A. O. Smith closed fiscal 2025 with record EPS of $3.85, up 6% versus adjusted $3.73, on roughly flat sales of $3.8 billion, as pricing and higher commercial water heater and boiler volumes offset a 12% local-currency decline in China. North America segment margin rose 20 basis points to 24.4% (earnings $728 million, up 2%), driven by a 400-basis-point water treatment margin improvement to nearly 13% and higher commercial mix, while Rest of World margin expanded 40 basis points to 8.7% despite lower China sales, helped by 2024 restructuring, plus 13% India growth and the Pureit addition. The company generated free cash flow of $546 million (up 15%, 100% conversion), returned $597 million to shareholders including $401 million of buybacks, and completed the Leonard Valve acquisition to enter the water management market. Headwinds included persistent China weakness after subsidies ended, a slower new-construction and more competitive wholesale residential channel, and a 2% water treatment sales decline from exiting retail. For 2026, management guided to EPS of $3.85-$4.15 (about 4% growth at the midpoint) and roughly 2%-5% top-line growth, assuming steel up ~10%, flat-to-down U.S. residential volumes, China down mid-single digits with a second-half recovery, and North America margin of 24%-24.5%. Strategically, the company is prioritizing three value-creation levers — portfolio management, innovation, and operational excellence — anchored by the water management expansion, further water treatment margin gains, an ongoing China strategic assessment with potential partners, and continued double-digit India growth.
Good morning, everyone, and welcome to the A. O. Smith full year and fourth quarter conference call. I'm Helen Gurholt, Vice President, Investor Relations and Financial Planning and Analysis. Joining me today are Steve Shafer, Chief Executive Officer, and Chuck Lauber, Chief Financial Officer. In order to provide improved transparency into the operating results of our business, we provided non-GAAP measures. Free cash flow is defined as cash from operations less capital expenditures. Adjusted earnings, adjusted earnings per share, and adjusted segment earnings exclude the impact of restructuring and impairment expenses. 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 will now turn the call over to Steve to begin our prepared remarks. Please turn to the next slide.
Thank you, Helen, and good morning, everyone. I want to take a moment to sincerely thank all of our employees for their outstanding dedication and hard work in 2025, allowing us to navigate a dynamic environment and deliver record EPS. Their commitment to serving our customers, adapting to new challenges, and consistently delivering high-quality solutions is instrumental in our success. Each and every member of the A. O. Smith team plays a vital role in building trust with our customers and upholding the values that define A. O. Smith. I am truly grateful for your ongoing passion and collaboration, and it has me excited for our potential together in 2026 and beyond. Now, moving on to our 2025 financial performance, please turn to slide four. Our 2025 sales increased slightly as pricing benefits and higher commercial water heater and boiler volumes were offset by lower China sales.
Our EPS increased 6% to a record $3.85, driven by profitability improvements in both segments. North America segment margin improved 20 basis points over 2024 adjusted segment margin, led by profitability improvements in our water treatment business, as well as mix benefits from higher commercial sales. In our Rest of World segment, benefits from our 2024 restructuring actions and other cost control measures in China resulted in margin expansion of 40 basis points, even with lower China sales. We returned $597 million of capital to shareholders with our dividend and share repurchases. In the fourth quarter, we announced the acquisition of Leonard Valve, which we completed earlier this month. This acquisition expands our water management market reach, digital capabilities, and integrated product portfolio. I welcome the Leonard Valve team to the A. O. Smith family. Now, turning to our North America segment performance.
North America water heater sales increased 1% in 2025 as cost and tariff-related pricing benefits and higher commercial volumes offset lower wholesale residential volumes. We project that full year 2025 residential industry unit volumes were roughly flat to 2024, and the commercial water heater industry volumes increased approximately 5%. We are pleased with our performance in the commercial market and retail residential channel. However, we faced some challenges in the wholesale residential channel in the fourth quarter. This part of the market is experiencing pressure from a new construction slowdown and continued initiatives by retailers to expand into serving the professional, which is leading to increased competitive intensity.
The benefit for us as an industry leader is that we have a strong presence in both the retail and wholesale channels, and we have a good line of sight into how the market moves, backed by data, analytics, and extensive customer relationships. We are actively working with select customers to address the specific geographies and product offerings that are under the most pressure to deliver better outcomes in the wholesale market in 2026. Our North America boiler sales grew 8% compared to 2024 due to higher commercial and residential boiler volumes, as well as pricing benefits. We are pleased with our 2025 boiler performance and the continued strong demand for our market-leading high-efficiency products. North America water treatment sales decreased 2% in 2025 as our strategic shift away from the on-the-shelf retail channel offset growth in our more profitable priority channels.
Sales in our priority dealer, direct-to-consumer, and e-commerce channels grew 10% in 2025. We also expanded operating margin by 400 basis points to almost 13% last year, which we expect to improve by an additional 200 basis points in 2026. In China, full year third-party sales decreased 12% in local currency as a result of continued economic weakness and soft consumer demand, particularly in the second half of the year as government subsidy programs were discontinued. The restructuring actions we took in late 2024 and expense management drove profitability improvement of 130 basis points, despite lower sales as the team executed well in a challenging environment. I'll now turn the call over to Chuck, who will provide more details on our full year and fourth quarter performance.
Thank you, Steve, and good morning, everyone. We delivered sales of $3.8 billion in 2025, a slight increase over last year. 2025 earnings were $3.85 per share compared with adjusted earnings of $3.73 per share in 2024. Turning to slide five, full year sales in the North America segment of $3 billion increased slightly compared to 2024. Pricing actions and higher boiler and commercial water heater volumes were offset by lower volumes of residential wholesale water heaters. North America segment earnings of $728 million increased 2% compared with 2024 adjusted segment earnings. Segment margin was 24.4%, an increase of 20 basis points year-over-year. The higher segment earnings and segment margin were primarily driven by improved profitability of our water treatment business and higher commercial volumes.
Moving to slide six, Rest of the World segment sales of $880 million decreased 4% year-over-year, primarily driven by lower sales in China that were partially offset by 13% sales growth in our legacy India business and Pureit sales of $54 million. Rest of the World segment earnings of $76 million were flat to 2024 adjusted segment earnings as the impact from lower sales in China was offset by the benefits from our 2024 restructuring actions and other cost-saving measures. Segment operating margin was 8.7%, an increase of 40 basis points over 2024 adjusted segment margin. Please turn to slide seven. Turning to fourth quarter performance, we delivered sales of $913 million in the fourth quarter of 2025, flat to the same period in 2024.
Earnings in the fourth quarter were $0.90 per share, a 6% increase over adjusted earnings of $0.85 per share in the fourth quarter of 2024. Please turn to slide eight. Fourth quarter sales in the North America segment increased 3% to $714 million compared to the same period in 2024, primarily as a result of pricing benefits. North America segment earnings of $165 million increased 7% compared to 2024. Segment margin of 23.1% increased 70 basis points compared to last year's adjusted segment margin. The higher 2025 segment earnings and segment margin were primarily due to pricing benefits and actions taken to improve water treatment profitability, which were partially offset by higher input costs. Moving to slide nine, fourth quarter, Rest of the World segment sales of $206 million decreased 13% year-over-year, primarily driven by lower sales in China.
Organic India sales grew 18% in local currency in 2025, and Pureit contributed $8 million to sales in the quarter. Rest of the World segment earnings and segment margin of $16 million and 7.8% respectively in 2025 compared to adjusted segment earnings and adjusted segment margin of $19 million and 8.1% in 2024. The lower segment earnings and segment margin compared to the prior period were primarily due to lower sales in China, partially offset by the benefits of our 2024 restructuring actions and other cost-saving measures. Please turn to slide 10. We generated strong free cash flow of $546 million during 2025, a 15% increase over 2024, primarily driven by lower year-over-year capital investments, as well as higher earnings and a benefit of a one-time tax adjustment. 2025 free cash flow conversion was 100%.
Our cash balance totaled $193 million at the end of December, and our net cash position was $38 million. Our leverage ratio was 7.7% as measured by total debt to total capital. While our 2026 leverage will increase due to the cash we borrowed under a new credit agreement used to acquire Leonard Valve, we continue to have significant available capacity for future acquisitions. Let's turn to slide 11. In addition to returning capital to shareholders, we continue to drive organic growth through the development of innovative product offerings and continuous improvement in productivity, two of our key strategic priorities. Consistent with our portfolio management priority, we continue to actively assess opportunities that meet our strategic and financial criteria. Earlier this month, our board approved our next quarterly dividend of $0.36 per share. We have increased our dividend for over 30 consecutive years.
We repurchased approximately 5.9 million shares of common stock in 2025 for a total of $401 million. We continue our strong track record of delivering returns to shareholders. Over the last two years, we have returned almost $1.1 billion to shareholders through dividends and share repurchases. Please turn to slide 12 in our 2026 earnings guidance and outlook. Our 2026 outlook includes an expected EPS range of $3.85-$4.15 per share. The midpoint of our EPS range represents 4% growth over our 2025 EPS. Our outlook is based on a number of key assumptions, including within material costs. Our guidance assumes that steel prices in the full year 2026 will increase approximately 10% compared to 2025. Other material and freight costs, including the carryover impact of tariffs, will also be ahead in 2026.
Our guidance assumes no change to the current tariff levels that are in effect today, but we continue to monitor the situation closely. We will continue to invest in our gas tankless offering. As a market leader, we believe that it's important for us to offer best-in-class product in this category. We project our year-over-year impact to our North America margins would be minimal as we continue to build a foundation in this category and gain scale over time. We estimate that 2026 CapEx will be between $70 million-$80 million. We project to generate a strong free cash flow of between $525 million and $575 million. Interest expense is projected to be between $30 million and $40 million, an increase over previous years due to the $470 million of additional debt incurred to acquire Leonard Valve.
Corporate and other expenses are expected to be approximately $80 million-$85 million and include advisory fees associated with the Leonard Valve acquisition. Our effective tax rate is estimated to be between 24%-24.5%. Our board has approved 5 million additional shares of stock for repurchase, and we expect to repurchase approximately $200 million of our stock in 2026. We project our outstanding diluted shares will be 138 million at the end of 2026. I'll now turn the call back over to Steve, who will provide more color on our key markets and top-line growth outlook for 2026, as well as a portfolio update. Staying on slide 12. Steve.
Thank you, Chuck. Our top-line outlook includes the following assumptions. While we believe that U.S. new home construction remains in a deficit, we project that the softness in new construction will persist into 2026. We assume that proactive replacement remains steady and will be similar to 2025. Based on those factors, we project that 2026 U.S. residential industry unit volumes will be flat to down compared to 2025. Our current projection assumes U.S. commercial water heater industry volumes will increase mid-single digits in 2026 due to a buy-ahead of lower-efficiency non-condensing commercial gas products that are scheduled to be eliminated as part of the October 2026 commercial regulatory change. We assume that 2026 commercial electric industry volumes will be flat to 2025. In addition, our outlook includes carryover from our May 2025 price increases in North America.
We project our North America boiler sales will grow 6%-8% in 2026 due to the carryover of pricing benefits and from the continuation of the transition of energy-efficient boilers, particularly as commercial buildings look to improve their overall carbon footprint. We expect North America water treatment sales will grow 10%-12% due to tariff-related pricing benefits as we continue to grow faster than the market through the expansion of our dealer network. In turning to our outlook for China, we foresee continued headwinds in our markets due to continued low consumer confidence, a discontinued government subsidy program, and ongoing competitive intensity. Because of these factors, we project that our 2026 China sales will decrease mid-single digits compared to last year.
We expect the first half of 2026 to be particularly difficult as consumer demand remains subdued, and we will face comps from 2025 during which stimulus programs were in place. We anticipate a return to growth in the second half of the year. We continue to manage our discretionary costs prudently in this environment. These decisive actions are designed to protect our profitability and strategically position the business to be competitive during an eventual recovery once market dynamics begin to improve. Our outlook excludes any potential outcomes of the ongoing China assessment. We project our India business, inclusive of Pureit, will have top-line growth of approximately 10% as we continue to leverage brand synergies and introduce innovative new products to grow faster than the market. Based on these 2026 assumptions, we expect top-line growth of approximately 2%-5%.
We expect our North America segment margin to be between 24% and 24.5% and Rest of World segment margin to be between 8% and 9%. Please turn to slide 13. 2025 was an exciting year of transition for A. O. Smith, with several leadership changes, including myself. As I began my tenure as CEO last year, we announced three key strategic value creation levers that will guide A. O. Smith's path forward: portfolio management, innovation, and operational excellence. These levers are fundamental to strengthening our industry leadership position, supporting our customers through a dynamic market environment, and delivering long-term profitable growth. We will be providing periodic updates on each of these areas going forward. Today, we'll discuss portfolio management. Over the past year, we have been actively working to transform our portfolio to be better positioned for long-term profitable growth.
We have been focused on looking at strategic options in our China assessment to better position our business there to be more competitive going forward and take advantage of the eventual market recovery. The assessment is ongoing, and I am pleased with the quality of discussions we are having with a number of potential partners. We are also continuing to evaluate opportunities to strengthen our core North American water heater and boiler business. Examples of actions we have taken include our recent investments in gas tankless, heat pump, and commercial condensing gas product development and manufacturing capacity. We continue to evaluate broader options for strengthening our leadership position in this space. We have also announced over the past year a number of actions to help scale and improve the profitability of our North American water treatment business.
We have been learning much about the space through the acquisition of high-quality businesses we have used as the foundation of this platform and have taken actions to prioritize the channels and further integrate the business to create more synergy and scale. These actions have allowed us to improve the profitability of this business by 400 basis points last year, and we believe additional opportunities are still in front of us to both continue expanding margins and returning the business to higher growth. Finally, we have done work to evaluate expanding into the broader market of water management. This includes the broader ecosystem of moving, controlling, and mixing water across the residential and commercial markets. These products, systems, and solutions often interact with our water technology products that serve as our core business today.
Leonard Valve and its portfolio of mixing valves and control units represents our first action expanding into this attractive market opportunity. Please turn to slide 14 as I share more details about our strategic rationale for this acquisition. Leonard Valve is well aligned with our strategic and financial criteria and is an excellent complement to our core water heater and boiler business. It enters us into the attractive water management market with the well-established premium Leonard and Heat-Timer brands. Leonard's connected products, which represents approximately 30% of their sales and growing, expand our digital platform and provide us capabilities to leverage going forward. By broadening and integrating our product offering, we will be able to create new and innovative solutions for our commercial and institutional customers. Along with its higher growth profile, the business also has predictable demand with approximately 80% of the volume associated with repair and replacement.
Leonard Valve is also a strong cultural fit as a values-based company with deep market experience, a strong brand and reputation across the industry, and many long-tenured and dedicated employees that have a passion for serving their customers and the market well. Simply put, they do business a lot like how A. O. Smith does business, and I'm looking forward to what we can do together. We expect Leonard Valve to contribute approximately $70 million in sales in 2026. In summary, we are further strengthening our portfolio to deliver greater value to our customers and other stakeholders. We also remain focused on leveraging operational excellence and innovation in addition to portfolio management to drive long-term sustainable growth for A. O. Smith. As we have discussed, while we had challenges to navigate in 2025, we also had meaningful achievements.
Highlights include the demonstrated strength and resiliency of our commercial water heater and boiler business. Our leadership in these markets is well recognized and valued by our customers. The significant profit improvement driven by our prioritized approach in North American water treatment. We are now better positioned for long-term growth and profitability. The disciplined cost management actions in China as we look to reposition that business for a more competitive future. The continued double-digit growth of our India business, now complemented by the addition of Pureit to drive continued growth at an even greater scale. And finally, the continued focus on making the necessary investments to ensure our bright future despite the challenging and uncertain market conditions. I am confident that the strategic actions we are taking today, along with our continued disciplined operational approach, will enable A. O. Smith.
to build on our leadership position, become more agile, and be better prepared to seize future opportunities. With that, we conclude our prepared remarks, and we are now available for your questions.