Operator
Welcome to Watts Water Technologies, Inc. second quarter 2026 earnings call. At the end of the presentation, we will open the line for questions. I will now turn the call over to Ray Nash, Vice President, Investor Relations.
Thank you, and good morning, everyone. Welcome to our second quarter earnings conference call. Before we begin, I'd like to remind everyone that during this call, we may be making certain comments that constitute forward-looking statements. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially. For information concerning these risks, see WASP'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, Ray. Welcome to your first earnings call with Watts. Good morning, everyone. Please turn to slide three, and I'll provide an overview of the second quarter. We delivered another quarter of better-than-expected results, including record sales, operating income, and earnings per share. I'd like to thank the entire Watts team for their dedication and contributions, which made these results possible. Organic sales rose 12% in the quarter, as we benefited from strong growth in data centers and favorable price, as well as pull-forward demand, partly offset by our 80-20 rationalization program. Adjusted operating margin was 21%, down 60 basis points, primarily reflecting the anticipated dilution from recent acquisitions and a difficult comparison against a one-time price cost benefit in the prior year that we discussed last quarter. Even with those headwinds, margin performance was better than expected due to favorable price, volume leverage, and productivity. Our balance sheet remains strong and provides ample capacity to support our disciplined capital allocation strategy. This includes evaluating strategic M&A opportunities while continuing to invest in productivity, product innovation, and other key growth initiatives. Moving on to our business updates, we continue to make good progress integrating our recent acquisitions using the OneWatch performance system. As a reminder, we completed five acquisitions in 2025 to expand our portfolio, strengthen our market reach, and increase exposure to non-residential markets. Overall, these businesses are performing well, and we remain on track to achieve or exceed our targeted synergies. We have also continued to proactively manage the impact of the Middle East conflict on our business. While it created some headwinds during the quarter, our teams have responded with pricing, supply chain, and productivity initiatives to help mitigate both the direct and indirect impacts we're also pleased with the resilience of our newly acquired saudi cast business as its in-country for country business model has limited the impact from the disruptions in the region the tariff environment also remained fluid with new section 301 and 338 tariffs recently announced these are in addition to the section 232 currently in effect and replace the Section 122 tariffs, which recently expired. Based on the tariff structures currently in place, we continue to believe we're well-positioned from a price-cost standpoint. Watts offers one of the industry's broadest portfolios of water solutions, and as we discussed before, approximately 60% of our sales come from repair and replacement activity. Together, these characteristics give us a strong foundation across different economic environments. As a result, while residential and non-institutional new construction markets remain challenged, we have continued to execute well and have been able to allocate resources towards high-growth market opportunities, including our data center initiative. We continue to see accelerated demand in data center cooling applications, and while data centers remain a relatively small part of our overall business today, we're encouraged by the momentum we're seeing i'll provide more of an update on our data center initiatives in a few moments we published our 2025 sustainability report in june our sustainability efforts continue to create value for both our customers and watts we've made meaningful progress against our second generation of environmental goals while expanding innovative solutions that improve safety water conservation and energy efficiency these efforts reinforce our commitment to solving our customers most critical water challenges while supporting long-term growth i'm proud of the progress our global teams have made and invite you to read more about it in the appendix of today's presentation or in our sustainability report which can be found on our investor relations website 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. Data center growth, price realization, and performance in Europe and APMEA are all better than expected versus the outlook we provided in May. However, we do continue to see weakness in some of our macro indicators. Inflation measures and commodity prices are persistently higher compared to earlier this year. In addition, the market outlook for interest rates has shifted with expectations of no further rate reductions throughout the rest of the year. These factors are compounded by continued uncertainty around trade policies and geopolitical disruptions, especially the ongoing Middle East conflict. As a result, we continue to expect softness in residential and non-institutional new construction markets. Next, please turn to slide four for an update on our data center growth initiative. In the second quarter, our data center sales more than tripled compared with the prior year, reflecting continued strong demand for our cooling solutions, including our recently launch CoolVault thermal storage tanks. Through the first six months of 2026, our data center sales represented 8% of total sales, including some of the pull forwards I mentioned earlier, which Diane will discuss in more detail. We estimate our served addressable market is approximately $2 billion. This is based on our view of the global market opportunity, including regions beyond China and North America, the double-digit growth rate of the market, and also the trend towards more liquid cooling solutions. As liquid cooling adoption continues to increase, we're also seeing greater content opportunities per megawatt than the traditional air-cooled systems. Because this is a project-based business, the timing and volume of sales will be more variable than in some of our other markets. This can have an impact on our quarterly outlook, as we saw with customer-driven pull-forward in Q2. Our expanding global data center organization, along with investments and new product launches, have been paying off, and we feel confident in our ability to scale with our customers. We now expect data center sales for the full year to represent mid to high single digits as a percentage of overall company sales, compared with just 3% of sales last year. We've been growing faster than the market based on our ability to serve our customers and deliver quality products while continuing to develop strong relationships with contractors, OEMs, and hyperscalers. Data centers continue to represent one of our most attractive growth opportunities. With that, let me turn the call over to Diane, who will address our second quarter results and our third quarter in full year outlook. Diane?
Thank you, Bob, and good morning, everyone. Please turn to slide five, which highlights our second quarter results. sales increased to 763 million reflecting a 19 increase on a reported basis and a 12 percent increase organically both better than expected growth was driven by price and volume including the benefit of growth in data center sales and pull forward sales from the third quarter which more than offset the impact of our 80 20 rationalization initiative the america's region delivered strong organic growth of 12 percent and reported growth of 17 percent both better than expected driven mainly by price and volume largely from data center sales the region also saw some pull forward demand from wholesale customers of approximately 10 million ahead of our sap implementation at the end of june at our largest site as well as approximately 5 million of pull forward of data center project sales, which shipped earlier than planned. Our 80-20 product rationalization initiative resulted in a reduction of sales of approximately 8 million, or a 1% impact on organic growth. Acquisitions accounted for 28 million in sales, contributing six points to the Americas' reported growth. In Europe, organic sales rose 9%, while reported sales increased 12 percent. Organic growth stemmed from favorable pricing and higher volumes, particularly in our HVAC business, while reported sales also benefited from positive foreign exchange. Our 80-20 product rationalization resulted in a decline of sales of roughly 1 million, or a one-point impact on organic growth. In Atmia, organic sales grew 31 percent, driven by an increase in data center sales in China, partly resulting from approximately 5 million of pull forward of several data center projects, which shipped early due to customer requirements, which more than offset the headwinds from the Middle East conflict. Acquisitions added 17 percent, and favorable foreign exchange contributed 9 percent for total reported sales growth of 57 percent. Adjusted EBITDA totaled 177 million, an increase of 15 percent, with an adjusted EBITDA margin of 23.1%, down 70 basis points year over year. Adjusted operating income of $160 million increased 15%, and adjusted operating margin decreased 60 basis points to 21%. The margin declines were primarily driven by the expected acquisition dilution of 70 basis points, the difficult comparison to the prior year tariff-related price-cost benefit, and inflation. This decline was partially offset by favorable price, volume leverage, and productivity gains. Segment margins were as follows. Americas decreased 150 basis points to 25.7, while Europe increased 160 basis points to 13.3%, and APMEA increased 100 basis points to 19.9%. Adjusted earnings per share were $3.66, representing 18% year-over-year growth, with operational performance, acquisitions, tax, and foreign exchange driving the majority of the increase. The adjusted effective tax rate in the quarter was 23.1%, favorable by 210 basis points compared to the second quarter of 2025, primarily due to a non-recurring tax benefit from the reversal of a prior year tax liability. Our free cash flow year-to-date was $98 million, compared to $105 million in the same period last year. The cash flow decrease was primarily due to an increase in accounts receivable, due to higher sales, and our strategic investment in inventory. We expect seasonal sequential improvement in the second half of the year and are on track to achieve our full year goal of free cash flow conversion greater than or equal to 90 percent of net income as previously communicated the balance sheet remains strong and provides us with good flexibility to execute on our capital allocation priorities our net debt to capitalization ratio at quarter end was negative 12 percent and our net leverage is negative 0.4 on slide six we'll review our outlook for the third quarter and full year 2026. As Bob mentioned, we are raising our full year sales and margin outlook. This is based on a strong first half and our third quarter outlook. This updated guidance assumes there is no change in the current status of the Middle East conflict. We are also assuming that there are no further changes to the tariff structure that is currently in place. And we are also not including any potential IEPA tariff refunds in our outlook and any refunds received in future periods will be treated as non-recurring special items and will therefore not be included in our adjusted results. We now anticipate organic sales growth of 8% to 11%, which reflects over a five-point increase to the midpoint of our previous outlook, Excluding the impact of our ongoing 80-20 product rationalization, our organic sales growth would be approximately one point higher. Our reported sales are now expected to be up 14% to 17%. Regionally, organic sales in the Americas are now expected to increase by 9% to 12%, driven by price and volume, especially within data centers, more than offsetting anticipated 80-20 product rationalization headwinds of $25 to $26 million. In Europe, organic sales are now projected to increase by 1 point to 4 points, as favorable price and volume are partly offset by $6 to $8 million in 80-20 product rationalization. Atmia is now expected to achieve organic growth between 9 and 12 percent. Incremental sales from acquisitions are expected to be between $105 million and $110 million in the Americas, a slight decline from our previous outlook as we begin to drive 80-20 actions in these businesses. We also expect between $21 million and $22 million of acquired sales in APMEA. Foreign exchange is estimated to be an $18 million favorable impact. We are raising our full-year adjusted EBITDA margin outlook to a range of up 20 to up 80 basis points, which is a 60 basis point increase in the midpoint of our previous outlook. We are also raising our full-year adjusted operating margin expansion to a range of up 20 to up 80 basis points, which is a 70 basis points higher than the midpoint of our previous outlook. Margin expansion continues to come from price, volume leverage, and productivity. which more than offset higher inflation and 50 basis points of acquisition dilution. Regionally, America's segment margin is now anticipated to range from a decrease of 20 basis points to an increase of 40 basis points, largely overcoming approximately 100 basis points of acquisition dilution. Europe's segment margin is now expected to increase 20 to 80 basis points based on strong price and productivity, which includes the expected benefits from our France restructuring program. Apnea, as said, margin is forecasted to increase by 30 to 90 basis points. This guidance assumes no changes to the current tariff environment. Our free cash flow expectation remains in line with our previous outlook, and we expect to deliver free cash flow conversion of greater than or equal to 90% of net income. Next, a few items to consider for the third quarter. Reported sales are expected to increase by 11 to 14 percent, with organic sales up 5 to 8 percent. We anticipate high single-digit to low double-digit growth in the Americas, which is sequentially lower than the second quarter due to the pull-forward demand previously discussed and the sequential decline in price as we comp prior year price increases. We expect flat to low single-digit growth in Europe and mid to high single-digit growth in apnea, with our expected data center sales offsetting the impact of the Middle East conflict. These estimates incorporate the negative impact from product rationalization under our 80-20 initiative of approximately $2 million in Europe and $6 million in the Americas. Incremental sales from acquisitions are projected at $30 to $33 million for the Americas and around $5 to $6 million for APMEA. We also estimate an unfavorable foreign exchange impact of approximately $3 million. Third quarter EBITDA margin is expected to be between 22.2 percent and 22.8 percent. Operating margin is expected to be between 19.8 percent and 20.4 percent. Across all regions, price and volume leverage are anticipated to be partly offset by higher inflation and acquisition dilution of approximately 50 basis points. Additional key assumptions for the third quarter and full year are available in the appendix of the earnings presentation. With that, I'll turn the call back over to Bob before moving to Q&A.
Bob? Thanks, Diane. To wrap up, we delivered another strong quarter with record sales, operating income, and EPS. As we discussed throughout the call, data centers are an important growth opportunity and also a good example of how we are successfully targeting additional growth markets. At the same time, our diverse market exposure and significant repair and replacement business continue to provide a consistent foundation for revenue and cash flow generation across different economic conditions. Based on our strong first-half performance and third-quarter expectations, we are increasing our full-year sales and margin outlook. We are monitoring the macro environment, including tariffs, interest rates, and geopolitical development, and we believe we are well-positioned to navigate those uncertainties. Our balance sheet is strong and our cash flow is healthy, and we have ample flexibility to support our disciplined capital allocation priorities. We'll continue to deploy capital to high return opportunities that will help us deliver sustainable, profitable growth and create value for our shareholders. With that operator, please open the lines for questions.
Operator
Thank you. We will now begin the question and answer session. If you have dialed in and would like to add a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via speakerphone in your device, please pick up your handset to ensure that your phone is not on mute when asking your question. We do request for today's session that you please limit to one question and one follow-up question only. Thank you. Our first question comes from the line of Andrew Creel with Deutsche Bank. Your line is open.
Hi, thanks. Good morning, everyone. Good morning, Andrew. I want to first on data centers, could you just give us some more color on why the TAM expanded or doubled from a billion, you were saying, pretty recently to two billion so quickly? Does this include the opportunity in Europe, or would that be incremental to this two billion? And on Europe, have you made any data center sales there, or is that in the forward look?
Yeah, so we've been fine-tuning that analysis, really, where we increased it from $1 to $2 billion. And yes, we added Europe inside of that, and we have been selling some business inside of Europe. But look at, in my prepared remarks, I talked about some of the shift towards liquid cooling, some of the growth we're seeing, and then adding our thermal storage tank with our cool vault. So, again, refining it more of a global number now versus just an APME in North America number.
Thanks. That's helpful. And then related topic for the data centers, can you give us some color on how hard you're running your manufacturing sites? I noticed the CapEx and the guide moved modestly higher. Is it fair? That's all related to data centers. and are we ever going to get to a point where there needs to be a more major, you know, footprint expansion? Thanks.
Yeah, so you're correct. We did expand our CapEx, and that is directly related to some of the additions we're doing at both our sites in North America, as well as inside of China, as well as we're growing our global supply chain. So the teams are really focused on that, and we're adding shifts where we need to. But, you know, as we look and look for the future here, We'll adjust our capex accordingly, but we're not seeing huge capex, and we're really focused on our existing facilities and some of our new acquisitions. Superior Boiler, for example, is making some of those cool tanks. So we're adjusting their capabilities inside their factories to allow them to continue to expand and leverage their capacity that they have.
Operator
Our next question comes from the line of William Gripen with Barclays. Your line is open.
Hi, good morning, and thanks for the time here. I guess just to start here on data centers, maybe not surprisingly, but it feels like growth has been much stronger even than maybe your own internal expectations. Just curious if you could provide a little more color here on where you're seeing the most success. How has adoption been of new products as you roll those out? And, you know, could you give us a flavor of sort of what maybe products are in development, what could be next, and how could that continue to drive growth in this customer segment?
Yeah, so, yes. Look, in this business, customers rely on quality products delivered on time, and our teams are doing exactly that. And, you know, it's all about profitable growth in this market, so we're very selective to make sure we can meet the customer requirements. And certainly our focus on the new cool vault that we talked about earlier. We did not have that product last year, and we do have it now, and that's been growing with the thermal storage tank. So we'll continue to expand. We're developing new products, especially in the stainless steel side, really, as things move to more towards liquid cooling is where we're focused, some of our R&D efforts. But we're working closely with our customers and looking forward to, you know, sharing more as some of these new products come online.
Appreciate that. And then I think the guidance encompasses mid to high single digit revenue mix for data centers. What sort of puts and takes, I guess, or how are you thinking about what would drive you to the low end versus the high end of that range? And what is your visibility into the second half? I know you talked about this being a project-based business, so maybe it's some of that, but we'll just be curious there for some more color.
Yeah, this is a really lumpy business. Project, as Diane talked earlier about it, we had customers move different projects around, and they accelerated some of our products and delayed some other projects that we weren't on. So it is lumpy. We have clearer visibility on construction schedules for Q3. It gets a little tougher in Q4 because some of these delays could push some of the projects out or in. So, again, we monitor that very closely. We have our project management teams working very close with customers to stay on top of that and continuing to work and leverage that. But, again, these are large projects, so it gets lumpy in some of these quarters. And we, you know, all things came together in the second quarter, quite honestly, and we shipped a lot. But we'll monitor that. And, you know, our best visibility is in Q3 right now, but we feel comfortable with our guidance.
Operator
Our next question comes from the line of Mike Halloran with RW Beard. Your line is open.
Hey, good morning, everyone. Good morning. Hey, so maybe just the State of the Union, not what you're seeing on the more legacy construction markets, non-data center, which is obviously exciting for you guys, but any signs of change either way in the quarter? I know the environment cumulatively remains challenging, but if you think about the sub segments that you serve within the non-res landscape or multifamily, are you seeing any real change either way in any of those sub areas?
Mike, when I look at the residential side, single family is probably getting slightly worse than it was last quarter. Multifamilies hanging in there, still soft compared to what we've seen before. Institution, you know, both healthcare and education is holding up, which is good. The other, other than data centers, the other non-residential product, new construction is still soft. So it varies by region, but I would say in general, it's similar to what we talked about last quarter, maybe slightly worse in the residential side.
Thanks for that. And then when you think about the pricing side of things, kind of a twofold question here, do you think the pricing actions you've taken position you for favorability or at least neutrality as you work through the back half of the year and maybe help just understand how that cadences the price cost piece cadences and the guidance in the back half of the year?
Yeah, Mike, we saw about 6% price in the second quarter. We do expect that to sequentially decline in the back half. We feel okay about our price cost dynamic right now. We did do a couple of selected price increases globally just to address some of the inflation from the Middle East conflict. And we're watching that closely. But we feel pretty good about where we're at.
Thank you. Much appreciated.
Thank you. next question comes from the line of jeff hammond with key bank capital markets your line is open hey good morning everyone good morning jeff so bob i'd call doubling your tam more than fine tuning jeff uh i always said greater than a billion so uh certainly two billion is greater than a billion can we just unpack that a little bit like how much is the europe tamp expansion how much you know do you have a tan for this thermal tank piece and then you know as you look at your product portfolio and i think you mentioned some of the work you're doing in liquid cooling like other products or applications that you are finding you can sell into that market would be helpful Yeah.
So there's a lot of puts and takes here, but it's not only Europe. We looked at the Middle East. We also looked at Southeast Asia and some of the other markets. So before the number was primarily, let's call it North America and China related. We've now expanded it global. We're seeing opportunities that we're quoting on a global basis. So that's the big shift. And certainly we have a little more weighted towards air cooled and we're seeing more of a shift towards liquid cooled. So a bunch of math, but it gets us closer there. When we said a billion before, we were around a billion 1.4, but we rounded it to a billion. Now we're leaning more up towards that $2 billion. So again, we believe it's a good number. We've cross-referenced it, tied it globally, and feel better about that overall number.
Okay, think about the thermal tank, TAM, and then other products that you can pull in. I want to say you've mentioned Easy Water in the past, a newer acquisition.
Yeah, the thermal tanks is a part of that, especially in the liquid cooling side of that. Each customer is different in how they're using thermal storage tanks, And we are leveraging our superior boiler because they had the ability to make large custom boilers, and they have the capacity to do these very large tanks, as well as what we can do in our Texas location. So, again, those are opportunities. We've seen some really strong success, especially in Q2, in winning some projects that we have visibility through the rest of this year on that market.
Okay, and then the last one, you mentioned the market 15% to 20% growth, which seems a little bit low, but maybe just talk about your outgrowth. I mean, it seems like you're crushing market growth in the near term, but just how much do you think – what do you think your data center business can grow at versus that 15% to 20%?
Yeah, so prior to this, I go back to that cool vault and those thermal storage tanks. We're shipping a lot more of that than we had last year. We didn't ship any last year, quite honestly. So as we're looking at that, we are outgrowing the market from that point of view because of our new product development. And as I said earlier, you know, we're focused on profitable growth. There's more activity you can get, but we're driving profitable growth. we're being disciplined in making sure we can meet the customer demand. So although the market might be growing, we're going to focus on the more profitable side of that market where the people and our customers trust our quality and on-time delivery and value that. So again, that's where we're focused and why we believe that number is the right number for us to look at.
Okay. Thanks for the time, Bob.
Operator
Our next question comes from the line of Brian Lee with Goldman Sachs. Your line is open.
This is Keshif Chaudhary on for Brian Lee. Thanks for taking my question. Earlier this year, you had mentioned that Asia Pacific used to be the leader for your data center business, and then America has accounted for more than half of the revenue. With the high growth highlighted in the Q2 for China data center demand, can you update us on the geographic mix and how you expect it to evolve over the next 12 months to maybe 24 months. And more importantly, are there any meaningful differences in the margin profile between U.S. and China and maybe other markets? And could a shift towards China be a tailwind or a headwind to the margins? Thank you.
So I'll take the first part of the question. You know, we continue to grow specifically in the China market, but we're expanding beyond that. We've had some really strong growth in Asia Pacific, at least from the inquiry's point of view other than China. As we look in, America is growing faster than China right now, primarily because of that cool vault, which we're really only having in the U.S. at this point in time. So that's where the U.S. is growing even faster than that region. But again, we're continuing to grow in all of our regions around the world, including Europe. So it's a global initiative where we're focused on leveraging our global capabilities to win in that market.
And I think on your margin question, you know, Bob's right. I think the Americas is growing faster than the Asia-Pacific region. But from a margin perspective, all of it's accretive. I don't think we're going to see a mixed issue going forward.
Okay, cool. Thank you. And just to maybe continue on the data center part, You disclosed a content opportunity of about 25,000 to 100,000 per megawatt content. Can you just help us identify what will drive a project towards the high end versus the low end of that range and whether the average content per megawatt opportunity is increasing over time? And additionally, is the content higher in the U.S. region versus the other regions?
So, going back to your previous question, yes, there's more content inside the U.S. only because we're selling that cool vault. But overall, when we look at it, each project varies depending on what part of the project and where we're getting. So, a project could be as low as, you know, $50,000 or as high as $30 million. So, again, it varies based on content, based on customer need, and based on it's going to be higher in a liquid cooling. application because we're selling there's more content inside of that so that drives you towards the higher liquid cooling with a tank would drive you to that higher one versus you know smaller content on the bottom of that so again it varies by project we're giving a range and and ranges adjust accordingly based on each one of the customer and based on project timing or where customers need us the most so it's it's a big range but uh again that's what we're seeing in the market cool thank you thank you next question comes from the line of jane's call with jeffreys
your line is open uh good morning uh thanks for taking questions here and congrats on the quarter morning morning uh i wanted to touch on the data center again uh sorry for keep getting on this but But like on project feasibility, I think other like companies kind of serving the data center construction kind of supply chain kind of described it as kind of multi-year backlog, and they have all the design wind pipelines and everything. So does Watts have similar visibility into its data center pipeline longer term, or is the nature of your product such that orders are placed closer to the construction date with kind of less late time?
Yeah, any color of that would be helpful. yeah so I think the answer is both right we have longer visibility in particular with the cool vaults because they're very large and take a long time to do it but some of the other products we have lower visibility so we don't have you know two years worth of visibility I would say at the largest amount we have you know maybe five months and then it is down from there but we stay very close to customers. We understand where their plans are, construction, contractors, et cetera, on what their needs are. And we're anticipating their future needs based on discussions with them. And we have a great pipeline. We're working with them. It's also a timing of their release. A lot of them change their designs and won't finalize a design till very close to the end, which impacts you know, the piping and the valve structure inside that business. So it's based on size, et cetera, as it gets closer. So we've been combating that by having inventory available on the various sizes and adjust accordingly. So as you can see, we've been investing in inventory to, you know, have that variability inside each one of those customer requirements. Got it.
Thank you. and i guess kind of like similar question kind of can you kind of walk us through how you actually kind of go to market on this data center cooling loop are you like selling primarily through distribution like direct to mechanical contractors or directly to hyperscalers and oems uh that are doing actual system and like at what stage product design process does watch typically gets specified in and do they usually source source or do they usually use multiple sourcing well i think in this market.
I think that all of them are multiple sourcing based on projects and where they're doing it. We involved a lot with our rep network. We're working closer with the customers. So we're partnering with our reps and the contractors, working directly with them. And in some cases, especially on the cool vault, we're really working with some of the hyperscalers and the contractors directly with that. So each one of its varies. We've been you get qualified by the hyperscalers and working directly with all the channel partners to do it. So we're in the whole process. We see the pipelines, we see the jobs, we're speaking with them and we stay very close with them until the final release is out there.
Great. Thanks for taking questions here. Thank you.
Operator
And again, if you would like to ask a question, press star then the number one on your telephone keypad our next question comes from the line of jeffrey reeve which has happened to disconnect his line okay everyone that concludes the question and answer session i would like to turn the call back over to ray nash for closing remarks operator it looks like he came back in to the queue okay um jeffrey reeve your line is now open yeah sorry about that the long pause made me question if i was logged in for a question
um so i just want to go back to some of the data center stuff i'm sorry for kind of so much of this discussion but the 25 000 to 100 000 per megawatt i think is a new disclosure you just help us understand where within the range your current mix sits and maybe what your pipeline looks like and should we just think about the hundred thousand as like a data center with both air and liquid cooling, or is there something else?
Yeah, we talked a little bit about this in the previous questions, but again, I would say the high end would assume it's a liquid cooled that also has thermal storage tanks. So that's on the high end and very high end. I would say the answer is always in between some of those numbers. I see that's kind of where we're seeing a lot of these, but again, every project's different. These are just general discussions. We've had a lot of inquiries over the past quarter, people asking us, could you quantify this for us? So we did our best job of doing it. Anytime you give a range like this, it gets very difficult because it can be on the small end. It depends on whether liquid cooled, air cooled, whether it's in the US, whether it's in China or wherever in Europe. So again, we participate throughout the whole cycle. We're just trying to give you, you know, the ranges for each one of these to give you some clarity when you look at inside of an overall data center and how we play.
Appreciate that. I guess directionally, we can then make an assumption kind of where liquid cooling growth is and kind of your opportunity. And maybe just one more on just the gross margin compressed this quarter. I think SG&A improved. Is that related to the data center business mix? Should we expect that to continue? And maybe is there a natural floor in gross margins as the portfolio shifts?
Yeah. You know, from the gross margin perspective, remember, there's a little bit of acquisition dilution in there. We did have the challenging price cost compared to last year. So, those are a couple pieces of it. And yet, on the data centers, we do have a little bit of gross margin dilution from that, but it's actually accretive to operating margin because there's a very low operating expense burden on that data center business. So, you will see that a little bit going forward.
Operator
There are no further questions at this time. I would like to turn the call back over to Ray Nash for closing remarks.
Thank you, Operator. Thank you for joining 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.
Operator
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
