Watts Water Technologies (NYSE:WTS) raised its 2026 sales and margin outlook after reporting record third-quarter results, as demand from data center projects and pricing gains helped offset weakness in parts of the construction market.
Sales rose 19% to $728 million, including 12% organic growth, Chief Financial Officer Diane McClintock said on the earnings call. Adjusted earnings per share increased 36% to $3.40, while adjusted operating margin expanded 240 basis points to 20.9%.
Chief Executive Officer Bob Pagano said data center demand and better-than-expected performance in Europe supported the higher forecast. He cautioned that leading indicators for new construction remained weak and that inflation, trade policy and uncertainty surrounding the Middle East conflict continued to pose risks.
Data Centers Drive Growth Across Regions
In the Americas, reported sales increased 19% and organic sales rose 12%, driven primarily by pricing and volume, much of it from data centers. Acquisitions contributed $35 million in sales, while product rationalization under the company’s 80/20 initiative reduced sales by about $8 million.
European sales rose 7% on a reported basis and 9% organically, with higher pricing and volumes in both original equipment manufacturer and wholesale businesses. Pagano said the region benefited from comparisons with a period of customer destocking a year earlier, as well as pricing actions and renewed heat pump incentives.
In Asia-Pacific, Middle East and Africa, or APMEA, reported sales increased 54% and organic sales rose 30%. McClintock attributed the organic growth to better-than-expected data center sales in China and higher volumes in Australia and New Zealand, which more than offset headwinds from the Middle East conflict.
Pagano said some large Chinese data center projects had been accelerated by customers. Data centers represented a high-single-digit percentage of company sales in the third quarter, he said, adding that Watts now expects the business to account for the high end of its previous mid- to high-single-digit range for the full year.
Adjusted EBITDA increased 32% to $169 million, and its margin rose 230 basis points to 23.2%. Adjusted operating income climbed 34% to $152 million. McClintock said adjusted earnings excluded $39 million in tariff refunds received during the quarter.
Watts Raises Full-Year Forecast
Watts now expects 2026 organic sales growth of 11% to 12%, a two-percentage-point increase at the midpoint of its prior outlook. Reported sales are projected to rise 17% to 18%.
The company also raised its forecasts for both adjusted EBITDA margin and adjusted operating margin. Each is now expected to increase by 70 to 80 basis points for the year, a 25-basis-point improvement at the midpoint from the previous outlook.
For the fourth quarter, Watts expects reported sales growth of 11% to 14% and organic growth of 9% to 12%. Adjusted operating margin is forecast at 19.1% to 19.7%, compared with 20.9% in the third quarter.
McClintock said the updated guidance assumes no change in the severity of the Middle East conflict and no further changes to the company’s tariff structure. The adjusted earnings outlook excludes tariff refunds. Watts maintained its expectation that full-year free cash flow would equal at least 90% of net income.
Management Sees Softer Construction Markets in 2027
Pagano said North American construction markets outside data centers appeared softer than management had expected three to six months earlier. Residential new construction and non-institutional commercial markets are showing weakness, while institutional demand and repair-and-replacement work are holding up, he said.
Watts expects residential markets to represent about 25% of 2026 sales, down from 40% in 2022, as acquisitions and product development shift its portfolio toward non-residential markets. Pagano said 60% of the residential exposure is repair and replacement. Across the entire company, repair and replacement represents about 60% of the business, according to management.
On data centers, Pagano said contractors and installers have solid books of business for the next couple of years, but Watts should not be expected to repeat the growth seen from 2025 to 2026. He pointed to an estimated 15% to 20% market growth rate as an assumption for next year, while noting that the company will face difficult comparisons after this year’s gains.
Pagano also said Watts plans a price increase of approximately 2% at the beginning of next year. The company is expanding capacity in its factories and supply chain, including plant expansions in China, to support data center demand.
About Watts Water Technologies (NYSE:WTS)
Watts Water Technologies, Inc designs and manufactures products that help control the safety, flow, and quality of water in plumbing, heating, and water-treatment systems. Its products serve residential, commercial, and industrial applications.
The company’s offerings include backflow preventers, valves, water pressure regulators, drainage products, water-quality and treatment systems, and controls for heating and hot-water applications. It also provides solutions for water reuse and other water-management needs.
Founded in 1874 by Joseph Watts, the company traces its origins to the development of a water pressure regulator.
