Watts Water Technologies Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2025

Key Takeaways

  • Positive Sentiment: Watts delivered record second-quarter sales, operating income, and EPS, with organic sales up 6% and adjusted operating margin expanding to a record 21.6%.
  • Positive Sentiment: The company raised its full-year outlook, now targeting 2%–5% reported sales growth and 50–110 basis points of adjusted operating margin expansion, reflecting stronger price realization, FX tailwinds, data center demand, and EasyWater contributions.
  • Neutral Sentiment: Watts expects approximately $40 million in direct tariff costs in 2025 but believes pricing actions and its global footprint will mitigate the impact amid a fluid trade environment.
  • Positive Sentiment: The June acquisition of EasyWater and ongoing integrations of Bradley, Josam, Icon, and EasyWater are ahead of synergy targets, with EasyWater adding an estimated $5 million in sales and a neutral EPS impact in 2025.
  • Negative Sentiment: Europe remains a drag, as organic sales in the region fell 8% due to OEM and market weakness, with ongoing uncertainty around recovery timing.
AI Generated. May Contain Errors.
Earnings Conference Call
Watts Water Technologies Q2 2025
00:00 / 00:00

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Operator

Thank you for standing by. Hello, and welcome to Watts Water Technologies Second Quarter twenty twenty five 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 and A and Investor Relations. Please go ahead.

Diane McClintock
Diane McClintock
SVP - FP&A & IR at Watts Water

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.

Diane McClintock
Diane McClintock
SVP - FP&A & IR at Watts Water

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.

Diane McClintock
Diane McClintock
SVP - FP&A & IR at Watts Water

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

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

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 seven years of impactful leadership. He has been a tremendous asset to the entire Watts team and has been a key strategic adviser to me. I wish him all the best in his retirement.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

Over the next two months, Shashank will help support the transition to our new CFO. On that note, I'm excited to welcome our new CFO, Ryan Lada, to his first earnings call with Watts. Ryan, would you like to say a few words?

Ryan Lada
Ryan Lada
CFO at Watts Water

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.

Ryan Lada
Ryan Lada
CFO at Watts Water

I look forward to working with the investment community and contributing to Watt's continued growth and long term value creation. With that, I will turn the call back to Bob.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

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

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

We also benefited from incremental sales from our Icon and EZ Water acquisitions and favorable foreign exchange movements. Adjusted operating margin of 21.6% exceeded expectations due to favorable price cost dynamic, volume leverage, productivity and cost containment. Our balance sheet remains strong and provides ample capacity to support flexibility in our capital allocation strategy. From an operations perspective, we continue to take proactive steps to mitigate the impact of tariffs through our pricing and supply chain strategies. The tariff environment remains fluid, but as of today, our global direct tariff impact in 2025 is estimated to be approximately $40,000,000 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.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

In line with our strategic approach to M and 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 $5,000,000 in sales and be neutral to adjusted EPS in 2025 after factoring in normal purchase accounting adjustments. The integrations of Bradley, Josam, Icon and Easy Water 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.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

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

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

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

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

Now please turn to slide four for an update on our sustainability journey. In early June, we published our 2024 sustainability report, which highlights the accomplishments and progress we've made within our four sustainability pillars: footprint, handprint, social responsibility, and corporate governance. We are confident that our triple play of solutions addressing safety and regulation, energy efficiency and water conservation enable our customers to manage operational pressures, comply with 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.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

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

Shashank Patel
Shashank Patel
CFO at Watts Water

Thank you, Bob, and good morning, everyone. Please turn to Slide five, which highlights our second quarter results. Sales of $644,000,000 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.

Shashank Patel
Shashank Patel
CFO at Watts Water

Sales from the Icon acquisition added $7,000,000 Easy Water sales were immaterial in the quarter. Impact from our eightytwenty actions in The Americas were limited with approximately $1,000,000 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.

Shashank Patel
Shashank Patel
CFO at Watts Water

Growth in Australia, New Zealand and The Middle East was more than offset by decline in China due to project timing. Compared to the prior year, EBITDA of $153,000,000 increased 22% and adjusted EBITDA margin of 23.8% increased two eighty basis points. Adjusted operating income of $139,000,000 also increased 24% and adjusted operating margin of 21.6% was up two eighty 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 two ninety basis points to 27.2%.

Shashank Patel
Shashank Patel
CFO at Watts Water

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 2024. For GAAP purposes, we incurred $3,800,000 of pre tax 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 $105,000,000 compared to $120,000,000 last year.

Shashank Patel
Shashank Patel
CFO at Watts Water

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.

Shashank Patel
Shashank Patel
CFO at Watts Water

Now on Slide six, let's review our assumptions about our third quarter and full year outlook. We are increasing our full year sales and margin outlook due to our strong first half incremental price, favorable foreign exchange, strength in data centers and our acquisition of Easy Water which will be included in our Americas segment. We now expect organic sales growth of flat to up 3%, a two point increase to the midpoint from our previous outlook. Our reported sales growth is expected to be up 2% to five percent, a three point increase from our previous outlook. We expect incremental revenue from our Easy Water acquisition and favorable foreign exchange movements, which are listed by region in the appendix.

Shashank Patel
Shashank Patel
CFO at Watts Water

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 $40,000,000 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.

Shashank Patel
Shashank Patel
CFO at Watts Water

Our free cash flow expectation remains in line with our previous outlook as we expect to deliver free cash flow conversion of greater than or equal to 100% of net income in 2025. Next, a few items to consider for the third quarter. On an organic basis, we expect sales growth of 2% to 5%. Regionally, expect mid single digit growth in The Americas and low single digit growth in APMEA, partly offset by high single digit decline in Europe. The Americas growth is sequentially lower than the second quarter due to the pull forward demand previously discussed.

Shashank Patel
Shashank Patel
CFO at Watts Water

We expect approximately $8,000,000 in incremental sales in The Americas from acquisitions. We estimate that foreign exchange in the quarter will be a tailwind of approximately $4,000,000 and our assumptions by region are listed in the appendix. We expect our eightytwenty actions in the third quarter to be an estimated $2,000,000 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.

Shashank Patel
Shashank Patel
CFO at Watts Water

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 non recurring price cost favorability in the second quarter as the impact of tariffs rolls into expense plus normal seasonality. Other key inputs for the third quarter and the full year can be found in the appendix. Before I turn the call over to Bob, I would like to express my gratitude to the entire Watts team for the opportunities I've had over the last seven years. I've also enjoyed working with you, the investor and analyst community, and wish you the best in the years to come.

Shashank Patel
Shashank Patel
CFO at Watts Water

With that, I'll turn the call back over to Bob before moving to Q and A. Bob?

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

Thanks, Shashank. On slide seven, I'd like to summarize our discussion before we address your questions. Our second quarter performance was better than we anticipated with record sales, operating income and earnings per share due to strong performance in our Americas region, which benefited from price realization, favorable price cost dynamic and volume leverage. We continue to execute well amid an uncertain trade environment and expect that price, our expansive U. S.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

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 and A, factory automation, investment in new product development and our digital strategy and returning capital to shareholders via share buybacks and dividends. I'm confident in our team's ability to execute despite the uncertain environment and continue to create durable long term value for our shareholders. With that, operator, please open the line for questions.

Operator

Thank you. Our first question comes from the line of Ryan Connors from Northcoast Research. Your line is open.

Ryan Connors
MD & Research Analyst at Northcoast Research Partners LLC

Good morning. Good morning. Congratulations, Shashank, and welcome, Ryan. So my first question was just, you mentioned in the press release, in addition to the other things here, this idea of a dynamic of a pull forward 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?

Shashank Patel
Shashank Patel
CFO at Watts Water

Yes, Ryan. This is there was approximately $20,000,000 of sales pull forward, pre price increase that we shipped in the quarter.

Ryan Connors
MD & Research Analyst at Northcoast Research Partners LLC

Okay. And then in terms of the price increase, you cite the favorable price cost. You mentioned the $40,000,000 headwind. But can you just kind of dive into a little deeper into the price dynamics? Obviously, you got lots of different products, lots of different magnitudes of price increases.

Ryan Connors
MD & Research Analyst at Northcoast Research Partners LLC

The copper tariffs are kind of brand new. I mean, what's the dynamic in terms of pricing? Have accomplished what you need to do? Are there certain products that are leading or lagging on that? Just any deep dive you can give us on the pricing dynamics would be helpful.

Shashank Patel
Shashank Patel
CFO at Watts Water

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, had some favorability approximately $6,000,000 The price increases we've announced and you're right, there's been multiple rounds of tariffs. So they've staggered between the March 31 date all the way to the June 2 date, 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.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

Yeah. Ryan, as you know, we are constantly yeah, 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.

Ryan Connors
MD & Research Analyst at Northcoast Research Partners LLC

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

Ryan Connors
MD & Research Analyst at Northcoast Research Partners LLC

So what should be kind of the what do you consider a base normalized level for the company over the intermediate term?

Shashank Patel
Shashank Patel
CFO at Watts Water

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, in our prior year, we're that 47% margin range. The goal this year was to get to that 48% level as part of our continuous improvement priorities, productivity driven primarily, as you noted. So going forward, I think in that 48% range.

Ryan Connors
MD & Research Analyst at Northcoast Research Partners LLC

Okay. Super. Very helpful. Thanks for your time.

Shashank Patel
Shashank Patel
CFO at Watts Water

Thank you.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

Thank you.

Operator

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

Nathan Jones
Nathan Jones
Managing Director at Stifel Financial Corp

Good morning, everyone.

Shashank Patel
Shashank Patel
CFO at Watts Water

Morning, everyone.

Nathan Jones
Nathan Jones
Managing Director at Stifel Financial Corp

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 domestic more domestic footprint and the advantage that gives you. Obviously, evolving, I'm sure customers are are talking about those kinds of things, but any update you can give us on what kind of benefit you think you'll see you'll be able to realize from that versus, you know, particularly some of the smaller competitors who who maybe source a lot more out of China or or other places internationally? Just how you think you can use that to gain market share?

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

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

Nathan Jones
Nathan Jones
Managing Director at Stifel Financial Corp

Do you think there are any opportunities to maybe manufacture more domestically? I mean, did say you saw us 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, you know, the breakpoints of of whether you would continue to source internationally for some of the products or whether you would reassure some of that production for yourself?

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

Yeah. I think our supply chain teams and our manufacturing teams are constantly looking at that. And, you know, where it makes financial sense to bring it here, we'll do that. I think we talked on the last call that we have capacity in 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, etcetera.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

So again, constantly evolving, but we have a great supply chain team and they're doing a great job in this environment.

Nathan Jones
Nathan Jones
Managing Director at Stifel Financial Corp

And I guess I'll just ask one on the European business, I guess, 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.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

Yeah. From a heat pump perspective, for the most part, we're starting to see it. It varies by each one of the customers based on their distribution channels and inventory. But like we thought, that has come down, the destocking has come down, and 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.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

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.

Nathan Jones
Nathan Jones
Managing Director at Stifel Financial Corp

Thanks very much for taking my questions.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

Thank you.

Operator

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

Jeffrey Hammond
Jeffrey Hammond
Managing Director at KeyBanc Capital Markets

Hey, good morning everyone.

Shashank Patel
Shashank Patel
CFO at Watts Water

Good morning Jeff.

Jeffrey Hammond
Jeffrey Hammond
Managing Director at KeyBanc Capital Markets

Congrats to Shashank. Ryan, welcome aboard.

Ryan Lada
Ryan Lada
CFO at Watts Water

Thank you.

Jeffrey Hammond
Jeffrey Hammond
Managing Director at KeyBanc Capital Markets

Bob, good to still have you with us. I wanna go back to the tariffs. So I think you originally said 60,000,000 and most of it or maybe 50 of the 60 was China. I know we had a big reset there. So I would have thought that that number would have gone down more. I think you said 40 is kind of the new baseline.

Jeffrey Hammond
Jeffrey Hammond
Managing Director at KeyBanc Capital Markets

So maybe just walk me through the puts and takes in that 60 to 40 change.

Shashank Patel
Shashank Patel
CFO at Watts Water

Yeah. So you're right. The China tariff did come down significantly. But since since that happened, there's been other tariffs including copper tariffs. Tariffs on Europe are now set at 15%.

Shashank Patel
Shashank Patel
CFO at Watts Water

So there's been quite a bit of change. And so we factored all of that change into coming up with the $40,000,000 from the previous $60,000,000 number on direct cost.

Jeffrey Hammond
Jeffrey Hammond
Managing Director at KeyBanc Capital Markets

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

Shashank Patel
Shashank Patel
CFO at Watts Water

Yes. So in the quarter across Watts, our price realization was approximately 3%. If you recall in Q1, was 1%. So it stepped up to 3%. And 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.

Jeffrey Hammond
Jeffrey Hammond
Managing Director at KeyBanc Capital Markets

Okay.

Jeffrey Hammond
Jeffrey Hammond
Managing Director at KeyBanc Capital Markets

And this pull forward, I assume it all comes out of March?

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

Yeah. That's our current assumption. Yep.

Jeffrey Hammond
Jeffrey Hammond
Managing Director at KeyBanc Capital Markets

You're good? Okay.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

Yep.

Jeffrey Hammond
Jeffrey Hammond
Managing Director at KeyBanc Capital Markets

And then just last one. It sounds like, you know, all your deals are integrating well.

Jeffrey Hammond
Jeffrey Hammond
Managing Director at KeyBanc Capital Markets

Can you just maybe talk about what's going better and, you know, whether it's, you know, cost, margin improvement, revenue synergies, any any you know, where are the upside surprises over? That'd be great.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

Yeah. I think it's across the board, and each one of them is different. But the nice thing is all all four of them are green, which we track, as you know, judiciously on a monthly basis and stuff. So, you know, costs are certainly the key focus. And as you know, we're doing the eightytwenty on most of these businesses.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

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.

Jeffrey Hammond
Jeffrey Hammond
Managing Director at KeyBanc Capital Markets

Okay. Thanks for the time guys.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

Thank you.

Shashank Patel
Shashank Patel
CFO at Watts Water

Thank you.

Operator

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

Michael Pesendorfer
VP - Senior Research Associate at Baird

Hey, good morning, everyone. It's Pez on for Mike and Shashank. Congratulations. I want to take a moment just to circle back on the eightytwenty comments. Bob, should we consider most of the eightytwenty actions that are being discussed going on in the acquired businesses?

Michael Pesendorfer
VP - Senior Research Associate at Baird

Or is there a chunk of that going on in some of the legacy business as well?

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

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 eighty twenty. Right? We don't necessarily call it eighty twenty, but it's the conceptual concept that we go through our organization and are always evaluating that.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

So, again, my team knows that our our goal is to drive profitable growth.

Michael Pesendorfer
VP - Senior Research Associate at Baird

Right. Alright. That's helpful. Thanks. And then, you know, we're we're two years post Bradley close.

Michael Pesendorfer
VP - Senior Research Associate at Baird

You know, are there areas where you've been able to maybe step on the gas in terms of investments where, you know, maybe maybe the previous, ownership maybe had had maybe not identified opportunities as well as you had? And then additionally, are are you seeing Bradley as an opportunity to be another platform to bolt on future acquisitions?

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

Yeah. So the answer is yes. We've been investing capital to lean out the organization, streamline the business, and invest in new product development. So we had the fortunate opportunity to have our board there on Monday and Tuesday of this week, and the board got to see firsthand all the improvements and the great strides the teams are making. So and yes, Bradley has been front of the wall.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

I think it's a nice start. And we purchased Icon 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, you know, we're ahead of schedule on our integration and synergies.

Michael Pesendorfer
VP - Senior Research Associate at Baird

Awesome. And last one for me. You know, Bob, some really helpful comments on the Nexa platform. You know, obviously, some some encouraging opportunities with the luxury condos and hospitality. You know, maybe talk a little bit about how you're approaching the targeted verticals.

Michael Pesendorfer
VP - Senior Research Associate at Baird

You know, is it is it kind of going pilot programs in certain verticals and then looking to expand? Maybe take just provide us a little bit more color about how you're thinking about expanding the the offering for Nexa and the approach in go to market.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

Yeah. 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, you know, they get to look at it for a while, then they have to put it in their budget. And then once they put it in their budget, they go forward. So it it could be anyways from a year to two year selling cycle. So it takes a while to get this, but we're happy to say that every installation is, you know, been a great success, and we're seeing the benefit of all. So again, it continues to move forward.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

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'll be done by the end of the year and early into next year.

Michael Pesendorfer
VP - Senior Research Associate at Baird

Awesome. Thank you. I know I said that was my last question, but

Michael Pesendorfer
VP - Senior Research Associate at Baird

I'm going to follow-up on one of your points there. You know, as we get further down the road and as you run more and more pilots, would you expect you know, and I'm not talking about necessarily this year, next year, maybe not even the year after that, but would you expect the sales time on Nexa to to shorten as proof points build and, you know, your ability to demonstrate returns to customers, kind of your your rolodex of of wins and pilots gets bigger? Would you expect that sales cycle to slow, Or is that just more of how their the the customers are able to integrate the technology into their current, assets?

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

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

Michael Pesendorfer
VP - Senior Research Associate at Baird

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

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

Thank you.

Operator

Thank you. Our next question comes from the line of Andrew Krill from Deutsche Bank. Your line is open.

Andrew Krill
Andrew Krill
Director at Deutsche Bank

Thanks. Good morning, everyone. 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. You know, I know 2Q is an elevated starting point to compare it against.

Andrew Krill
Andrew Krill
Director at Deutsche Bank

But just, you know, can you talk through again, like, any of the moving pieces here? Like, was it really all pull forward and price cost related, or was some of this more structural? You know? And I thought that could have persisted more into the back half. So maybe just touch on that and, like, if there's any conservatism in that play, please.

Shashank Patel
Shashank Patel
CFO at Watts Water

Yes. So Andrew, there's three pieces of that, right? First was the price cost dynamic, which I quantified at approximately $6,000,000 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?

Shashank Patel
Shashank Patel
CFO at Watts Water

So certainly, the volume in Q2 volume growth is higher than the volume growth in Q3, especially when you strip out price. So it's those three elements that contribute to that approximately 400 basis point decline in op income margins.

Andrew Krill
Andrew Krill
Director at Deutsche Bank

Okay. Great. That's helpful. And then for sales in the back half, can you maybe speak to, you know, what you're assuming for end market demand? You know, price clearly, I think, is going up.

Andrew Krill
Andrew Krill
Director at Deutsche Bank

So do you have any cushion for volume destruction related to that, or are you assuming more of kind of the status quo of current run rate? Thanks.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

Yeah. So for the most part, there's still a lot of uncertainty, especially in the far back, the fourth quarter in particular. But we're basically the same. You know, the markets haven't changed significantly. If anything, residential is down a little bit more than we expected.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

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.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

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.

Andrew Krill
Andrew Krill
Director at Deutsche Bank

Great. Thanks, guys.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

Thank you.

Operator

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

Joseph Giordano
Managing Director at TD Cowen

Hey guys, good morning.

Shashank Patel
Shashank Patel
CFO at Watts Water

Morning.

Joseph Giordano
Managing Director at TD Cowen

Shashank, just that $6,000,000 on the price cost, I just want to make sure I understand. That's just you're getting the price capture plus the 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?

Shashank Patel
Shashank Patel
CFO at Watts Water

Absolutely. That's correct.

Joseph Giordano
Managing Director at TD Cowen

Okay. Great. On data center, like, how large do think that's gonna be now that you're you mentioned it a couple times already, this this call.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

Yeah. 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 it's offsetting the residential softness we're seeing in the market, and the team's doing a great job to continue to grow in that area. So nice story.

Joseph Giordano
Managing Director at TD Cowen

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

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

Yeah. So there's a cost for installation of the various products, and we're flexible with the customer based on, you know, what, you know, OpEx or or whether, you know, how they wanna do it inside of it. If they wanna pay by the month, we'll incorporate the cost inside of it. And, yes, it does have a 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 so, yes, it's the combination of both of those.

Joseph Giordano
Managing Director at TD Cowen

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

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

Yeah. We don't provide that information, but it's certainly growing. It's it's small. Right? But it's growing growing, you know, high percentage basis on a low number, but we'll continue to grow it.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

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.

Joseph Giordano
Managing Director at TD Cowen

Thanks, guys.

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

Thank you.

Shashank Patel
Shashank Patel
CFO at Watts Water

Thank you.

Operator

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

Nick Cash
Nick Cash
Global Investment Research Associate at Goldman Sachs

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

Nick Cash
Nick Cash
Global Investment Research Associate at Goldman Sachs

Or just kind of talk to the puts and takes that you're expecting in the back half of the year on margins?

Shashank Patel
Shashank Patel
CFO at Watts Water

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

Nick Cash
Nick Cash
Global Investment Research Associate at Goldman Sachs

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

Shashank Patel
Shashank Patel
CFO at Watts Water

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

Nick Cash
Nick Cash
Global Investment Research Associate at Goldman Sachs

Okay. Awesome. That's it for me. Thank you.

Shashank Patel
Shashank Patel
CFO at Watts Water

Thank you.

Operator

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

Robert Pagano
Robert Pagano
Chairman, President & CEO at Watts Water

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.

Executives
Analysts
    • Diane McClintock
      SVP - FP&A & IR at Watts Water
    • Robert Pagano
      Chairman, President & CEO at Watts Water
    • Ryan Lada
      CFO at Watts Water
    • Ryan Connors
      MD & Research Analyst at Northcoast Research Partners LLC
    • Nathan Jones
      Managing Director at Stifel Financial Corp
    • Jeffrey Hammond
      Managing Director at KeyBanc Capital Markets
    • Michael Pesendorfer
      VP - Senior Research Associate at Baird
    • Andrew Krill
      Director at Deutsche Bank
    • Joseph Giordano
      Managing Director at TD Cowen
    • Nick Cash
      Global Investment Research Associate at Goldman Sachs
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