Watts Water Technologies Q2 Earnings Call Highlights

Key Points

• Record Q2 performance: Sales rose 19% to $763 million, while adjusted EPS increased 18% to $3.66. Growth was driven by pricing, acquisitions and strong data-center demand, although adjusted operating margin fell 60 basis points to 21%.
• Data centers are a rapidly expanding opportunity: Sales to data-center customers more than tripled year over year, and Watts raised its estimated served market to approximately $2 billion, including liquid-cooling and thermal-storage applications. Management cautioned that project timing and customer pull-forwards could increase quarterly volatility.
• Full-year outlook raised despite construction weakness: Watts now expects 8%–11% organic sales growth, 14%–17% reported growth and 20–80 basis points of adjusted margin expansion. Residential and broader nonresidential construction remain soft, but repair-and-replacement activity, which represents about 60% of sales, provides support.

Watts Water Technologies NYSE: WTS reported record second-quarter sales, operating income and earnings per share, driven by pricing, data center demand and contributions from recent acquisitions. The company raised its full-year sales and margin outlook, though executives said residential and non-institutional construction markets remain under pressure.

Second-quarter sales increased 19% on a reported basis to $763 million and rose 12% organically. Adjusted operating income increased 15% to $160 million, while adjusted operating margin declined 60 basis points to 21%. Adjusted earnings per share rose 18% year over year to $3.66.

“We delivered another quarter of better-than-expected results, including record sales, operating income and earnings per share,” Chief Executive Officer Robert Pagano Jr. said. He attributed organic growth to data center demand and favorable pricing, partly offset by the company’s 80:20 product rationalization program.

Data Center Sales More Than Tripled

Data centers continued to be a major source of growth for Watts during the quarter. Pagano said data center sales more than tripled from the prior-year period, supported by demand for cooling products, including the company’s recently launched CoolVault thermal storage tanks.

For the first six months of 2026, data center sales represented 8% of total company sales, including some customer-driven sales that were pulled forward from later periods. Watts now expects data center revenue to account for a mid- to high-single-digit percentage of full-year sales, compared with 3% in the prior year.

The company increased its estimate of its served addressable market for data center products to approximately $2 billion, from a prior estimate of more than $1 billion. Pagano said the revised estimate incorporates a broader global opportunity, including Europe, the Middle East and Southeast Asia, as well as growing adoption of liquid-cooling systems.

Watts said liquid cooling can increase its content opportunity per megawatt compared with traditional air-cooled systems. Pagano said the company’s content opportunity varies considerably by project, ranging from about $25,000 to $100,000 per megawatt. Liquid-cooled projects that include thermal storage tanks generally represent the higher end of that range.

While the company sees strong demand, management cautioned that data center projects can make quarterly results more variable. Customer requirements pulled roughly $5 million of data center project sales into the second quarter in the Americas and another approximately $5 million in APMEA, the Asia-Pacific, Middle East and Africa region.

Pagano said Watts has its greatest visibility into third-quarter construction schedules, while fourth-quarter timing is less certain because customers can shift project schedules or finalize designs closer to installation. The company said it is investing in inventory and capacity to respond to customer needs.

Regional Growth Led by Americas and APMEA

The Americas segment posted 17% reported sales growth and 12% organic sales growth, largely reflecting pricing and volume tied to data center activity. Wholesale customers also pulled forward approximately $10 million in demand ahead of an SAP implementation at Watts’ largest site at the end of June.

Acquisitions contributed $28 million in Americas revenue, while the company’s product rationalization initiative reduced segment sales by approximately $8 million. Americas segment margin declined 150 basis points to 25.7%.

Europe reported sales growth of 12% and organic growth of 9%, supported by pricing and higher HVAC volumes. Foreign exchange also benefited reported growth. Europe’s segment margin increased 160 basis points to 13.3%.

APMEA delivered 57% reported sales growth and 31% organic growth. The company cited increased data center sales in China, including the pull-forward projects, as well as acquisition and foreign-exchange benefits. The Middle East conflict created headwinds, but the company said its recently acquired Saudi Cast operation has been relatively resilient because of its in-country business model. APMEA segment margin increased 100 basis points to 19.9%.

Margins, Cash Flow and Acquisitions

Adjusted EBITDA rose 15% to $177 million, while adjusted EBITDA margin declined 70 basis points to 23.1%. Chief Financial Officer Diane McClintock said the margin decline primarily reflected 70 basis points of expected dilution from acquisitions, inflation and a difficult comparison against a prior-year tariff-related price-cost benefit.

Those factors were partly offset by favorable pricing, volume leverage and productivity gains. McClintock said the company recorded about 6% pricing in the second quarter and expects pricing to decline sequentially in the second half as it laps prior-year price increases. Watts has implemented selected price increases globally to address inflation linked to the Middle East conflict.

Year-to-date free cash flow was $108 million, compared with $105 million a year earlier. The company said higher accounts receivable from increased sales and a strategic inventory investment affected cash flow, but it expects seasonal improvement in the second half. Watts maintained its goal of converting at least 90% of net income into free cash flow for the full year.

Watts ended the quarter with a net debt-to-capitalization ratio of negative 12% and net leverage of negative 0.4 times. Pagano said the balance sheet provides capacity for strategic acquisitions, productivity investments, product development and other growth initiatives. The company completed five acquisitions in 2025 and said those businesses are performing well and remain on track to achieve or exceed targeted synergies.

Full-Year Outlook Raised Despite Construction Weakness

Watts raised its full-year organic sales growth outlook to 8% to 11% and now expects reported sales growth of 14% to 17%. The company also increased its forecasts for adjusted EBITDA margin and adjusted operating margin expansion to a range of 20 to 80 basis points.

• Americas organic sales are expected to rise 9% to 12%.
• Europe organic sales are projected to increase 1% to 4%.
• APMEA organic sales are forecast to grow 9% to 12%.
• Third-quarter organic sales growth is expected to be 5% to 8%.

The guidance assumes no change in the Middle East conflict or in the current tariff structure. Watts also said it is excluding any potential refunds related to IEEPA tariffs from adjusted results.

Management said residential single-family construction conditions have become “slightly worse” than in the prior quarter, while multifamily construction remains soft. Healthcare and education have held up better, according to Pagano, but other nonresidential new-construction activity remains subdued outside of data centers.

“We are monitoring the macro environment, including tariffs, interest rates, and geopolitical developments,” Pagano said, adding that the company believes its repair-and-replacement exposure, which represents about 60% of sales, provides support across varying economic conditions.

About Watts Water Technologies (NYSE:WTS)

Watts Water Technologies, Inc is a global manufacturer and distributor of flow control products and solutions designed to ensure the safe, efficient delivery and use of water. Founded in 1874 and headquartered in North Andover, Massachusetts, the company has built a reputation for engineering innovation in residential, commercial and industrial plumbing, heating, cooling and water treatment systems. Watts operates through a comprehensive portfolio of brands and product lines that address application-specific requirements in water safety, pressure regulation, flow control and filtration.

The company's product offerings span backflow preventers, pressure reducing valves, relief valves and steam traps, as well as hydronic balancing and temperature control devices for heating systems.

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