Watts Water Technologies, Inc. Class A Aktie

Welcome to Watts Water Technologies, Inc. First Quarter 2026 Earnings Call. [Operator Instructions]

I will now turn the call over to Diane McClintock, Chief Financial Officer. Please go ahead.

Thank you, and good morning, everyone. Welcome to our first 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 Watts' 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, Diane, and good morning, everyone. Please turn to Slide 3, and I'll provide an overview of the first quarter. We began 2026 with better-than-expected results, including record sales, operating income, operating margin and earnings per share. I'd like to thank the entire Watts team for their impactful contributions to our results.

Organic sales rose 12% in the quarter as we benefited from price and incremental volume. Adjusted operating margin of 20.1% increased 110 basis points due to better-than-expected price, volume and productivity, which more than offset tariff costs, inflation and acquisition dilution of 80 basis points. Our balance sheet remains strong and provides ample capacity to support our disciplined capital allocation strategy. This includes evaluating strategic M&A opportunities while continuing to invest in product innovation and advancing our digital strategy.

As a result of our solid start to 2026 and expected cash flows for the remainder of the year, we announced a 21% increase to our dividend beginning in June. We continue to see strong momentum in data center cooling applications with sales more than doubling in the quarter as we deepen customer relationships and leverage our broad portfolio. To support this growth and meet our customers' needs, we are investing in our team and accelerating innovation across our product portfolio.

Additionally, we're expanding capacity, including adding inventory to meet shorter lead time expectations. We're also gaining traction with our digital solutions, including the Nexa platform, our intelligent water management solution. Together, these strategic initiatives are driving growth and helping to offset softer end markets.

In 2025, we completed 5 acquisitions, enhancing our technology capabilities and expanding our product range, geographic reach and exposure to high-growth nonresidential end markets. These businesses are performing well, and we are successfully integrating them through our One Watts performance system. We're on track to achieve or exceed the targeted synergies.

We are proactively working to mitigate the impact of the Middle East conflict. Our direct sales exposure to the Middle East is limited to approximately 2% of global sales with the majority being in our APMEA region. We are implementing targeted pricing strategies as well as sourcing and productivity initiatives to mitigate both the direct and indirect impacts, including freight and energy cost increases.

Our direct Middle East exposure includes our recent acquisition, Saudi Cast, and I wanted to highlight that the Saudi Cast business is largely an in-country for-country business model, which should help insulate it from the full impact of the conflict. The tariff environment also remains fluid with IEEPA tariffs being eliminated, but generally being offset by new tariffs under Section 122 and changes in the Section 232 rules. Additionally, the administration is considering new tariffs under Section 301. Based on the tariff structure in place as of today, we believe we are well positioned from a price/cost perspective.

Our strong first quarter performance and outlook for the second quarter give us a solid start towards achieving our outlook for the full year. We continue to face an uncertain macroeconomic and geopolitical environment, including the Middle East conflict, downward revisions of global GDP forecasts and elevated interest rates. In light of these factors, we believe it's prudent to maintain our full year outlook and we'll revisit in our next earnings call.

With that, let me turn the call over to Diane, who will address our first quarter results and our second quarter and full year outlook. Diane?

Thank you, Bob, and good morning, everyone. Please turn to Slide 4, which highlights our first quarter results.

Sales reached $677 million, reflecting a 21% increase on a reported basis and a 12% increase organically. This performance was supported by favorable price and volume, including the benefit of growth in data center sales. The Americas region delivered strong organic growth of 16% and reported growth of 23%, exceeding our expectations. Acquisitions accounted for an additional $31 million in sales, contributing 7 points to the Americas reported growth.

In Europe, organic sales rose 1%, while reported sales increased 12%. Organic growth stemmed from favorable pricing, while reported sales also benefited from positive foreign exchange. In APMEA, organic sales grew 3%, with acquisitions adding 19% and favorable foreign exchange contributing 7% for a total reported sales growth of 29%.

Adjusted EBITDA totaled $151 million, an increase of 27% with an adjusted EBITDA margin of 22.3%, up 90 basis points year-over-year. Adjusted operating income of $136 million increased 28% and adjusted operating margin improved 110 basis points to 20.1%. These improvements were primarily driven by favorable pricing, volume leverage and productivity gains, more than offsetting inflationary pressure, tariffs and acquisition dilution of 80 basis points.

Segment margins were as follows: Americas increased 80 basis points to 24.2% and APMEA increased 120 basis points to 18.7%, while Europe decreased 20 basis points to 13.7%.

Adjusted earnings per share equaled $3.04, representing a 28% year-over-year increase with operational performance, acquisitions, tax and foreign exchange gains outweighing higher net interest expense. The adjusted effective tax rate in the quarter was 24.2%, down 30 basis points compared to the first quarter of 2025, primarily due to a higher tax benefit from the vesting of stock compensation awards that occur in the first quarter of each year.

Our free cash flow for the quarter was $7 million compared to $46 million in the first quarter of last year. The cash flow decrease was primarily due to the increase in accounts receivable due to higher sales volume, increases in and timing of our annual customer rebate payments and an increase in inventory related to incremental tariffs and our strategic investment in inventory. 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 90% of net income as previously communicated.

We have a strong balance sheet and solid cash flow, giving us flexibility in executing our capital allocation strategy, including the announced 21% increase in our dividends that will begin in June.

On Slide 5, we will review our outlook for the second quarter and full year 2026. We are reaffirming the full year 2026 outlook we presented in February, which reflects the market factors Bob discussed. It assumes the Middle East conflict is short term in nature, the current tariff structure remains in place for the remainder of the year, and there are no IEEPA tariff refunds.

For the full year 2026, we are maintaining both our consolidated and regional sales outlooks. Consolidated organic sales growth is expected to be between plus 2% and plus 6%, and our reported sales growth is expected to be between plus 8% and plus 12%. We are also maintaining our full year adjusted EBITDA and adjusted operating margin outlook.

Next, a few items to consider for the second quarter. Reported sales are expected to increase by 10% to 14% with organic sales up 4% to 8%. We anticipate mid- to high single-digit growth in the Americas despite the tough compare to the second quarter last year, which included an estimated $20 million of pull-forward sales into the second quarter from the third quarter due to the timing of price increases.

We expect a low single-digit decline in Europe and low to mid-single-digit growth in APMEA with our expected data center sales offsetting the direct impact of the Middle East conflict. These estimates incorporate the negative impact from product rationalization under our 80/20 initiative of approximately $2 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. We also estimate a foreign exchange benefit of approximately $5 million. Second quarter EBITDA margin is expected to be between 22.3% and 22.9%. Operating margin is expected to be between 20% and 20.6%. Price and volume leverage in the Americas and APMEA are anticipated to be offset by acquisition dilution of approximately 70 basis points.

In addition, last year, we had a nonrecurring price/cost benefit of approximately $6 million in the second quarter, in addition to the volume leverage on the estimated $20 million of sales pull forward that together are a 120 basis point headwind to margins in the second quarter. Additional key assumptions for the second 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 wrap up, we had a strong start to the year with record first quarter sales and earnings. Our portfolio spans diverse end markets, and we are actively reallocating resources towards areas of strong demand, including institutional and data centers.

Importantly, approximately 60% of our sales are driven by repair and replacement activity, which provides a consistent foundation for revenue and cash flow generation over time. We remain nimble and are confident in our ability to execute through dynamic market conditions. We're maintaining our full year outlook despite the macro and geopolitical uncertainty. Our balance sheet remains strong and provides ample flexibility to support our capital allocation priorities. We believe we are well positioned to deliver on our financial commitments, create value and drive profitable growth over the long term.

With that, operator, please open the lines for questions.

[Operator Instructions] We'll go to our first question from Nathan Jones at Stifel.

I guess I'll ask a dumb question about the full year guidance. I know you said, Bob, it's only 1 quarter in. There's a lot going on, but you did beat the first quarter by a long way, and the second quarter guidance is a fair way ahead of consensus as well.

Is there any kind of assumption in here that you're making? I guess, maybe the MRO business slows down a little bit with global GDP. You've always said it's pretty well correlated with that? Or is there any reason to think that the second half is likely to be any weaker than you thought it was going to be 3 months ago? Or this is just purely being conservative given the macro environment that we're in?

Thanks, Nathan, for the question. Look, I think it's being prudent right now. I think we've dialed in and we feel really confident about that. And it just depends on how long the war goes on at this point in time and does it impact future demand in the future. But if it's over with quickly and everything else, I think we have opportunities in the second half. But let's talk about that in 3 months, and we'll have a better answer for you at that point in time.

Fair enough. My second question is on the topic du jour of data centers and Watts' exposure there. I think you said it doubled in the first quarter. Can you maybe talk about any details you can give us on how big this is, what the contribution to the overall Watts growth is, how big the addressable market is, how much you think you can grow it over the next few years? Any more details you can give us around that kind of thing?

Yes. Regarding data centers, look, it's an over $1 billion addressable market that we have in front of us. We ramped up last year. So the first half of this year is going to have better, easier comps than the first -- last year, we ramped up and the second half was stronger than the first half of last year.

So our goal is to do high double-digit increases in data center for the year, and we believe we're well on our way to do that at this point in time. Teams are doing a great job. We're innovating new products and the customers are happy with our performance. So we're excited about this opportunity, and we're doubling down on it.

Is it accretive to the company margins?

It is. Overall operating income, very much so. Some movements on the gross profit margin with lesser SG&A costs, but overall accretive for overall Watts.

We'll move next to Mike Halloran at Baird.

So certainly acknowledged the answer to the first question Nate asked there on the conservatism in the back half of the year. So just keeping that as a backdrop, maybe just help understand how you're talking about margin cadencing, price cost, et cetera. Guidance in the back half of the year implies lower margins front half, but it feels like if this trajectory continues, there's room there.

But maybe just talk to how you're thinking about price cost, particularly in the context of recent inflation and then what you're doing on the pricing side?

Yes. So we've been -- as you know, we always stay in front of the price cost. And we believe with all the movements in tariffs and everything else, we're still ahead of that. Regarding, let's call it, the cost of inflation as an impact of the war, our international units have put in additional price increases because they're more impacted than we are in the U.S. And right now, we're evaluating in the U.S., we're watching very closely how long this war will continue and fuel costs, et cetera, going up. And we're prepared to put an additional price increase if that -- if required.

Now regarding your discussion regarding margins, certainly, with the second half volume assumptions, which is flattish in the second half, if there's opportunities there, that we certainly should have opportunities from a margin point of view if we increase our outlook in the second half. Again, it all depends on the war and the longer-term impacts of it. As we said earlier on the call, about 2% of overall Watts sales is in the Middle East. We have addressed that in the second quarter, about an $8 million headwind in Q2. We're just watching to see the bigger impact in the second half if this war continues.

And then maybe just an update on the 80/20 side of things, both in terms of the progress with the initiatives, expectations for drag on the sales side and how that plays out for the year and then where you're starting to see the benefit so far?

Yes. From an 80/20 perspective, we'll expect to see that ramp up in the back half of the year. So that's another piece of our decline in the second half. I think we had about $15 million of that total in the first half, and you'll see that significantly increase in the back half.

Things are going well. I think we've started, in terms of price increases, that's always the first piece of it, getting a good response around that. But we do expect that to ramp up in the second half and then clearly wrap into the front half of 2027.

We'll go to our next question from Jeff Hammond at KeyBanc Capital Markets.

Can you give us price mix versus volume in North America in the quarter and just how you think that's going to pace through? And then I think you said on price, you're pushing some internationally. What do you need to see on North America to kind of move forward with any incremental pricing, whether it be moving pieces in tariffs or copper inflation or some of this fuel transportation inflation?

Well, you hit all the categories we're looking at, Jeff. I mean we're watching that very closely. Certainly, our international units have impacted more. They're seeing higher charges. So we immediately went out with that. Likely, the impact of that won't be seen probably until the third quarter by the time that all the way goes through.

But overall, price cost, approximately just a little shy of 8% of price was in the first quarter, which was strong overall to cover our costs in that, during the quarter and stuff. So we're on top of this. As you know, we watch it. We stay in front of it. And certainly, we're preparing if need be over the next few weeks to be ready to put in additional price increases if this continues.

And Jeff, on your question of sequentials, we'll see that price realization come down sequentially across the year as we start to lap over the 2025 price increases.

Okay. Great. And then just back on kind of the uncertainty. If you look at kind of your order book through the quarter and into April, May, like are you seeing any pockets of slowing? Or is this just, hey, we're going to assume this thing continues and it's going to start to get more disruptive?

Right now, we're not seeing it. At this point in time, we've seen some drain business that's been lumpy that was waiting for some BABA funding, not material. I mean we're off some very difficult compares on an order rate in Q2 of last year because of the pull-in with the price increases.

But overall, the order book is in line with our Q2 forecast at this point in time, with certainly data centers offsetting a lot of the softness, in particular, in the resi market.

Okay. And then just last one. This inventory investment, can you kind of quantify what it was and kind of how you think working capital use is going to look like for the year? It doesn't seem like you're really changing your free cash flow guidance, but it seems like a change in tone a little bit on inventory.

Yes. It's really around the strategic investment from the data center point of view, right? Our customers are asking for quicker lead times and adjustments, and we want to make sure the inventory is on hand to support that. But overall, net-net, by the end of the year, we believe it worked its way through.

We'll take our next question from Andrew Krill at Deutsche Bank.

I wanted to see if there was any meaningful impact from weather this quarter. I think one of your main public peers called this out as a point benefit for the first quarter, and I think that continues into 2Q. Just historically, I think losses even over-indexed on this versus then. So anything you can provide there?

Yes. It was not a huge impact, a little under 1% in the first quarter. We're not expecting it to be meaningful in the second quarter, but the freeze that happened in the first quarter created some incremental demand, but we don't expect that to carry over into the second quarter.

Okay. Makes sense. And then following back up on the 2Q margin guide, again, it implies just a little bit of sequential expansion, and you went through some of the year-over-year headwinds.

But -- any reason we're not seeing a bigger sequential expansion? I think you said $8 million of Middle East costs. Was that a cost number or sales there? Any help why that's not a bigger jump into 2Q?

Yes. Sequentially, first quarter to second quarter on the margin side, we're going to have that decline in price. So that's going to be a little bit of a margin headwind. And then if you remember, we had a pull forward last year in Q4. So that's a margin headwind for us as well. And the Middle East conflict, that will be about $5 million to $6 million on the margin side. So that's also going to be a headwind. It's a challenging compare as well.

Yes. The $8 million I referred to was the $8 million of sales we're negatively impacting in the Middle East. And certainly, we're keeping our team fully aligned inside the Middle East. So it's -- we'll have some net negative absorption costs as a result of this. We believe it's timing, and we're going to ride it out with the team because we've got a great team and a growing opportunity in the Middle East.

Okay. Great. And just one last quick one. You said you said $5 million to $6 million cost, $8 million of sales. Was there anything meaningful in the first quarter on both of those metrics?

Not on the cost side. On the sales side, a small number, a few million dollars of sales at that point because most of the conflict didn't really happen until March. So we were able to get most of our shipments out that we were expecting.

We'll take our next question from James Ko at Jefferies.

I wanted to touch on the guidance here a little bit again. So are you assuming the Middle East conflict continues for the remainder of the year and it potentially impact other regions like Europe? Or like are you assuming that it ends by like first half? Because most of the companies, I think, are guiding like that Middle East should be over by first half, but it sounds like it's going to be more elongated for you guys. So just wanted to get like clarification here.

Yes. So we really are not assuming a long impact in Q2 right now. We've not made a full assumption for the rest of this year at this point in time, given we don't know the duration, et cetera. As I said earlier, certainly, if this conflict gets over and the strait opens up and things get moving, I think there's opportunities in the second half at this point in time. But we didn't want to -- there's too many geopolitical uncertainties at this point in time.

So raising at this time just didn't make sense. But we'll look at it in the next 3 months because I think we'll have greater clarity at that point in time.

Great. And I guess I wanted to touch on the Europe margin here. It was down a bit in the first quarter and -- but the last quarter, we had like nearly 500 basis point improvement. So can you kind of parse out kind of what changed sequentially, why aren't we seeing a strong margin expansion like we did like the last quarter?

Are you looking at Q1 to Q2, James?

No, I'm comparing Q1, what is the margin performance versus last quarter, 4Q on a year-over-year basis.

Yes. There's typically a seasonality in Europe in Q4. It tends to be our higher margin quarter, in fact. So really some volume leverage there. Volume is down in the quarter. So that's a piece of it. 80/20, piece of it. And so those are all sort of contributing factors to that margin decline.

There was also a small mix issue in the first quarter also. So again, nothing to really read into that. The team is doing a good job. We're relatively stabilized in Europe at this point in time. So 2 decent quarters in a row where it's more flat. We're not seeing the decrease. And it just depends on how long this war continues and the knock-on effects inside of Europe at this point in time.

We'll move next to Jeff Reive at RBC Capital Markets.

Last quarter, you characterized North American and European residential construction markets as remaining soft in 2026. As you sit here today, are you seeing any meaningful change in demand trends or customer behavior relative to those expectations?

No, I would just say there's probably -- it's a little softer than we probably anticipated only because of the uncertainty in the fuel costs. I think just people are holding back on that, and you can see it in the starts, et cetera, on the resi side.

So I would say resi is a little bit softer, but all the other markets are kind of in line with what we expected.

Got it. And maybe within that resi, is it single-family, multifamily, repair/remodel? What's tracking worse?

I think it's all of the above. I mean it's -- in general, I would say repair and replacement is holding up, in resi. Big remodeling is probably a little softer because people are deferring that. But the new construction markets are still soft, and we're carefully watching that, but we are more than offsetting that with our data center growth.

We'll go next to Joseph Giordano at TD Cowen.

This is Chris on for Joe. You had mentioned institutional alongside data center as showing growth. I'm just wondering if you could elaborate on which particular areas within that market that you're seeing? And if you could also discuss what you're seeing in terms of the Nexa attach rate broadly in both data center and institutional, if it's applicable.

Yes. So schools and hospitals are primarily inside of the institutional market that've been holding up on that as well as data centers are really strong at this point in time. Your second question was that on Nexa, did you say? You broke up a little bit.

Yes. If you could just elaborate on the -- what you're seeing in terms of Nexa uptake. You touched on it briefly. Just...

Yes. Yes. So Nexa continues to be a favorable story for us. We continue to grow that slow but surely. Team is making great progress. And I want to remind everybody, Nexa is going to be being put on all of our products, right? So all of our main products are going to be Nexa-enabled.

So it's also something to protect our core business and allows people to hook that up on a proactive basis when they're ready to do so. So again, Nexa is also a play to protect our core business and help that to grow and command higher pricing based on the value it's doing to our customers.

Great. And have you seen any evolution or change to the M&A environment incrementally over the last 90 days? Any change in terms of the attractiveness of the targets or what's taking place in M&A?

Yes. So M&A, the pipeline, there's still a strong pipeline out there. As you know, we're disciplined, and we always say we have to make -- it has to make strategic and financial sense based on our criteria, and we'll be watching that. As you know, you can never predict timing of acquisitions, but we'll continue to cultivate and we'll keep you posted as we make progress there.

[Operator Instructions] And that concludes our Q&A session. I will now turn the conference back over to Bob Pagano 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 second quarter earnings call in early August. Have a great day and stay safe.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.

Welcome to Watts Water Technologies, Inc. Fourth Quarter and Full Year 2025 Earnings Call. [Operator Instructions]

I will now turn the call over to Diane McClintock, Chief Financial Officer. Please go ahead.

Thank you, and good morning, everyone. Joining me today is Bob Pagano, President and CEO. 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 Watts' 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, Diane, and good morning, everyone. Please turn to Slide 3, where I'll recap 2025 and outline the key drivers for our 2026 outlook. I want to begin by expressing gratitude to the entire Watts 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 105%. 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 2 acquisitions. Superior Boiler based in Hutchinson, Kansas, is a leading designer and maker of customized fire tube, water tube and condensing boilers for commercial, institutional and industrial uses. Superior's mission-critical heating and hot water solutions expands our customer offerings. Superior has about $60 million in annual sales. Saudi Cast, 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. Saudi Cast's 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've 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.

Here's 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 over $130 million in incremental revenues from the acquisitions of EasyWater, Haws, Superior and Saudi Cast. 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 4, you'll see examples of solutions we've 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'll keep investing in new products and technologies to meet evolving customer needs and believe this market will continue expanding for years.

Slide 5 covers our acquisitions over the past 3 years. We finalized 8 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, we're driving value through successful integration, synergy realization and improving margins. Despite the typical early-stage margin dilution from acquisitions, we've expanded adjusted operating margin by 320 basis points in 3 years. We're proud of our performance and pleased to add such quality brands to our portfolio.

With that, I'll hand things back to Diane, who will discuss our Q4 and full year 2025 results and share the outlook for Q1 and all of 2026. Diane?

Thank you, Bob. Let us now turn to Slide 6, 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 1 additional shipping day and growth from data center sales. Acquisitions accounted for an additional $27 million in sales, contributing 7 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, more than offsetting inflationary pressures, volume deleverage in Europe, tariffs and acquisition dilution.

Segment margins were as follows: 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 7. 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 8, 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% 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 the 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, 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% to 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'll turn the call back over to Bob before moving to Q&A. Bob?

Thanks, Diane. Let's move to Slide 9, where I'll 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 Instructions] Our first question will come from the line of Nathan Jones with Stifel.

I'm going to start with a question on M&A. Obviously, the level of M&A that you guys have done over the last couple of years has picked up, and it looks to be something that's 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'm just interested in hearing a bit more about your philosophy around M&A, kind of on average over the next few years, what percentage of revenue you'd like to be able to acquire, leverage targets that you'd be comfortable going to. Just any more color you could give us around that given it's becoming a bigger piece of the value driver for Watts.

Well, thanks, Nathan. But as you can imagine, we certainly have a healthy balance sheet that does that. We cultivate acquisition targets for many, many years, and sometimes they break. And certainly, this year, 5 of them broke, which is exciting. So 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 and making sure the cultures work together.

So we'll continue to be active as we always have been. The teams are focused on this where it makes sense and where it makes financially attractive. But certainly, we'd like to deploy capital. We look at small, medium and large acquisitions. Certainly, in this environment, we wouldn't want to leverage more than 2, 2.5 at this point in time. But again, it just depends on how fast cash flow drives repayment of debt. So anyways, those are philosophically what we're looking at, but the team is focused on it where it makes sense.

And do you need things that are going to be accretive to earnings in the first year, return on invested capital, 10% by year 3 or year 5? Or what are the kind of hurdles that you're looking at when you're looking at these kinds of deals?

Yes, Nathan, those are our key criteria. We like to have the acquisitions be accretive to EPS in year 1, try to get our EBITDA margins up to Watts' level between year 3 and year 5. We've been pretty successful at that with the acquisitions we've had so far. It's not -- there are opportunities sometimes where you may not get your EPS accretive in year 1, but those are certainly our key criteria.

And I'll just sneak one in on data center thing as you highlighted it in the deck. 3% of sales is a meaningful amount. And Bob, you talked about it growing double digits, which is a pretty wide kind of range. Any more color you can give us on what kind of -- a bit more narrow range for double digits and potentially what you think that business could get to over the next few years?

Yes. I mean it's the higher end of the double digits, I would say. And certainly, it's a key focus of ours. Asia Pacific was the leader of that several years ago. Now America is taking that and Americas is over half of that. And as long as they continue to build, we'll continue to be there and provide our products to support them. So it's our fastest-growing initiative that the teams are focused on.

Our next question will come from the line of Mike Halloran with Baird.

So 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?

Yes, Mike, that's right. The 80/20 is included in the organic guide. So the organic growth would be 2 points higher, excluding that 80/20. And from a price/volume perspective, from a full year, we kind of expect price to be low single digits. There'll 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.

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 Bobby said it was retail. And then secondarily, I mean, 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 here to continue to push on this type of thing to streamline the organization, products, et cetera? I know Europe has always been a focal point for this more consistently. So I suppose the question is a little more geared to the Americas on that side.

Yes, Mike. So we're always looking for productivity through the One Watts Performance System. And certainly, with tariffs and all the adjustments and refocus on more, let's call it, faster-growing, higher-margin type businesses. So we make profit on some of this retail OEM business, but really, it's about focus, keeping our team focused on the growing, more profitable types of business and reallocating resources in the organization. So we'll keep looking at it and keep driving it. But certainly, our expectations are to gain higher returns, higher margins, and we'll continue to look at it. It presented an opportunity where our team said, "Hey, let's focus more on data centers than on retail," and that's what we're doing.

Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

So Bob, we should put you down for 99% growth in data center. Is that...

That's a little high, Jeff.

Just on -- maybe just a quick one on data center. One, if you look at that $1 billion TAM, I'm just wondering like how much that really has expanded as we've shifted from just air cooling to liquid cooling, just 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?

Yes. So certainly, the stainless steel is growing faster as you're seeing the shift there, and we're moving towards that. And stainless steel because of its metallurgies and properties is more of a solution. So it has higher margins. So that's -- the teams are focused on that, driving that, and that will be accelerating our growth into the market. And we took that into consideration when we developed, basically, $1 billion-plus market.

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

Yes. Well, Nexa, you certainly see the focus. The buzz is it's getting out there. We're excited about -- we're making very good progress. We completed the installation of a very large real estate investment group with their hospitality properties. And we're gaining -- they've gained significant insights and benefits. And we're also growing in other hospitality and stadiums and multifamily properties. So we're excited about the growth, a lot of potential there. But I think as I've told many of you, that also supports selling our core products, and that's where we're focused on.

In EasyWater, what they're known for is their salt and chemical-free treatment solutions, which they're offsetting a lot of places that use chemicals. And certainly, using less chemicals is obviously more environmentally friendly, et cetera. So that's an opportunity. It was something we had smaller versions of that in our portfolio, and now we're expanding that. So yes, we're really excited about that. There's many opportunities. There's some new codes out there in the health care industry that are on things like medical device cleaning, et cetera, which should be a nice fit for that because there's no chemicals. So yes, the teams are excited, and I'm glad you saw the momentum inside the booth.

Our next question comes from the line of James Ko with Jefferies.

I wanted to talk about the data center here again. Can you kind of talk about like competitive landscape for cooling valves? And who are the main competitors? And what share do you estimate you have today? And what are kind of the risk if new competitors kind of enter into the market?

Well, certainly, we don't talk about competitors usually in general. But I would say there's a handful of competitors. In this market, it's about quality, delivery and reputation and standing by their product. So we're -- I would say we're in the top 3 competitors in this area based on the products we sell. And I would say we've gained a great reputation based on our performance in the industry. And so different people can enter it, but you got to make sure you have the reputation. And with our 151-year history, I think that gives us credibility, and we've been delivering on time and having great results with our customers.

So that's a key area of focus for us, and we'll continue to grow, and we believe it's a great opportunity. And we're working with the general contractors, the architects and the entire value chain and penetrating more into the hyperscalers. So that just doesn't happen. It takes time to do that, and our multiyear effort here is starting to really pay off.

Great. Thanks for the color. And I guess touching on the Europe margin here. Obviously, it improved pretty meaningfully this quarter and in 2025. Looking at 2026, I think you're guiding for roughly flattish. So does that kind of suggest that restructuring benefits are largely done? Or are there still more margin opportunities remaining in that region?

James, Q4 really benefited from that extra shipping day and some of the volume leverage in Q4. We expect volume to be muted in 2026. We do expect to continue to get some of the restructuring savings, primarily really in the first quarter and in the 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 the mix is at play there. So -- but we expect margins will be flat. As you know, we're always a little bit cautious on Europe when we're starting the year, and we'll see how things go as we go through the year.

Our next question comes from the line of Jeff Reive with RBC Capital Markets.

It's really great to see the data center opportunity highlighted. I was hoping, can you just walk us through your go-to-market model in data centers? Are you selling through distribution directly to liquid cooling OEMs? Are you engaging upstream with hyperscalers? And also, how customized are your solutions here versus more standardized?

We're playing with all of those. We're 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 what type of product. I would say, for the most part, these are more standardized products. We're starting to work with them on more technical finite solutions on that, and that's as we grow with confidence in them and going up the value chain. So yes, it's been an exciting ride, and we're working very closely with all of them.

That's great to hear. As you scale your data center deployments, is there a meaningful opportunity for Nexa or digital monitoring solutions here? And maybe how should we think about the long-term opportunity?

Yes, that's an opportunity for the long run. Right now, they have their own systems that they've developed over many years. The last thing they want is a new system. But we're leveraging some of our smart and connected products where it makes sense with them. So that would be the next evolution. We're working with them on that. And -- but right now, that's early innings on that.

Our next question comes from the line of Andrew Krill with Deutsche Bank.

Going back to the 2026 organic sales guide for the Americas, I was hoping you could put a little 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 versus multifamily, maybe just some help on how you're thinking about those different markets.

Yes. So when we look at the residential, we're projecting to be down again, right? Single-family, low single digits. Multifamily, mid-single digits. Institutional, we're seeing up low single digits. Data centers is up double digits. And I would say all the other commercial types of businesses would be down low single digits. So that's how we're kind of framing it, very similar to what we saw here in last year in 2025. Kind of the markets are kind of about the same here, maybe a little more softness in residential than what we saw, but that's how we're framing it at this point in time.

Okay. Great. That's helpful. And then going back to 80/20, I think the acceleration to it being a 2-point headwind. It had been, I think, 1 point or a little bit less in '25. Just -- were these existing businesses, you just found new opportunities or really what changed? And then as we look forward into '27, do you think this could flip to being more neutral or maybe it's even a positive as you start to overserve some of your like better customers?

Yes. So again, we look at the portfolio. I think in the residential section, it's been more competitive, especially after all the tariffs and stuff. And we're always looking at making sure we have differentiated products and solutions that customers are going to pay for, right? So in the end, we're trying to get rid of lower-margin type products and focusing our teams on higher-margin businesses. So we've identified a portion of that, that it's just not worth us spending the time and effort, and it's better for us to reallocate our resources to the faster, higher growing margin businesses. So that's all it is. It's -- we took a second look, another look, especially after all these tariffs have settled down and pricing actions and looked at this and where we're going and said it's time to exit some of this business.

And Andrew, just a little more color on that. It is products and channels within our core Americas business. So it's not within the acquisition. It's our core Americas business, retail and OEM.

Our next question will come from the line of Ryan Connors with Northcoast Research.

I'm not going to ask you about data centers, although I would say your call is going to screen really well here with the AI bots on the data center mentions and might set a new record. But yes, back to the basics, talking about price for a minute. You -- I was a little bit surprised, underwhelmed, I guess, would be the word, low single-digit price you mentioned, Diane, in 2026. When you think about copper year-to-date and the fact that we've set a new record there, I was just curious how that fits into the equation on the thoughts around price. I know we've taken a lot of price the last few years. Just kind of reset us with the move in copper and how we feel about price cost going forward just conceptually.

Yes. So we expect -- certainly, we expect higher price in the first quarter as we carry over some of the price that we -- price increases we had in the fourth quarter. So think about that as higher in Q1 and then ramping down sequentially over the year and probably averaging out to maybe low single digits. But we expect to be high single digits Q1 and then sequentially going down after that across the year.

In terms of copper, we're watching that very carefully. Bob, do you want to add some color on that?

Yes. I mean we're looking at copper just like you are, Ryan. And as you know, we're not bashful about pushing prices. So if this continues, we'll probably be looking for another price increase midyear.

Yes. Okay. Yes, that's kind of what I figured. Okay. And then just a real quick one on. So you've talked quite a bit in the Q&A here about these product lines you're exiting. And I'm just curious the mechanics on that. So these aren't any kind of divestiture. There's no monetization here. We just literally stop taking orders, kind of just stop making the products and let whoever else is out there take that share. I mean is that what happens here? You just sort of just walk away.

Or walk away from various channels of inventory. In other words, we'll still make it and sell it through to other channels, but some of the channels we're deemphasizing based on competitive nature and profitability in those markets.

I see. So it's not a product walk away. It's just on the channel. I see. Okay.

Our next question comes from the line of Joe Giordano with TD Cowen.

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?

Yes. I mean we usually -- basically repair and replace, we assume GDP, right? So around 2%. That's kind of what we're assuming on repair and replace.

Got it. And could you elaborate on how you're set from a capacity standpoint to meet the demand from the data center end market?

Yes. So we're leveraging our global supply chain and our facilities around the world, whether it be in North America, Europe and our facilities in Asia Pacific and our global supply chain. So we've been adding capacity, building capacity, and we feel good about our ability to ramp up for this market.

[Operator Instructions] And our next question comes from the line of Brian Lee with Goldman Sachs.

Can you hear me?

Can hear you now.

Just a couple of questions around the outlook. A lot has been covered already on the call. But when I look at the top line outlook here for 2026, it seem to be growing well ahead of many water peers at the 2% to 6% organic, which actually 2 points lower due to the 80/20, as you mentioned, so even better than on paper. Maybe kind of walk us through what's driving some of that performance? Is it price? Is it geo? Is it specific end markets? It just seems like you guys, even off of a good 2025 performance, positioned better here in terms of growth versus peers.

Yes. I think it's a combination of all of the above, right? We're leveraging the institutional market, the data center market, certainly price, repair and replacement is growing. And again, our new solutions, which are around Nexa, and I would call some of our electrification products in our heating and hot water solutions group with our Aegis heat pump.

So again, those are all growing and we're leveraging those capabilities. As you know, we've been investing a lot in R&D, and we're starting to see the benefits of some of that new product even in difficult markets.

Yes. Fair enough. And then on the margin guidance here as well, you called out the 50 basis points of dilution due to acquisitions. If you strip that out, I think you guys would have been guiding to basically a typical annual margin expansion targets that you've maintained for the past several years. How should we think about sort of the recapture of that margin into the out years as you kind of realize some of these synergies? Is that something that comes right back in 2027?

Yes. I mean that's our goal and focus as an organization, 30 to 50 basis points improvement on margins or operating income really at that point. And we'll get that through leveraging the One Watts Performance System through factory automation, productivity initiatives and some of our products that are -- we can charge higher prices because they're having better solutions to our customers. So again, it's not just one thing. It's a combination of things that give us confidence that we'll continue to grow the 30 to 50 basis points on a go-forward basis.

And that will conclude our question-and-answer session. I'll hand the call back over to Bob Pagano for closing remarks.

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

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

Thank you for standing by. At this time, I would like to welcome everyone to today's Third Quarter 2025 Watts Water Technologies' Earnings Call. [Operator Instructions] I'd now like to turn the call over to Diane McClintock, Senior Vice President of Investor Relations. Diane?

Thank you, and good morning, everyone. Welcome to our third quarter earnings conference call. Joining me today are Bob Pagano, President and CEO; and Ryan Lada, our CFO.

During today's call, Bob will provide an overview of the third quarter, a business update and an update on our outlook for 2025. Ryan will discuss the details of our third quarter performance and provide our outlook for the fourth quarter and for the full year. Following our remarks, we will address questions related to the information covered during the call.

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.

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 Watts' 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.

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

Thank you, Diane, and good morning, everyone. Please turn to Slide 3, and I'll provide an overview of the quarter.

We are pleased with our strong third quarter results, which exceeded expectations. Watts' multiyear track record of success would not be possible without the dedication, collaboration and support of our team members and business partners, and I'd like to express my sincere gratitude.

Organic sales increased 9% in the quarter, with favorable price in the Americas, volume and pull-forward demand more than offsetting the decline in Europe. We also benefited from incremental sales from our I-CON and EasyWater acquisitions and favorable foreign exchange movements. Adjusted operating margin of 18.5% was better than anticipated due to favorable price, volume leverage, productivity and mix.

Year-to-date free cash flow continues to be solid, and we expect to generate seasonally strong free cash flow through year-end. The balance sheet remains healthy, and we have ample flexibility to support our disciplined capital allocation strategy. On that note, we're excited to have acquired Haws Corporation, a leading global brand providing emergency, safety and hydration solutions for use in industrial, institutional and nonresidential end markets for more than 120 years. The addition of Haws' innovative specified product portfolio enhances our value proposition and broadens our capabilities.

Haws has annual sales of approximately $60 million and is expected to be modestly dilutive to margins for the first year while we integrate and realize the benefits of synergies leveraging the One Watts performance system.

I'm also pleased with the integrations of Bradley, Josam, I-CON and EasyWater, which are progressing well and synergy realization is tracking ahead of our original estimates. We continue to proactively manage tariff-related challenges through strategic pricing and supply chain optimization. The tariff environment remains uncertain, but based on tariffs in effect as of today, our global direct tariff impact in 2025 is estimated to be $40 million, consistent with our guidance at the last earnings call. We have successfully handled the cost impact so far in 2025 and plan to continue doing so.

Now an update on our outlook for the remainder of the year. Due to our strong third quarter performance and our expectations for the fourth quarter, we are increasing our full year sales and margin outlook. Tariff-related price increases, foreign exchange movements, strong data center sales and the acquisition of Haws, are all favorable relative to the sales outlook we provided in August. However, there's ongoing uncertainty around the impact of supply chain disruptions and tariffs including the effect on new construction and global GDP, as well as around the impact of the U.S. government shutdown. As a reminder, GDP is a proxy for our repair and replacement business, which represents approximately 60% of total revenue.

With that, let me turn the call over to Ryan, who will address our third quarter results and our fourth quarter and full year outlook in more detail. Ryan?

Thank you, Bob, and good morning, everyone. Please turn to Slide 4, which highlights our third quarter results.

Sales reached $612 million, setting a third quarter record for Watts. This reflects growth of 13% on a reported basis and 9% on an organic basis. Strong organic growth in the Americas more than offset a decline in Europe and a flat quarter in APMEA. In the Americas, reported sales were up 16% and organic sales were up 13%, exceeding expectations. Growth was driven by favorable price, volume and approximately $11 million of pull-forward demand.

Sales from the I-CON and EasyWater acquisitions added another $11 million or 3 points to America's reported growth. Europe reported sales were up 4%, while organic sales were down 2% as market weakness more than offset price. Reported sales in Europe benefited from favorable foreign exchange. APMEA sales decreased 1% on a reported basis and were flat on an organic basis. Growth in Australia and the Middle East was offset by declines in China and New Zealand.

Compared to prior year, adjusted EBITDA of $128 million increased 21% and adjusted EBITDA margin of 20.9% increased 140 basis points. Adjusted operating income of $113 million increased 22% and adjusted operating margin of 18.5% was up 140 basis points. Adjusted EBITDA and operating income were supported by favorable price, leverage in the Americas and productivity. These benefits more than offset inflation, volume deleverage in Europe, tariffs and investments.

Our Americas segment margin increased 180 basis points to 23.7%. Europe segment margin increased 160 basis points to 12.2%, and APMEA segment margin increased 90 basis points to 19.4%.

Adjusted earnings per share of $2.50 were up 23% compared to the prior year with contributions from operations, acquisitions, foreign exchange and reduced interest expense. The adjusted effective tax rate in the quarter was 25.8%, an increase of 60 basis points relative to the third quarter of 2024. This increase was primarily due to the recent changes in U.S. tax regulations related to the One Big Beautiful Bill act.

For GAAP purposes, we incurred $1.9 million of pretax 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 third quarter was $216 million compared to $204 million last year. The cash flow increase was driven by higher net income and lower tax payments resulting from the change in U.S. tax regulations, which more than offset inventory investment and increased CapEx. We expect seasonally strong free cash flow in the fourth quarter 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. Our quarter end net debt to capitalization ratio was negative 15% and our net leverage is negative 0.5x. Our solid cash flow and healthy balance sheet continue to give us capital allocation optionality.

Now on Slide 5, let's review our assumptions about our fourth quarter and full year outlook. As Bob mentioned, we are raising our full year sales and margin outlook. This is driven by a strong third quarter, incremental price, favorable foreign exchange and strong sales in data centers. We are also benefiting from incremental sales of approximately $10 million related to the acquisition of Haws Corporation, which will be included in our Americas segment.

We now anticipate organic sales growth of 4% to 5%, a 3-point increase to the midpoint from our previous outlook. Our reported sales growth is expected to be up 7% to 8%, a 4-point increase from our previous outlook. This reflects incremental revenue from the Haws acquisition and favorable foreign exchange impacts detailed by region in the appendix.

Regionally, we anticipate stronger sales growth in the Americas and Europe while APMEA is projected to be slightly below our previous outlook.

We are raising our full year adjusted EBITDA margin outlook to a range of 140 to 150 basis points, an increase of 55 basis points from the midpoint of our previous outlook. We are also raising our full year adjusted operating margin expansion to a range of up 140 to 150 basis points, an increase of 65 basis points from the midpoint of our previous outlook. Our updated outlook includes 10 basis points of dilution from the Haws acquisition. It also assumes $40 million in estimated direct tariff costs, consistent with our previous guidance. This is based on tariffs in effect as of today. Our free cash flow expectation remains in line with our previous outlook. 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 fourth quarter. On an organic basis, we expect sales growth of 4% to 8%. Regionally, we expect high single-digit growth in the Americas, low single-digit growth in APMEA and slight declines in Europe. The sequential slowdown in the Americas reflects the pull forward demand discussed earlier. We expect approximately $20 million in incremental sales in the Americas from the I-CON, EasyWater and Haws acquisitions. Additionally, we estimate a foreign exchange tailwind of approximately $10 million in the quarter. Regional assumptions are detailed in the appendix.

Fourth quarter adjusted EBITDA margin is expected to be in the range of 19.6% to 20.1%, an increase of 30 to 80 basis points. Adjusted operating margin is projected to be between 17% and 17.5% or up 20 to 70 basis points. Price and volume leverage in the Americas should more than offset volume deleverage in Europe and dilution from the Haws acquisition. The sequential margin decline reflects normal seasonality and the impact of the Haws acquisition. Other key inputs for the fourth quarter and full year can become in the appendix.

And with that, I'll turn the call back over to Bob before we move to Q&A. Bob?

Thanks, Ryan. On Slide 6, I'd like to summarize our comments before we address your questions. Our third quarter performance was better than anticipated with record third quarter sales, operating income and earnings per share, driven by strong performance in our Americas region and better-than-expected results in Europe. We continue to execute well amid an uncertain trade environment, and we expect that price and our global supply chain strategy will enable us to continue navigating effectively.

As a result of our strong third quarter performance and fourth quarter expectations, we are increasing our full year sales and margin outlook. We successfully closed on the acquisition of Haws Corporation earlier this week and look forward to welcoming them to the Watts family of brands. Our balance sheet remains strong and provides ample flexibility to support our capital allocation priorities. I'm confident in the resilience of our business and our team's ability to execute despite the uncertain environment as we continue to create durable, long-term value for our shareholders.

With that, operator, please open the line for questions.

[Operator Instructions] It looks like our first question today comes from the line of Nathan Jones with Stifel.

Maybe just starting on the $11 million of demand pull forward into the third quarter. I assume that's probably ahead of price increases related to the increase in copper tariffs. And so that would then lead me to the question of, can you talk about what the price contribution was in 3Q? And then I assume the price contribution in Americas in 4Q will be somewhat higher due to those tariffs?

Correct, it was $11 million, as you said -- as we talked about, and about 6% was our price.

That's in 3Q. Do you have an expectation for 4Q? I assume there's been more price to cover that tariffs.

Slightly higher than that.

Okay. Fair enough. I guess the second question I wanted to ask was on this Haws acquisition. Obviously, the questions are going to be around the drinking water business. It's been pretty robust growth, been seen by one of your competitors in that business, but they do have very high market share in that. And based on Haws revenue, pretty low market share for them. How do you go about competing with the LK business in -- specifically in that drinking water business and look to grow the market share for that business?

Well, Nathan, as we talked about it, Haws is a $60 million sales company, about 20% of its business is in the hydration market. Look it's a company that's been around a long time, 120 years, great brand, known for their quality and customer service. So they're niche in their hydration area, mainly on the West Coast. So we'll be evaluating that, but we primarily bought that business for their safety product, which complements our Bradley business.

Maybe then just as a final question, you could talk about how it complements the Bradley business. I did notice that and whether or not you can kind of marry those two together to generate revenue synergies out of those businesses.

Yes. Yes, so they make bigger sizes of safety showers and equipment and other products that we don't have. So it's complementary with some of the gaps that we have and gives us the full portfolio to leverage in our portfolio. So we believe it's a nice growing market and something we can leverage going forward.

And our next question comes from the line of Mike Halloran with R.W. Baird.

Could you just dig into how you're looking at the end markets here today and how you're thinking about the trajectory next year? I think primary focus for the question would be on the non-res, res pieces and how you see those playing out over to next year in North America as well as maybe generic comment on Europe as well?

Yes. So let's look at Q3, we basically saw similar markets that we saw in Q2. So we'll be watching, I think, in general, multifamily, residential, which -- single family, again, slow growth. We're seeing probably similar to that going into next year. It's too early to talk about next year at this point in time. But I think we're all looking at ABI, Dodge Momentum, all the leading indicators. So 2026 is probably going to be a slow growth market similar to 2025 at this point in time.

On the question on Europe, it was nice to see Europe finally getting close to bottom like we were projecting, minus 2% organically for us against easier compares, but something -- it's nice to see we're finally getting to the bottom of this. I don't think you'll see new construction growth really grow significantly in Europe, until this war -- the war in Ukraine subsides and each one of the government's understanding how much they have to fund that. So again, continued slow growth assumptions in Europe.

And then secondary question, just maybe the puts and takes that drove the sequential margin improvement in Europe, but if you look at the guide for Europe margins up substantially. I guess the primary question, though is, is that the right run rate to think about sort of going into next year? The EBITDA margin implied for the European segment for the fourth quarter. In other words, are you back at the previous run rate now that you've gotten a chunk of that restructuring done and hopefully, a little bit more normal mix?

Yes, that's the goal, Mike. I mean certainly, the team has been doing a great job of getting through the restructuring and closing of the site. We're now complete, adjusting their cost structure to the current market environment. And the team is doubling down and relooking on an 80-20 basis, the markets because they've shifted so much over the last couple of years. So team's really looking at that. We'll provide a little more guidance as we move into 2026.

And our next question comes from the line of Jeff Hammond with KeyBanc.

You talked about kind of pricing through Q4. I'm just wondering, as we look forward into '26, what you think carryover prices at least into the first half? And then as you contemplate your normal course pricing for '26, is that a more normal kind of view? Or does it continue to be elevated with inflation, tariffs, et cetera?

Well, Jeff, I mean, most of the price increases happened in the -- starting in April, et cetera. So there will be some carryover because we've had multiple price increases during the year. With the adjustments of tariffs, with all tariffs, there's a fluid thing, as we all know. So we'll be adjusting and looking at tariffs as we go forward into next year right now. So again, we're watching it very closely. We should have some favorable price certainly in the first quarter as we continue to roll off of some of those and you know, we had both prebuy in Q2 and Q3 now of this year. So again, we'll be providing more information in 2026, but there'll be some carryover into next year.

Okay. And then we talk more and more about data center, obviously, booming. Just wondering if you can, I guess, size that business for 2025 year, what you think -- for this year. What you think it can be in a few years? And I think most of your exposure historically was Asia, a lot of the demand is happening in the U.S., and I'm just wondering about your success bringing that over to the North American market.

Yes, Jeff. I would say our North America team is going to surpass Asia Pacific this year. We've been growing very quickly in North America. We'll size it at the end of this year, but I can say that it's growing high double digits, and it's one of our fastest-growing markets in North America and in Asia Pacific. So we'll continue to double down on that. It's offsetting some of the softness in the residential side of our markets and it's nice, complementary to what we're doing, and you're seeing it come through our results in Q3.

Okay. And then just last one, multifamily, just update there. It seems like maybe some bottoming and things getting better. And I guess it depends on where you are in the build process, but just an update there.

Yes. On the multifamilies, again, it's been a soft market. Like you said, there's various regions of the country that are still booming. But certainly, when you look at the single housing crisis where there's not enough homes and unaffordability, we are seeing projects in the multifamily, but it's not -- and there's shovel-ready projects ready to go. People are finishing what they've started. I think they're waiting for some certainty on the tariff front and making sure that comes down as well as waiting for some lower interest rates. So we think it's close to bottoming out, and we'll watch carefully through there, but it's not been a robust market. But we're hopeful that it will begin getting better as interest rates start coming down next year.

[Operator Instructions] And our next question comes from the line of Ryan Connors with Northcoast Research.

Most of my questions have been answered. You've been pretty comprehensive here. But I did pick up there, Bob, through the phone on your tone around tariffs and the increased uncertainty there. I think you're kind of alluding to the SCOTUS case, which I don't follow these things too closely, but apparently, it didn't go all that well and there's a chance that maybe the whole thing could be just disallowed. So obviously, that would be a very disruptive outcome given the -- all the price you've taken related to tariffs. So without getting too detailed, I mean just conceptually, if we were to hypothetically assume tariffs just go away and SCOTUS says no go. What does that conceptually look like? Do you keep the price that you've gotten? Do you give that back? Just curious how -- conceptually how you would look at that kind of a scenario?

Yes, Ryan, that's a great question. Fundamentally, I have a hard time believing that the government is going to give anything back to any of us and even if they lose the case, it will be interesting to see the appeals and the potential adjustments. So we're watching it carefully. It would be very complicated, as you can imagine, because our pricing has not just been because of tariffs. Copper prices have been up double digits, general inflation has been high, labor, et cetera. So it's a very complicated item, and we're watching this very closely and we'll adjust based on what the market does at this point in time. But it's very complicated, as you said. And I think a lot of people are trying to figure this out, and we'll just have to wait and see how it plays out.

Yes. I mean just as a follow-up to that, would it be crazy to think that, okay, the price you put in the market has been accepted in the market. It's been -- it's kind of there and you can sort of keep that and even if you don't get any retroactive credits that maybe that scenario could actually be a margin positive going forward? I mean, is that -- am I way off base there?

Yes. That's -- it's such a difficult question, Ryan. And it's just -- there's so many different variables from that point of view. I think we're all going to have to wait and see and have many different scenarios to understand what's market pricing and what's happening on this. So again, stay tuned. I think we're all watching carefully.

And our next question comes from the line of Joe Giordano -- sorry, Giordano with TD Cowen.

This is Chris on for Joe. You had mentioned the uncertainty surrounding the government shutdown. Just wondering if you could elaborate on what parts of the business that you are seeing or expect to potentially see impact from that shutdown?

It's primarily on the residential side, right? Any time there's uncertainty, people withhold and slow down things. So I think it's just one of those things. Just an added variable, we're watching very carefully. Nothing big to report on at this point in time, but something that's certainly out there, and it's just normal process, people pull back when they're uncertain. And we'll see how that goes through. Hopefully, they'll get that resolved very soon.

Great. And with Haws, is there any difference in how they go to market versus your predominant channels and any opportunity to sell through your existing channels?

It's very similar to our current process through wholesalers and distributions. And so yes, no, it's very similar. We can leverage our channels. The nice thing about Haws is they have more international exposure than we have, so that's an opportunity for us to leverage.

[Operator Instructions] And our next question is from the line of Andrew Krill with Deutsche Bank.

Want to ask another one on Haws. Just can you provide like any sense of the historical growth rates there? What do you expect looking forward? And then on margins for the business, and I guess, if we do the math on the dilution, is it correct, it's around like 10% EBIT margins initially as you integrate the business? And then like over time, any reason this can't be a lot to average or better margin business?

Yes. So in general, I would say they're similar to the institutional growth, which is above, let's call it, growth of our traditional portfolio that includes residential. I would say their EBITDA is in the mid- to high single digits right now. And we certainly believe over the next several years, we'll be able to get them to the Watts' overall margin. So teams are on it really early at this point. Team, we're making out, great brand, great quality and great people. So we're excited to leverage that going forward.

Great. And then switching back to Europe. I know the margin improvement is encouraging, a pretty nice inflection. More medium term, I think the prior high watermark was about 16% EBIT margin. So just -- like can you get there, do you think that volumes remain sluggish around where they are just with the new initiatives you have in place? Or I think we're getting back to that? Like, one, is it possible like and do you need volume leverage to get there?

Well, certainly, volume leverage would help. And certainly, we're taking cost structure. I think the team is relooking, as I said earlier, at the 80-20 because the markets have changed significantly since we did a very detailed 80-20 on that. We're reshuffling that, and we'll provide more guidance, but that should help our margins going forward, but it takes a while to unravel some of the contracts we have with customers.

But team's on it. We're looking at it. I would say, our aspirations are to get back up to those levels. But as you know, I'm always cautious on Europe at this point in time given the market dynamics and given the uncertainty with the conflict in Ukraine that's having an impact on local incentives, et cetera. So watching it very closely. The team's on it, but it's nice to see. I think we're starting to hit that bottoming out at this point in time.

And there are no further questions at this time, so I will now turn the call back over to Bob Pagano for closing remarks. Bob?

Thank you for taking the time to join 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 good day, and stay safe.

Thank you. And this concludes today's conference call. You may now disconnect. Have a great day, everyone.

Thank you for standing by. Hello, and welcome to Watts Water Technologies Second Quarter 2025 Earnings Conference Call. Please note that this call is being recorded. I would now like to turn the call over to Diane McClintock, Senior Vice President, FP&A and Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to our second quarter earnings conference call. Joining me today are Bob Pagano, President and CEO; Shashank Patel, our former CFO; and Ryan Lada, our new CFO. During today's call, Bob will provide an overview of the second quarter, an operational update and an update on our outlook for 2025. Shashank will discuss the details of our second quarter performance and provide our outlook for the third quarter and for the full year.

Following our remarks, we will address questions related to the information covered during the call. 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 this presentation.

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 Watts' 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.

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

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 as this will be his last earnings call with Watts. I'm grateful for his 7 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 2 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?

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 and contributing to Watts continued growth and long-term value creation.

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

Thank you, Ryan, and welcome to the team. Now please turn to Slide 3, 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 I-CON and EasyWater 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 approximately $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.

EasyWater'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, I-CON 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 the 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 we'll 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 EasyWater 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 4 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 4 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 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?

Thank you, Bob, and good morning, everyone. Please turn to Slide 5, 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 I-CON acquisition added $7 million. EasyWater sales were immaterial in the quarter. Impact from our 80/20 actions in the Americas were limited with 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 a 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 and is 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 the second quarter of 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 6, 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 2-point increase to the midpoint from our previous outlook. Our reported sales growth is expected to be up 2% to 5%, a 3-point increase from our previous outlook. We expect incremental revenue from our EasyWater 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, we 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 7 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?

Thanks, Shashank. On Slide 7, 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 Instructions] Our first question comes from the line of Ryan Connors from Northcoast Research.

Congratulations, Shank, 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 in 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?

Yes, Ryan, this is -- it was approximately $20 million of sales pull forward pre-price increase that we shipped in the quarter.

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 in a little deeper into the price dynamics? Obviously, you got lots of different products, lots of different magnitudes of price increases. The copper tariffs are kind of 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.

Yes. So specifically, in the second quarter, we talked about 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, you're right, there's been multiple rounds of tariffs. So they have staggered between the March 31 date all the way to the June 2 date, and they're in the range of 5% to 15% of price increases. We'll see the full realization of those in the second half.

Yes. Ryan, as you know, we are -- yes, we're 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.

Yes. Yes. And then lastly, just on the gross margin, I mean, really impressive to see a number above 50%. What should we be thinking about intermediate term 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 company over the intermediate term?

So that 50% certainly benefited from about 100 basis points on the price/cost dynamic I talked about, which was onetime, right? And it also benefited to a certain extent from volume leverage. We got significant volume leverage in the second quarter. So as you recall, prior year, we're in 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 in that 48% range.

Our next question comes from the line of Nathan Jones from Stifel.

Shashank, congratulations on getting Bob to finally let you retire and Ryan, welcome to the team. I 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 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?

Well, listen, Nathan, we always believe that our overall strategy of -- basically 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 it has helped. But certainly, we do source, as we indicated, globally to diversify our product and our production capabilities. But again, we believe it's a positive for us in this current environment, and we'll continue to capitalize on that going forward.

Do you think there are any opportunities to maybe manufacture more domestically? I mean you did say you source globally. It certainly does seem that there's going to be some level of tariffs that are permanent here. And just how you think about 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?

Yes. I think our supply chain teams and our manufacturing teams are constantly looking at that. And 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 by adding 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, et cetera. So again, constantly evolving, but we have a great supply chain team, and they're doing a great job in this environment.

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, that was kind of going to bottom out midyear, destocking it might be done midyear. It sounds like maybe that's not the case. So just an update on your expectations there?

Yes. 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 we're believing Q3 is probably the end of that. However, it's just the general construction market is soft in Europe, and it continues to be. And as you know, I'm cautious on Europe. I always have been. And until I start seeing the order rates pick up, we're going to continue to be cautious.

Our next question comes from the line of Jeff Hammond from KeyBanc.

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

Yes. 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 $40 million from the previous $60 million number on direct cost.

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?

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 half, we're probably going to be in the mid-single digits.

Okay. And this pull forward, I assume it all comes out of 3Q?

Yes, that's our current assumption, yes.

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

Yes, I think it's across the Board and each one of them is different. But the nice thing is all 4 of them are green, which we track, as you know, judiciously on a monthly basis and stuff. So 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 we are seeing synergies definitely on the top line, but we're also -- as Shashank earlier said, 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.

Our next question comes from the line of Mike Halloran from Baird.

It's Pez on for Mike and Shashank, congratulations. I want to take a moment just to circle back on the 80-20 comments. Bob, 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?

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 that our goal is to drive profitable growth.

Right. All right. That's helpful. And then we're 2 years post Bradley close. Are there areas where you've been able to maybe step on the gas in terms of investments where maybe the previous ownership had -- maybe not identified opportunities as well as you had? And then additionally, are you seeing Bradley as an opportunity to be another platform to bolt on future acquisitions?

Yes. 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 and the great strides the teams are making. So -- and yes, Bradley has been front of the wall. I think it's a nice start, and we purchased I-CON as we talked about before. So that continues to expand our front-of-the-wall capabilities. So nice platform, doing exactly what we thought it was, and we're ahead of schedule on our integration and synergies.

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

Yes. So we're leveraging our complete sales force, whether 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 -- 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 2-year selling cycle. So it takes a while to get this.

But we're happy to say that every installation has 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 for all the Watch products. So for the most part, that will be done by the end of the year and early into next year.

Awesome. I know I said that was my last question, but I'm going to follow up on one of your points there. As we get further down the road and as you run more and more pilots would you expect -- 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 your ability to demonstrate returns to customers, kind of your Rolodex of wins and pilots gets bigger, would you expect that sales cycle to slow? Or is that just more of how the customers are able to integrate the technology into their current assets?

We would expect it to grow, but certainly, you raised the concern again. 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 U.S.

Our next question comes from the line of Andrew Krill from Deutsche Bank.

Congrats again, Shashank, and welcome, Ryan. I want to go back to the 3Q margin guidance as it implies a very steep about 400 basis points or so sequential decline in the EBIT margin. I know 2Q is an elevated starting point to compare it against. But just 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? 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?

Yes. So Andrew, there's 3 pieces of that, right? First was the price/cost dynamic, which I quantified at approximately $6 million. So that's about 100 basis points. The second element is usually is the typical seasonality we see between Q2 to Q3, which is about 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 3 elements that contribute to that approximately 400 basis point decline in op income margins.

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

Yes. 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 -- the markets haven't changed significantly. If anything, residential is down a little bit more than we expected. But overall, we had to pull forward. That's going to play out against Q3 and then the markets will continue. And we're having strength in data centers. 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 Q4 looks like when it's there, but we're going to watch what the markets do, how the reaction to these recent tariffs and some of the uncertainty, how it unplays out in the market.

Our next question comes from the line of Joe Giordano from TD Cowen.

Shashank, just that $6 million on the price cost, like I just want to make sure I understand, that's just you're getting the price capture plus what you're selling is just flowing through 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?

Absolutely. That's correct.

Okay. Great. On data center, like how large do you think that's going to be now this year? You mentioned it a couple of times already this call.

Yes. We're not going to give the specifics. But as we've talked about in the past, last year it was 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 is doing a great job to continue to grow in that area. So nice story.

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

Yes. So there's a cost for installation of the various products, and we're flexible with the customer based on what OpEx or whether -- how they want to do it inside. They want to 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.

How big do you think your whole like software type revenue base is now?

Yes. We don't provide that information, but it's certainly growing. It's small, right? But it's growing -- growing 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.

Our next question comes from the line of Brian Lee from Goldman Sachs.

This is Nick Cash on for Brian Lee. Just kind of a question going into, again, the end of the year. I mean, we've had pull forward kind of expecting a step down in margins 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 some incremental volume? Or just kind of talk to the puts and takes that you're expecting in the back half of the year on margins?

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

Okay. But then I guess, I think the guide implies another step down in adjusted operating margins in, what, 4Q. Is that mostly due to, again, additional volume deleveraging off of 3Q in the Americas segment?

Yes, that's correct. Yes. The volumes in Q4 are lower than Q3. So you had volume deleverage that's impacting margins in Q4.

There are no further questions. That concludes the question-and-answer session. I will now turn the call back to Bob Pagano for closing remarks.

Thank you for taking the time to join us 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.

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