Release Date: August 06, 2026
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Record sales, operating income, and earnings per share in Q2 2026, with organic sales up 12%.
- Data center sales more than tripled year-over-year, with full-year expectations raised to mid-to-high single digits as a percentage of total sales.
- Raised full-year 2026 organic sales growth outlook to 8%-11% and adjusted operating margin expansion to up 20-80 basis points.
- Strong balance sheet with negative net leverage of 0.4, providing ample capacity for M&A and capital allocation.
- Successful integration of recent acquisitions, with performance on track to achieve or exceed targeted synergies.
- Resilient performance in Europe and APMEA, with organic sales up 9% and 31% respectively, despite macro headwinds.
Negative Points
- Adjusted operating margin declined 60 basis points year-over-year due to acquisition dilution and a difficult prior-year price-cost comparison.
- Persistent weakness in residential and non-institutional new construction markets, with single-family residential getting slightly worse.
- Uncertainty from the Middle East conflict creating headwinds, though mitigated by pricing and supply chain actions.
- Fluid tariff environment with new Section 301 and 338 tariffs announced, adding to existing Section 232 tariffs.
- Data center business is project-based and lumpy, with customer-driven pull-forwards in Q2 expected to cause sequentially lower growth in Q3.
- Free cash flow year-to-date decreased to $98 million from $105 million due to higher accounts receivable and strategic inventory investment.
Q & A Highlights
Q: Can you provide more color on why the data center TAM expanded or doubled from $1 billion to $2 billion so quickly? Does this include the opportunity in Europe, and have you made any data center sales there?
A: CEO Bob Pagano explained that the TAM increase reflects a refined, more global analysis. The previous $1 billion estimate was primarily focused on North America and China, while the new $2 billion figure includes Europe, the Middle East, and Southeast Asia. The expansion also accounts for the industry shift towards liquid cooling solutions and the addition of new products like the CoolVault thermal storage tanks. The company has begun selling some smaller data center business in Europe, but the primary growth driver remains the broader global opportunity.
Q: Data center sales more than tripled in Q2 and now represent 8% of total sales. Can you unpack the TAM expansion further—how much is Europe, how much is the thermal tank piece, and what other products or applications are you finding you can sell into this market?
A: CEO Bob Pagano clarified that the TAM expansion is not solely Europe-driven; it includes a global view of opportunities in the Middle East and Southeast Asia. The shift from air-cooled to liquid-cooled systems increases content per megawatt, and the thermal storage tanks (CoolVault) are a significant part of this, leveraging Superior Boiler's large custom manufacturing capacity. The company is also developing new stainless steel products focused on liquid cooling applications, with more details expected as these products launch.
Q: Can you give us some color on how hard you're running your manufacturing sites for data centers? Is the modestly higher CapEx guide all related to data centers, and will there be a need for a more major footprint expansion?
A: CEO Bob Pagano confirmed that the increased CapEx is directly related to additions at sites in North America and China to support the growing global supply chain. The company is adding shifts where needed but is not seeing a need for huge CapEx. They are leveraging existing facilities, including the Superior Boiler acquisition, to expand capabilities and capacity for making large thermal storage tanks.
Q: Can you provide more color on where you're seeing the most success in data centers, how adoption of new products has been, and what could be next to drive growth?
A: CEO Bob Pagano stated that customers rely on quality products delivered on time, and the company is being selective to ensure profitable growth. The newly launched CoolVault thermal storage tanks, which didn't exist last year, have been a key growth driver. R&D efforts are focused on stainless steel products as the market moves towards liquid cooling, and the company is working closely with customers to develop new products, with more announcements expected as they come online.
Q: What are the puts and takes that would drive data center sales to the low end versus the high end of the mid-to-high single-digit revenue mix guidance for the full year? What is your visibility into the second half?
A: CEO Bob Pagano acknowledged that this is a lumpy, project-based business. In Q2, customers accelerated some projects and delayed others. The company has clearer visibility on construction schedules for Q3, but Q4 becomes tougher as delays could push projects in or out. The project management teams are working closely with customers to monitor this, and while Q2 was a strong quarter, the company feels comfortable with its guidance based on current visibility.
Q: What is the state of the legacy construction markets (non-data center)? Are there any signs of change in sub-segments like non-residential or multifamily?
A: CEO Bob Pagano noted that single-family residential is getting slightly worse than last quarter, while multifamily remains soft. Institutional markets (healthcare and education) are holding up well. Other non-residential new construction remains soft. Overall, the environment is similar to last quarter, with residential slightly worse, but the company's diverse exposure and 60% repair/replacement business provide a strong foundation.
Q: Do you think the pricing actions you've taken position you for favorability or neutrality in the back half of the year? Can you help understand the price-cost cadence?
A: CFO Diane McClafferty stated that the company saw about 6% price in Q2, which is expected to sequentially decline in the back half. The company feels okay about the price-cost dynamic and has implemented a couple of selected price increases globally to address inflation from the Middle East conflict. They are watching the situation closely but feel pretty good about their current position.
Q: Earlier this year, Asia Pacific was the leader for data center business, and then Americas accounted for more than half. With high growth in China, can you update us on the geographic mix and any margin differences between regions?
A: CEO Bob Pagano said the company continues to grow in China but is expanding beyond it, with strong inquiries in Asia Pacific. The Americas is currently growing faster than China, primarily due to the CoolVault, which is only available in the US at this point. CFO Diane McClafferty added that all data center business is accretive to margins, and they don't foresee a mix issue going forward.
Q: You disclosed a content opportunity of $25,000 to $100,000 per megawatt. What drives a project to the high end versus the low end, and is the average content per megawatt increasing? Is content higher in the US?
A: CEO Bob Pagano explained that content varies significantly by project, ranging from as low as $50,000 to as high as $30 million. The high end assumes a liquid-cooled application with thermal storage tanks, while the low end is for smaller content. The US has more content per project currently due to the CoolVault, but the range varies based on customer needs, project timing, and whether it's air-cooled or liquid-cooled.
Q: Does Watts have multi-year visibility into its data center pipeline like other companies in the construction supply chain, or are orders placed closer to construction dates?
A: CEO Bob Pagano said visibility is mixed. For large products like CoolVaults, there is longer visibility (up to five months), but for other products, visibility is lower. The company stays close to customers and contractors to anticipate needs, but designs often change until close to the end, impacting piping and valve structures. To combat this, they are investing in inventory to handle variability in customer requirements.
Q: How do you go to market on data center cooling loops
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
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