stock in the first nine months of 2025 for a total of $335 million. This is an increase compared to the same period last year as we raised our planned full-year repurchase intentions from $306 million in 2024 to approximately $400 million of shares for 2025. Consistent with our key priorities, we are actively assessing strategic opportunities and have sufficient dry powder for acquisitions that meet our strategic and financial criteria. Our M&A priority continues to be deals that strengthen our core business or help us build new growth platforms.
Please turn to slide 10 and our 2025 earnings guidance and outlook. We are narrowing the range and lowering the top end of our 2025 EPS outlook from a range of $3.70-$3.90 per share to a range of $3.70-$3.85 per share. We have included the following assumptions in our outlook. We began to see the impact from tariffs in the third quarter and expect that our tariff costs will continue to increase into the fourth quarter as additional impacts make their way through our supply chain. Though the tariff landscape remains uncertain, we maintain our estimate that annualized tariffs will increase total company cost of goods sold by approximately 5%, which includes tariff rates currently in place, as well as the mitigation efforts we have implemented. As a reminder, our mitigation strategies include footprint optimization, strategic sourcing, and other cost controls and pricing actions as necessary.
Apart from tariffs, we expect overall material costs for the year to remain approximately flat versus last year, with steel costs rising 15%-20% in the second half of 2025 compared to the first half. We estimate that 2025 CapEx will be approximately $75 million. We expect to generate free cash flow of approximately $500 million. Interest expense is projected to be approximately $15 million. Corporate and other expenses are expected to be approximately $75 million. Our effective tax rate is estimated to be approximately 24%, and we project our outstanding diluted shares will be 142 million at the end of 2025. I will now turn the call back over to Steve, who will provide more color around our key markets, top-line growth outlook, and segment expectations for 2025, remaining on slide 10. Steve.
Thanks, Charles. Key assumptions in our top-line outlook include the following. We project that 2025 U.S. residential industry unit volumes will be flat to slightly down compared to last year, a slight decrease from our previous guidance due to residential new construction expectations that have come down since last quarter. Lower housing completions, particularly in multifamily, as well as concern around consumer confidence, have led to this revised outlook. The wholesale channel impact is expected to be greater due to its heavier exposure to new construction. That said, we are encouraged by the resilient demand we are seeing in the commercial water heater market segment, and as a result, we are increasing our projection for commercial water heater industry volumes from flat to last year to up low single digits.
We are pleased with our strong performance relative to the market in the third quarter and the share momentum we have going into the fourth quarter, supported by our winning products in this segment. Economic challenges persist in China. While government stimulus programs help to stabilize parts of the market in the first half of 2025, we believe the stimulus programs pulled forward a significant amount of demand. During the third quarter, national subsidies were discontinued, resulting in increased promotional activity and discounting from our competitors, much of which we chose not to participate in. Because we do not expect an improvement in market conditions in the near term, we are lowering our 2025 China sales outlook to a decline of approximately 10% in local currency.
We continue to benefit from the restructuring actions taken in 2024, as well as other cost-saving measures, which we project will offset the margin impact of lower volumes for the year. Our 2025 North America boiler sales projection of an increase of between 4% and 6% compared to 2024 is unchanged. We are very pleased with our growth in the first nine months of the year, although we believe we may have benefited from a minimal amount of pre-buy related to price increases implemented in the second quarter. We continue to monitor our key markets closely. We have not changed our guidance that North America water treatment sales will decline approximately 5% in 2025, as we de-emphasize the less profitable retail channel. We continue to be pleased with the growth we have seen in our priority channels and our onboarding of new dealers during the year.
Our plan to drive 250 basis points of operating margin improvement in 2025 for the North America water treatment business is on track. Finally, we expect the addition of Pureit will add approximately $55 million in sales in 2025, slightly higher than our earlier guidance. It will not have a significant bottom-line contribution this year as we work through integration. Based on the continued economic challenges in China and the softening wholesale residential water heater market in the U.S., we have lowered our full-year sales outlook from 2%-3% growth to a range of flat to up 1% compared to last year. We continue to expect our North America segment margin will be between 24%-24.5%, and we expect that the rest of the world segment margin will be approximately 8%. Please turn to slide 11. Last quarter, I laid out my areas of focus.
Earlier this month, the top 140 leaders of A. O. Smith gathered to talk about the future of our company, to align on key priorities, and inspire each other through the opportunity to connect and share ideas on how to deliver the next great chapter of the A. O. Smith legacy. I came away from this important time together confident in our path forward and with the commitment from our leadership team to execute. I look forward to sharing more regarding this leadership summit and our focus areas in the quarters to come. I am also pleased to welcome Chris Howe as our new Chief Digital Information Officer. Chris is the transformational leader that we need to help us invest wisely in new technologies for the future and unlock even more value potential in the technologies we are invested in today.
In his previous roles, Chris led transformational efforts to leverage enterprise software solutions and most recently worked on the forefront of generative AI solutions. He will be instrumental in ensuring we have the technical capabilities needed to support all our priorities, especially operational excellence and innovation. As we shared last quarter and as part of our portfolio management priority, we announced the intention of our formal China strategic assessment. While we remain early in the process, we are making good progress. We commissioned a third-party analysis of the China market, and it confirmed many of our assumptions entering the strategic assessment. One, our brand remains strong, well-known, and respected among Chinese consumers, especially with regard to our innovative products and premium solutions. Two, our strategy to expand into broader categories that can be connected by smart home solutions and our AI link capability was a necessary path forward.
Three, we have a number of go-to-market and business model opportunities to better strengthen the business and capture our fair share of market recovery. We believe that we have a good understanding of our challenges and are evaluating potential opportunities to ensure the future success of this business as we drive greater value for shareholders, employees, and other stakeholders. In conclusion, I am pleased with our third-quarter execution, particularly in the North American segment. I'm also encouraged by the progress we are making on our strategic priorities, including portfolio work to help strengthen our business going forward. Regarding execution, we delivered a solid third quarter in North America, led by pricing performance and our strong commercial high-efficiency portfolio, while expanding margins through operational discipline.
Looking forward, we remain confident in our ability to navigate the tariff and competitive landscape in our core water heater and boiler businesses, where we serve a large replacement-driven market with a broad industry-leading portfolio and go-to-market model. Regarding our portfolio, we are driving double-digit growth in priority areas, including boilers, select North America water treatment channels, and India. At the same time, through our strategic assessment, we are working to understand and address what is required to improve the performance of our China business. Finally, we continue to generate cash, maintain a strong balance sheet, and are ready with dry powder necessary to build out our portfolio in ways that complement our business today. With that, we conclude our prepared remarks and are now available for your questions.