瓦茨水技術 (WTS) 2026 年第 3 季法說會：資料中心帶動營收創新高並上修財測指引

重點摘要

• Watts Water Technologies 公布 2026 年第三季創紀錄營收達 7.28 億美元，呈報營收年增 19%，有機成長達 12%，主要受價格調漲、銷量增加及資料中心需求帶動。
• 調整後營業利益成長 34% 至 1.52 億美元。調整後營業利益率擴增 240 個基點至 20.9%，主因價格、銷量槓桿效益與生產力提升，足以抵銷通膨與併購帶來的稀釋影響。
• 調整後每股盈餘 (EPS) 成長 36% 至 3.40 美元。調整後業績排除了本季收到的 3,900 萬美元關稅退稅款。
• 資料中心佔季度營收的高個位數百分比。管理階層表示，承包商與安裝商未來幾年的訂單狀況良好，但 2027 年的成長將面臨高基期挑戰。
• 管理階層上調 2026 年全年展望，預期有機營收成長率為 11%–12%，呈報營收成長率為 17%–18%。調整後 EBITDA 與營業利益率預計各改善 70–80 個基點。
• 管理階層預期住宅與非機構類新建工程將維持疲弱，而機構需求、維修與更換需求以及資料中心則提供支撐。

主要財務業績

調整後獲利排除了第三季收到的 3,900 萬美元關稅退款。年初至今自由現金流包含該退款，並受惠於淨利增加，但部分被應收帳款增加、庫存投資、資本支出以及前一年納稅時點等因素所抵銷。

業務與營運表現

美洲地區呈報營收成長 19%，有機成長 12%，主要受價格調漲與資料中心銷量帶動。併購貢獻了 3,500 萬美元（即 7 個百分點），而 80/20 產品合理化計畫則使營收減少約 800 萬美元。該部門利潤率上升 180 個基點至 25.5%。

歐洲地區呈報成長 7%，有機成長 9%。價格調漲以及 OEM 與批發銷量的增加，抵銷了 200 萬美元的匯率逆風及約 100 萬美元的產品合理化影響。管理階層亦指出基期較低、熱泵補貼政策以及額外的定價調漲。該部門利潤率提升 230 個基點至 14.5%。

APMEA 地區呈報營收成長 54%，有機成長 30%。成長主要由中國的資料中心專案以及澳洲與紐西蘭的銷量成長帶動，但部分被中東市場的疲軟所抵銷。併購增加 600 萬美元，外匯效益貢獻 300 萬美元。該部門利潤率擴增 170 個基點至 21.1%。

管理階層表示，資料中心佔第三季營收的高個位數百分比。中國在製程水與液冷應用的導入速度快於北美，但設施用水仍是 Watts 的主要強項。該公司正透過工廠投資、中國廠房擴建、收購 Superior Boiler 等併購案，以及拓展供應鏈來擴增產能。

產品組合調整持續降低住宅業務的曝險。管理階層預計 2026 年住宅市場將佔營收約 25%，低於 2022 年的 40%，而非住宅市場預計將從 60% 提高至 75%。在住宅業務曝險中，有 60% 來自維修與更換。

管理階層指引

針對 2026 年全年，管理階層目前預期：

全年併購營收預計在美洲地區達 1.07 億至 1.09 億美元，在 APMEA 地區達 2,100 萬至 2,200 萬美元。外匯預計帶來 2,000 萬美元的挹注。80/20 計畫預計將使美洲營收減少 2,600 萬至 2,800 萬美元，歐洲營收減少 400 萬至 500 萬美元。

針對 2026 年第四季，管理階層預期呈報營收成長率為 11%–14%，有機成長率為 9%–12%。調整後 EBITDA 利潤率預估為 21.6%–22.2%，增加 20–80 個基點；調整後營業利益率預期為 19.1%–19.7%，增加 10–70 個基點。

該展望假設中東衝突的嚴峻程度未變，且關稅架構沒有進一步變動。調整後獲利指引不包含關稅退款。

風險與觀察重點

管理階層表示，高利率與不確定性正對住宅與非機構類商業建築造成壓力。邁入 2027 年的市況可能比該公司三到六個月前的預期稍顯疲弱。

大宗商品、貨運、物流、工資與福利等領域的持續通膨仍是一大壓力。Watts 計劃在 2027 年初進行約 2% 的常態性年度調價，大幅低於與關稅相關的調價幅度。

資料中心需求依舊強勁，但管理階層提醒，2027 年的成長將面臨 2026 年的大幅增長以及新產品全年貢獻的高基期挑戰。此外，第三季部分中國的大型專案進度亦受到客戶提前拉動。

其他不確定因素包括中東衝突、貿易政策、關稅架構，以及第四季 APMEA 地區的銷量反向槓桿效應。

分析師問答精選

• 資料中心能見度：管理階層表示，承包商與安裝商未來幾年的訂單狀況良好。在手訂單增加且能見度改善，但 Watts 未公布在手訂單具體數據。
• 2027 年資料中心成長：公司提及 15%–20% 的市場成長假設，同時指出在 2026 年大幅成長與市佔率提升後，基期將相對偏高。
• 營建業展望：除資料中心外，新建工程指標維持疲弱。機構市場保持穩健，而維修與更換需求則提供了額外的穩定性。
• 定價能力：管理階層表示，在暖通空調 (HVAC) 與供暖產品方面，並未出現經銷商或承包商的強烈反彈。公司持續維持有利的價格與成本關係。
• 資本配置：在對資料中心產能、產品開發與工廠自動化進行內部投資後，併購仍是首要任務。股票買回預計將抵銷股票選擇權的稀釋影響，股利將維持發放，並可能參考同業進行檢視。
• 產能狀況：Watts 正在擴建廠房、深化供應鏈合作關係並提升生產能力，以支援資料中心成長。管理階層表示，公司正妥善應對當前的產能需求。

完整法說會逐字稿

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完整財報電話會議逐字稿

管理層陳述

Operator

Welcome to Watts Water Technologies, Inc. Third Quarter 2026 Earnings Call. [Operator Instructions] I will now turn the call over to Ray Nash, Vice President, Investor Relations.

Ray Nash

Thank you, and good morning, everyone. Welcome to our third 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 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, 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.

Robert Pagano

Thank you, Ray, and good morning, everyone. Please turn to Slide 3, and I'll provide an overview of the third quarter. Our third quarter performance exceeded expectations with record sales, operating income and earnings per share. Strong execution in our diversified portfolio enabled us to capitalize on attractive opportunities, including data center growth. As always, I would like to thank the entire Watts team for their commitment to serving our customers and executing our strategy.

Organic sales rose 12% in the quarter as we benefited from strong growth in data centers and favorable price, which more than offset the impact of our 80/20 rationalization program. Adjusted operating margin expanded 240 basis points to 20.9%. Margin performance was driven by favorable volume leverage, price and productivity, which more than offset inflation and the expected dilution from recent acquisitions. Our balance sheet remains strong and provides flexibility to pursue strategic acquisitions and invest in high-growth opportunities, including product innovation and automation.

Moving on to our business updates. We are maintaining a positive price-cost relationship despite persistent inflation in commodities, tariffs, freight, logistics, wages and benefits. Our teams have done an excellent job managing these pressures through pricing actions and sourcing and productivity initiatives under our One Watts performance system, allowing us to maintain a favorable price/cost dynamic. We are also seeing tangible benefits from the continued transformation of our portfolio. Through strategic acquisitions and targeted product innovation, we have increased the size of our served markets, expanded our capabilities and strengthened our position in attractive end markets, including institutional and data centers.

At the same time, our 80/20 initiative is redirecting resources towards the product and channels where Watts has durable competitive advantages and greater potential for long-term profitable growth. Together, these actions are shifting our business mix towards higher growth and higher-margin end markets while reducing our exposure to slower growth residential markets. Residential markets are expected to represent approximately 1/4 of 2026 sales compared to 40% in 2022, while nonresidential markets, including data centers, are expected to represent a total of 75% in 2026 compared to just 60% in 2022. Of the 25% residential exposure, 60% is repair and replacement.

Now an update on our outlook for the remainder of the year. We are increasing our full year sales and margin outlook due to our strong third quarter results and our expectations for the fourth quarter, reflecting the continued strength in data centers, better-than-expected performance in Europe. Leading indicators for new construction remain weak, although demand remains strong in data centers and is holding up in institutional markets. Higher interest rates continue to weigh on new construction activity, while inflationary pressures continue to unfavorably impact our input costs. Uncertainty surrounding the Middle East conflict and trade policy also remain a concern. Against this backdrop, we expect continued weakness in noninstitutional and residential new construction markets. Despite the uncertainty, the stability of our repair and replacement business, combined with our increasingly diversified portfolio, new products and disciplined execution support our confidence in our updated outlook.

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

Diane McClintock

Thank you, Bob, and good morning, everyone. Please turn to Slide 4, which highlights our third quarter results. Sales increased to $728 million, reflecting a 19% increase on a reported basis and a 12% increase organically, both better than expected. Growth was driven by price and volume, including strong data center demand, which more than offset the impact of our 80/20 rationalization program. The Americas region delivered strong reported growth of 19% and organic growth of 12%, driven mainly by price and volume, largely from data center sales. Our 80/20 product rationalization initiative reduced sales by approximately $8 million or a 1% impact on organic growth.

Acquisitions accounted for $35 million in sales, contributing 7 points to Americas reported growth. In Europe, reported sales increased 7% and organic sales rose 9%. Organic growth was driven by favorable pricing and higher volumes in both our OEM and wholesale businesses, while reported sales had an unfavorable foreign exchange impact of $2 million. Our 80/20 product rationalization reduced sales by approximately $1 million, slightly less than we expected. In APMEA, reported sales increased 54% and organic sales grew 30%. Organic growth was driven by better-than-expected data center sales in China as well as higher volumes in Australia and New Zealand, which more than offset continued headwinds from the Middle East conflict. Acquisitions added $6 million in sales or 17% and favorable foreign exchange contributed $3 million or 7%.

Adjusted EBITDA totaled $169 million, an increase of 32% with an adjusted EBITDA margin of 23.2%, up 230 basis points year-over-year. Adjusted operating income of $152 million increased 34% and adjusted operating margin increased 240 basis points to 20.9%. Margin expansion was primarily driven by favorable price, volume leverage and productivity gains, which were partly offset by inflation and the expected acquisition dilution of 30 basis points. Segment margin expansion was broad-based, with all 3 regions delivering meaningful year-over-year improvement. Americas increased 180 basis points to 25.5%, Europe increased 230 basis points to 14.5% and APMEA increased 170 basis points to 21.1%. And just to confirm, adjusted earnings excludes the impact of $39 million of tariff refunds received in the quarter.

Adjusted earnings per share were $3.40, representing 36% year-over-year growth with operational performance, acquisitions and tax driving the increase. The adjusted effective tax rate in the quarter was 24.6%, favorable by 120 basis points, primarily due to the prior year tax regulation changes. Our free cash flow year-to-date was $230 million compared to $216 million in the same period last year. The cash flow increase was primarily due to higher net income, including the tariff refunds received in the quarter, partly offset by an increase in accounts receivable due to higher sales, our investment in inventory to support data center demand, higher capital spend and lower tax payments in the prior year. We expect sequentially strong cash flow in the fourth quarter. The balance sheet remains strong, providing good support for our capital allocation priorities.

On Slide 5, we'll review our outlook for the fourth quarter and full year 2026. As Bob mentioned, we're raising our full year sales and margin outlook based on our strong third quarter and our fourth quarter outlook. This updated guidance assumes no change in the severity of the Middle East conflict, no further changes in our tariff structure and our adjusted earnings outlook excludes the impact of tariff refunds. We now anticipate organic sales growth of 11% to 12%, which reflects a 2-point increase to the midpoint of our previous outlook. Our reported sales are now expected to be up 17% to 18%. Regionally, organic sales in the Americas are now expected to increase by 12% to 13%, driven by price and volume, especially within data centers, more than offsetting anticipated 80/20 product rationalization headwinds of $26 million to $28 million.

In Europe, organic sales are now projected to increase by 5% to 6% as favorable price and volume are partly offset by $4 million to $5 million in 80/20 product rationalization. APMEA is now expected to achieve organic growth between 18% and 19% due to strong data center demand. Incremental sales from acquisitions are expected to be $107 million to $109 million in the Americas and $21 million to $22 million in APMEA. Foreign exchange is estimated to be a $20 million favorable impact. We are raising our full year adjusted EBITDA margin outlook to an increase of 70 to 80 basis points, a 25 basis point improvement compared to the midpoint of our previous outlook. We are also raising our full year adjusted operating margin to an increase of 70 to 80 basis points, a 25 basis point increase to the midpoint.

Margin expansion continues to come from price, volume leverage and productivity, which are expected to more than offset higher inflation and 50 basis points of acquisition dilution. Regionally, Americas segment margin is now anticipated to increase 30 to 40 basis points despite 90 basis points of acquisition dilution. Europe's segment margin is now expected to increase 90 to 100 basis points based on strong price and productivity improvements and the benefits of our France restructuring program. APMEA's segment margin is forecasted to increase by 100 to 110 basis points due to volume leverage and acquisition accretion. 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 in 2026.

Next, a few items to consider for the fourth quarter. Reported sales are expected to increase by 11% to 14% with organic sales up 9% to 12%. We anticipate organic growth of 11% to 14% in the Americas, 2% to 5% in Europe and 9% to 12% in APMEA. These estimates incorporate product rationalization headwinds under our 80/20 initiative of approximately $1 million to $2 million in Europe and $4 million to $6 million in the Americas. Incremental sales from acquisitions are projected at $13 million to $15 million for the Americas and $3 million to $4 million for APMEA. We also estimate a $2 million headwind from foreign exchange.

Fourth quarter adjusted EBITDA margin is expected to be between 21.6% and 22.2%, an increase of 20 to 80 basis points. Adjusted operating margin is expected to be between 19.1% and 19.7%, an increase of 10 to 70 basis points. Across all regions, price and volume leverage are anticipated to be partly offset by higher inflation. Additional key assumptions for the fourth 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?

Robert Pagano

Thanks, Diane. To summarize, we delivered a record third quarter with strong performance across all our regions. Our strategic investments and portfolio actions are strengthening our competitive position in attractive growth markets, particularly data centers, while helping offset continued weakness in noninstitutional and residential new construction. We've capitalized on these opportunities as demonstrated by our strong performance year-to-date, which supports our higher full year sales and margin expectations. Our strong balance sheet gives us the flexibility to continue investing in innovation, productivity and strategic M&A while returning capital to shareholders. We remain focused on deploying capital towards opportunities that support sustainable, profitable growth and long-term shareholder value.

With that, operator, please open the lines for questions.

Operator

[Operator Instructions] Your first question comes from the line of Jeff Hammond with KeyBanc.

分析師問答

Jeffrey Hammond

Great. I guess let's start outside of data center. Just how are you feeling about -- Bob, you're always kind of prudently cautious, but how are you feeling about kind of North American construction markets versus, say, like 3 months ago, given kind of the rate movement? And how is that impacting, if at all, pipeline activity? And maybe how does it inform an early view into '27? I know one of your comps was a bit more cautious on '27.

Robert Pagano

Yes. So I think with the higher interest rates and just the uncertainty, I think probably a little softer than what we thought last quarter. So I think, again, there are going to be soft markets heading into 2027, similar to what we saw, but probably slightly worse than originally planned for 3 to 6 months ago.

Jeffrey Hammond

Okay. And are you planning for that? Or are you actually seeing that on the ground as projects get deferred or delayed or...

Robert Pagano

Yes. We're starting to see that. I mean we're seeing just softness. Again, the good news is 60% of our business is repair and replace. That's holding up. We're seeing institutional markets hold up. I think it's really around the residential new construction and some of the other noninstitutional commercial markets, excluding data centers, which is strong and offsetting a lot of that. So it's nice to have a diversified portfolio that offsets some of those things.

Jeffrey Hammond

Okay. Great. And then a lot of companies talk complaining a little bit more about price cost. You guys kind of always manage that well and have great pricing power. What are you seeing near term in terms of pricing, logistics costs? And is that kind of driving any near-term price actions or any different view into '27 about how you think about kind of your normal course of price increases?

Robert Pagano

Yes. I think we're all seeing inflation, especially with the war and the commodity costs are increasing. We will be putting in a price increase in the first -- at the beginning of the year, like we always do, but nowhere near the size that we did with the tariffs, et cetera. So think about a normal price increases in the 2 percentage area as we go into next year.

Operator

Your next question comes from the line of Mike Halloran with Baird.

Michael Halloran

So we'll start on the data center side of things. Maybe just think about the durability of the dynamics out there. It's probably way too early post election to think about how things might change. But maybe talk about what your visibility looks like based on the current backlog, current conversations? How far does that stretch out? And as far as product breadth, et cetera, goes, do you feel like there's more that you can do within the data center side than you're doing today? Is there an opportunity to expand the penetration there? Any thoughts on that side as well?

Robert Pagano

Yes. So like you said, it's early days in the data center, a lot of discussion going on right now. But look, we don't expect the midterm results to materially change the underlying demand for data center infrastructure, right? So it's out there and the hyperscalers are going to have to work with communities to figure that all out. But regarding near-term demand, we're talking to our contractors and installers, and their book of business is solid for the next couple of years for sure. And our portfolio continues to expand based on our working with them and looking at how do we sustainably help them solve their water problems. So again, the team is doing a great job. You're obviously not going to see the growth we saw from 2025 to '26 because we've had a lot of new products that we have a full year run rate on. But again, pipeline is good and visibility is good, and we'll be watching and monitoring as it gets out into the latter years.

Michael Halloran

Balance sheet side of things, maybe just more comments on what the market looks like, how good your pipeline is on the M&A side of things and what valuations are looking like out there?

Robert Pagano

Yes. So the M&A, as you know, you never can predict the timing of it. We have a strong pipeline out there. We're going to be disciplined like we always are in making sure we create shareholder value with those acquisitions. So again, we're concentrating our capital allocation on our internal investments, investing in inventory for data center growth, factory automation and then clearly driving M&A where it makes sense and where we can create value. So again, teams are working hard, a lot out there, and we'll be disciplined, Mike.

Operator

Your next question comes from the line of Nathan Jones with Stifel.

Nathan Jones

I got on a bit late, Bob. So if I ask anything you already answered, you know, you can just tell me to be quiet. I guess I wanted to ask first a little bit about Europe. 9% organic growth in Europe. It's been a little while since we've seen some really strong growth in Europe. So maybe you could talk a little bit about what's driving that up and how sustainable you think that is?

Robert Pagano

Yes. So our team in Europe has been doing a great job. And certainly, we have easier comps last year, there was some destocking going on still in the third quarter. But the team has done a nice job of realizing price. Part of that's through the 80/20 initiatives and also, they've done an incremental price increase given the commodity situation and tariffs -- or not tariffs, the transportation costs there. So they've been holding firm on that. In addition, we're seeing heat pump incentives again, which is driving incremental growth. So the team is capitalizing on that, balancing that out there, but doing a nice job with it. So we changed our outlook, and we're expecting some growth in the fourth quarter with that team. But as you know, I'll always be conservative and cautious on Europe as we make sure we get our cost structure aligned.

Nathan Jones

Absolutely. Maybe just on the data center business, how much of what you expect to generate in revenue is currently in backlog for 2027? And how much is things that you book in 2027 and then ship? I'm just wondering like how close a finer point can you put on what you'd expect growth in data centers to be in 2027 versus things that you've still got to go out and get?

Robert Pagano

Yes. So again, we have shorter lead times. We don't talk about our backlog. I would just tell you, generally, it's up, and we have stronger visibility than we've had before. But certainly, we've had huge growth. So we talked last quarter that we think the market is growing in the 15% to 20% growth rate assumptions. And I think for now that, that's a nice thing to assume as we're going into next year. So that's what we're looking at. We've had huge growth this year, but we're going to be lapping some very big hard comps as we go into 2027.

Nathan Jones

And then we'll have to layer on your market share initiatives for that on to that 15% to 20% next year?

Robert Pagano

Again, we've done large market share gains this year. So let's see how the team goes with our new products. But as you know, we'll get more than our fair share.

Operator

Your next question comes from the line of James Ko with Jefferies.

Jae Hyun Ko

Bob, I guess, data centers like touch on data centers, it was like 8% of sales in the first half. Obviously, there was some pull forward and you kind of guided to mid- to high single digit for the year. Where did kind of 3Q land? And does the raised kind of guidance put you at the higher end for the full year?

Robert Pagano

Yes. It's more on the high single digits in the quarter, and we're reflecting that for the rest of the year versus we were saying mid- to high. Now we're on the high end of that. Team is doing a nice job.

Jae Hyun Ko

Got it. And kind of as a follow-up, I think last quarter, you kind of gave out that like 25,000 to 100,000 content per megawatt with kind of liquid cooling and CoolVault kind of at the higher end. Is the product mix kind of moving toward the higher end? And are you guys kind of contemplating any new stainless or liquid cooling products like going into next year? Or have you launched anything new?

Robert Pagano

We launched new products every quarter. So the answer is yes, and they replace older type products. But still in the facility water is our strength. But as things are moving more towards liquid cooling and the technical water side, we're participating with that. So yes, technical water is growing, but it's after a lower base. So the numbers on a percentage basis, it's high, but the dollar volume is lower. And we're seeing more of that in the Asia Pacific region. We're seeing the China market move to that much faster than we're seeing in North America, but we're starting to see that starting to follow along with that.

Operator

Your next question comes from the line of William Grippin with Barclays.

William Grippin

I guess just a general question to start. Could you just remind us where you sit in terms of the process of new construction just in terms of your sales? Are they more coincident with current year new construction starts? Or would you say that new construction starts are more of a leading indicator for your sales?

Robert Pagano

Construction starts are certainly a leading indicator. We look at ABI, we look at Dodge. We look at permits. So we're watching construction put in place, et cetera. So we're continuing to watch all that, and those are our leading indicators. And some of them are lagging anywhere for up to a year to 18 months on some of these. So we watch those closely. And what we're seeing certainly in all of those is it's showing strong data center growth. Institutional is holding up. And then we're seeing softness in the other markets on a new construction basis.

Diane McClintock

And Will, if your question was when does our content go into new construction? We start at the beginning of the project with the drains. So our content is really going in across the duration of the entire project and finishing out with some of, as an example, our front-of-the-wall products.

William Grippin

Got it. Very helpful. And then just last one here on capital allocation. Obviously, the stock has done well this year. How are you thinking about the balance or relative attractiveness of continued share repurchase activity versus M&A given what you might be seeing in the pipeline and versus organic growth initiatives?

Diane McClintock

Yes. I think our priority is still M&A. Right now, we're focusing on internal investments to support our data center initiative, our new product development and automating our factories to drive productivity. But M&A is going to be a priority. We continue to look at the funnel, as Bob said. And we'll continue just to maintain our share repurchase program consistent with the way it is now, which is really just buying back the creep from the stock options. And we'll maintain our dividends as we have. We're probably going to have to look at increases just trying to stay at the median of our peer group, but those will be our priorities.

Operator

Your next question comes from the line of Brian Lee with Goldman Sachs.

Brian Lee

Kudos on the solid execution. Maybe just to start with one data center one and then I'll do one non-data center one. On the APMEA data center growth and opportunity, pretty jump -- pretty big jump here in the quarter. Can you kind of elaborate a bit on what you're seeing there? Is that a function of easier comps? Or are you seeing some share gains? Or just any thoughts on the sustainability of the growth out there?

Robert Pagano

Yes. Our Asia Pacific team is doing a great job, especially in the China market, where we've had some really large projects in Q3. And some of those projects have been accelerated by the customers. So team is doing a great job. The majority of the growth has been in -- for Asia Pacific was driven by data centers, offsetting the softness in Middle East as well as New Zealand and Australia had a decent quarter themselves.

Brian Lee

Okay. That's helpful. And then I guess outside of data centers, I know you're not guiding for '27. But as you think about kind of the puts and takes of the growth outlook moving forward here, given, as you alluded to, data centers probably aren't going to grow as fast as they did this year. What businesses do you expect could be some of the bigger contributors to organic growth in '27, especially if new construction remains soft?

Robert Pagano

Yes. I think it's going to be the institutional side of the business. That's been holding up in this marketplace. So that's where the strength is going to be. The other markets are going to be soft. Again, it's a regional market. So each region is different, but that's where the softness. But generally, the overall market, as I said earlier in one of the questions, I think it's going to be slightly softer than it was in 2026. And again, we're proud of our portfolio that allows us to diversify and really focus on where the growth opportunities are.

Diane McClintock

And remember, our -- 60% of our portfolio is repair and replace, so that tends to follow GDP. So we'll have that support going forward as well.

Operator

Your next question comes from the line of Jeff Reive with RBC Capital Markets.

Jeffrey Reive

Some of the larger HVAC OEMs have actually recently flagged pushback on pricing from the channel despite persistent inflation. For your HVAC and heating products specifically, are you seeing anything similar like of that resistance from the distributors to contractors? Or has your experience been different just given the nature of your products?

Robert Pagano

Yes. We're not seeing that. I mean, obviously, it's always competitive given the market dynamics, but nothing extraordinary than we see in the normal course of business.

Jeffrey Reive

Okay. Great. And then maybe just switching gears. Your 4Q APMEA segment margin guidance down 50 bps to up 10 bps. I think that one stood out as the one that was kind of below consensus. Just walk us through the key drivers, kind of what's driving the year-over-year margin degradation or deceleration.

Diane McClintock

Yes. A big piece of that is really just volume deleverage. And then on the intercompany side, we tend to get some volume deleverage there, and we're going to see that in the fourth quarter.

Operator

Our last question will be from Walt Liptak with Seaport Research Partners.

Walter Liptak

Great quarter, guys. I wanted to ask about the channel inventory with the commentary around residential being a little bit weaker. I wonder how that, how your customers are reacting with that and what the fourth quarter inventories would be like? And then is there anything on the reactionary or cost side that you would do related to that weaker residential to kind of mitigate or shore up profits?

Robert Pagano

No, we're not seeing any major adjustments in residential. It's been soft all year and for the last couple of years. So I think the inventories have been adjusted accordingly. And again, regarding cost actions, we're always driving productivity every year inside of our business as well as with our 80/20 initiatives, making sure we're focused on profitable growth. And certainly, some of the moves we've been taking have been moving us to more profitable data center overall growth. So again, team's focused on that, and we're proud of being in front of the price cost assumptions in the market.

Walter Liptak

Okay. Great. And then maybe just a last one on data center. Some of the companies have been talking about capacity or supply chain-related issues. I wonder if you could talk about sort of the nature of your data center-related products and if you've got the supply chain and capacity that you need to meet the demand.

Robert Pagano

Yes. We've been building capacity both inside of our factories. We've done plant expansions in China. We're leveraging some of our new acquisitions, our Superior Boiler one to help us with our CoolVault tanks and expanding there as well as expanding our supply chain with our partners. So again, team is on it. It -- they've been aggressively doing that, and we've been investing capital expenditures where we see appropriate to allow us to get the returns for our shareholders. But overall, we're on top of the situation and managing this growth.

Operator

There are no further questions at this time. I will now turn the call back to Ray for closing remarks.

Ray Nash

Thank you for joining us today. We appreciate your continued interest in Watts and look forward to speaking with you again during our fourth quarter earnings call in early February. Have a great day and stay safe.

Operator

This concludes today's call. Thank you for attending. You may now disconnect.