Watts Water (WTS) Q2 2025 Earnings Call Transcript

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Date

Thursday, Aug. 7, 2025, at 9 a.m. ET

Call participants

• Chairman, President, and Chief Executive Officer — Robert J. Pagano Jr.
• Chief Financial Officer — Shashank Patel
• Chief Financial Officer — Ryan Lada

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Takeaways

• Revenue-- $644 million in reported sales for the second quarter of 2025, a record high, up 8% year-over-year and 6% organic sales growth, driven primarily by price, volume, and approximately $20 million in pull-forward demand before price increases.
• Americas segment sales-- Organic sales in the Americas increased 10% and reported sales rose 11%, with the Icon acquisition contributing $7 million; Americas organic growth offset declines in other regions.
• Europe segment sales-- Organic sales in Europe declined 8% and reported sales fell 3%, with weakness across all geographies despite favorable foreign exchange impact.
• APMEA segment sales-- Declined 1% organically in APMEA; growth in Australia, New Zealand, and the Middle East was offset by a decline in China due to project timing.
• Adjusted EBITDA-- Adjusted EBITDA was $153 million, up 22% year-over-year, with an adjusted EBITDA margin of 23.8%, representing a 280-basis-point increase in margin, driven by price-cost favorability and volume leverage in the Americas.
• Adjusted operating income-- Adjusted operating income was $139 million, up 24%; adjusted operating margin of 21.6%, up 280 basis points, a record for the company.
• Americas segment margin-- Increased 290 basis points to 27.2% for the Americas segment.
• Europe segment margin-- Rose 170 basis points to 11.7%.
• APMEA segment margin-- Held steady at 18.9% for APMEA segment margin.
• Adjusted EPS-- Adjusted earnings per share of $3.09, up 26% year-over-year, reflecting operations, acquisitions, foreign exchange, and reduced interest expense.
• Price realization-- Achieved approximately 3% company-wide price realization; price increases in the 5%-15% range are being implemented due to tariff-related actions, with full realization expected in the second half.
• Tariff impact-- $40 million in direct tariff costs estimated for 2025, reflecting reductions from Chinese tariffs but new copper and European tariffs in effect as of 2025.
• Adjusted effective tax rate-- 25.2% adjusted effective tax rate.
• Free cash flow-- Free cash flow was $105 million year-to-date, down from $120 million year-to-date through the second quarter of 2024, due to working capital timing and increased capital expenditures; full-year 2025 free cash flow conversion target of at least 100% of net income remains in place.
• Net debt to capitalization ratio-- Net debt to capitalization ratio was negative 10% at quarter end; net leverage stood at negative 0.4, reflecting a strong balance sheet.
• Acquisition update-- EasyWater was acquired in June with expected to contribute $5 million in 2025 sales; integrations of Bradley, Josam, Icon, and EasyWater are ahead of synergy targets.
• Nexa platform-- Rollout gaining traction, with installations in luxury multifamily, hotel, and commercial real estate sectors; migration of all smart/connected products onto Nexa will be complete by end of year or early next year.
• Guidance increase-- Raised full-year organic sales growth outlook to flat to 3% (up two points) for 2025, and reported sales growth to 2%-5% (up three points from previous view).
• Adjusted EBITDA margin guidance-- Full-year adjusted EBITDA margin expansion expected at 60-120 basis points for 2025, 30 basis points higher at the midpoint than prior guidance.
• Adjusted operating margin guidance-- Full-year adjusted operating margin expansion expected at 50-110 basis points for 2025, with the midpoint raised by 50 basis points from the earlier outlook.
• Third quarter sales guidance-- Organic sales expected to rise 2%-5% in the third quarter of 2025, with mid-single-digit organic Americas growth expected, low-single-digit organic APMEA growth expected, and high-single-digit organic sales decline in Europe expected.
• Third quarter margin guidance-- Expected EBITDA margin of 19.7%-20.3% for the third quarter of 2025 (20-80 basis points higher) and operating margin of 17.1%-17.7% (flat to up 60 basis points), reflecting normalization post pull-forward and reduced price-cost benefit.
• 80/20 initiatives-- Approximately one million dollars of sales eliminated and two million dollars expected in the third quarter of 2025 within the Americas as part of ongoing profitability improvement actions.
• Data center exposure-- Now offsetting residential weakness; previously represented approximately 2% of total sales in the prior year.
• Acquisition and restructuring costs-- $3.8 million in GAAP pretax charges incurred, primarily related to French facility exit and other Europe actions.
• Shipping days impact-- Lower shipping days in the first quarter will be recovered in the fourth quarter, potentially boosting fourth-quarter volume.

Summary

Watts Water Technologies (WTS -1.16%) reported record quarterly revenue and profit, supported by strong pricing actions and significant Americas growth, including a notable effect from approximately $20 million in sales pulled forward ahead of price increases. Management raised full-year sales and margin guidance, factoring in incremental contributions from acquisitions, foreign exchange, and ongoing pricing actions that are expected to offset a $40 million direct tariff headwind and ongoing margin expansion.

• Pagano emphasized, "Our second quarter performance was better than we anticipated, with record sales, operating income, and earnings per share due to strong performance in our Americas region," directly connecting momentum to the region's price realization and supply chain strengths.
• Latest acquisitions including EasyWater and Icon are tracking ahead of original synergy targets, positioning the company for further portfolio and revenue expansion.
• While Nexa's commercialization is described by Pagano as following a lengthy adoption cycle, customer pilots have begun translating into recurring platform and monitoring revenue streams, with complete product migration to a single application expected by early next year.
• Volume guidance for later quarters remains cautious, as sequentially lower third quarter growth reflects pull-forward effects and what Pagano referred to as "residential softness" while noting continued outperformance in secular-growth pockets such as data centers.

Industry glossary

• 80/20 initiatives: Business discipline to prioritize resources on top-performing products, customers, or processes, while systematically discontinuing or exiting lower-profit segments to enhance overall operating efficiency and margin.
• Nexa Intelligent Water Management: Watts' proprietary digital platform for real-time water system monitoring, management, and issue detection, delivering data-driven operational insights, payback cycles, and recurring revenue through software- and service-enabled solutions.
• Pull-forward demand: Acceleration of customer purchases ahead of scheduled price increases or supply chain disruptions, creating a temporary sales and volume increase in the reporting period, often followed by a related slowdown.
• Adjusted EBITDA margin: The ratio of earnings before interest, taxes, depreciation, and amortization, adjusted for items like restructuring or acquisition costs, to total revenue—a key measure of operating profitability.

Full Conference Call Transcript

Bob Pagano: Thank you, Diane, and good morning, everyone. Before beginning our second quarter overview, I'd like to take a moment to express my gratitude to Shashank Patel. This will be his last earnings call with Watts. I'm grateful for his seven years of impactful leadership. He has been a tremendous asset to the entire Watts team and has been a key strategic adviser to me. I wish him all the best in his retirement. Over the next two months, Shashank will help support the transition to our new CFO. On that note, I'm excited to welcome our new CFO, Ryan Lada, to his first earnings call with Watts. Ryan, would you like to say a few words?

Ryan Lada: Thank you, Bob, and good morning, everyone. I'm excited to be part of Watts and contribute to its continued success. I had the opportunity to attend the board meeting shortly after joining Watts, and I was able to spend time with the board members and the leadership team. I was incredibly impressed with the talent, engagement, and high-performance culture. And I'm thrilled to be part of the team. Over the next few months, I will focus on getting up to speed and plan to spend time traveling to our sites to learn about the operations and the team. I look forward to working with the investment community contributing to Watts' continued growth and long-term value creation.

With that, I will turn the call back to Bob.

Bob Pagano: Thank you, Ryan, and welcome to the team. Now please turn to Slide three, and I'll provide an overview of the second quarter. Our second quarter results were better than expected, with record sales, operating income, and earnings per share. Our performance is a direct result of the commitment and strong execution of the entire Watts team and their dedication to serving our customers amid a challenging environment. Organic sales increased 6% in the quarter, with favorable price, volume, and pull-forward demand more than offsetting continued weakness in Europe. We also benefited from incremental sales from our Icon and EZ Water acquisitions and favorable foreign exchange movements.

Adjusted operating margin of 21.6% exceeded expectations due to favorable price-cost dynamic, volume leverage, productivity, and cost containment. Our balance sheet remains strong and provides ample capacity to support flexibility in our capital allocation strategy. From an operations perspective, we continue to take proactive steps to mitigate the impact of tariffs through our pricing and supply chain strategies. The tariff environment remains fluid, but as of today, our global direct tariff impact in 2025 is estimated to be $40 million. We have a proven track record of successfully navigating through inflationary periods and are confident in our ability to maintain a favorable price-cost outcome.

In line with our strategic approach to M&A, in June, we acquired the assets of EasyWater, a company that engineers and manufactures innovative water conditioning and filtration solutions that serve residential, commercial, and industrial markets. EZ Water's custom solutions will complement our existing water quality portfolio. We expect EasyWater to contribute approximately $5 million in sales and be neutral to adjusted EPS in 2025 after factoring in normal purchase accounting adjustments. The integrations of Bradley, Josam, Icon, and EasyWater are progressing well, and synergy realization is tracking ahead of our original estimates. The rollout of our Nexa Intelligent Water Management solution is gaining traction, and we continue to build scale.

We've had numerous successful installations, including the luxury multifamily condominium, hotels, and in a commercial real estate portfolio, where Nexa provided remote monitoring, issue identification, and replacement component revenue. Importantly, we are partnering with customers to help them make the most of the Nexa platform through data-driven insights and comprehensive solutions for their water management challenges. We view Nexa as one of the most promising long-term opportunities and will continue to leverage our differentiated capabilities and expertise to build scale and drive growth. Nexa is delivering measurable savings and quick payback cycles for our customers within our targeted verticals, which include hospitality, multifamily, and property management companies.

Nexa's momentum is building slowly, but we expect continued expansion and growth in the coming years. Now an update on our outlook for the remainder of the year. Due to our strong first half and our expectations for the third quarter, we are increasing our full-year sales and margin outlook. Tariff-related price increases, foreign exchange movements, strong data center growth, and our Easy Water acquisition are all favorable relative to the outlook we provided in May. However, some uncertainty still remains around the impact of tariffs, including the effect on global GDP. As a reminder, GDP is a proxy for our repair and replacement business, which represents approximately 60% of our total revenue.

Now please turn to slide four for an update on our sustainability journey. In early June, we published our 2024 sustainability report, which highlights the accomplishments and progress we've made within our four sustainability pillars: footprint, handprint, social responsibility, and corporate governance. We are confident that our triple play of solutions addressing safety and regulation, energy efficiency, and water conservation enable our customers to manage operational pressures, comply with the evolving regulations, and meaningfully advance their sustainability initiatives. We continue to make progress towards our long-term goals, including an absolute carbon emissions reduction target, which will help advance our sustainability mission while improving our operations.

I'm proud of the progress our global teams have made and invite you to read more about it in our sustainability report, which can be found on our investor relations website. With that, let me turn the call over to Shashank, who will address our second quarter results and our third quarter and full-year outlook. Shashank?

Shashank Patel: Thank you, Bob, and good morning, everyone. Please turn to Slide five, which highlights our second quarter results. Sales of $644 million were a record for Watts and were up 8% on a reported basis and 6% on an organic basis. Strong organic growth in The Americas more than offset declines in APMEA and Europe. Americas organic sales were up 10%, and reported sales were up 11%, both better than expected, driven by price, volume, and pull-forward demand. Sales from the Icon acquisition added $7 million. Easy Water sales were immaterial in the quarter.

Impact from our 80/20 actions in The Americas were limited to approximately $1 million of eliminated product sales as a result of strategies aimed at improving profitability. Europe organic sales were down 8%, and reported sales were down 3%, with organic declines across all geographies due to continuing OEM and market weakness. Reported sales benefited from favorable foreign exchange. APMEA sales decreased 1% on an organic basis and 3% on a reported basis. Growth in Australia, New Zealand, and The Middle East was more than offset by decline in China due to project timing. Compared to the prior year, adjusted EBITDA of $153 million increased 22%, and adjusted EBITDA margin of 23.8% increased 280 basis points.

Adjusted operating income of $139 million also increased 24%, and adjusted operating margin of 21.6% was up 280 basis points, a record for Watts. Adjusted EBITDA and operating income benefited from favorable price-cost dynamic, volume leverage in The Americas, productivity, and cost containment, which more than offset inflation, volume deleverage in Europe, and investments. Americas segment margin increased 290 basis points to 27.2%. Europe segment margins increased by 170 basis points to 11.7%, and APMEA segment margin was flat to prior year period at 18.9%. Adjusted earnings per share of $3.09 increased 26% versus last year, with contributions driven by operations, acquisitions, foreign exchange, and reduced interest expense.

The adjusted effective tax rate in the quarter was 25.2%, which was flat compared to 2024. For GAAP purposes, we incurred $3.8 million of pretax acquisition costs and restructuring charges related to the exit of a facility in France and other actions within Europe. Our free cash flow year-to-date through the second quarter was $105 million compared to $120 million last year. The cash flow decrease was primarily due to working capital timing and increased CapEx. We expect sequential improvement in our free cash flow and are on track to achieve our full-year goal of free cash flow conversion greater than or equal to 100% of net income. The balance sheet remains strong and provides us with ample flexibility.

Our net debt to capitalization ratio at quarter end was negative 10%, and our net leverage is negative 0.4. Our solid cash flow and healthy balance sheet continue to give us capital allocation optionality. Now on slide six, let's review our assumptions about our third quarter and full-year outlook. We are increasing our full-year sales and margin outlook due to our strong first half, incremental price, favorable foreign exchange, strength in data centers, and our acquisition of EasyWater, which will be included in our Americas segment. We now expect organic sales growth of flat to up 3%, a two-point increase to the midpoint from our previous outlook.

Our reported sales growth is expected to be up 2% to 5%, a three-point increase from our previous outlook. Expect incremental revenue from our Easy Water acquisition and favorable foreign exchange movements, which are listed by region in the appendix. Regionally, we expect The Americas sales growth to be better and Europe to be slightly worse compared to our previous outlook. We are increasing our full-year adjusted EBITDA margin outlook to a range of up 60 basis points to up 120 basis points, an increase of 30 basis points to the midpoint of our previous outlook.

We are also increasing our full-year adjusted operating margin expansion to a range of up 50 basis points to up 110 basis points, an increase of 50 basis points to the midpoint of our previous outlook. Our updated outlook includes $40 million of estimated direct tariff costs as previously mentioned by Bob. This is based on the tariffs in effect as of today, which includes copper tariffs as currently defined. Our free cash flow expectation remains in line with our previous outlook as we expect to deliver free cash flow conversion of greater than or equal to 100% of net income in 2025. Next, a few items to consider for the third quarter.

On an organic basis, we expect sales growth of 2% to 5%. Regionally, expect mid-single-digit growth in The Americas and low single-digit growth in APMEA, partly offset by high single-digit decline in Europe. The Americas growth is sequentially lower than the second quarter due to the pull-forward demand previously discussed. We expect approximately $8 million in incremental sales in The Americas from acquisitions. We estimate that foreign exchange in the quarter will be a tailwind of approximately $4 million, and our assumptions by region are listed in the appendix. We expect our 80/20 actions in the third quarter to be an estimated $2 million of product exits, primarily within The Americas.

Third quarter EBITDA margin is expected to be in the range of 19.7% to 20.3%, or up 20 to 80 basis points. Operating margin should be in the range of 17.1% to 17.7%, or flat to up 60 basis points. We expect that price and volume leverage in The Americas and APMEA will more than offset continued volume deleverage in Europe. The sequential decline in margins is due primarily to the nonrecurring price-cost favorability in the second quarter as the impact of tariffs rolls into expense plus normal seasonality. Other key inputs for the third quarter and the full year can be found in the appendix.

Before I turn the call over to Bob, I would like to express my gratitude to the entire Watts team for the opportunities I've had over the last seven years. I've also enjoyed working with you, the investor and analyst community, and wish you the best in the years to come. With that, I'll turn the call back over to Bob before moving to Q&A. Bob?

Bob Pagano: Thanks, Shashank. On slide seven, I'd like to summarize our discussion before we address your questions. Our second quarter performance was better than we anticipated, with record sales, operating income, and earnings per share due to strong performance in our Americas region, which benefited from price realization, favorable price-cost dynamic, and volume leverage. We continue to execute well amid an uncertain trade environment and expect that price, our expansive U.S. footprint, and global supply chain will enable us to navigate the current backdrop effectively. As a result of our strong first half performance and third quarter expectations, we are increasing our full-year sales and margin outlook.

Our balance sheet remains strong and provides ample flexibility to support our capital allocation priorities, including M&A, factory automation, investment in new product development, and our digital strategy, and returning capital to shareholders via share buybacks and dividends. I'm confident in our team's ability to execute despite the uncertain environment and continue to create durable long-term value for our shareholders. With that, operator, please open the line for questions.

Operator: Thank you. If you'd like to ask a question, please press star and the number one on your telephone keypad. Additionally, if you'd like to withdraw your question, please press the star key followed by the number two. Our first question comes from the line of Ryan Connors from North Coast Research. Your line is open.

Ryan Connors: Good morning. Congratulations, Shashank, and welcome, Ryan. So my first question was just you mentioned in the press release in addition to the other things here, this idea of a dynamic of a pull forward, the quarter. Is there any quantification you can put on that in terms of the impact of volume of that pull forward effect you mentioned in the press release?

Shashank Patel: Yeah, Ryan. It was approximately $20 million of sales pull forward pre-price increase that we shipped in the quarter.

Ryan Connors: Okay. And then in terms of the price increase, you cite the favorable price-cost. You mentioned the $40 million headwind. But can you just kind of dive into a little deeper into the price dynamics? Obviously, you got lots of different products, lots of magnitudes of price increases. The copper tariffs are kinda brand new. I mean, what's the dynamic in terms of pricing? Have you accomplished what you need to do? Are there certain products that are leading or lagging on that? Just any deep dive you can give us on the pricing dynamics would be helpful.

Shashank Patel: Yeah. So specifically, in the second quarter, we talked about, you know, price-cost favorability, and that's where we implemented price increases, but based on having lower-cost inventory, we had some favorability approximately $6 million. The price increases we've announced, and you're right, there's been multiple rounds of tariffs. So they've staggered between the March 31 date all the way to the June 2 date. They're in the range of 5% to 15% of price increases. We'll see the full realization of those in the second half.

Bob Pagano: Yeah. Ryan, as you know, we are constantly analyzing our cost inputs, especially with the recently announced tariffs. And are looking for all options including price increases in the future. So like we've done in the past. So we'll update you on our pricing as we roll into the next quarter.

Ryan Connors: Yep. And then lastly, just on the gross margin. I mean, really, impressive to see, you know, a number above 50%. What should we be thinking about intermediate term, you know, kind of run rate? I mean, it's obviously, that might be a little elevated here, but you've made strides in terms of internal improvement and other things. So what should be kind of the what do you consider a base normalized level for the over the intermediate term?

Shashank Patel: So that 50% certainly benefited from about a 100 basis points on the price-cost dynamic I talked about, which was one-time. Right? And it also benefited to a certain extent from volume leverage. You'd have significant volume leverage in the second quarter. So as you recall, our prior year, we're that 47% margin range. The goal this year was to get to that 48% level, as part of our continuous improvement priorities, productivity driven primarily, as you noted. So going forward, I think, you know, in that 48% range.

Ryan Connors: Okay. Super. Very helpful. Thanks for your time.

Shashank Patel: Thank you.

Operator: Thank you. Our next question comes from the line of Nathan Jones from Stifel. Your line is open.

Nathan Jones: Good morning, everyone. Shashank, congratulations on getting Bob to finally let you retire, and Ryan, welcome to the team. Guess I'll ask first about the competitive positioning and the footprint your more domestic footprint and the advantage that gives you, obviously, evolving, I'm sure customers are talking about those kinds of things. But any update you can give us on what kind of benefit you think you'll see you'll be able to realize from that versus, you know, particularly some of the smaller competitors who maybe source a lot more out of China or other places internationally. Just how you think you can use that to gain market share.

Bob Pagano: Well, listen, Nathan. We always believe that our overall strategy of basically, you know, producing products in the countries we sell is a positive strategy, especially in this uncertain market environment where the tariffs keep on changing. So just that uncertainty has helped, certainly, you know, we do source as we indicated globally to diversify our product and our production capabilities. But, again, you know, we believe it's a positive for us in this current environment, and we'll continue to capitalize on that going forward.

Nathan Jones: Do you think there are any opportunities to maybe manufacture more domestically? I mean, you did say you source globally. Certainly does seem that there's going to be some level of tariffs that are permanent here. And just how you think about, you know, the breakpoints of whether you would continue to source internationally for some of the products or whether you would reshore some of that production for yourself.

Bob Pagano: Yeah. I think our supply chain teams and our manufacturing teams are looking at that and, you know, where it makes financial sense to bring it here, we'll do that. I think we talked on the last call that we have capacity in, you know, by adding, you know, third shifts in most of our locations. So we're open to those ideas and just looking at overall what the competitive opportunities are by country, by place, etcetera. So, again, constantly evolving, but we have a great supply chain team. And they're doing a great job in this environment.

Nathan Jones: And I guess I'll just ask one on the European business. I guess, with the focus on the heat pump market in Germany. I think the belief was that was kind of gonna bottom out midyear, destocking, it might be done midyear. Sounds like maybe that's not the case. So just an update on your expectations there.

Bob Pagano: Yeah. From a heat pump perspective, for the most part, we're starting to see it. It varies by each one of the customers based on their distribution channels and inventory. But like we thought, that has come down. The destocking has come down, and you know, we're believing Q3 is probably the end of that. However, you know, it's just a general construction market. Is soft in Europe, and it continues to be in as you know, I'm cautious on Europe. I always have been. And until I start seeing the order rates pick up, we're gonna continue to be cautious.

Nathan Jones: Very much for taking my questions.

Bob Pagano: Thank you.

Operator: Thank you. Our next question comes from the line of Jeff Hammond from KeyBanc. Your line is open.

Jeff Hammond: Hey, good morning, everyone. Congrats to Shashank. Ryan, welcome aboard.

Shashank Patel: Thank you.

Bob Pagano: Bob, good to still have you with us. I wanna go back to the tariffs. So I think you originally said $60 million and most of it or maybe 50 of the 60 was China. I know we had a big reset there. So I would have thought that number would have gone down more. I think you said 40 is kind of the new baseline. So maybe just walk me through the puts and takes in that 60 to 40 change.

Shashank Patel: Yeah. So you're right. The China tariff did come down significantly. But since that happened, there's been other tariffs including copper tariffs, tariffs on Europe are now set at 15%. So there's been quite a bit of change. And so we factored all of that change into coming up with the, you know, the $40 million from the previous $60 million number on direct cost.

Jeff Hammond: Okay. And then is there a way to quantify what price you got in the quarter and what you think you get for price in the second half?

Shashank Patel: Yes. So in the quarter across Watts, our price realization was approximately 3%. If you recall in Q1, it was 1%. So it stepped up to 3%. Our expectation is with the full impact of price realization in the second we're probably going to be in the mid-single digits.

Jeff Hammond: Okay. And this pull forward, I assume, it all comes out of Three Q.

Shashank Patel: Yeah. That's our current assumption. Yep.

Jeff Hammond: Good. Okay. And then just last one. It sounds like you know, all your deals are integrating well. Can you just maybe talk about what's going better and, you know, whether it's, you know, cost, margin improvement, revenue synergies, any you know, where the upside surprises are, that'd be great.

Bob Pagano: Yeah. I think it's across the board. And each one of them is different. But the nice thing is all four of them are green, which we track, as you know, judiciously on a monthly basis and stuff. So you know, costs are certainly the key focus. And as you know, we're doing the 80/20 on most of these businesses and so the top line is important, but you know, we are seeing synergies definitely on the top line, but we're also, you know, as Shashank earlier said, we're we continue to look at making money, and so we don't want we're getting rid of some of the bad business that we've had in the past.

Jeff Hammond: Okay. Thanks for the time.

Bob Pagano: Yes.

Operator: Thank you. Our next question comes from the line of Mike Hallum from Baird. Your line is open.

Mike Hallum: Hey. Good morning, everyone. It's Ped on for Mike and Shashank. Congratulations.

Shashank Patel: Thanks.

Mike Hallum: Wanna take a moment just to circle back on the 80/20 comment. Bob, are should we consider most of the 80/20 actions that are being discussed going on in the acquired businesses or is there a chunk of that going on in some of the legacy business as well?

Bob Pagano: It's always it's constantly going on. For the most part, we continue to talk about big ones that especially with some of the acquisitions that we've pointed out, that's the biggest pieces. But we're always doing 80/20. Right? We don't necessarily call it 80/20, but it's the conceptual concept. That we go through our organization and are always evaluating that. So again, my team knows Right. That our goal is to drive profitable growth.

Mike Hallum: Right. Alright. That's helpful. Thanks. And then, you know, we're two years post Bradley close. You know, are there areas where you've been able to maybe step on the gas in terms of investments where, you know, maybe the previous ownership maybe had maybe not identified opportunities as well as you had. Then, additionally, are you seeing Bradley as an opportunity to be another platform to bolt on future acquisitions?

Bob Pagano: Yeah. So the answer is yes. We've been investing capital to lean out the organization, streamline the business, and invest in new product development. So we had the fortunate opportunity to have our board there on Monday and Tuesday of this week, and the board got to see firsthand all the improvements in the great strides the teams are making. So and, yes, Bradley has been, you know, front of the wall. I think it's a nice start, and we purchased ICON as we talked about before. So, you know, that continues to expand. Our front of the wall capability.

So nice platform, doing exactly what we thought it was, and, you know, we're ahead of schedule on our integration and synergies.

Mike Hallum: Awesome. And last one for me. You know, Bob, some really helpful comments on the Nexa platform. You know, obviously, some encouraging opportunities with the luxury condos, hope and hospitality. Know, maybe talk a little bit about how you're approaching the targeted verticals. You know? Is it kind of going pilot programs in certain verticals and then looking to expand? Maybe take it just provide us a little bit more color about how you're thinking about expanding the offering for Nexa and the approach in go to market.

Bob Pagano: Yeah. So we're leveraging our complete Salesforce, whether it we have some direct capabilities, strategic accounts, and leveraging distribution. The process is a long process. It's a long sell process where we pilot, and then the pilot, you know, they get to look at it for a while, then they have to put it in their budget. And then once they put it in their budget, they go forward. So it could be anyways from a year to two-year selling cycle. So it takes a while to get this, but we're happy to say that every installation is, you know, been a great success, and we're seeing the benefit of all. So, again, it continues to move forward.

It's never as fast as I would want it to be, but it's moving in the right direction. And I think we've also talked about that we're migrating all our previously smart and connected products that had individual apps into the Nexa platform, so it's all centered on one overall application, you know, for all the Watts products. So the most part, that'll be done by the end of the year and early into next year.

Mike Hallum: Awesome. Thank you. I know I said that was my last question. But I'm gonna follow-up on one of your points there. Know, as we get further down the road and as you run more and more pilots, would you expect you know? And I'm not talking about necessarily this year, next year, maybe not even the year after that. But would you expect the sales time on Nexa to shorten as proof points build and, you know, your ability to demonstrate returns to customers kinda your Rolodex of wins and pilots gets bigger.

Would you expect that sales cycle to slow or is that just more of how their the customers are able to integrate the technology into their current assets?

Bob Pagano: I we would expect it to grow, but certainly you raised the concern again. You know? But, yes, the answer is we expect it to accelerate as more people have it and really realize the benefit. And I think this property group is when we get that fully installed by the end of this year, that would be a great asset for people to see. And understand how to manage their portfolios across The US.

Mike Hallum: Great. Thanks, Bob. I'll pass it on there.

Bob Pagano: Thank you.

Operator: Thank you. Our next question comes from the line of Andrew Creel from Deutsche Bank.

Andrew Creel: Thanks. Good morning, everyone. Congrats again to Shashank, and welcome, Ryan. Wanna go back to the 400 basis points or so sequential decline in the EBIT margin. Know, I know two Q is an elevated starting point to compare it against. But just, you know, can you talk through again, like, any of the moving pieces here? Like, was it really all pull forward and price-cost related, or was some of this more structural? You know? And I thought that could have persisted more into the back half. So maybe just touch on that and, like, if there's any conservatism at play, please.

Shashank Patel: Yeah. So, Andrew, there's three pieces of that. Right? First was the price-cost dynamic, which I quantified at approximately $6 million, so that's about a 100 basis points. The second element is usually is the typical seasonality we between Q2 to Q3, which is about a 170 basis points. And then the balance is basically volume deleverage. Right? So certainly, the volume in Q2 volume growth is higher than the volume growth in Q3, especially when you strip out price. So it's those three elements that contribute to that approximately 400 basis point decline in op income margins.

Andrew Creel: Okay. Great. That's helpful. And then for sales in the back half, can you maybe speak to, you know, what you're assuming for end market demand? Price clearly, I think, is going up. So do you have any cushion for volume destruction related to that, or are you assuming more of kind of the status quo of current run rate? Thanks.

Bob Pagano: Yeah. So for the most part, there's still a lot of uncertainty, especially in the far back, the fourth quarter in particular. But we're basically the same, you know, the markets haven't changed significantly. If anything, you know, residential's down a little bit more than we expected, but overall, you know, we had to pull forward. That's gonna play out against Q3, and then the markets will continue. And we're having strength in data. That's been a great win for the team this year, and we're continuing to see the benefit going forward.

So we'll see what four looks like when it when it's there, but we're gonna watch what the markets do, how the reaction to these recent tariffs and some of the uncertainty, how it unplays out in the market.

Andrew Creel: Great. Thanks, guys.

Bob Pagano: Thank you.

Operator: Thank you. Our next question comes from the line of Joe Giordano from TD Cowen. The line is open.

Joe Giordano: Hey, guys. Good morning.

Shashank Patel: Good morning.

Joe Giordano: Shashank, just that $6 million on the price-cost, I just wanna make sure I understand. That's just you're getting the price capture plus what you're selling is just flowing through an inventory that was acquired at a lower price point that didn't include the tariffs. Is that what we're and then that ultimately goes away? Is that what we're talking about?

Shashank Patel: Absolutely. That's correct.

Joe Giordano: Okay. Great. On data center, like, how large do you think that's gonna be now this year? You mentioned a couple of times already. This call.

Bob Pagano: Yeah. We're not gonna give the specifics, but as we've talked about in the past, last year is about 2% of sales, and I would say it's growing high double digits at this point in time. So again, it's offsetting the residential softness we're seeing in the market and the team's doing a great job to continue to grow in that area. So nice story.

Joe Giordano: Yeah. That makes sense. And last for me on Nexa, what is the what is, like, the pay terms on this? Is this, like, a subscription-based? Like, how and what is it based on?

Bob Pagano: Yeah. So there's a cost for installation of the various products and we're flexible with the customer based on, you know, what you know, OpEx or whether, you know, how they wanna do it inside of it. They wanna pay by the month, we'll incorporate the cost inside of it. And, yes, it does have a future annual fee that we charge to customers to continue to monitor and measure and keep the upgrades in the system and have access to our experts. So yes, it's the combination of both of those.

Joe Giordano: How big do you think your whole, like, software type revenue base is now?

Bob Pagano: Yeah. We don't provide that information, but it's certainly growing. It's small. Right? But it's growing, you know, high percentage basis on a low number, but we'll continue to grow it. And when it gets big enough, we'll begin talking about that. But we're accelerating that, and we believe Nexa is one of the best platforms to do that with.

Joe Giordano: Thanks, guys.

Bob Pagano: Thank you.

Operator: Thank you. Our next question comes from the line of Brian Lee from Goldman Sachs. The line is open.

Nick Cash: Hey, everyone. This is Nick Cash on for Brian Lee. Just a kind of a question going into, again, the end of the year. I mean, it's, you know, we've had pull forward kind of expecting, you know, a step down in margins. You know, heading into 3Q and then probably another one heading into 4Q. But do you guys have any additional shipping days in 4Q that you expect to see and realize, again, you know, some incremental volume or just kinda talk to the, you know, puts and takes that you're expecting in the back half of the year? On margins?

Shashank Patel: There's a couple of days impacting Q4. If you recall in Q1, talked about lower shipping days. We picked those up at the back end of the year.

Nick Cash: Okay. But then, guess, know, our I think the guide implies, you know, another step down in adjusted operating margins in, what, April? Is that mostly due to, again, you know, additional volume deleveraging off of 3Q in The Americas segment?

Shashank Patel: Yeah. That's correct. Yeah. The volumes in Q4 are lower than Q3, so you had volume deleverage that's impacting margins in Q4.

Nick Cash: Okay. Awesome. That's it for me. Thank you.

Shashank Patel: Thank you.

Operator: Thank you. I'll now turn the call back to Bob Pagano for closing remarks.

Bob Pagano: Thank you for taking the time to join today. We appreciate your continued interest in Watts and look forward to speaking with you again during our third quarter earnings call in early November. Have a great day and stay safe.

Operator: The meeting has now concluded. Thank you all for joining. You may now disconnect.