Watts Water (WTS) Q4 2025 Earnings Call Transcript

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Date

Monday, February 9, 2026 at 12:00 a.m. ET

Call participants

• Chairman, President, and Chief Executive Officer — Robert J. Pagano
• Chief Financial Officer — Diane M. McClintock

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Takeaways

• Organic sales growth -- Company organic sales grew 8% in the quarter and 5% for the year; reported sales increased 16% for the quarter and 8% for the year.
• Adjusted operating margin -- Improved by 220 basis points in fiscal Q4 to 19%, and by 190 basis points for the fiscal year ended Dec. 31, 2025, reaching 19.6%.
• Regional organic growth -- Fiscal Q4 organic sales: The Americas up 10%, Europe up 1%, APMEA up 9%.
• Adjusted EBITDA -- $134 million for fiscal Q4 (up 28%, margin 21.4%); $534 million for the fiscal year (up 18%, margin 21.9%).
• Adjusted earnings per share -- $2.62 for fiscal Q4 (up 28%); $10.58 for the fiscal year (up 19%).
• Free cash flow -- Reached $356 million for the fiscal year, a 7% increase and a company record, with conversion rates of 100%-105% reported for fiscal Q4 and full year respectively.
• Shareholder returns -- $83 million returned through dividends and share repurchases, with a 20% increase in annual dividend payout.
• Acquisitions -- Completed Superior Boiler ($60 million annual sales, U.S.) and Saudicast ($20 million, Saudi Arabia); both expected to be accretive to adjusted EPS in 2026.
• Product rationalization (“80/20”) -- Plans to exit $10-$15 million in European and $25-$30 million in Americas low-margin retail and OEM sales in 2026; expected to be margin neutral or accretive.
• Guidance: Reported and organic sales -- 2026 reported sales growth guided at 8%-12%; organic sales growth at 2%-6%; removing impact of product rationalization, organic growth would be about 2 percentage points higher.
• Segment margin guidance: 2026 -- The Americas expected to decline 50-110 basis points; Europe flat to down 30 basis points; APMEA up 30-60 basis points.
• Acquisition impact: 2026 -- Acquisitions projected to add $130 million+ incremental revenue and dilute adjusted operating margin by about 50 basis points.
• Data center sales -- Accounted for just over 3% of company sales in fiscal 2025, growing at a "higher end of double digits" rate and described as the fastest-growing initiative.
• Q1 2026 guidance -- Reported sales growth 12%-16%; organic growth 4%-8%; Americas projected to be up high single digits, Europe down low single digits, APMEA up low single digits; $25-$30 million incremental Americas sales from acquisitions, $5 million from APMEA acquisitions, and $13 million foreign exchange benefit.
• Q1 margin guidance -- EBITDA margin 21.1%-21.7%; operating margin 18.6%-19.2%; 70 basis points EBITDA margin dilution from acquisitions expected in Q1.
• End market outlook: 2026 Americas -- Institutional up low single digits, data centers up double digits, residential (single-family) down low single digits, multifamily down mid single digits, other commercial down low single digits.

Summary

Watts Water Technologies (WTS 0.31%) delivered record sales, operating margin, earnings per share, and free cash flow for both fiscal Q4 and the fiscal year ended Dec. 31, 2025. Management completed two strategic acquisitions—Superior Boiler and Saudicast—that are expected to positively impact 2026 adjusted EPS and expand product offerings and geographic reach. The "80/20" product rationalization will remove $35-$45 million of low-margin sales across Europe and The Americas, with management anticipating either neutral or positive margin contribution as a result. Looking ahead, Watts Water Technologies guided for 2026 reported sales growth of 8%-12%, with organic growth of 2%-6%, factoring in the negative impact of product rationalization. Segment guidance points to margin dilution from recent M&A, but continued productivity and pricing initiatives may offset some pressure. Data center solutions are highlighted as a significant, rapidly growing business line now accounting for over 3% of total sales.

• Pagano stated, "These acquisitions have broadened our product range, expanded channel access, and increased our geographic reach. Just as importantly, they diversified our end market exposure and shifted our mix toward higher-growth, higher-margin, nonresidential, institutional, and industrial segments."
• Europe's organic sales declined 5% for the fiscal year while reported growth was positive due to currency benefits and acquisitions.
• Free cash flow achieved a record 105% conversion for fiscal 2025, driven by higher net income and lower tax payments.
• Guidance assumes no changes in the current tariff environment for 2026.
• Price realization in 2026 is expected to average low single digits, with the first quarter benefiting most from carryover price increases due to tariffs.
• Pagano clarified that targeted product exits are channel-focused, not full product discontinuations, reallocating sales through alternative channels where margin profiles are stronger.

Industry glossary

• 80/20 model: Watts Water Technologies' ongoing process of trimming underperforming or low-margin product lines and channels to improve profitability and operational focus.
• APMEA: Acronym for Asia-Pacific, Middle East, and Africa region, as used by Watts Water Technologies for segment reporting.
• Free cash flow conversion: The ratio of free cash flow to net income, indicating how effectively the company turns earnings into cash.
• Dodge Momentum Index (DMI): A measure of nonresidential construction planning in the United States, discussed as a sector indicator during the call.
• ABI: Architecture Billings Index, used as a forward-looking indicator of nonresidential construction activity in the call.
• One Watts Performance System: Company-wide operational improvement initiative focused on portfolio optimization, integration, and productivity gains from acquisitions.

Full Conference Call Transcript

Robert J. Pagano: Thank you, Diane, and good morning, everyone. Please turn to slide three where I will recap 2025 and outline the key drivers for our 2026 outlook. I want to begin by expressing gratitude to the entire Watts Water Technologies, Inc. team for their dedication and meaningful contributions which made 2025 another outstanding year. We achieved record sales, operating margin, and earnings per share for both the fourth quarter and the full year. Organic sales rose 8% and reported sales were up 16% this quarter. Adjusted operating margin climbed 220 basis points to 19%. For the entire year, organic sales grew 5% and adjusted operating margin improved by 190 basis points to 19.6%, while we continued investing in strategic priorities.

We generated a record $356 million in free cash flow for 2025, up 7%, reaching a conversion rate of 100%. This strong cash flow supports our robust balance sheet and gives us flexibility to invest in future growth. Our capital allocation continues to focus on strategic M&A, high-return organic investments, competitive dividends, and steady share buybacks. Since our last earnings call, we completed two acquisitions. Superior Boiler, based in Hutchinson, Kansas, is a leading designer and maker of customized fire tube and water tube boilers for commercial, institutional, and industrial uses. Superior's mission-critical heating and hot water solutions expand our customer offerings. Superior has about $60 million in annual sales.

Saudicast, located in Riyadh, Saudi Arabia, manufactures high-quality cast iron and stainless steel drainage products for nonresidential and industrial markets. This acquisition grows our footprint in the fast-developing Middle East region. Saudicast annual sales are around $20 million. Both acquisitions are expected to be accretive to adjusted EPS in 2026 after accounting for added interest expense and normal purchase accounting adjustments. Integration efforts are already underway for both companies. As previously discussed, we regularly review our portfolio and phase out underperforming products under our 80/20 model within the One Watts Performance System.

Through this ongoing evaluation, we have identified $10 million to $15 million of European sales and $25 million to $30 million in The Americas, mainly in lower-margin retail and OEM channels, that we intend to eliminate during 2026. We anticipate these changes will be neutral or potentially margin accretive in 2026. An overview of what will drive our 2026 outlook: we expect that pricing along with continued repair and replacement activity will fuel further growth in 2026. Global GDP, a proxy for our repair and replacement business, remains positive within our main end markets. In The Americas, indicators for nonresidential new construction present a mixed picture. The ABI remains below 50, suggesting subdued market conditions in 2026.

However, the Dodge Momentum Index is slightly more optimistic, indicating potential growth in nonresidential projects. Most of this growth should come from strength in institutional and data center sectors, though it could be tempered by weaker segments such as offices, retail, warehouses, and recreation. We also anticipate a soft single-family and multifamily residential construction market through 2026. Lastly, Europe's new residential and nonresidential construction is expected to remain sluggish. Uncertainty surrounding inflation, trade policies, and interest rates might continue to hamper new construction projects. Overall, we foresee market conditions similar to those experienced in 2025. We expect to benefit by over $130 million in incremental revenues from the acquisitions of EasyWater, Hawes, Superior, and Saudicast.

Collectively, these additions are projected to dilute adjusted operating margin by about 50 basis points in 2026 as we implement the One Watts Performance System and realize synergies. Now let me highlight a few strategic growth initiatives, including our data center and M&A strategy. On slide four, you will see examples of solutions we have developed for both air-cooled and liquid-cooled data centers. Our most notable product is the cooling valves that control the flow of chilled water to sustain the required temperatures in data centers. Typically, these valves and related equipment are made of iron for air cooling and stainless steel for liquid cooling.

Other important offerings include strainers, drainage, and our Cool Vault thermal storage tanks, which serve as emergency backups during chiller restarts. Our data center initiative spans the globe, and we estimate the addressable market exceeds $1 billion. In 2025, sales from this sector represented just over 3% of total company sales and are growing at a double-digit rate. We will keep investing in new products and technologies to meet evolving customer needs and believe this market will continue expanding for years. Slide five covers our acquisitions over the past three years. We finalized eight deals deploying about $660 million in cash and adding around $450 million in annualized revenue.

These acquisitions have broadened our product range, expanded channel access, and increased our geographic reach. Just as importantly, they diversified our end market exposure and shifted our mix toward higher-growth, higher-margin, nonresidential, institutional, and industrial segments. By leveraging the One Watts Performance System, driving value through successful integration, synergy realization, and improving margins, and despite the typical early-stage margin dilution from acquisitions, we have expanded adjusted operating margin by 320 basis points in three years. We are proud of our performance and pleased to add such quality brands to our portfolio. With that, I will hand things back to Diane M.

McClintock, who will discuss our Q4 and full year 2025 results and share the outlook for Q1 and all of 2026. Diane?

Diane M. McClintock: Thank you, Robert. Let us now turn to slide six, which outlines our fourth quarter results. Sales reached $625 million, reflecting a 16% increase on a reported basis and an 8% increase organically. The Americas region delivered strong organic growth of 10% and reported growth of 17%, exceeding our expectations. This performance was supported by favorable price and volume, including the benefit of one additional shipping day and growth from data center sales. Acquisitions accounted for an additional $27 million in sales, contributing seven percentage points to The Americas reported growth. In Europe, organic sales rose by 1% while reported sales increased 10%.

Organic growth stemmed from favorable pricing and the extra shipping day, while reported sales also benefited from positive foreign exchange effects. In APMEA, organic sales grew 9% with acquisitions adding 6% for total reported sales growth of 15%. Adjusted EBITDA totaled $134 million, an increase of 28%, with an adjusted EBITDA margin of 21.4%, up 210 basis points year over year. Adjusted operating income of $119 million increased 31%, and adjusted operating margin improved 220 basis points to 19%. These improvements were primarily driven by favorable pricing and productivity gains, which more than offset inflationary pressures, volume deleverage in Europe, tariffs, and acquisition dilution.

Segment margins were as follows: The Americas increased by 150 basis points to 23.3%, Europe increased by 490 basis points to 15.1%, while APMEA decreased slightly by 20 basis points to 17.3%. Adjusted earnings per share equaled $2.62, representing a 28% year-over-year increase, with operational performance, acquisitions, and foreign exchange gains outweighing higher tax and net interest expense. Turning to full year results, please refer to slide seven. As previously noted, we achieved record operating results for 2025. Total company sales were $2.4 billion, up 8% on a reported basis and 5% organically. Organic growth in The Americas and APMEA reached 8% and 5%, respectively, partially offset by a challenging year in Europe where organic sales declined by 5%.

Acquisitions contributed $52 million, or 2% of incremental sales growth, and favorable foreign exchange added another 1%. Adjusted EBITDA for the year was $534 million, up 18%, and adjusted EBITDA margin improved by 180 basis points to 21.9%. Adjusted operating income rose 19% to $477 million, resulting in 19.6% operating margin, up 190 basis points. These increases reflect the benefit of price, volume, and productivity gains which more than compensated for inflation, European volume deleverage, tariffs, and acquisition-related dilution. Segment margin in The Americas increased to 24.5%, up 190 basis points. Europe increased to 13.3%, up 160 basis points. And APMEA remained flat at 18.3%.

Adjusted EPS was $10.58, up $1.72 or 19% compared to prior year, with benefits from operations, acquisitions, favorable foreign exchange, and lower net interest expense exceeding higher tax costs. For GAAP reporting, after-tax charges of $22.3 million were recorded related to restructuring and acquisition-related costs, partly offset by an $8.3 million tax benefit from the reversal of a prior year tax liability. Free cash flow reached $356 million, a 7% increase from 2024, setting a new company record. This was primarily driven by higher net income, lower tax payments due to changes in U.S. tax regulations, and contributions from acquisitions, which more than offset higher inventory investment and capital expenditures. Free cash flow conversion was 105%.

Our balance sheet remains strong and continues to support our disciplined approach to capital allocation. In 2025, we returned $83 million to shareholders through dividends and share repurchases, increasing our annual dividend payout by approximately 20%. On slide eight, we will review our outlook for the first quarter and full year 2026. The outlook for 2026 is based on the anticipated market conditions discussed earlier. For the full year, we anticipate reported sales growth of 8% to 12%, and organic sales growth of 2% to 6%. Excluding the impact of product rationalization, our organic sales growth would be approximately 2 percentage points higher.

Organic sales in The Americas are expected to increase by 3% to 7% driven by price and volume, especially within data centers, more than offsetting anticipated product rationalization headwinds of $25 million to $30 million. Price contribution will be higher in the first half, particularly Q1, due to carryover effect of prior year tariff-related price increases. In Europe, organic sales are projected to range from a 4% decline to flat as favorable price is offset by lower volume, partly due to $10 million to $15 million in product rationalization. APMEA is expected to achieve organic growth between 4% and 8%.

Additionally, we anticipate incremental sales from acquisitions of between $110 million and $115 million in The Americas and between $18 million and $20 million in APMEA, with foreign exchange favorability estimated at $18 million. We expect adjusted EBITDA margin to be in the range of 21.5% to 22.1%, and the adjusted operating margin between 19.1% and 19.7%. Margin expansion from price, volume leverage, and productivity and restructuring savings is expected to be partially offset by inflation and 50 basis points of acquisition dilution. Regionally, The Americas segment margin is anticipated to decrease by 50 to 110 basis points mainly due to approximately 100 basis points of acquisition dilution.

Europe segment margin is expected to be down 30 basis points to up 30 basis points, and APMEA is estimated to increase by 30 to 60 basis points. This guidance assumes no changes to the current tariff environment. We expect free cash flow conversion at or above 90% of net income for 2026, reflecting planned investments in automation in our core operations and with our new acquisitions, investments in our data center capabilities, and investment in our SAP implementation. Key considerations for Q1: reported sales are expected to increase 12% to 16% with organic sales up 4% to 8%. We anticipate high single-digit growth in The Americas, low single-digit decline in Europe, and low single-digit growth in APMEA.

These estimates incorporate a negative impact from product rationalization of approximately $1 million in Europe and $6 million in The Americas. Incremental sales from acquisitions are projected at $25 million to $30 million for The Americas, and around $5 million for APMEA, with a foreign exchange benefit estimated at $13 million. First quarter EBITDA margin is expected to be between 21.1% and 21.7%. Operating margin is expected to be between 18.6% and 19.2%. Price and volume leverage in The Americas and APMEA are anticipated to be offset by volume deleverage in Europe and acquisition dilution of approximately 70 basis points. Additional key assumptions for the first quarter and full year are available in the appendix of the earnings presentation.

With that, I will turn the call back over to Robert J. Pagano before moving to Q&A.

Robert J. Pagano: Thanks, Diane. Let us move to slide nine, where I will summarize before taking questions. In 2025, we posted strong outcomes across the board: record Q4 and full year sales, operating income, EPS, and free cash flow. We continue investing in strategic growth and productivity programs including data center solutions, our Nexa digital strategy, and factory automation for enhanced efficiency. Five strategic acquisitions in 2025 further diversified our business and market reach. Our broad portfolio is resilient, and our teams are positioned to capitalize on growth opportunities, including institutional and data centers. Our model, driven largely by repair and replacement, ensures steady revenue and cash flow. Our balance sheet remains strong and provides flexibility to support our balanced capital strategies.

The M&A pipeline is active, and we plan to pursue appealing opportunities to expand our solutions and global presence as we aim for sustainable profitable growth. With that, operator, please open the line for questions.

Operator: We will now open the call for questions. To ask a question, press star then the number one on your telephone keypad. We ask that you please limit your questions to one and one follow-up. Our first question will come from the line of Nathan Jones with Stifel. Please go ahead.

Nathan Hardie Jones: Good morning, everyone. I am going to start with a question on M&A. Obviously, the level of M&A that you have done over the last couple years has picked up, and it looks to be something that is going to be a little more serial and a little more of a contributor to the earnings growth over the next several years. So I am just interested in hearing a bit more about your philosophy around M&A—on average over the next few years, what percentage of revenue you would like to be able to acquire, leverage targets that you would be comfortable going to.

Just any more color you could give us around that, given it is becoming a bigger piece of the value driver for Watts Water Technologies, Inc. Thanks.

Robert J. Pagano: Thanks, Nathan. As you can imagine, we certainly have a healthy balance sheet that supports that. We cultivate acquisition targets for many, many years and sometimes they break. And certainly, this year, five of them broke, which is exciting. M&A has always been a key part of our strategy. It has to make strategic and financial sense, obviously, and it also has to fit our culture—making sure the cultures work together. We will continue to be active as we always have been. The teams are focused on this where it makes sense and where it is financially attractive. We would like to deploy capital across small, medium, and large acquisitions.

In this environment, we would not want to leverage more than 2.0x to 2.5x at this point in time, but it depends on how fast cash flow drives repayment of debt. Those are philosophically what we are looking at, and the team is focused on it where it makes sense.

Nathan Hardie Jones: And do you need things that are going to be accretive to earnings in the first year? Return on invested capital 10% by year three or year five—what are the hurdles that you are looking at when you are evaluating these kinds of deals?

Diane M. McClintock: Yes, Nathan. Those are our key criteria. We like to have the acquisitions be accretive to EPS in year one and try to get EBITDA margins up to Watts Water Technologies, Inc. levels between year three and year five. We have been pretty successful at that with the acquisitions we have had so far. There are opportunities sometimes where you may not get EPS accretion in year one, but those are certainly our key criteria.

Nathan Hardie Jones: I will just sneak one in on data centers since you highlighted it in the deck. Three percent of sales is a meaningful amount. Bob, you talked about it growing double digits, which is a pretty wide range. Any more color you could give us on a bit more narrow range for double digits and potentially what you think that business could get to over the next few years? Thanks, and I will pass it on.

Robert J. Pagano: It is the higher end of double digits, I would say. It is a key focus of ours. Asia-Pacific was the leader several years ago. Now The Americas is taking that, and The Americas is over half of that. As long as they continue to build, we will continue to be there and provide our products to support them. It is our fastest-growing initiative that teams are focused on.

Nathan Hardie Jones: Thank you very much for taking the questions.

Robert J. Pagano: Thank you.

Operator: Our next question will come from the line of Mike Halloran with Baird. Please go ahead.

Michael Halloran: Good morning, everyone. First question—I just want to make sure I understand the moving pieces in the organic guide. I think the 80/20 revenue is included in that organic number—just want to confirm. And then how should I think about price versus volumes? At the midpoint, are volumes roughly flattish embedded in the guide?

Diane M. McClintock: Yes, Mike. The 80/20 is included in the organic guide, so organic growth would be two points higher excluding the 80/20. From a price/volume perspective for the full year, we expect price to be low single digits. There will be a little bit of volume, maybe more in The Americas than in Europe, and most of that volume is going to be offset by the 80/20 efforts.

Michael Halloran: Great, appreciate that. And then staying on the 80/20 piece, kind of a twofold question here. Maybe just discuss what you saw this year that gave the opportunity—I think, Bob, you said it was retail. And then secondarily, I think it was a little more than I was expecting, probably more in The Americas at this point. How much opportunity do you see broadly over the next chunk of years to continue to push on this type of thing to streamline the organization, products, etc.? I know Europe has always been a focal point for this more consistently, so I suppose the question is a little geared to The Americas on that side.

Robert J. Pagano: We are always looking for productivity through the One Watts Performance System and, certainly with tariffs and all the adjustments, refocus on faster-growing, higher-margin businesses. We make profit on some of this retail and OEM business, but it is really about focus—keeping our team focused on the growing, higher-margin types of business and reallocating resources in the organization. We will keep looking at it and keep driving it. Our expectations are to gain higher returns and higher margins, and we will continue to look at it. It presented an opportunity where our team said, “Let us focus more on data centers than on retail,” and that is what we are doing.

Operator: Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Jeffrey David Hammond: Good morning. So, Bob, we should put you down for 99% growth in data center—is that right?

Robert J. Pagano: That is a little high, Jeff.

Jeffrey David Hammond: Just a quick one on data center. If you look at that $1 billion TAM, how much has that really expanded as we shifted from just air cooling to liquid cooling—the liquid cooling opportunity, which seems early and nascent? And then as you shift to stainless, can you talk about how that impacts price/mix within data center?

Robert J. Pagano: Stainless steel is growing faster as you are seeing the shift there, and we are moving toward that. Stainless steel, because of its metallurgy and properties, is more of a solution, so it has higher margins. The teams are focused on that and driving it, and that will accelerate our growth into the market. We took that into consideration when we developed the $1 billion-plus market estimate.

Jeffrey David Hammond: I was at your AHR booth, and there was a lot of excitement around Nexa, but also EasyWater, which I know is small, but it seems like the technology is pretty disruptive and could benefit from your scale and manufacturing expertise. Maybe talk about uptake on Nexa as you roll it out, and a little more on the EasyWater deal and the opportunity there?

Robert J. Pagano: Nexa has real momentum. We completed the installation for a very large real estate investment group in hospitality properties, and they have gained significant insights and benefits. We are also growing in other hospitality, stadiums, and multifamily. A lot of potential there, and it also supports selling our core products, which is a key focus. EasyWater is known for its salt- and chemical-free treatment solutions, replacing chemicals in many applications. Using fewer chemicals is more environmentally friendly, and that is an opportunity. We had smaller versions in our portfolio, and now we are expanding that. There are new codes in the healthcare industry—for example, medical device cleaning—that should be a nice fit because there are no chemicals.

The teams are excited, and I am glad you saw the momentum in the booth.

Jeffrey David Hammond: Great. Thank you.

Operator: Our next question comes from the line of James Kho with Jefferies. Please go ahead.

James Kho: Good morning. I wanted to touch on data centers. Can you talk about the competitive landscape for cooling valves? Who are the main competitors, and what share do you estimate you have today? What are the risks if new competitors enter the market?

Robert J. Pagano: We do not usually talk about competitors, but I would say there is a handful in this market. It is about quality, delivery, reputation, and standing by the product. I would say we are in the top three competitors in this area based on the products we sell. We have gained a great reputation based on our performance—on-time delivery and great results with our customers. Others can enter, but you have to have the reputation. With our 151-year history, we have credibility, and our multiyear effort is starting to pay off as we work with general contractors, architects, the entire value chain, and penetrate more into hyperscalers. That takes time.

James Kho: Thanks for the color. Touching on the Europe margin, it improved pretty meaningfully this quarter in 2025. Looking at 2026, I think you are guiding for roughly flattish. Does that suggest that restructuring benefits are largely done, or are there still more margin opportunities in that region?

Diane M. McClintock: Hi, James. Q4 really benefited from the extra shipping day and some volume leverage. We expect volume to be muted in 2026. We do expect to continue to get some restructuring savings, primarily in the first quarter and second quarter; it will trail off after that. But we are expecting to have some headwinds with the 80/20 as well and with volume deleverage. Also, a little bit of mix is at play. We expect margins will be flat. As you know, we are always a little cautious on Europe when we are starting the year, and we will see how things go as we move through the year.

James Kho: Great. Thanks for taking questions.

Robert J. Pagano: Thank you.

Operator: Our next question comes from the line of Jeff Reeve with RBC Capital Markets. Please go ahead.

Jeff Reeve: Good morning. Thanks for all the detail thus far. It is great to see the data center opportunity highlighted. Can you walk us through your go-to-market model in data centers? Are you selling through distribution, directly to liquid cooling OEMs, engaging with hyperscalers? How customized are your solutions versus more standardized?

Robert J. Pagano: We are playing with all of those—leveraging our distribution chain as well as working with general contractors all the way through the value chain. We have to hit all of them for various reasons, and it depends on the product. For the most part, these are more standardized products. We are starting to work with them on more technical, finite solutions as we grow confidence and move up the value chain. It has been an exciting ride and we are working very closely with all of them.

Jeff Reeve: As you scale your data center deployments, is there a meaningful opportunity for Nexa or digital monitoring solutions here? How should we think about the long-term opportunity?

Robert J. Pagano: That is an opportunity for the long run. Right now, they have their own systems developed over many years—the last thing they want is a new system. We are leveraging some of our smart and connected products where it makes sense. That would be the next evolution we are working with them on, but it is still early innings.

Jeff Reeve: Got it. Thank you.

Robert J. Pagano: Thank you.

Operator: Our next question comes from the line of Andrew Creel with Deutsche Bank. Please go ahead.

Andrew Creel: Good morning. For the 2026 organic sales guide for The Americas, can you put a finer point on the level of growth or declines you expect for some of your bigger verticals—institutional, commercial, and then in resi, single-family and multifamily? How are you thinking about those markets?

Robert J. Pagano: In residential, we expect single-family to be down low single digits and multifamily down mid single digits. Institutional should be up low single digits. Data centers up double digits. All other commercial types of businesses would be down low single digits. That is very similar to 2025, maybe a little more softness in residential.

Andrew Creel: Thanks. And on 80/20—the acceleration to it being a two-point headwind. It had been a point or a little less in 2025. Were these existing businesses where you found new opportunities, or what changed? And as we look forward into 2027, could this flip to being more neutral or even a positive as you start to overserve some of your better customers?

Robert J. Pagano: We reviewed the portfolio again. In the residential section, it has been more competitive, especially after the tariffs. We are always making sure we have differentiated products and solutions that customers will pay for. We are exiting lower-margin products and focusing teams on higher-margin business. We identified a portion that is not worth the time and effort; better to reallocate resources to faster, higher-margin businesses. After tariffs and pricing actions settled, we decided it is time to exit some of this business.

Diane M. McClintock: And, Andrew, a little more color. It is products and channels within our core Americas business—retail and OEM. It is not within the acquisitions; it is our core Americas business.

Operator: Our next question will come from the line of Ryan Connors with Northcoast Research. Please go ahead.

Ryan Michael Connors: Good morning. I will talk about price for a minute. I was a little underwhelmed—low single-digit price you mentioned, Diane, in 2026. When I think about copper year to date and the fact that we have set a new record there, how does that fit into thoughts around price? We have taken a lot of price the last few years. Reset us with the move in copper—how do we feel about price/cost going forward?

Diane M. McClintock: We expect higher price in the first quarter as we carry over some of the price increases we had in the fourth quarter—think high single digits in Q1, then ramping down over the year and averaging out to low single digits. In terms of copper, we are watching that very carefully.

Robert J. Pagano: We are looking at copper just like you are, Ryan. As you know, we are not bashful about pushing prices. If this continues, we will probably be looking for another price increase midyear.

Ryan Michael Connors: Thanks. And on the product lines you are exiting—what are the mechanics? These are not divestitures; there is no monetization. Do you just stop taking orders and stop making the products and let others take the share? Or how does this work?

Robert J. Pagano: We are walking away from various channels. We will still make the products and sell them through other channels, but some channels are being deemphasized based on competitive nature and profitability.

Ryan Michael Connors: Got it. Not a product walk-away; it is channel-focused. Thanks for the clarification.

Operator: Our next question comes from the line of Joe Giordano with TD Cowen. Please go ahead.

Chris: Hi. Good morning. This is Chris on for Joe. For the 2026 Americas guide, could you elaborate on how much growth is anticipated from repair and replace versus new construction?

Robert J. Pagano: We usually assume GDP for repair and replace—around 2%. That is what we are assuming.

Chris: Could you elaborate on how you are set from a capacity standpoint to meet demand from the data center end market?

Robert J. Pagano: We are leveraging our global supply chain and facilities in North America, Europe, and Asia-Pacific. We have been adding and building capacity, and we feel good about our ability to ramp up for this market.

Chris: Thank you very much.

Robert J. Pagano: Thank you.

Operator: Again, that is star one for any questions. Our next question comes from the line of Brian Lee with Goldman Sachs. Brian, you might be on mute.

Brian Lee: Hello? Can you hear me now? Good morning. A couple of questions around the outlook. When I look at the top-line outlook for 2026, you seem to be growing well ahead of many water peers at the 2% to 6% organic, which is actually two points lower due to the 80/20 you mentioned—so even better than on paper. What is driving some of that performance—is it price, geography, specific end markets?

Robert J. Pagano: It is a combination of all of the above. We are leveraging the institutional market, the data center market, price, and repair and replacement. Our new solutions around Nexa and some of our electrification products in heating and hot water—like our Aegis heat pump—are growing. We have been investing a lot in R&D and are starting to see the benefits of new products even in difficult markets.

Brian Lee: On the margin guidance, you called out 50 basis points of dilution due to acquisitions. If you strip that out, I think you would have been guiding to basically your typical annual margin expansion targets you have maintained for the past several years. How should we think about recapturing that margin into the out years as you realize synergies—is that something that comes right back in 2027?

Robert J. Pagano: That is our goal and focus—30 to 50 basis points improvement on operating margin annually. We will get that through leveraging the One Watts Performance System, factory automation, productivity initiatives, and products where we can charge higher prices because they are better solutions for customers. It is a combination of things that gives us confidence we will continue to grow margins 30 to 50 basis points on a go-forward basis.

Brian Lee: Appreciate the color. I will pass it on. Thank you.

Robert J. Pagano: Thank you.

Operator: That will conclude our question and answer session. I will hand the call back over to Robert J. Pagano for closing remarks.

Robert J. Pagano: Thank you for joining us today. We appreciate your ongoing interest in Watts Water Technologies, Inc. and look forward to speaking with you again in May for our first quarter results. Have a great day, and stay safe.

Operator: This concludes today's call. Thank you all for joining. You may now disconnect.