Welcome to Watts Water Technologies, Inc. third quarter 2026 earnings call. At the end of the presentation, we will open the line for questions. I will now turn the call over to Ray Nash, Vice President, Investor Relations.

Thank you and good morning, everyone. Welcome to our third quarter earnings conference call. Before we begin, I'd like to remind everyone that during this call, we may be making certain comments that constitute forward-looking statements. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially. For information concerning these risks, see WAAT's publicly available filings with the SEC. The company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Today's webcast is accompanied by a presentation, which can be found in the investor relations section of our website. We will reference this presentation throughout our prepared remarks. Any reference to non-GAAP financial information is reconciled in the appendix to the presentation. With that, I will turn the call over to Bob.

Thank you, Ray, and good morning, everyone. Please turn to slide three, and I'll provide an overview of the third quarter. Our third quarter performance exceeded expectations with record sales, operating income, and earnings per share. Strong execution in our diversified portfolio enabled us to capitalize on attractive opportunities including data center growth. As always, I would like to thank the entire Watts team for their commitment to serving our customers and executing our strategy. Organic sales rose 12% in the quarter as we benefited from strong growth in data centers and favorable price, which more than offset the impact of our 80-20 rationalization program. Adjusted operating margin expanded 240 basis points to 20.9%. Margin performance was driven by favorable volume leverage, price, and productivity, which more than offset inflation and the expected dilution from recent acquisitions. Our balance sheet remains strong and provides flexibility to pursue strategic acquisitions and invest in high-growth opportunities, including product innovation and automation. Moving on to our business updates, we are maintaining a positive price-cost relationship despite persistent inflation in commodities, tariffs, freight, logistics, wages, and benefits. Our teams have done an excellent job managing these pressures through pricing actions and sourcing and productivity initiatives under our one watts performance system, allowing us to maintain a favorable price-cost dynamic. We're also seeing tangible benefits from the continued transformation of our portfolio. Through strategic acquisitions and targeted product innovation, We have increased the size of our served markets, expanded our capabilities, and strengthened our position in attractive end markets, including institutional and data centers. At the same time, our 80-20 initiative is redirecting resources towards the product and channels where Watts has durable competitive advantages and greater potential for long-term profitable growth. Together, these actions are shifting our business mix towards higher growth and higher margin end markets while reducing our exposure to slower growth residential markets. Residential markets are expected to represent approximately one quarter of 2026 sales compared to 40% in 2022, while non-residential markets, including data centers, are expected to represent a total of 75% in 2026 compared to just 60% in 2022. Of the 25% residential exposure, 60% is repair and replacement. Now an update on our outlook for the remainder of the year. We are increasing our full year sales and margin outlook due to our strong third quarter results and our expectations for the fourth quarter reflecting the continued strength in data centers better than expected performance in Europe. Leading indicators for new construction remain weak, although demand remains strong in data centers and is holding up in institutional markets. Higher interest rates continue to weigh on new construction activity, while inflationary pressures continue to unfavorably impact our input costs. Uncertainty surrounding the Middle East conflict and trade policy also remain a concern. Against this backdrop, we expect continued weakness in non-institutional and residential new construction markets. Despite the uncertainty, the stability of our repair and replacement business combined with our increasingly diversified portfolio New Products, and Disciplined Execution support our confidence in our updated outlook. With that, let me turn the call over to Diane, who will address our third quarter results and our fourth quarter and full year outlook. Diane?

Thank you, Bob, and good morning, everyone. Please turn to slide four, which highlights our third quarter results. Sales increased to $728 million, reflecting a 19% increase on a reported basis and a 12% increase organically, both better than expected. Growth was driven by price and volume, including strong data center demand, which more than offset the impact of our 80-20 rationalization program. The Americas region delivered strong reported growth of 19% and organic growth of 12%, driven mainly by price and volume, largely from data center sales. Our 80-20 product rationalization initiative reduced sales by approximately 8 million or a 1% impact on organic growth. Acquisitions accounted for 35 million in sales, contributing seven points to America's reported growth. In Europe, reported sales increased 7% and organic sales rose 9%. Organic growth was driven by favorable pricing and higher volumes in both our OEM and wholesale businesses, while reported sales had an unfavorable foreign exchange impact of $2 million. Our 80-20 product rationalization reduced sales by approximately 1 million, slightly less than we expected. In apnea, reported sales increased 54% and organic sales grew 30%. Organic growth was driven by better-than-expected data center sales in China as well as higher volumes in Australia and New Zealand, which more than offset continued headwinds from the Middle East conflict. Acquisitions added 6 million in sales, or 17%, and Favorable Foreign Exchange contributed $3 million or 7%. Adjusted EBITDA totaled $169 million, an increase of 32% with an adjusted EBITDA margin of 23.2% up 230 basis points year-over-year. Adjusted operating income of $152 million increased 34% and adjusted operating margin increased 240 basis points to 20.9%. Margin expansion was primarily driven by favorable price, volume leverage, and productivity gains, which were partly offset by inflation and the expected acquisition dilution of 30 basis points. Segment margin expansion was broad-based, with all three regions delivering meaningful year-over-year improvement. Americas increased 180 basis points to 25.5%, Europe increased 230 basis points to 14.5%, and APMIA increased 170 basis points to 21.1%. And just to confirm, adjusted earnings excludes the impact of 39 million of tariff refunds received in the quarter. Adjusted earnings per share were $3.40, representing 36% year-over-year growth with operational performance, acquisitions and tax driving the increase. The adjusted effective tax rate in the quarter was 24.6%, favorable by 120 basis points, primarily due to the prior year tax regulation changes. Our free cash flow year to date was $230 million compared to $216 million in the same period last year. The cash flow increase was primarily due to higher net income, including the tariff refunds received in the quarter, partly offset by an increase in accounts receivable due to higher sales. our investment and inventory to support data center demand, higher capital spend, and lower tax payments in the prior year. We expect sequentially strong cash flow in the fourth quarter. The balance sheet remains strong, providing good support for our capital allocation priorities. On slide five, we'll review our outlook for the fourth quarter and full year 2026. As Bob mentioned, we're raising our full year sales and margin outlook. based on our strong third quarter and our fourth quarter outlook. This updated guidance assumes no change in the severity of the Middle East conflict, no further changes in our tariff structure, and our adjusted earnings outlook excludes the impact of tariff refunds. We now anticipate organic sales growth of 11 to 12%, which reflects a two-point increase to the midpoint of our previous outlook. Our reported sales are now expected to be up 17 to 18%. Regionally, organic sales in the Americas are now expected to increase by 12 to 13%, driven by price and volume, especially within data centers, more than offsetting anticipated 80-20 product rationalization headwinds of 26 to 28 million. In Europe, organic sales are now projected to increase by 5 to 6%, as favorable price and volume are partly offset by 4 to 5 million in 80-20 product rationalization. Atmia is now expected to achieve organic growth between 18 and 19 percent due to strong data center demand. Incremental sales from acquisitions are expected to be 107 to 109 million in the Americas and 21 to 22 million in Atmia. Foreign exchange is estimated to be a 20 million favorable impact. We are raising our full year adjusted EBITDA margin outlook to an increase of 70 to 80 basis points. a 25 basis point improvement compared to the midpoint of our previous outlook. We are also raising our full year adjusted operating margin to an increase of 70 to 80 basis points, a 25 basis point increase to the midpoint. Margin expansion continues to come from price, volume leverage, and productivity, which are expected to more than offset higher inflation and 50 basis points of acquisition dilution. Regionally, America's segment margin is now anticipated to increase 30 to 40 basis points despite 90 basis points of acquisition dilution. Europe's segment margin is now expected to increase 90 to 100 basis points based on strong price and productivity improvements and the benefits of our France restructuring program. AMIA's segment margin is forecasted to increase by 100 to 110 basis points. due to volume leverage and acquisition accretion. Our free cash flow expectation remains in line with our previous outlook, and we expect to deliver free cash flow conversion of greater than or equal to 90% of net income in 2026. Next, a few items to consider for the fourth quarter. Reported sales are expected to increase by 11% to 14%, with organic sales up 9% to 12%. We anticipate organic growth of 11-14% in the Americas, 2-5% in Europe, and 9-12% in APMIA. These estimates incorporate product rationalization headwinds under our 80-20 initiative of approximately 1-2 million in Europe and 4-6 million in the Americas. Incremental sales from acquisitions are projected at 13-15 million for the Americas and 3-4 million for APMIA. We also estimate a $2 million headwind from foreign exchange. Fourth quarter adjusted EBITDA margin is expected to be between 21.6 and 22.2%, an increase of 20 to 80 basis points. Adjusted operating margin is expected to be between 19.1 and 19.7%, an increase of 10 to 70 basis points. Across all regions, price and volume leverage are anticipated to be partly offset by higher inflation. Additional key assumptions for the fourth quarter and full year are available in the appendix of the earnings presentation. With that, I'll turn the call back over to Bob before moving to Q&A.

Bob? Thanks, Diane. To summarize, we delivered a record third quarter with strong performance across all our regions. Our strategic investments and portfolio actions are strengthening our competitive position in attractive growth markets particularly data centers while helping offset continued weakness in non-institutional and residential new construction. We've capitalized on these opportunities as demonstrated by our strong performance year to date which supports our higher full-year sales and margin expectations. Our strong balance sheet gives us the flexibility to continue investing in innovation, productivity, and strategic M&A while returning capital to shareholders. We remain focused on deploying capital towards opportunities that support sustainable, profitable growth and long-term shareholder value. With that, operator, please open the lines for questions.

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Jeff Hammond with KeyBank. Jeff, your line is now open.

Yeah. Hi, good morning. Can you hear me? Good morning, Jeff.

Yes, good morning.

All right, great. I guess let's start outside of data center. Just how are you feeling about, you know, Bob, you're always kind of prudently cautious, but how are you feeling about kind of North American construction markets versus, say, like three months ago, given kind of the rate movement and, you know, how is that impacting, if at all, pipeline activity and maybe how does it inform an early view into 27? I know one of your comps was a bit more are cautious on 27.

Yeah, so I think with the higher interest rates and just the uncertainty, I think probably a little softer than what we thought last quarter. So I think, you know, again, they're going to be soft markets heading into 2027, you know, similar to what we saw, but probably slightly worse than originally planned for, you know, three to six months ago.

Okay, and are you planning for that, or are you actually seeing that on the ground as projects get deferred or delayed?

Yeah, we're starting to see that. I mean, we're seeing just softness. Again, the good news is 60% of our business is repair replaced. That's holding up. We're seeing institutional markets hold up. I think it's really around the residential new construction and some of the other non-institutional commercial markets, excluding data centers, which is strong in offsetting a lot of that. So it's nice to have a diversified portfolio that offsets some of those things. Okay, great.

And then a lot of companies talk, you know, complaining a little bit more about price-cost. You guys kind of always manage that well and have great pricing power. What are you seeing in terms of pricing, logistics costs. And is that kind of driving any near-term price actions or any different view into 27 about how you think about kind of your normal course of price increases?

Yeah, I think we're all seeing inflation, especially with the war and the commodity costs are increasing. We will be putting in a price increase in the first at the beginning of the year, like we always do, but nowhere near the size that we did, you know, with the tariffs, etc. So think about a normal price increases, you know, in the two percentage area as we go into next year.

Okay, great. Thanks so much. Thank you.

Your next question comes from the line of Mike Halloran with Baird. Mike, your line is now open.

Morning, everyone. Good morning. So we'll start on the data center side of things. Maybe just think about the durability of the dynamics out there. You know, it's probably way too early post-election to think about how things might change, but maybe talk about what your visibility looks like based on the current backlog, current conversations. How far does that stretch out? And as far as product breadth, et cetera goes. Do you feel like there's more that you can do within the data center side than you're doing today? Is there an opportunity to expand the penetration there? Any thoughts on that side as well?

Yeah. So, you know, like you said, it's early days in the data center. A lot of discussion going on right now. But look, you know, we don't expect the midterm results to materially change the underlying demand for data center infrastructure. Right. So it's out there and and the hyperscalers are going to have to work with communities to figure that all out. Regarding near-term demand, we're talking to our contractors and installers and their book of business is solid for the next couple of years for sure. Our portfolio continues to expand based on are working with them and looking at how do we sustainably help them solve their water problems. So again, the team's doing a great job. You're obviously not going to see the growth we saw from 2025 to 2026 because we've had a lot of new products that we have a full year run rate on. But again, pipeline's good, invisibility's good, and we'll be watching and monitoring as it gets out into the latter years.

Balancing side of things, maybe just more comments on what the market looks like, how good your pipeline is on the M&A side of things, and what valuations are looking like out there?

Yeah, so the M&A, as you know, you never can predict the timing of it. We have a strong pipeline out there. We're going to be disciplined like we always are in making sure we create shareholder value with those acquisitions. So again, we're concentrating our capital allocation on Thank you. Appreciate it. Thank you. Your next question comes from the line of Nathan Jones with Stifle. Nathan, your line is now open.

Morning, everyone. I got on a bit late, Bob. I got on a bit late, Bob. So if I ask anything you already answered, Jay, you can just tell me to be quiet. I guess I wanted to ask first a little bit about Europe. 9% organic growth in Europe. It's been a little while since we've seen some really strong growth in Europe. So maybe you could talk a little bit about what's driving that up and how sustainable you think that is.

Yeah, so our team in Europe has been doing a great job, and certainly we have easier comps. Last year, there was some destocking going on still in the third quarter, but the team's done a nice job of realizing price. Part of that's through the 80-20 initiatives, and also they've done an incremental price increase given the commodity situation and tariffs – or not tariffs – The transportation costs there. So they've been holding firm on that. In addition, we're seeing heat pump incentives again, which is driving incremental growth. So the team is capitalizing on that, balancing that out there, but doing a nice job with it. So, you know, we changed our outlook and we're expecting some growth in the fourth quarter with that team. But as you know, I'll always be conservative and cautious on Europe as we make sure we get our cost structure aligned.

absolutely um maybe just on the data center business how much of what you expect to generate in revenue is like currently in backlog for 2027 and how much is you know things that you book in 2027 and then ship i'm just wondering like how how close i'll find a point do you can you put on what you'd expect growth in data centers to be in 2027 versus things that you've still got to go out and get

Yeah, so again, we have shorter lead times. We don't talk about our backlogs. I'll just tell you generally it's up and we have stronger visibility than we've had before. But certainly, you know, we've had huge growth. So we talked at last quarter that we think the market's growing in the 15 to 20 percent growth rate assumptions. And I think for now that that's a nice thing to assume as we're going into next year. So that's what we're looking at. We've had huge growth this year, but we're going to be lacking some very big hard comps as we go into 2027.

Then we'll have to layer on your market share initiatives onto that 15% to 20% next year?

Again, we've done large market share gains this year, so let's see how the team goes with our new products, but as you know, we'll get more than our fair share.

Okay, fair enough. Thanks for taking the question, Steve.

Thank you.

Your next question comes from the line of James Koh with Jefferies. James, your line is now open.

Good morning. Thanks for taking questions here. Bob, I guess data centers, like touching on data centers, it was like 8% of sales in the first half. Obviously, there was some pull forward, and you kind of guided me to high single-digit for the year. Where did kind of 3Q land, and does the race kind of guidance put you at the higher end for the full year?

Yeah, it's more on the high single digits in the quarter, and we're reflecting that for the rest of the year versus we were saying mid to high. Now we're on the high end of that. Team's doing a nice job.

Got it. Thanks for the caller. And kind of as a follow-up, I think last quarter you kind of gave out that like 25 to 100K content per megawatt with kind of liquid cooling and cool bar kind of at the higher end. Is the project mix kind of moving toward the higher end, and are you guys kind of contemplating any new stainless or liquid cooling products like going into next year or have you launched anything new?

We launch new products every quarter so the answer is yes and they replace older type products but still in the facility water is our strength but as things are moving more towards liquid cooled in the technical water side we're participating with that so yes technical water is growing but it's after a lower base so the numbers on a percentage basis it's high but the dollar volume is lower and we're seeing more of that in the Asia-Pacific region. We're seeing the China market move to that much faster than we're seeing in North America but we're starting to see that starting to follow along with that.

Great, thanks for taking questions.

Thank you. Thank you.

Your next question comes from the line of William Grippen with Barclays. William, your line is now open.

All right. Thanks very much. Appreciate the time here. I guess just a general question to start. Could you just remind us where you sit in terms of the process of new construction, just in terms of your sales? Are they more coincident with and many more.

We watch those closely and what we're seeing certainly in all of those is showing strong data center growth, institutional is holding up, and then we're seeing softness in the other markets on a new construction basis.

And Will, if your question was when does our content go into new construction, we start at the beginning of the project with the drains. So our content is really going in across the duration of the entire project. and finishing out with some of, as an example, our front of the wall products.

Got it. Very helpful. And then just last one here on capital allocation. Obviously, the stock's done well this year. How are you thinking about the balance or relative attractiveness of continued share repurchase activity versus M&A, given what you might be seeing in the pipeline and versus organic growth initiatives?

Yeah, I think our priority is still M&A. Right now, we're focusing on internal investments to support our data center initiative, our new product development, and automating our factories to drive productivity. But M&A is going to be a priority. We continue to look at the funnel, as Bob said. And we'll continue just to maintain our share repurchase program consistent with the way it is now, which is really just buying back the creep from the stock options. And we'll maintain our dividends as we have. We're probably going to have to look at increases just trying to stay at the median of our peer group, but those will be our priorities.

Great. Appreciate the time. Thank you.

Your next question comes from the line of Brian Lee with Goldman Sachs. Brian, your line is now open.

Hey, everyone. Good morning. Thanks for taking the questions and kudos on the solid execution. Maybe just to start with one data center one and then I'll do one non-data center one. On the APMIA data center growth and opportunity, pretty big jump here in the quarter. Can you kind of elaborate a bit on what you're seeing there? Is that a function of easier comps or are you seeing some share gains or just any thoughts on the sustainability of the growth out there?

Yeah, our Asia Pacific team is doing a great job, especially in the China market where we've had some really large projects in Q3. And some of those projects have been accelerated by the customers. So the team's doing a great job. The majority of the growth has been in, you know, for Asia Pacific was driven by data centers offsetting the softness in Middle East as well as, you know, New Zealand. New Zealand and Australia had a decent quarter themselves.

Okay. That's helpful. I guess outside of data centers, I know you're not guiding for 27, but as you think about kind of the puts and takes of the growth outlook moving forward here, given, as you alluded to, data centers probably aren't going to grow as fast as they did this year, what businesses do you expect could be some of the bigger contributors to organic growth in 27, especially if new construction remains off?

Thank you for joining us. to diversify and really focus on where the growth opportunities are.

And remember, 60% of our portfolio is repair and replace, so that tends to follow GDP. So we'll have that support going forward as well.

All right. Thanks a lot. I'll pass it on. Thank you.

Your next question comes from the line of Jeff Reeve with RBC Capital Markets. Jeff, your line is now open.

Thank you. Good morning, everyone. Some of the larger HVAC OEMs have actually recently flagged pushback on pricing from the channel despite persistent inflation. For your HVAC and heating products specifically, are you seeing anything similar, like of that resistance in the distributors or contractors, or has your experience been different just given the nature of your products?

Yeah, we're not seeing that. I mean, obviously, it's always competitive given the market dynamics, but nothing really extraordinary than we see in the normal course of business.

Okay, great. And then maybe just switching gears, your 4Q ATMEO segment margin guidance, down 50 bits to up 10 bits, I think that was, you know, stood out as the one that was kind of below consensus. Just walk us through the key drivers, kind of what's driving the year-over-year margin degradation or deceleration.

Yeah, big pieces of that is really just volume deleverage. And then on the intercompany side, we tend to get some volume deleverage there. And we're going to see that in the fourth quarter.

Got it. Thanks.

Thank you.

Our last question will be from Walt Liptack with Seaport Research Partners. Walt, your line is now open.

Hi, thanks. Great quarter, guys. I wanted to ask about the channel inventory with the commentary around residential being a little bit weaker. I wonder how your customers are reacting with that and what the fourth quarter inventories would be like. And then is there anything on the reactionary or cost side that you would do related to that weaker residential to kind of mitigate or shore up profits?

No, we're not seeing any major adjustments in residential. It's been soft all year for the last couple of years. So I think the inventories have been adjusted accordingly. And again, regarding cost actions, we're always driving productivity every year. inside of our business, as well as with our 80-20 initiatives, making sure we're focused on profitable growth. And certainly, some of the moves we've been taking have been moving us to more profitable data center overall growth. So, again, teams focused on that, and we're proud of being in front of the price-cost assumptions in the market.

Okay, great. And then, you know, maybe just a last one on data center. You know, some of the companies have been talking about capacity or supply chain related issues. I wonder if you could talk about sort of the nature of your data center related products and if you've got the supply chain and capacity that you need to meet the demand.

Yeah, we've been building capacity both inside of our factories. We've done plant expansions in China. We're leveraging some of our new acquisitions, our superior boiler one to help us with our cool vault tanks and expanding there as well as expanding our supply chain with our partners. So, again, teams on it. They've been aggressively doing that. And again, We've been investing capital expenditures where we see appropriate to allow us to get the returns for our shareholders. But overall, we're on top of the situation in managing this growth.

Okay, great. Thank you.

Thanks, Walt. There are no further questions at this time. I will now turn the call back to Ray for closing remarks.

Thank you for joining us today. We appreciate your continued interest in Watts and look forward to speaking with you again during our fourth quarter earnings call in early February. Have a great day and stay safe.

This concludes today's call. Thank you for attending. You may now disconnect.