A. O. 史密斯 (AOS) 2026 年第三季法說會：出售中國業務與更新財測指引

重點摘要

• A. O. Smith 公布 2026 年第三季銷售額為 9.41 億美元，與去年同期基本持平，稀釋後每股盈餘 (EPS) 為 0.93 美元。
• 北美地區銷售額成長 3% 至 7.62 億美元。有機銷售額增加約 1%，主要得益於鍋爐成長 13% 與水處理成長 5%，而熱水器銷售額則下滑 1%。
• 北美部門營利率下降 60 個基點至 23.6%。投入成本上升使獲利減少 1,800 萬美元，但部分被 1,000 萬美元的 IEEPA 關稅退款與 600 萬美元的其他成本節約所抵銷。
• 管理層預計 2026 全年不含中國的銷售額將成長約 4%，不含中國的調整後 EPS 為 3.42 美元至 3.52 美元。
• A. O. Smith 同意以約 4 億美元的估值，將其中國業務 81% 的股權出售給 CPE，同時保留 19% 的股權。若計入預估的未來權利金，總價值預計將超過 5 億美元。
• 公司預計中國交易帶來的約 3.5 億美元稅後所得與匯回資金，將在預計於 2027 年上半年完成交易後，優先用於股票買回。

核心財務業績

業務與營運表現

北美有機銷售額成長約 1%。鍋爐銷售額成長 13%，反映出家用市占率提升、對高效率商用冷凝鍋爐的需求以及產品調漲。管理層將全年鍋爐成長展望上調至 10%-12%，但表示長期常態成長率應為 4%-6%。

本季水處理銷售額成長 5%，以專業經銷商和特約批發管道為主導。自 2026 年初以來，公司已增加約 30 家經銷商。然而，由於消費者管道疲軟以及俄亥俄州格羅夫波特 (Groveport) 生產轉移後的出貨時程影響，全年成長預期有所下調。

熱水器銷售額下滑 1%，主因家用銷量下降抵銷了價格上漲的好處。管理層表示，家用需求依然疲軟，特別是在批發管道，而商用銷量則保持韌性。

Leonard Valve 貢獻了 1,500 萬美元的季度銷售額和 500 萬美元的北美部門獲利。混水閥與數位閥產品表現符合預期，但紐約地區的能源效率專案延宕影響了控制系統業務。公司目前預計 Leonard Valve 將在 2026 年產生約 6,500 萬美元的銷售額，低於先前預估的約 7,000 萬美元。

世界其他地區銷售額下降 7%。受消費需求疲軟以及與策略檢討相關的干擾影響，以當地貨幣計算，中國銷售額下滑 17%。印度仍為成長市場，管理層預計 2026 年以當地貨幣計算的銷售額（含 Pure）將實現雙位數成長。

管理層財務預測

在達成 CPE 協議後，A. O. Smith 預計將自 2026 年第四季起，將中國業務列為待出售資產並作為停業單位（discontinued operations）進行列報，先前期間的財務數據也將相應重列。

管理層預計鋼鐵和運費成本全年將分別增加約 15%，使北美部門的銷貨成本增加約 5%。大多數熱水器產品預計將於 12 月起實施高達 9.5% 的漲價。公司還計畫在其他業務中採取價格調整措施，並持續推進採購、生產力與銷管費用（SG&A）的節約。

風險與關注事項

投入成本通膨仍是利潤率的主要壓力來源。管理層預期 2026 年底結算時的成本運作率（cost run rate）將顯著上升，而 12 月的漲價措施需要時間才能抵銷這些壓力。

家用熱水器需求依然疲軟，且受到價格調整、假期、競爭對手動向以及潛在客戶庫存調整影響，年底訂單模式仍具不確定性。

水處理生產線的轉移預計將造成短期出貨延宕，並導致進入 2027 年時積壓訂單增加。管理層預計 2027 年產能將會提升，且積壓訂單將轉化為銷售額。

中國交易案仍需獲得監管部門批准並滿足慣常交割條件。交易公告發布後，中國業務的近期營運展望被描述為具有極高變數。

分析師問答亮點

管理層表示，第三季北美營利率略好於預期，主因 IEEPA 關稅退款抵銷了較高的運費及其他投入成本。公司預計第四季不會有顯著的關稅退款效益，這將增加近期營利率的壓力。

在價格與成本對等方面，管理層重申其目標是透過產品調漲與內部成本控制相結合來抵銷通膨。由於鋼鐵、柴油和運費成本持續波動，達到對等的時間點仍不確定。

公司將營運成本精簡描述為結構性的而非一次性，並有 A. O. Smith 營運體系及更廣泛地應用精益（Lean）做法做支撐。

管理層表示，其併購案源仍聚焦於北美核心業務、水處理及水資源管理。管理層亦指出，考量公司的現金流與資產負債表能力，計畫中與中國交易相關的股票買回並不會阻礙持續的投資或併購。

法說會逐字稿全文

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完整財報電話會議逐字稿

管理層陳述

Operator

Good day, and thank you for standing by. Welcome to the A. O. Smith Third Quarter 2026 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Helen Gurholt. Please go ahead.

Helen Gurholt

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. Joining me today are Steve Shafer, Chief Executive Officer; and Carrie Anderson, Chief Financial Officer.

In order to provide improved transparency into the operating results of our business, we provide non-GAAP measures. Free cash flow, defined as cash from operations less capital expenditures. Organic growth excludes Leonard valves and foreign currency impacts. Adjusted earnings, adjusted earnings per share, total segment earnings, adjusted segment earnings and adjusted segment margin exclude the impact of restructuring and impairment expenses. EBIT margin excludes the results of the China business.

Reconciliations from GAAP measures to non-GAAP measures are provided in the appendix at the end of this presentation and on our website. On a forward-looking basis, we provide guidance for net sales excluding China and adjusted earnings per share, excluding China, which are non-GAAP measures. We do not provide a reconciliation of these measures to the most directly comparable GAAP measures, net sales and diluted earnings per share, because we cannot predict or estimate certain reconciling items without unreasonable efforts.

These items include forecasted China sales and a forecast of China's contribution to earnings per share. These items are uncertain, depend on factors outside of our control and could have a significant impact on our GAAP results for the guidance period.

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.

Stephen Shafer

Thank you, Helen, and good morning, everyone. I'd like to begin by highlighting an important step forward for A. O. Smith. On October 27, we announced a definitive agreement to sell a majority interest in our China business to CPE, a leading alternative asset manager. These agreements complete the strategic assessment we began in July of last year.

I want to sincerely thank all of our China team members for their continued dedication and professionalism throughout this process. I am confident that the increased clarity and certainty that this announcement provides will be energizing for both our employees and customers in China.

We approached the assessment with one objective. Determine the path that would allow our business in China to have the best chance to compete and win in a very competitive and changing market. China has been an important part of our company's history. And our team there has built a strong brand on the back of great innovation and great service. But the market has changed significantly, and we need to continue to make changes to remain competitive.

As a result, we concluded the business is best positioned for its next chapter under an experienced local owner prepared to invest in the business. And CPE brings deep knowledge of the Chinese market with the right capabilities to make that happen.

The transaction is structured to deliver value today while preserving a potential upside in the future. CPE will acquire 81% of a business valued at approximately $400 million. We will retain a minority stake of 19% and the A. O. Smith brand will remain in the market under a multi-decade licensing agreement. Including the estimated value of future royalties, we expect total value to exceed $500 million.

We intend to prioritize the after-tax proceeds, along with roughly $80 million of cash we expect to repatriate from China to share repurchases. We plan to close in the first half of 2027 and subject to regulatory approvals and customary closing conditions. This transaction sharpens our strategic focus and simplifies our portfolio. Later in the call, I'll come back to talk about what this means for A. O. Smith going forward.

Let me now turn to our third quarter results on Slide 5. At the total company level, Q3 sales were $941 million, essentially flat with last year and earnings per share were $0.93. In North America, we delivered 3% growth despite the continued challenging macro environment.

Excluding Leonard Valve, organic sales grew 1%, led by double-digit growth in our boiler business and mid-single-digit growth in our water treatment business. We continue to believe our investment in product innovation, customer service and channel partnerships position these businesses as well in attractive markets.

In water heaters, sales decreased 1% in the quarter. We maintained our market share amid continued softness in residential water heater demand, particularly in the wholesale channel.

Commercial water heater volumes remained resilient, adding to the stability of our water heater portfolio. In this environment, our leading brands, broad product offering and channel presence and strong customer relationships continue to differentiate A.O. Smith.

Leonard Valve contributed $15 million in sales in the quarter, and we remain excited about how the business will expand our capabilities in commercial water management.

At the same time, we continue to face rising input costs. We expect steel and freight, two of our largest cost categories to each increase by double digits for the full year. Freight costs rose sharply in Q3, with second half increases expected well above the full year rate, driven by tighter trucking capacity and record diesel prices.

In the quarter, IEEPA tariff refunds helped offset these pressures. However, we expect these elevated costs to continue. To address these pressures, we recently announced an additional price increase of up to 9.5% on most of our water heater products effective in December. We are also pursuing additional offsets including future pricing actions in other parts of our business and cost actions, such as procurement savings, supply chain productivity and disciplined SG&A cost management. We expect these actions to help mitigate the impact of higher costs on our margins over time, while still supporting our customers and remaining competitive in their markets.

I'll now turn the call over to Carrie, who will provide more details on our third quarter performance.

Carrie Anderson

Thank you, Steve, and good morning, everyone. Please turn to Slide 6. We North America segment sales of $762 million increased 3% compared to last year. As shown on the left side of the slide, organic growth contributed $4 million or approximately 1% and Leonard Valve contributed 2%. Organic growth was driven primarily by a 13% increase in boiler sale and 5% growth in water treatment. These gains were partially offset by a 1% decline in water heater sales as lower residential volumes more than offset the benefit of our pricing actions.

Our boiler performance reflected continued share gains in residential boilers, strong demand for our high-efficiency commercial condenser boilers and the benefit of pricing actions. In water treatment, growth was led by our professional dealer and specialty wholesale channels, where we have added approximately 30 new dealers since the beginning of the year.

As mentioned earlier, Leonard Valve contributed $15 million in the quarter. Performance in our mixing and digital valve business was in line with our expectations. Partially offset by softness in voice controls, where delays in energy efficiency upgrade projects in the New York region affected order timing.

The fourth quarter is seasonally Leonard Valve's strongest and we continue to expect that pattern this year. So we anticipate these regional project delays will moderate the seasonal step up somewhat. This is reflected in our full year outlook.

Moving to the right side of the slide. North America segment earnings were $180 million, flat with the prior year, and segment margins decreased 60 basis points to 23.6%. The Lower volumes reduced earnings by $3 million and Leonard Valve contributed 15 -- $5 million. Higher-than-expected input costs driven by the double-digit steel and freight increases Steve mentioned, reduced earnings by $18 million. IEEPA tariff refunds and other cost savings partially offset this with a total benefit of $16 million.

Finally, we made meaningful progress on water treatment footprint and portfolio optimization initiatives. In October, we ceased manufacturing in our s Groveport, Ohio facility and transfer production to other sites. As is typical with the transition of this scope, we expect some near-term shipment delays as those lines come up to full output, which I'll touch on in our guidance.

We continue to expect annual savings of approximately $6 million to $8 million associated with these initiatives with approximately $1 million to be realized in the second half of 2026.

Moving to Slide 7. Rest of World segment sales of $193 million decreased 7% compared to prior year. Lower organic sales reduced revenue by $20 million, partially offset by a $5 million favorable currency impact, primarily related to China.

In local currency, China sales decreased 17%, this reflects continued weak consumer demand as well as some disruption to the business related to the strategic assessment we recently concluded.

Turning to the right side of the slide. Rest of World segment earnings were $11 million and segment margin was 5.4%. Lower volumes in China reduced earnings by $9 million partially offset by a $5 million benefit from SG&A and other cost actions. Our team in China continues to manage costs carefully, which helps limit the impact of lower volumes on this segment.

Turning to cash flow and capital allocation on Slide 8. We continue to generate strong cash. Operating cash flow for the first 9 months of 2026 was $429 million, compared to $434 million in the same period last year. Capital expenditures were $33 million, lower than the $53 million we spent last year. Our healthy cash flow lets us invest in growth and return cash to shareholders at the same time.

On investing for growth, we deployed $470 million in acquisitions this year with the addition of Leonard Valve. It strengthens our water management platform and is already contributing to our North America growth.

On returning cash to shareholders, we returned $410 million year-to-date. Through $149 million in dividends, up from $145 million last year. This reflects our long record of consecutive annual dividend increases, including the 6% dividend raise we announced in Q3.

As well as $261 million in share repurchases. Recall earlier this year, we raised our full year repurchase target by 50% and to $300 million, which leaves about $39 million planned for Q4. Our debt-to-capital ratio was 27% at the end of September, up from 9.2% a year ago. mainly because of the Leonard Valve acquisition. Our balance sheet remains strong with $235 million of cash and net debt of $439 million, and that gives us continued flexibility.

Looking ahead, our priorities have not changed. Invest in organic growth, pursue disciplined acquisitions that expand our core and adjacent water platforms and return test to shareholders. As announced earlier this week, we intend to prioritize share repurchases as the use of the after-tax proceeds and repatriated cash following the closing of the China transaction.

If we move to Slide 9, I'll provide an update on our full year guidance. Following the CPE agreement, we expect to classify the China business as held for sale and reported as discontinued operations beginning in the fourth quarter of 2026, with prior periods we cast accordingly. As a result, we have updated our full year 2026 guidance to exclude the China business for all of 2026 and reflect our updated outlook for the remaining businesses.

Full year sales, excluding China, are expected to grow approximately 4% on with adjusted EPS between $3.42 and $3.52 per share.

Within North America, our top line outlook includes the following assumptions: our outlook for the residential water heater industry remains down low single digits, with the commercial water industry flat to 2025. Retail channel momentum has been sustained while most of the market pressure year-to-date has been in the wholesale channel.

In our boiler business, we are now raising our growth expectations. Full year boiler sales are now expected to grow 10% to 12% and up from our prior range of 6% to 8%, reflecting strong year-to-date performance, robust quoting activity and a healthy order pipeline.

For our North America water treatment business, 2026 sales are expected to grow approximately 3% to 4% compared with our previous outlook of 5% to 6%. This reflects the continued weakness in the consumer channel and the timing of shipments following the transfer of growth for production. We expect to end the year with an elevated backlog that we expect to convert to sales as output increases into 2027. We also continue to make good progress in our priority dealer channel, including the expansion of dealer network, and we expect sales in this channel to grow approximately 10% in 2026.

For Leonard Valve, we now project sales of approximately $65 million in 2026 compared with our prior expectation of approximately $70 million. The valid portion of the business continues to perform well, reinforcing our confidence in the strategic value of the acquisition and the long-term growth potential of our water management platform.

As I mentioned earlier, the updated outlook reflects timing delays on several regional projects within the control of business. We remain encouraged by the underlying opportunities across the Leonard Valve portfolio and are focused on capturing that growth as project activity progresses.

And rounding out the revenue guidance is Rest of World, excluding China. We expect foreign currency translation to be a meaningful headwind on to our Rest of World businesses in 2026. Excluding currency impacts, India remains a bright spot. Including [ Pure ], we expect Indian sales to grow double digits in local currency in 2026, in line with our expectations as we continue to expand our brand and channel coverage. Our local currency India performance is partially offsetting macro challenges in other international businesses.

Turning to costs. Input cost inflation remains significant and is affecting all of our businesses. The impact is greatest in water heaters, which are steel intensive and in both water heaters and boilers, where product size and weight drive higher freight costs. Full year steel and freight costs are expected to each increase approximately 15% compared to 2025, adding approximately 5% to our full year North America segment cost of goods sold, and we expect to exit 2026 at a meaningfully higher cost run rate.

We are responding with pricing. As a reminder, our 4% to 7% price increase on most North America water heater and voice products took effect at the end of the second quarter with fuller realization beginning mid-third quarter. To help offset these escalated costs, we have announced an additional price increase of up to 9.5% on most water heater products effective in December.

A longtime pricing, we continue to work the cost leverage within our control. With inflationary pressures persisting our teams across the business remain focused on identifying savings opportunities and running our operations efficiently and we continue to look for ways to offset higher costs where we can.

As we head into the final quarter of the year, our priorities are clear when the heating season and when the holiday season. In boilers, we entered Q4 with strong momentum. In water heaters, we are working closely with our channel partners to be ready as colder weather drives replacement demand and to manage order patterns ahead of our December price increase. And in water treatment, we are increasing output across our facilities to fulfill our backlog and serve customers throughout the holiday season. Across all of our businesses, we remain focused on execution, disciplined pricing and cost management to finish 2026 strong.

And with that, I'll turn the call back to Steve.

Stephen Shafer

Thank you, Carrie. Please turn to Slide 10. Earlier, I described the recently announced China transaction itself. Now I'd like to show you what A. O. Smith looks like once it is complete. On this slide, we recast our 2025 results to exclude the China business. The picture is clear: a more focused company with an enhanced growth and margin profile.

First, we keep our scale. Excluding China, our 2025 revenue would have been approximately $3.2 billion, and we retain leading positions in our core markets.

Second, we improve our growth profile. Excluding China, our 2025 revenue would have grown approximately 3% compared to flat on a reported basis. China has weighed on our consolidated growth. and removing it gives us a more focused portfolio anchored in North America where we have the strongest position and greatest opportunity for near-term value creation.

Third, we have a higher-margin business. Excluding China, our 2025 EBIT margin would have been approximately 200 basis points higher, reflecting the structurally higher margins of our core business.

And finally, as you can see on the right side of the slide, our geographic mix shifts decisively. North America would represent approximately 94% of revenue, up from 77%. This is a market where we have deep customer relationships, leading brands and resilient demand, driven largely by replacement. Simply put, the company that emerges from this transaction is a focused water platform anchored in North America with a stronger growth and margin profile.

So where do we go from here? Slide 11 summarizes how we intend to grow and create value for shareholders. It starts with our portfolio priorities shown on the left. Our foundation is our leadership in North American water heaters and boilers. We hold leading residential and commercial market share earned through decades of innovation and deep customer relationships. And with 80% to 85% of sales driven by replacement demand, this core is highly resilient through the cycle.

Building on that core, we have three growth platforms. Water treatment is a growing, scalable business supported by long-term health and sustainability trends with recurring filter revenue that creates attractive operating leverage.

Water management is a new growth platform. With Leonard Valve, we're moving deeper into the commercial mechanical room with spec-driven digital, high-margin solutions that we can scale through bolt-on acquisitions and future connectivity.

And in India, we see compelling long-term market dynamics where our innovation and expanding brand and channel coverage are driving growth.

On the right are the three levers we use to turn that portfolio into shareholder value. First, market-led innovation, differentiated products that help us navigate the changing regulatory environment strengthen our brands and win share.

Second, operational excellence, delivering pricing and productivity that protects our margins and fund our growth investment.

And third, disciplined capital deployment. Our strong cash flow and balance sheet led us reinvest in the business, pursue targeted acquisitions and return cash to shareholders. as reflected in our increased share repurchase target this year.

In closing, A. O. Smith is entering its next chapter as a simpler, higher-margin company with a resilient core and multiple platforms for growth. I'm proud of how our team continues to execute, and I'm confident we're well positioned to deliver long-term value for our shareholders.

With that, we conclude our prepared remarks and open the call for questions.

Operator

[Operator Instructions] Our first question comes from Mike Halloran with Baird.

分析師問答

Michael Halloran

A lot of happy people including me. So first question, kind of just a simple one. Can you just calibrate the current guidance to the old guidance there's some ranges in the outlook. So I just want to make sure I understand what has or hasn't changed. Obviously, the treatment side touch lower boilers, decent amount higher any moving pieces that you're seeing on the -- more on the residential or commercial water heater side? And then maybe just touch on what's changed on the price cost side, if anything going into the fourth quarter?

Carrie Anderson

Yes. So maybe I'll start with just kind of level setting July guidance to our current guidance. So as you know, we took China out of the current guidance, and we're not providing a direct loss from the July guidance because the assumptions for China have materially changed since either when we had last talked back in July. And no doubt, our China results in Q3 were well below our expectations. And I've talked about a bit of the fact that, that continued China softness itself, but also the impact of the strategic assessment process concluding in the third quarter also was a part of that.

So at this point, I think the China outlook for Q4 is very -- is highly variable given the recent announcement. So made the decision in concert with the fact that we're going to intend to move that to discontinued operations to remove China from the outlook. So there's -- I can appreciate there's no like-for-like bridge between July and August.

But what we have done, Mike, is to update those assumptions for the rest of the business, and I covered those in my prepared remarks. I would say the guidance ex China is within the ranges that we would have assumed in the July guidance. with some puts and takes, as you talked about, and I'll have Steve talk a bit more about the water heater industry volumes.

But no doubt the strength of the boiler side of the business, we've raised expectations there. And it's offset some other softness in some of the other parts of the business. So net-net, still will be within the ranges that we provided you back in July.

Steve, do you want to provide some comments on...

Stephen Shafer

Yes. I would say just as relative to the kind of final few months here, we've got a lot of variables that make it maybe more kind of a wider set of outcomes as we finish the year. We've obviously got this announced price [indiscernible] out there. The industry has kind of had made these price announcements. We've got some competitive situations. We've got how our customers are going to kind of pick up on that, which makes the water hear side of the business a bit uncertain relative to the finish. But as Carrie mentioned, the boiler business is coming on really strong. We've got a little bit of softness in some of the other portfolios. So that's kind of where we kind of net out relative to the growth profile and the change on the earnings side is primarily that piece of the China removal.

Michael Halloran

Got it. No, that's super helpful. And then maybe just a little bit more on the price/cost comments there or the pricing in the environment and just still uncertain how that's going to shake out.

Maybe just what's embedded in the fourth quarter specifically in terms of what that price cost spread might look like and how you're accounting for that in the guidance. And then when do you think that a more neutral or position will be achieved based on all the actions you're taking?

Carrie Anderson

Yes. Mike, we have maintained the North American margin guidance of approximately 24% for the full year. And as I reflect on our Q3 performance, our margin performance in North America actually came in slightly higher than what we expected. And as I went through the prepared remarks, I called out the benefit of the IEEPA tariff refunds that actually did help offset some higher-than-expected costs. And that was notably on freight. That certainly was higher than what we expected in July. As well as other input costs that are certainly related to some of the things we're seeing on oil prices and derived oil pricing and other input costs and other steel-related component costs as well.

So the good news is that for Q3, between our own cost savings and the health of the IEEPA benefit tariff refunds, we were able to come in slightly stronger on North America margins. But for the full year, we are expecting to basically hold the original 24%, which means that Q4 will come under -- have some amount of pressure. And it really goes back to the fact that there will be a lag. So there are these cost increases that are coming in. We're taking action with additional price increases, but there will be a lag on when those additional price increases come into effect. But overall, between the third and the fourth quarter, it's allowing us to stay balanced at that approximately 24%.

Operator

Our next question comes from Bryan Blair with Oppenheimer.

Bryan Blair

Good morning. To approach price costs from a slightly different angle. If we were to assume that cost to levelize at the current run rate kind of snapped the line as flood that assumption inevitably be for the sake of this exercise, I assume that what level of incremental price realization would you need to reach price cost parity in early '27? .

Stephen Shafer

I mean it's -- what I would say is we always are looking to price through inflationary cost pressures that we can offset ourselves, right? And I think as we do our own calculations as we kind of enter next year, that's what's behind kind of our announced price changes.

As Carrie mentioned, there's sometimes a time lag in there. But as you think about heading into 2027, our goal is to offset inflationary pressures and some combination of the cost management controls that we put in place and pass-through pricing when necessary.

Carrie Anderson

And as you refer back to Steve's remarks, we did comment that there will be other price increases in other parts of the business. So we've done the 9.5% announcement for water heaters to get ahead of that. And so we'll continue to balance that, as Steve said, with our own cost management, creating additional opportunities there with a balanced approach to price to pricing.

Stephen Shafer

And it's fluid, right? So as we think about things like diesel costs and where steel is going to evolve to just 1 of the things we can monitor, and we'll continue to react for you.

Bryan Blair

I understand. I appreciate the color. Boiler sales were obviously a good guy again in the quarter. You've raised your 2026 guidance and in turn, can you parse out how much of the upside has been driven by stronger industry demand versus share capture for your team?

Carrie Anderson

Yes. I mean we're definitely very, very pleased with that weather performance, being able to deliver 10% to 12% is pretty impressive.

I would say there are three main things that are really driving that fiscal '26 growth. The first one is a really strong portfolio that's really built around high efficiency. So it's allowing us to have a leading lineup that's well placed for continued demand for higher efficiency solutions.

Also, we're seeing some of that growth coming through pricing benefits. We've taken pricing actions in the year were needed to offset cost pressures as well.

And the third 1 is the share gains in the residential or a market driven in part by some competitors that have exited the market, and we'll begin lapping those gains in the late fourth quarter of 2026. And because of the -- some of these tailwinds, as you can appreciate, won't repeat at that same level. And so we wouldn't expect 10% to 12% growth to be an ongoing rate. Over time, we would expect boiler growth to really settle into a 4% to 6% range compared to with our a market expectation of low single-digit growth for the overall market, which means that we should be able to drive unit growth that's a little bit above the market growth, and then we'll have normalized pricing benefits to basically get into what we would say a normalized growth rate of 4% to 6%. So we remain confident that the strength of our portfolio in the boiler area, our quality and our service capabilities are going to let us keep outperforming the market.

Operator

One of our next question. Our next question comes from Matt Summerville with D.A. Davidson.

Matt Summerville

A couple of questions. Can you remind us what your tariff refunds were in Q2 and Q3? And what, if anything, you expect in Q4? And then can you also maybe talk a little bit about actionability as you see it in your M&A pipeline now that China is kind of getting put in the rearview mirror? And then I have a follow-up.

Carrie Anderson

Great. I would say in the second quarter, it was a couple of million dollars, so not material impact to our second quarter results. In Q3, we called out that they were about $10 million. And then I would say, going forward for Q4, we're not expecting anything material there in Q4. I think all of the benefit came in, in Q3. And I think the timing of that actually worked out well because we did see some higher than expected input costs coming into the quarter that really allowed us to manage the margin in North America quite well and come in a little bit better than what we expected.

Stephen Shafer

I'll maybe step in on the M&A pipeline. I think we've got a strong pipeline. It's in the areas that I talk to often, which is in our core business, right, our core North America business, in our growth platforms, namely water treatment here in North America and now the building out of the water management platform.

So those are the areas where we focus our platform -- or sorry, our pipeline I would say we continue to cultivate it. We invest time and energy in terms of developing that pipeline. We also remain very disciplined about how we approach it.

So it is a priority for our growth strategy is to build out those platforms and at the same time, protect our core franchise, which generates a lot of cash. And so I feel good that it's an active pipeline, and we're going to continue to work on it and develop it. And obviously, still, at the same time, remain disciplined in our approach.

Matt Summerville

And then maybe could you comment on what you're seeing sort of the updated view on the discretionary side of the resi replacement market and just more broadly kind of macro thinking do you have a view on an early view on what the market might hold for residential volumes in '27.

Stephen Shafer

Yes. I mean it's not a seismic shift that we see. I think we watch that trend very carefully. I think one of the things that in the repair replace that we know is -- well, then we talk a lot about new home construction, but also when homes aren't being transacted and changing in ownership and because of those inspections that often identify the need to or interest in refreshing a water heater, for example, that in a wall as well.

So that replacement market is seeing a little bit of pressure, but the dynamics are still there. Some of it generational, right? So younger generations tend to replace more proactively than the boomer generation does. So we see that as relatively stable but a little bit soft just given the environment that we're navigating through.

Carrie Anderson

And it's still [indiscernible] over 30% proactive. It's still over 3%. So as Steve mentioned, we're not seeing any real moves in that number.

Stephen Shafer

And it's some of the things we think about over longer terms, too, right, in terms of just how we collect our data.

We're preparing as we go into next year, we've talked about some of the things of how we see ourselves exiting 2026 that we're preparing for a continued kind of muted environment on those fronts. And we'll be ready if that changes, but also a resilient business model that navigates through the cycle is something that we also invest in and make sure we're ready for it.

Operator

Our next question comes from Susan Maklari with Goldman Sachs.

Susan Maklari

Good morning, everyone. My first question is on your comments on exiting this year with a more elevated backlog in some of the product categories. Can you just talk more specifically about your expectations there? And how we should think about your ability to work that through as we move into 2027? .

Carrie Anderson

Yes. That was specifically water treatment. And it relates to the fact that we did cease manufacturing at our s Groveport facility and transferred that production to two other facilities. And it's really just associated with the ramp-up of production at those current facilities taking on the additional work.

So that's the backlog. So I think the good news is that we would expect to continue to ramp up and be able to work through that backlog as we move into 2027. And again, we expect water treatment to continue to be an area of growth for us. with some of the priority work that we're doing in both our consumer channels as well as the dealer side of our Pro channel, including wholesale as well. So I think that bodes well for us to continue to focus on that in 2027.

Susan Maklari

Okay. All right. That's helpful. And then you mentioned that you've added 30 new dealers so far this year. Can you talk about the kind of dealers that you are adding to the portfolio, what the value proposition is? Are you taking share from others? And how we should think about further expansion of the network?

Stephen Shafer

Yes. Where we're engaging is kind of independent dealers who are looking for a reliable and trusted kind of OEM manufacturer for water treatment and to be a part of our brand. And I think what they find us is we've got a great product and an innovative lineup, a brand that we stand behind and provide the technical service that those are sort of hallmarks of A. O. Smith.

We also really are investing in supporting for these independent dealers, how do they actually go out and drive demand generation find new business, be able to provide the technical support out in the field. And so that's part of the value proposition. It's a space it's highly fragmented today in terms of the people who are in this space is very regional. Again, those are some dynamics we know well from maybe the plumbing side of the business and our ability to bring a compelling product offering, but then wrap it up into how we actually support small business owners and help them drive their business forward as part of how we go and sign those guys up.

Operator

The next question comes from Nathan Jones with Stifel.

Nathan Jones

Good morning. Just a quick question on the bridge for operating earnings on North America. There's an other cost savings in there that's $6 million that goes along with the tariff refunds. Is that something -- those structural savings that continue going forward or something that was more onetime in nature in the quarter?

Carrie Anderson

Yes. Go ahead. Go ahead, Steve.

Stephen Shafer

Just -- it's a continued evolution of our A. O. Smith operating system that I talked about, and that's our model for how we go after and eliminate waste and deploy lean across the company, and so our goal is to make that repeatable, right, in a repeatable process.

And I would say, as we've made some changes, we brought in some new leaders to the company over the last few years. I think those new leaders are bringing in even fresh ideas on how we can even expand that further. And so we're thinking about how do we take our AOS operating system and make it broader and make it even more impactful. So our goal is certainly to make it sustainable and get the flywheel spinning and you're seeing some of that in some of the results that we talk about, but I think there's more to come.

Nathan Jones

Okay. So that sounds like something that's more structural I guess my other question is around potential inventory levels in the channel at the end of the year. Typically, when you have price increases, you see demand pull forward. you had a price increase at the end of June, which maybe pulled demand forward into 2Q. You've got another price increase in December. So maybe there would be some demand pulled forward into the fourth quarter, but maybe it was already pulled forward earlier in the year to get through some of the other price increases.

So there's a lot of stuff going on there with -- related to where inventories might end the year. So just your thoughts on whether or not it's going to be in kind of a balanced position, whether there will be a need to run out some of that inventory in the first quarter of '27 or just how you're thinking about that?

Stephen Shafer

You characterized with more color on my previous comment about there's a lot of uncertainty for the final 2 months, right? And we've got a previous price increase that's now kind of in the marketplace. Now we've introduced a new one. We've got a holiday period, how our customers sort of respond? We're going to work closely with them as we always do to kind of navigate through to the end of the year.

So there's some variability there, but I will say we'll be ready, and we'll serve our customers well, and we'll work closely with them to figure out how to navigate and provide them the product that they need.

So it's -- not every year is the same, right? And this is a unique situation in terms of both the timing of the price change, the impact of kind of what's happening in calendarization. There's other things at play here in terms of what our competitors are doing. So we'll follow it closely, but we'll be ready to serve our customers.

Carrie Anderson

Yes. Our lead times -- our order lead times remain pretty stable and so we can respond if there on any changes there.

Operator

Our next question comes from Jeff Hammond with KeyBanc Capital Markets.

Jeffrey Hammond

Just on the China deal. One, what are the cash proceeds? I know you talked about the $80 million you can repatriate? And then just speak to how the royalty work? And if there's any predetermination around eventually exiting the 19% or if that's just at some point in time in the future?

Carrie Anderson

Yes. Maybe I'll start there. I would say, right now, we're estimating that the after-tax proceeds plus the repatriated cash would give us about $350 million to prioritize towards returning cash to shareholders that's really what we want to prioritize when we get it closed. So we'll finalize the details at that point. But my current estimate is that approximately $350 million would be the number.

And I would say that as we think about the minority or the royalty rate, I would say we aren't disclosing the specifics on the royalty rate. But we believe it is consistent with arm's length rates for [ RAN ] licenses of that type. And so the transaction in our earnings announcement and in the announcement that we put out a couple of days ago on the China transaction, we did estimate the value of that royalty at about $100 million, so essentially $400 million for the transaction value and the royalty present value of about $100 million. So totality of $500 million.

So I'll ask Steve to comment on the minority...

Stephen Shafer

Yes. I mean I think, first of all, I'll go back and reiterate, we see the 19% retained ownership stake as a way to participate in future upside of the business along with the brand licensing.

And we -- part of the rationale for selecting CPEs, they are very capable company. They've got a very capable set of leaders that they're going to help bring into the business, and we believe in the plan that they have to grow the business. They're also great passionate stewards of the brand in A. O. Smith.

So we feel optimistic about where the future of the business could go under their leadership and that there will be value that we'll participate in along with that. We've always -- we're going to stay connected with them because the brand is a big part of the value that they're buying into and the A. O. Smith brand means obviously a lot to us.

And I think the monetization of that in the future, we'll see. We think we're optimistic of where to go. And I believe that the China market will have a recovery period in front of it. And obviously CPE, as a kind of financial asset manager, we'll look at some point for their own exit, and we'll work closely with them on what that will look like.

Jeffrey Hammond

Okay. Great. And then just on the price increases, it seems like the second price increase kind of midyear was maybe more difficult than in the past. And I don't know if that's competitive dynamics with wholesale retail timing or just consumer fatigue. But I'm just trying to get a sense of how confident you are that you can kind of push this price?

And then, Steve, I didn't know if I caught this, have you heard -- have you seen your competitors do a similar price increase? Or you said you haven't seen it yet?

Stephen Shafer

We've seen announcements from competitors in the marketplace for similar price changes and similar timing. So that's out there in the industry right now. I think we're all dealing with very similar realities. We all are making products primarily made of steel and that are big and multi and have to be shipped. And those are rates that I think are pressuring the entire industry.

As you mentioned, past dynamics around retail wholesale. I mean those are equalizing because of the changes happening in the marketplace. Past dynamics in the past that made a [ Murphy ] were [indiscernible] refunds, right? We're kind of through that too. So we're pretty confident that I think this is a price change that is going to be required for the industry to remain profitable.

Operator

Our next question comes from Brendan Shea with JPMorgan.

Tomohiko Sano

This is Tomo Sano from JPMorgan. So if we step it back and once China is largely out of the portfolio, how should we think about the through cycle growth profile of the new A. O. Smith? Like what would you need to go right for the company to sustainably grow above its historical rate, please?

Stephen Shafer

Well, I'll kind of walk through kind of our portfolios and where they stand. Our core North American water heater boiler business. So you've seen the growth profile of our boiler business. That is a terrific franchise. Our lock in bar business is a great business. And with the product offering, the value proposition and the technical support we supply -- we supply the marketplace, we expect that, that will continue to be kind of a growth business and be very competitive and take share in the marketplace.

I think on the commercial water heater side, it's also a very -- a great franchise business, and we're the market share leader there, and we have a great offering and again, supported by our go-to-market model and our technical capabilities.

I think on the residential side, we're going to continue to navigate through the cycle on that. Ultimately, a recovery in some of the macro factors will help improve the growth profile there.

Also regulatory changes. We had a regulatory change on the commercial side this year that did not go through. We still believe, longer term, regulation is going to drive greater efficiency and greater technology upgrade. And so that's an opportunity to kind of grow the business as well as we tend to lead through those technical changes. And so those are some areas in our core that I would highlight as future growth opportunities for us.

And then really a lot of growth for us, we see coming through the additional growth platforms in water treatment, which we've been on a journey with, but I think we've got a great strategy for how we're focusing that business and in the right areas where we have the right to compete in.

And then with our Leonard Valve acquisition this year, we've stepped into building out a platform around water management. And like I said, there's more work to be done on both of those platforms, including on the M&A front. And I think that's going to position us into some higher growth markets and then also allow us to think about how innovation and connectivity can bring that together longer term.

Operator

Our next question comes from Scott Graham with Seaport Research Partners.

Scott Graham

Back on this price increase for water heaters, apart from changes in efficiency standards, I don't remember, price increase this large.

So I'm wondering, since you're telling us, I'm sure you've talked to customers, I'm wondering what that feedback has been? And is there a risk here that the couple of new entrants use this as an opportunity to kind of gain more ground in the territory.

Stephen Shafer

Well, I would say the industry has had a track record of meaningful price changes and often the driver for it has been steel, right? Because one of the things for tank-type water heaters in particular, steel is a major component. And that's the case for everybody. And even new entrants who want to get into that space.

So from that standpoint, I think the industry does have history around when there's meaningful movements in steel the industry understands that there is a price pass-through because it's a very steel-based product. So from that standpoint, I think there is -- and look, we always take new entrants seriously, and we watch folks who look to get into the space.

And I think as I've said in the past, it's not just about reaching a price point. It's the holistic business model is you need to have a comprehensive portfolio of with the right channel partners that can have inventory available when a customer needs it and support that with all of the technical service and the reliability and the brand trust that we provide.

So it's a comprehensive business model, one that we invest heavily in. And I think it's also -- that business model that makes it difficult for somebody to play in a small scale way.

Scott Graham

Fair. Just a follow-up on capital allocation. So you indicated in your agreement with -- to divest China announcement that you'd be looking seemingly heavily towards share repurchases. I guess with that agreement signed visibility on what the proceeds will be, and you're having a like small level of net leverage. Is there a reason why we can't start that acceleration in share repurchases now?

Carrie Anderson

Yes. I would say, certainly, part of the transaction unlocks cash. So we want to -- the transaction needs to close to be able to get a portion of that. We also want to make sure we have a general idea of all of the after-tax -- the tax consequences of the deal as well as any of the customary closing costs, those things to get a better estimate.

We did increase our buyback earlier this year from $200 million to $300 million. We're on track with that. So we'll finish out the fourth quarter with additional share buybacks to close out the $300 million program. And then as part of our 2027 planning, we'll then figure in, again, approximately $350 million is what we're expecting. So I think it will figure prominently in how we think about our 2027 plan. at this point.

Operator

Our next question comes from Andy Kaplowitz with Citigroup.

Andrew Kaplowitz

Give us a little bit more color on what's going on in Leonard Valve. I think you mentioned you're seeing some project delays, maybe, just a little bit more detail into those delays and how the business should fare as we go into '27?

Stephen Shafer

Yes. There's primary components of the Leonard Valve portfolio. There's the mixing valves and the digital mixing valve side of the business, and then there's the boiler control side of the business, which prevail goes to market as heaters its brand.

And when we bought the business, we really like both sides of that business. The mixing valve is a key component is stepping into water management. And the boiler control side too is part of that, but also has a great connectivity to our franchise around the lack of our boiler system. So we like both of those parts of the portfolio for very strategic reasons.

In terms of the kind of the performance that we talked about today, the mixing valve side of the business continues to perform very well. And as we -- as expected and is providing good growth for our business going forward. And we also like a lot of the synergies that we've been having in the dialogues with our customers in the marketplace about adding that to the A. O. Smith lineup.

On the timer side, the boiler timer piece, that can be tied to like other parts of our business are at times, certain regulatory changes and policy decisions made, right, about upgrading for higher efficiency. So the heat timer business is tied to increasing building efficiencies. And right now, in parts of the country where they have high penetration, there's been some changes in policy decisions, which have put projects on delay. That's what we're feeling right now in terms of the near-term financial performance.

We don't believe it's structural or a fundamental shift in how that business will perform. We believe that many of those policy decisions just need to work their way through the system. Ultimately, at the end of the day, building owners are still going to look to improve the efficiency of their buildings, and we're part of that solution.

And longer term, we just think having the time our business is a great synergy with how we go to market with our boiler franchise and then more broadly, how water management is going to play within our portfolio.

Andrew Kaplowitz

Got it. And maybe to that point, like obviously, we understand the focus on repurchases with the divestiture -- but as you probably know and there's been a fair amount of derating on water assets out there. So do you see more opportunity as you go into '27, whether it's adding into water management or some other adjacency. Should we expect a little bit more activity out of you guys at that point?

Carrie Anderson

Maybe I'll start there, and I'll ask Steve to comment specifically on M&A. But I would say our use of the after-tax China proceeds and the repatriated cash for share repurchases isn't going to limit our opportunity to do other capital allocation priorities.

So it doesn't mean choosing between share repurchases or growth investments, so it's not an or, but I'd like to think of it as an and. Our balance sheet and our cash flow are strong enough that we can continue to balance capital allocation priorities.

So Steve, to kind of pick up on this...

Stephen Shafer

Yes. I would just say, as it relates to how we want to deploy capital costs, our allocation priorities and specifically as we think about how we want to build out the portfolio on the platforms that I talked about.

From my standpoint, it starts with having a clear strategy of where you want to go. Clear understanding for how you're going to create value by going there. And then you have to have conviction around following through and doing it.

And I think what we have is a clear strategy, understanding how we're going to create value and conviction of what we want to do. That alone doesn't get you to then putting capital to work, right? So in the world of M&A, particularly timing has to line up -- sometimes you got to be patient, right? As I mentioned, we're going to be a disciplined acquirer.

And -- but I like our strategy, I think we have clear understanding of where we want to go. I think we've got a robust pipeline, and it's just a question of continuing to work it, staying active and then making sure we have the conviction when the time is right and we've got the right asset that we can find a way to close it and build out our portfolio.

But it's difficult to control the time, and we're playing this for the long game, and we're going to take the time if needed to do it.

Operator

Our next question comes from Ryan Connors with North Coast Research.

Ryan Connors

Just a couple of very quick housekeeping points of clarification on the China cash and proceeds. Number one, is the $80 million in cash being repatriated, is that the entirety of the cash balance in China? Or is there anything else after that?

Carrie Anderson

Yes, I would say that there's certainly cash that is needed to run the business. So this transaction obviously facilitates to bring back some of that excess cash back as a result of the transaction. But there is still cash there as we are -- need to operate the business still.

Ryan Connors

Right. But nothing material in terms of further repatriation?

Stephen Shafer

As the business kind of moves through and continues to return to a growth path, the royalty stream that will come from that schedule for in payments and other things down the right.

Ryan Connors

Got it. Okay. And then the second one was the $350 million in proceeds, will that be repatriated immediately? I would assume that was the case, but then you did use the term portion when you talked about the repatriation post closing?

Carrie Anderson

No. Again, I would just say that our intent is to prioritize my estimate of around $350 million to share repurchases after closing.

Ryan Connors

So that money will come back immediately and be free and clear for repurchases immediately upon closing.

Stephen Shafer

Doesn't [indiscernible] that close.

Operator

And I'm not showing any further questions at this time. I'd like to turn the call back to Helen for any further remarks.

Helen Gurholt

Thank you, everyone, for joining us today. We look forward to updating you on our progress in the quarters to come. In addition, please mark your calendars to join our presentations at two conferences this quarter. Baird on November 10 and Goldman on December 2. Thank you, and enjoy the rest of your day.

Operator

Ladies and gentlemen, that concludes today's presentation. You may now disconnect, and have a wonderful day.