A.O. Smith Corp (AOS) — Q3 2025 Earnings Call Transcript

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 Steve Shafer, Chief Executive Officer; and Chuck Lauber, Chief Financial Officer. Within today's presentation, we have provided non-GAAP measures. Free cash flow is defined as cash from operations less 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 expressing my gratitude to the dedicated A.O. Smith employees and our partners and customers for another quarter of making clean, hot, and safe water accessible to millions. We appreciate your efforts in making this happen. Please turn to Slide 4, and I will review our financial performance for the quarter. Our global A.O. Smith team achieved third quarter sales of $943 million, a 4% year-over-year increase, and EPS of $0.94, a 15% increase compared to 2024. Sales in North America grew 6%, primarily due to our pricing actions and strong commercial water heater and boiler volumes. We saw a segment margin expansion of 110 basis points in North America and 90 basis points in the Rest of World segment. Ongoing economic challenges and reduced availability of government stimulus programs resulted in a 12% decrease in local currency sales in China. Pureit contributed $17 million in sales during the quarter, and our legacy India business continued its strong double-digit growth with a 13% increase in local currencies. North America water heater sales rose 6% in the third quarter, driven by pricing actions in response to higher tariffs and increased costs, along with a rise in commercial water heater volumes. Our high-efficiency condensing gas and heat pump products continue to narrate a compelling payback story in commercial applications. Residential water heater volumes were also strong, despite a decline in Q3 industry volumes year-over-year. We believe we outperformed in the residential and commercial markets during the quarter, partly due to our production efficiency initiative that minimized the prebuy impact on sales in the first half of the year. Our North American boiler sales increased by 10% compared to the third quarter of 2024, aided by pricing actions and higher volumes of our high-efficiency boilers. North America water treatment sales fell by 5% in the third quarter, as growth in our priority channels was more than offset by a decline in the retail channel. Our priority dealer, e-commerce, and direct-to-consumer channels grew by 11% this quarter. In China, third quarter sales dropped 12% in local currency, impacted by persistent economic challenges, limited government subsidy programs, and increased competition leading to reduced volumes. Despite these challenges, we achieved a 90 basis points margin expansion compared to last year due to our restructuring initiatives from 2024 and other cost-saving measures. Please turn to Slide 5. I would now like to discuss our commitment to sustainability. For us, sustainability is a core aspect of our identity and daily operations. We are dedicated to not just developing high-efficiency products but also to sustainability in our facilities and manufacturing processes. Later this week, we will release our sustainability progress report, which will feature our sustainability scorecard and updates on our water conservation, greenhouse gas emissions, and waste reduction goals. This report will demonstrate that we are meeting or exceeding our established goals. The results of these efforts support both sustainability and financial outcomes. Initiatives like our test water recirculation system, which reuses water from product testing, and our glass enamel reuse process, which captures waste glass for reuse in tank manufacturing, exemplify our approach to integrating sustainability into our operational excellence and innovation. We are committed to continually improving our business while safeguarding our planet. I will now hand over the call to Chuck, who will provide further insights on our third quarter performance.

Thank you, Steve, and good morning, everyone. Please turn to Slide 6. 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 7. 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 8. Operating cash flow grew 21% to $434 million, and free cash flow grew 35% to $381 million during the first 9 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 9. 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 dividend. We repurchased approximately 5 million shares of common stock in the first 9 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 to $3.90 per share to a range of $3.70 to $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% to 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.

Thanks, Chuck. 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. 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 helped 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 sub fees 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 9 months of the year, although we believe we may have benefited from a minimal amount of prebuy 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 deemphasize 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 USD 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% to 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% to 24.5%, and we expect that Rest of 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 or 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. And 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 tariffs 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.

Maybe just building on some of the China color. You obviously lowered expectations around China sales. Could you just talk about your performance versus the overall market there? And is this just a weaker market? Or are there any competitive dynamics going on?

Yes. It's a little bit of both. So the market continues to have its challenges. And as I mentioned, there's been a little bit of a demand pull-forward driven by the government subsidy program. So we're on the other side of that. And I think within that down market, competitive intensity continues to increase. So we see a lot of promotional activities trying to step in where government subsidies were playing a role to generate demand previously. And so that's adding to the competitive pressure. And I think, as we see our path forward, as I mentioned, we've got confirmation that our brand remains very strong there. We have a really strong innovative portfolio to serve our customers, but we need to work through this period of challenging market conditions.

Appreciate that. And then obviously, one of the bright spots this quarter was in the North America commercial water heater sales. I think previously, you attributed some of the strengths to prebuy. So just maybe a little bit more detail on what you're seeing in that market and what's driving the strength there?

Yes, the market conditions for commercial products have been strong, and we have a robust portfolio in that area. I previously mentioned the launch of our FLEX commercial water heater, which is now in the marketplace and performing well. This success is attributed to both a favorable market backdrop and our competitive product offering.

And I would add that during the third quarter, we benefited from our production efficiency program to make sure that we were level loading a bit closer to the market. And some of that strength we saw in commercial and residential heater was a part of the output of that benefit in the level loading program.

Just to level set on the China strategic review. We know there isn't a timetable as of now in terms of the ultimate decision, but given the insights from the assessment so far, has the range of potential outcomes been narrowed in any way?

No, Bryan, not yet. I mean, we're still early enough in the process that we're not ruling out any outcomes at this point. So like I said, we've done some really good work just trying to profile and understand the market. We've gotten some third-party assessment to do that. We've started the process of reaching out to other participants, which is why we wanted to announce that we were putting the business under the strategic assessment, but we're not at a point yet where we've kind of narrowed down or have a view of what the outcome of that is yet. It's still too early.

Yes. Understood. Appreciate the color. The priority channel growth in North American water treatment, certainly encouraging in Q3, and that 11% nicely aligns with the 10% to 12% organic growth target you had put out at Investor Day. With the mix now reset for the platform, is that kind of organic growth in play going forward?

I mean, that's certainly how we think about the business long term. I would say there's still more work to be done, right? So we've done some reprioritization of the channels and where we think we can be competitive and win. I think there's still more work and investment in that space to build out that platform. But we feel good about the growth potential of that business.

Just on the U.S. residential water heater market, I think you didn't change your industry shipment assumptions, but seem to lean a little more cautious. So I just wanted to understand a little bit better how you see that playing out.

Yes. Our outlook for the industry, we were talking about flat industry on our last call. And now, we're saying flat to slightly down. So we do see a little bit of pressure on the residential side. Most of that is coming through new home construction completions on the residential side that we're seeing some of that weakness. So we've taken it down just a tad.

And are you seeing kind of the market share recapture play out as you thought?

Yes. As we were looking at level loading our production this year, we've seen our performance relative to the market in Q3 come back and gain share back as we expected.

Okay. Can you discuss the additional tariff challenges you're facing and provide some details on that? Additionally, as you consider steel pricing and potential tariffs going into 2026, how will that influence your pricing decisions for that year? We're hearing from other sources that next year could see another above-average increase, and I would like to know your perspective on that.

Yes. This is Chuck. I mean, the mention on tariff pressure was really framing from third quarter to fourth quarter. It's probably maybe 20 basis points on North America margins, where we are seeing a bit heavier tariffs kind of accumulate. Our full year outlook at 5% has not changed. So it's still a little bit of timing, putting a little pressure on the North American margins in the fourth quarter. We'll be back in January. We're giving a little bit of an outlook on cost. The tariff world is a bit volatile. So I think we'll kind of hold off commentary to see where material costs go in that respect.

Could you talk a little bit through what you're seeing in the residential side of things in terms of the discretionary spend? I certainly heard the commentary earlier that some of that incremental weakness you saw in the residential volume side from an outlook perspective is tied to new housing starts being a little bit lower, no surprise. Are you seeing anything different on the discretionary piece?

We really haven't seen that change. We do a survey every quarter, and we look at proactive replacement, as you know. And if we kind of look at that survey, there's quarters where it edges up, edges down. But overall, it's still above that 30%. Proactive replacement remains pretty resilient. Certainly, something we'll watch as we go forward. But it's a backward since the last trailing 12 months survey. So we'll have to continue to watch that and make sure we understand if there is a trend developing. But right now, still above 30%.

Following up on Jeff's question, I understand you're not sharing your thought process for 2026, but if current trends continue without any additional actions, do you believe the pricing adjustments you've made will allow you to be price-cost positive or at least neutral in terms of margins or EBITDA dollars once everything levels out? Is that your thinking, or do you expect to see some discrepancies regarding inflation in relation to the measures you've taken?

Yes. When we do our price increases, and it really was no different other than the amount of the price increase this time with the tariff costs hitting us, we typically look to cover margin plus cost. So just a reminder, the last one was second quarter because it was effective. When we announce those prices, they go out, and certainly, we see pressures over time on the price, and we have a bit of a fade. So I think we'll kind of still reserve kind of the answer to that as we get into the next quarter, but we're comfortable with our price-cost relationship now. But as you'll see, there's some pressure when you look at our guidance and a little bit of pressure on margins in the fourth quarter.

This is Charles Perron-Piche. First, I'd like to go back on the China market. Understanding the market conditions are tough, but I guess, do you have any thoughts on potential additional restructuring initiatives in the region given the environment and something that would be done ahead of a potential strategic announcement?

I think it's one of the things we're going to continue to kind of work through and learn more about as we go through our strategic assessment, and I kind of alluded to the fact that there are opportunities for us as we think about how we go to market, our business model. We're going to continue to evaluate those things. Whether we do those through partnerships or we do them for ourselves, it's something we still have to work through. But our goal is to make sure that the business is set up well for success. And obviously, a little bit of market recovery will help aid that in a bit. But we're going to continue to kind of learn from the changing market environment and make the necessary changes. And whether that comes through things that we'll take on and self-help to do that or whether that's done through partnerships is one of the things we're assessing right now.

Okay. That's helpful color. And then I think in your prepared remarks, you talked about the potential for a strategic acquisition within your or adjacent market. I guess, on this, can you talk about what the pipeline for these types of opportunities looks like in the current environment, along with if the timing of any strategic decision on that is dependent on the potential announcement of the strategic review in China?

No, I think one of the strengths we have, right, is a strong balance sheet and our cash generation capabilities, so we've got an active pipeline. We continue to evaluate that from both a strategic lens and financial lens, where we want to go next. As I mentioned, partly it's how do we strengthen the core of our business, how do we think about building new, higher-growth businesses, and we're going to continue through that process. So I don't think it's connected to other decisions we're making across our portfolio at this time, and we're ready to move, I think, when the right opportunities come about.

Could you provide an update on gas tankless, including the progress on the relocation of manufacturing and market development, as well as its impact on third quarter margin contribution and the projections for the fourth quarter as outlined in the '25 guide?

Sure. As you know, we've made a big investment to enter with our own products into the gas tankless space. We've been building out the right set of products, the manufacturing capability here in North America. And all of that is progressing well. I think the market itself for tankless is under pressure, heavily connected back to the residential construction market that we talked about. So from that standpoint, it remains kind of a challenging market. But I think we're really excited that I think we've got the right products, we've got the manufacturing capability ready. As we've talked about in the past, we've made some changes. In the past, we were talking about launching in China, moving to North America. We've made some changes into that strategy, which has made some delays to our current plan in terms of how we're going to go after the market. But I think we're happy with where we're at. We'd like to move faster in the marketplace. And I think as the market picks up and recovers, especially around new construction, and with the product offering we have and the supply chain we have, we'll be ready to compete successfully.

Are you receiving positive feedback? Please continue.

I was just going to answer the question on margin pressure. We're anniversarying when we first launched the product last year, so the margin pressure is a bit less than the 40 basis points we had historically talked about. For the quarter, it's probably about 20 basis points. It's not overly significant. And I think you were asking about feedback.

Yes, folks love the product. And when they get their hands on it, and they get comfortable with it. And as you know, we've been building out our portfolio. So when we have the full portfolio, it'll be even more compelling. There's also elements of how we serve this market, right? A lot of more gas tankless tied to the new construction. So we're working out on the business model as well. But I would say, at the end of the day, the product is a market-leading product, and that's what we look to do when we got kind of our own product offering into this space.

This is Adam Farley filling in for Nathan. I wanted to ask about the situation in China. Typically, the fourth quarter is a stronger season due to shopping holidays. What are your expectations for this selling season as we approach the fourth quarter, considering some of the challenges you are facing there?

Well, you're exactly right. Typically, the fourth quarter is one of our strongest quarters in China. Our outlook assumes that there is an uptick in volume in the fourth quarter compared to the third quarter. But I will say when you kind of frame our outlook for China overall to be down 10%, you'll note the fourth quarter gets a little more pressure on year-over-year comps compared to the third quarter. So without the discontinuation of the subsidy program, there's a bit of uncertainty in China on how the fourth quarter may play out. But right now, we have a kind of normal cadence, but not at normal volumes. But just kind of relative to the third quarter, we do see a bit of an uptick.

That's helpful. And then maybe shifting to boilers, which was a bright spot in the quarter, I think you mentioned maybe you think there's a little bit of pre-buy there, but I was also wondering if the boiler sales cycle is maybe elongating at all due to general market uncertainty or maybe that's not an issue at all?

No. I mean, we do believe that there was some pre-buy, so there are certain boilers that, I'll call it, are inventoriable size. They're small enough that you'd be willing to invest and put them in inventory. We've seen a couple of strong quarters in boilers. Typically, our strongest quarter is the third quarter. So we do think we'll see a little bit of a headwind as we go into the fourth quarter for some of the unwind of the, call it, inventoriable boilers that will come out in the fourth quarter. But overall, the market quoting remains pretty steady, pretty consistent, particularly on the large CREST units. So we're not seeing any major change or elongation in what I would say, quoting to the order cycle.

Steve, obviously, you've had good operating experience in your past positions. Maybe just stepping back as you've looked at A.O. Smith, and given how many of your markets are relatively sluggish, how have you sized the potential opportunity for cost out overall at A.O. Smith and/or the potential to accelerate new product-related growth as you begin to transition into '26?

Yes, Andy. As I mentioned, two of our main focus areas are enhancing A.O. Smith's operational excellence and maximizing our operating system alongside innovation. This addresses both parts of your question. While we don't have a precise estimate of the value at stake yet, I am optimistic about the potential to introduce more discipline into our operations at A.O. Smith. We have strong manufacturing capabilities and experienced team members driving our business. The addition of Chris Howe as our Chief Digital Information Officer brings a level of discipline and the opportunity to leverage our technology investments. Although we haven't quantified this yet, we're laying a solid foundation for future growth, which we will continue to update you on. Regarding innovation, we have onboarded a new Chief Technology Officer, and we are focused on enhancing our commercialization capabilities across our businesses. We are working on establishing that foundation. Our company has a strong track record of breakthrough innovations and category creation, so tapping into our culture of innovation remains a significant priority for us.

That's helpful. And maybe just a little more color on inventories across your residential channels, anything you're seeing there? Obviously, residential HVAC is having much more difficult time than residential water heaters, given their own inventory problems over there. It doesn't seem to be the case with you guys here, but what's the risk given weaker consumer confidence that we could see some destocking?

Right now, I would say we think that inventories in the channel on both residential and commercial side are at pretty normal levels, pretty much target levels. As there's hesitancy, maybe on new home construction, we may see some of the distributors looking to be very prudent on how they manage inventories in the back half of the year. But we feel like channel inventories are pretty much where they should be right now.

My first question is on CapEx. Could you talk about the CapEx guidance compared to 3 months ago, including what kind of items did you revise for the full year, please?

Yes. We lowered our CapEx outlook just a little bit. We pushed out some of the investments that we had planned for the fourth quarter of this year into early next year. Some of those, not all of those were related to just watching the DOE commercial regulatory initiatives out there, and we're just being prudent on making those investments until we have more surety around that.

And my follow-up is capital allocation. So you have been aggressive with buybacks and dividend increases, how do you prioritize capital allocations going forward, especially if the macro headwinds persist, please?

I mean, certainly, the dividend is very important to us. We've raised it for 32 years. We look at that from a yield perspective, and we feel pretty comfortable with where we are at on that. Buybacks, we're framing really to not grow cash, which we're buying back a prudent amount, we believe, to not grow cash and still reserve firepower for acquisitions. So as Steve mentioned, we have adequate firepower. We're looking for adding those acquisitions, and we're in a good position to do that.

And I'd say in terms of market conditions and how they change, we still recognize we need to deploy capital to our core business, and we have a very resilient core business from that standpoint. So making sure that we maintain a very strong core business that's cash flow generating is in that dynamic as well. At the same time, we're looking at how we provide more adjacencies that get us into kind of higher growth businesses.

I apologize for joining the call late and missing your prepared remarks. Could you clarify if the reduction to the lower end of the guidance range for the year is solely related to China, or are there other factors involved as well?

Yes. Scott, there were two things we pointed out. There was obviously the softness, and we did revise down our China outlook for the year to down 10%. So that was a big part of it. The other thing we've highlighted is weakness on the residential side of the North America business, and we just see that a little bit softer now, where previously, we talked about it as a flat market. We now see it as flat to slightly down. So those two components are what have us being a little bit more cautious.

Okay. And I'm sorry for having to ask that. It was something you already said. Does that presuppose that, or maybe contemplate that, the October industry shipments were better than September because September really dropped off there? Can you talk about what you're seeing in the industry in October?

In August, industry shipments for the residential sector declined significantly. We anticipate that September will not experience a similar decline, but it was still weak. Regarding our orders, we will comment more once we have October's industry data. However, as we assess our orders for October, we have not observed any resilience, particularly in the wholesale segment, which is usually affected by new home construction. Overall, the situation has been somewhat weak. These factors influence our perspective, leading us to adjust our outlook from a flat market in the previous quarter to flat to slightly declining now. We are noticing some pressure, especially related to new home construction.

And we've talked about our approach to trying to level load our production a bit more for the efficiency benefits of that, working closely with our customers to do that. So we saw Q3 where the industry was down a bit, but we also gained share as was our intention as we walked through the quarter because of the way we level-loaded our production.

Thank you for joining us today. Let me conclude by reminding you that we are pleased with our growth in the quarter. 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 three conferences this quarter: Baird on November 11; UBS on December 3; and Goldman on December 4. Thank you, and enjoy the rest of your day.