Welcome to Watts Water Technologies, Inc. Fourth Quarter and Full Year 2025 Earnings Call. At the end of the presentation, we will open the line for questions. 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 WATT's 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 three where I'll recap 2025 and outline the key drivers for our 2026 outlook. I want to begin by expressing gratitude to the entire WATS 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 two 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. SaudiCast, located in Riyadh, Saudi Arabia, manufactures high-quality cast iron and stainless steel drainage products for non-residential and industrial markets. This acquisition grows our footprint in the fast-developing Middle East region. SaudiCast's annual sales are around $20 million. Both acquisitions are expected to be accreted 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 OneWatch performance system. Through this ongoing evaluation, we've identified 10 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 placement business, remains positive within our main end markets. In the Americas, indicators for non-residential 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 non-residential 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 non-residential 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 Easy Water, Haas, Superior, and SaudiCast. Collectively, these additions are projected to dilute adjusted operating margin by about 50 basis points in 2026 as we implement the one-watch performance system and realize synergies. Now let me highlight a few strategic growth initiatives including our data center and M&A strategy. On slide four you'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 and 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 one billion dollars. In 2025 sales from this sector represented just over three percent 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 five covers our acquisitions over the past three years. We finalized eight deals deploying about $660 million in cash and adding around $450 million in annualized revenue. These acquisitions have broadened our product range, expanded channel access, and increased our geographic reach. Just as importantly, they diversified our end market exposure and shifted our mix toward higher growth, higher margin, non-residential, institutional, and industrial segments. By leveraging the 1 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 three 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 six, which outlines our fourth quarter results. Sales reached $625 million, reflecting a 16% increase on a reported basis and an 8% increase organically. The Americas region delivered strong organic growth of 10% and reported growth of 17%, exceeding our expectations. This performance was supported by favorable price and volume, including the benefit of one additional shipping day and growth from data center sales. Acquisitions accounted for an additional $27 million in sales, contributing seven percentage points to the Americas' reported growth. in europe organic sales rose by one percent while reported sales increased ten percent organic growth stemmed from favorable pricing in the extra shipping day while reported sales also benefited from positive foreign exchange effects in apnea organic sales grew nine percent with acquisitions adding six percent for total reported sales growth of 15 percent 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 D leverage in Europe tariffs and acquisition dilution segment margins were as follows America's increased by 150 basis points to 23.3 percent Europe increased by 490 basis points to 15.1 percent while apnea 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 the 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 apnea 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 one percent. Adjusted EBITDA for the year was $534 million, up 18 percent, and adjusted EBITDA margin improved by 180 basis points to 21.9 percent. Adjusted operating income rose 19 percent 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 percent, up 190 basis points. Europe increased to 13.3%, up 160 basis points, and ATVIA remained flat at 18.3%. Adjusted EPS was $10.58, up $1.72, or 19% compared to prior year, with benefits from operations, acquisitions, favorable foreign exchange, and lower net interest expense exceeding higher tax costs. For GAAP reporting, after-tax charges of $22.3 million were recorded related to restructuring and acquisition-related costs, partly offset by an $8.3 million tax benefit from the reversal of a prior-year tax liability. Free cash flow reached $356 million, a 7% increase from 2024, setting a new company record. This was primarily driven by higher net income, lower tax payments due to changes in U.S. tax regulations, and contributions from acquisitions, which more than offset higher inventory investment and capital expenditures. Free cash flow conversion was 105%. Our balance sheet remains strong and continues to support our disciplined approach to capital allocation. In 2025, we returned $83 million to shareholders through dividends and share repurchases, increasing our annual dividend payout by approximately 20%. On slide eight, we will review our outlook for the first quarter and full year 2026. The outlook for 2026 is based on the anticipated market conditions discussed earlier. For the full year, we anticipate reported sales growth of 8% to 12% and organic sales growth of two percent to six percent excluding the impact of product rationalization our organic sales growth would be approximately two percent higher organic sales in the americas are expected to increase by three percent to seven percent driven by price and volume especially within data centers more than offsetting anticipated product rationalization headwinds of 25 to 30 million dollars. 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 to $15 million in product rationalization. APMEA is expected to achieve organic growth between four percent and eight percent. Additionally, we anticipate incremental sales from acquisitions of between 110 and 115 million in the Americas and between 18 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 percent to 22.1 percent, and the adjusted operating margin between 19.1 percent and 19.7 percent. Margin expansion from price, volume leverage, and productivity in restructuring savings is expected to be partially offset by inflation and 50 basis points of acquisition dilution. Regionally, America's segment margin is anticipated to decrease by 50 to 110 basis points, mainly due to approximately 100 basis points of acquisition dilution. Europe's segment margin is expected to be down 30 basis points to up 30 basis points, and ATMEA 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 percent of net income for 2026 reflecting planned investments in automation and our core operations and within 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 percent with organic sales up four to eight percent we anticipate high single-digit growth in the Americas, low single-digit decline in Europe, and low single-digit growth in apnea. 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 to $30 million for the Americas and around $5 million for apnea, 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 apnea 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.

Thanks, Diane. Let's move to slide nine, 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.

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

Good morning, everyone.

Morning. Morning, Nathan. 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 kicked 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 what?

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, you know, five 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. You know, we look at small, medium, and large acquisitions. Certainly in this environment, we wouldn't want to leverage more than two, two and a half at this point in time. But, again, it just depends on how fast cash flow, you know, drives repayment of debt. So, anyways, those are philosophically what we're looking at, but the team's focused on it where it makes sense.

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

Yeah, Nathan, those are our key criteria. We like to have the acquisitions be accreted to EPS in year one, try to get our EBITDA margins up to Watts level between year three and year five. We've been pretty successful at that with the acquisitions we've had so far. You know, it's not – there are opportunities sometimes where you may not get your EPS accretive in year one, but those are certainly our key criteria.

I'll just sneak one in on the data center, seeing as you highlighted it in the deck. Three percent 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? Thanks, Aaron.

Yeah, I mean, it's the higher end of the double digits, I would say, and certainly it's a key focus of ours. You know, Asia Pacific was the leader of that several years ago. Now America is taking that, and America is over half of that. And, you know, 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 teams are focused on.

Thanks very much for taking the questions.

Thank you.

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

Good morning, everyone. Morning, Mike. So, first question, 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?

Yeah, Mike, that's right. The 80-20 is included in the organic guide. So the organic growth would be two 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 two-fold 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 think it was a little more than I was expecting, probably more than 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? You know, 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 Americans on that side.

Yeah, Mike, so we're always looking for productivity through the 1WATS 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, you know, 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 you know our expectations are to gain higher returns higher margins and you know we'll continue to look at it presented an opportunity where our team said hey let's focus more on data centers and on retail and that's what we're doing thank you thank you our next question comes from the line of Jeff Hammond with key bank capital markets please go ahead

hey good morning good morning Jeff so Bob we should put you down for 99% growth and data center is that that's a little higher just on maybe just a quick one on data center. One, if you look at that billion-dollar 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, you know, early and nascent. And then as you shift the stainless, can you talk about, you know, how that impacts, you know, price mix within data center?

Yeah, 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 the teams are focused on that, driving that, and, you know, that will be accelerating our growth into the market. And we took that into consideration when we developed the basically $1 billion-plus market.

Okay. And then I was at your HR booth and a lot of excitement around Nexa, but also this Easy Water, which I know is small, but it seems like the technology is pretty disruptive and 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 Easy Water deal and the opportunity there.

Yeah, well, Nexa's, you know, you certainly see the focus, the buzz is, you know, 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, you know, other hospitality and stadiums and multi-family 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. And Easy Water, what they're known for is their salt and chemical-free treatment solutions, which, you know, they're off-sending a lot of places that use chemicals. And certainly, you know, 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, you know, on things like medical device cleaning, et cetera, which would be a nice fit for that, you know, because there's no chemicals. So, yeah, the teams are excited, and I'm glad you saw the momentum inside the booth. Great, thank you. Thank you.

Our next question comes from the line of James Koh with Jeffries. Please go ahead.

Good morning. Thanks for taking questions here. 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 kinds of risk if new at new competitors kind of enter into the market well certainly you know 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 in reputation and standing by the product so we're you You know, I would say we're in the top three 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've 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, you know, we'll continue to grow, and we believe it's a great opportunity in more working, you know, with the general contractors, the architects, and the entire value chain and, you know, penetrating more into the hyperscaler. So, you know, that just doesn't happen. It takes time to do that, and our multi-year effort here is starting to really pay off.

Great. Thanks for the caller. And I guess touching on the year of margin here, obviously it improved pretty meaningfully this quarter 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?

Hi, 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 mixes at play there. 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.

Great. Thanks for taking questions. Thank you.

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

Good morning. Thanks for all the details thus far. 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 or 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 chains. We have to hit all of them for various reasons, and it depends on what type of product. But 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 yeah, 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 MEXA or digital monitoring solutions here? And maybe how should we think about the long-term opportunities?

Yeah, 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 we 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, but right now that's early innings on that. Got it. Thank you.

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

Hi, thanks. Good morning, everyone. Going back to the, you know, good morning 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, you know, institutional, commercial, and then in resi, you know, single-family versus multi-family, maybe just some help on how you're thinking about those different markets things.

Yeah, so 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 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, you know, I think the acceleration to it being a two-point headwind, you know, it had been, I think, a 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, you know, this could flip to being more neutral, or maybe it's even a positive as, you know, you start to over-serve, you know, some of your, like, better customers?

Yeah, 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, you know, 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, you know, 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. 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 it is products and channels within our core America's business so it's not within the acquisition it's our core America's business retail and OEM thank you our next question will come from the line of Ryan Connors with North Coast research please go ahead good morning morning I'm not going to ask 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.

I might set a new record. But, yeah, back to the basics. You know, talk about price for a minute. 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, how we feel about price costs going forward, you know, just conceptually.

Yeah, so we expect, certainly we expect higher price in the first quarter as we carry over some of the 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, you know, 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, you want to add some color on that?

Yeah. 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 mid-year.

Yep. Okay. Yeah. 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 other channels, but some of the channels we're de-emphasizing based on competitive nature and profitability in those markets.

Oh, I see. So it's not a product walk away. It's just on the channel, I see. That helps so much. Thanks for your time. Thank you.

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

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

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

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

Yeah, 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, you know, we feel good about our ability to ramp up for this market. Thank you very much. Thank you.

Again, that is star one for any questions. And our next question comes from the line of Brian Lee with Goldman Sachs. Please go ahead. Brian, you might be on mute.

Hello, can you?

Can hear you now?

Okay, sorry about that. Just a couple questions around the outlook. A lot's been covered already on the call. But, you know, when I look at the top-line outlook here for 2026, you know, it seemed to be growing well ahead of many water piers at, you know, the 2% to 6% organic, which actually, you know, two 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, you know, the price? Is it geo? Is it specific end markets? It just seems like you guys, even off of a good 2025 performance position, better here in terms of growth versus peers.

Yeah, 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 replacements 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.

Yep, fair enough. And then on the margin guidance here as well, you called out the 50 basis points of dilution due to acquisitions. You know, if you strip that out, I think you guys would have been guiding to basically, you know, 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, you know, into the out years as you kind of realize some of these synergies? Is that something that comes right back in 2027?

Yeah, 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, you know, through leveraging the one-watch performance system through factory automation, productivity initiatives, and some of our products that are, you know, 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.

Okay. Appreciate the call. I'll pass it on. Thank you.

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.