Watts Water Technologies, Inc.

Thank you for standing by. At this time, I would like to welcome everyone to today's third quarter 2025 Watts Water Technologies earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. Once again, star one. And if you'd like to withdraw your question, simply press star one again. Thank you. I'd now like to turn the call over to Diane McClintock, Senior Vice President of Investor Relations. Diane?

Thank you, and good morning, everyone. Welcome to our third quarter earnings conference call. Joining me today are Bob Pagano, President and CEO, and Ryan Latta, our CFO. During today's call, Bob will provide an overview of the third quarter, a business update, and an update on our outlook for 2025. Ryan will discuss the details of our third quarter performance, and provide our outlook for the fourth quarter and for the full year. Following our remarks, we will address questions related to the information covered during the call. 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. 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. With that, I will turn the call over to Bob.

Thank you, Diane, and good morning, everyone. Please turn to slide three, and I'll provide an overview of the quarter. We're pleased with our strong third quarter results, which exceeded expectations. Watt's multi-year track record of success would not be possible without the dedication, collaboration, and support of our team members and business partners, and I'd like to express my sincere gratitude. Organic sales increased 9% in the quarter, with favorable price in the Americas, volume, and pull-forward demand more than offsetting a decline in Europe. We also benefited from incremental sales from our ICON and Easy Water acquisitions and favorable foreign exchange movements. Adjusted operating margin of 18.5% was better than anticipated due to favorable price, volume leverage, productivity, and mix. Year-to-date free cash flow continues to be solid, and we expect to generate seasonally strong free cash flow through year-end. The balance sheet remains healthy, and we have ample flexibility to support our disciplined capital allocation strategy. On that note, we're excited to have acquired Hawes Corporation, a leading global brand providing emergency safety and hydration solutions for use in industrial, institutional, and non-residential end markets for more than 120 years. The addition of HAWS innovative specified product portfolio enhances our value proposition and broadens our capabilities. HAWS has annual sales of approximately $60 million and is expected to be modestly diluted to margins for the first year, while we integrate and realize the benefits of synergies leveraging the one watts performance system. I'm also pleased with the integrations of Bradley Joe Sam icon in easy water, which are progressing well in synergy realization is tracking ahead of our original estimates. We continue to proactively manage tariff related challenges through strategic pricing and supply chain optimization. The tariff environment remains uncertain, but based on tariffs in effect as of today. Our global direct tariff impact in 2025 is estimated to be $40 million, consistent with our guidance at the last earnings call. We have successfully handled the cost impact so far in 2025 and plan to continue doing so. Now, an update on our outlook for the remainder of the year. Due to our strong third quarter performance and our expectations for the fourth quarter, we are increasing our full-year sales and margin outlook. Tariff-related price increases, foreign exchange movements, strong data center sales, and the acquisition of HAWS are all favorable relative to the sales outlook we provided in August. However, there's ongoing uncertainty around the impact of supply chain disruptions and tariffs, including the effect on new construction and global GDP, as well as around the impact of the U.S. government shutdown. As a reminder, GDP is a proxy for our repair and replacement business, which represents approximately 60% of total revenue. With that, let me turn the call over to Ryan, who will address our third quarter results and our fourth quarter in full year outlook in more detail.

Ryan? Thank you, Bob, and good morning, everyone. Please turn to slide four, which highlights our third quarter results. Sales reached $612 million, setting a third quarter record for Watts. This reflects growth of 13% on a reported basis and 9% on an organic basis. Strong organic growth in the Americas more than offset a decline in Europe and a flat quarter in apnea. In the Americas, reported sales were up 16% and organic sales were up 13%, exceeding expectations. Growth was driven by favorable price, volume, and approximately 11 million of pull-forward demand. Sales from the ICON and Easy Water acquisitions added another 11 million or three points to America's reported growth. Europe reported sales were up 4% while organic sales were down 2% as market weakness more than offset price. Reported sales in Europe benefited from favorable foreign exchange. APMEA sales decreased 1% on a reported basis and were flat on an organic basis. Growth in Australia and the Middle East was offset by declines in China and New Zealand. Compared to prior year, adjusted EBITDA of 128 million increased 21%. An adjusted EBITDA margin of 20.9% increased 140 basis points. Adjusted operating income of 113 million increased 22%. An adjusted operating margin of 18.5% was up 140 basis points. Adjusted EBITDA and offering income were supported by favorable price, leverage in the Americas, and productivity. These benefits more than offset inflation, volume deleverage in Europe, tariffs, and investments. Our America's segment margin increased 180 basis points to 23.7%. Europe's segment margin increased 160 basis points to 12.2%. and APMEA segment margin increased 90 basis points to 19.4%. Adjusted earnings per share of $2.50 were up 23% compared to the prior year with contributions from operations, acquisitions, foreign exchange, and reduced interest expense. The adjusted effective tax rate in the quarter was 25.8%, an increase of 60 basis points relative to the third quarter of 2024. This increase was primarily due to the recent changes in U.S. tax regulations related to the One Big Beautiful Bill Act. For GAAP purposes, we incurred 1.9 million of pre-tax restructuring charges related to the exit of a facility in France and other actions within Europe. Our free cash flow year to date through the third quarter was 216 million compared to 204 million last year. The cash flow increase was driven by higher net income and lower tax payments resulting from the change in U.S. tax regulations, which more than offset inventory investment and increased CapEx. We expect seasonally strong free cash flow in the fourth quarter and are on track to achieve our full-year goal of free cash flow conversion greater than or equal to 100% of net income. The balance sheet remains strong. Our quarter-end net debt-to-capitalization ratio was negative 15%, and our net leverage is negative 0.5x. Our solid cash flow and healthy balance sheet continue to give us capital allocation optionality. Now, on slide five, let's review our assumptions about our fourth quarter and full year outlook. As Bob mentioned, we are raising our full year sales and margin outlook. This is driven by a strong third quarter, incremental price, favorable foreign exchange, and strong sales and data centers. We are also benefiting from incremental sales of approximately $10 million related to the acquisition of Haas Corporation, which will be included in our Americas segment. We now anticipate organic sales growth of 4% to 5%, a three-point increase to the midpoint from our previous outlook. Our reported sales growth is expected to be up 7% to 8%, a four-point increase from our previous outlook. This reflects incremental revenue from the Haas acquisition and favorable foreign exchange impacts detailed by region in the appendix. Regionally, we anticipate stronger sales growth in the Americas and Europe, while APME is projected to be slightly below our previous outlook. We are raising our full-year adjusted EBITDA margin outlook to a range of up 140 to 150 basis points, an increase of 55 basis points from the midpoint of our previous outlook. We are also raising our full-year adjusted operating margin expansion to a range of up 140 to 150 basis points, an increase of 65 basis points from the midpoint of our previous outlook. Our updated outlook includes 10 basis points of dilution from the HAWS acquisition. It also assumes $40 million in estimated direct tariff costs, consistent with our previous guidance. This is based on tariffs in effect as of today. Our free cash flow expectation remains in line with our previous outlook. We expect to deliver free cash flow conversion of greater than or equal to 100% of net income in 2025. Next, a few items to consider for the fourth quarter. On an organic basis, we expect sales growth of 4% to 8%. Regionally, we expect high single-digit growth in the Americas, low single-digit growth in Apnea, and slight declines in Europe. The sequential slowdown in the Americas reflects the pull-forward demand discussed earlier. We expect approximately $20 million in incremental sales in the Americas from the ICON, EasyWater, and HAWS acquisitions. Additionally, we estimate a foreign exchange tailwind of approximately 10 million in the quarter. Regional assumptions are detailed in the appendix. Fourth quarter adjusted EBITDA margin is expected to be in the range of 19.6 to 20.1%, an increase of 30 to 80 basis points. Adjusted operating margin is projected to be between 17 and 17.5%, or up 20 to 70 basis points. Price and volume leverage in the Americas should more than offset volume B leverage in Europe and dilution from the HAAS acquisition. The sequential margin decline reflects normal seasonality and the impact of the HAAS acquisition. Other key inputs for the fourth quarter and full year can be found in the appendix. With that, I'll turn the call back over to Bob before we move to Q&A.

Bob? Thanks, Ryan. On slide six, I'd like to summarize our comments before we address your questions. Our third quarter performance was better than anticipated with record third quarter sales, operating income, and earnings per share driven by strong performance in our Americas region and better than expected results in Europe. We continue to execute well amid an uncertain trade environment, and we expect that price and our global supply chain strategy will enable us to continue navigating effectively. As a result of our strong third quarter performance and fourth quarter expectations, we're increasing our full-year sales and margin outlook. We successfully closed on the acquisition of Haas Corporation earlier this week and look forward to welcoming them to the Watts family of brands. Our balance sheet remains strong and provides ample flexibility to support our capital allocation priorities. I'm confident in the resilience of our business and our team's ability to execute despite the uncertain environment, as we continue to create durable, long-term value for our shareholders. With that, operator, please open the line for questions.

Thanks, Bob. And at this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Once again, star one. In the interest of time, we ask that you please limit your questions to one primary and one follow-up question. Then if you have additional questions, you can rejoin the queue. Thanks in advance. And we'll pause just a moment to compile the Q&A roster. All right, looks like our first question today comes from the line of Nathan Jones with Steeple. Nathan, please go ahead. Good morning, everyone. Good morning.

Maybe just starting on the 11 million of demand pulled forward into the third quarter. I assume that's probably ahead of price increases related to the increase in copper tariffs. And so that would then lead me to the question of, can you talk about what the price contribution was in 3Q? And then I assume the price contribution in America's in 4Q will be somewhat higher due to those tariffs.

Yeah, correct. It was $11 million, as you said, as we talked about, and about 6% was our price.

That's in 3Q. Do you have an expectation for 4Q? I assume there's been more price put through to cover those tariffs.

Yeah, slightly higher than that. Okay, fair enough.

I guess the second question I wanted to ask was on this Hawes acquisition. Obviously, the questions are going to be around the drinking water business. There's been pretty robust growth been seen by one of your competitors in that business, but they do have very high market share in that. And based on Hawes revenue, pretty low market share for them. How do you go about competing with the LK business specifically in that drinking water business and look to grow the market share for that business?

Well, Nathan, as we talked about it, Haas is a $60 million sales company. About 20% of its business is in the hydration market. Look, it's a company that's been around a long time, 120 years, great brand known for their quality and customer service. You know, they're niche in their hydration area, mainly on the West Coast. So we'll be evaluating that. But we primarily bought that business for their safety product, which complements our Bradley business.

Maybe then just as a final question, you could talk about how it complements the Bradley business. I did notice that. And whether or not you can kind of marry those two together to generate revenue out of those businesses. And I'll leave it there. Thanks.

Yeah. Yeah, so they make bigger sizes of safety showers and equipment and other products that we don't have. So it's complementary with some of the gaps that we have and gives us the full portfolio to leverage in our portfolio. So we believe it's a nice growing market and something we can leverage going forward.

Great. Thanks for taking the questions.

Thank you.

Thanks, Nathan. And our next question comes from the line of Mike Halloran with RW Baird. Mike, please go ahead.

Hey, morning, everyone. Hey, Bob, could you just dig into how you're looking at the end markets here today and how you're thinking about the trajectory next year? I think primary focus for the question would be on the non-res, res pieces and how you see those playing and going into next year in North America, as well as maybe a generic comment on Europe as well.

Yeah. So, you know, let's look at Q3. We basically saw similar markets than we saw in Q2. So, you know, we'll be watching, I think, in general, you know, multifamily, residential, you know, which single family, again, slow growth. We're seeing probably similar to that going into next year. It's too early to talk about next year at this point in time. But, you know, I think we're all looking at ABI, Dodge Momentum, all the leading indicators. So, 2026 is probably going to be a slow growth market similar to 2025 at this point in time. On the question on Europe, it was nice to see Europe finally getting close to bottom like we were projecting, minus 2% organically for us against easier compares. But it's nice to see we're finally getting to the bottom of this. I don't think you'll see new construction growth really grow significantly in Europe. until, you know, this war, the war in Ukraine subsides and, you know, you know, each one of the governments understanding how much they have to fund that. So again, continued slow growth assumptions in Europe.

Thanks for that, Bob. And then secondary questions, just maybe to put some takes in Joe that drove the sequential margin improvement in Europe. But if you look at the guide for Europe margins up substantially, I guess the primary question, though, is, is that the right run rate to think about for going into next year, the EBITDA margin implied for the European segment for the fourth quarter? In other words, are you back at the previous run rate now that you've gotten a chunk of that restructuring done and hopefully a little bit more normal mix?

Yeah, that's the goal, Mike. I mean, certainly the team has been doing a great job of You know, getting through the restructuring closing of the site, we're now complete adjusting their cost structure to the current market environments. And, and the team, um, is doubling down and relooking on an 80, 20 basis. Um, you know, the markets because they've shifted so much over the last couple of years. So teams really looking at that. We'll provide a little more guidance as we move into, uh, 2026. Thanks, Bob.

Appreciate it.

Thank you.

Thanks, Mike. And our next question comes from the line of Jeff Hammond with KeyBank. Jeff, please go ahead. Hey, good morning, guys.

Morning, Jeff. You talked about pricing 3Q, 4Q. I'm just wondering, as we look forward into 26, what you think carryover price is, at least into the first half. And then, as you contemplate your normal course pricing for 26, is that or more normal kind of view, or does it continue to be elevated with inflation tariffs, et cetera?

Well, Jeff, I mean, most of the price increases happened in the, you know, starting in April, et cetera. So there'll be some carryover because we've had multiple price increases during the year with the adjustments of tariffs. We're all, you know, tariffs, there's a fluid thing, as we all know. So we'll be adjusting and looking at tariffs as we go forward into next year right now. So again, we're watching it very closely. We should have some favorable price, certainly in the first quarter, as we continue to roll off some of those. And as you know, we had both pre-buy in Q2 and Q3 now of this year. So again, we'll be providing more information in 2026, but there'll be some carryover into next year.

Okay. And then, um, you know, we, we talk more and more about data center, obviously booming. Um, just wondering if you can, I guess, size that business for 2025 year, what, what you think, or for this year, what you think it can be, you know, in a few years. And, and I think most of your exposure historically was Asia. A lot of the demands happening in the U S and I'm just wondering about, you know, your success, um, you know, bringing that over to the North American market.

Yeah, Jeff, I would say our North America team is going to surpass Asia Pacific this year. You know, we've been growing very quickly in North America. We'll size it at the end of this year, but I can say that it's growing high double digits and it's one of our fastest growing markets in North America and in Asia Pacific. So we'll continue to double down on that. It's offsetting some of the softness in the residential side of our markets.

and it's nice complementary to what we're doing in it you're seeing it come through our results in q3 okay and then just last one um you know multi-family just update there it seems like um you know maybe some bottoming and things getting better and you know i guess it depends on on where you are in the you know in the build process but just an update there

Yeah, and the multifamilies, again, it's been a soft market. Like you said, there's various regions of the country that are still booming. But certainly when you look at the single housing crisis where there's not enough homes and unaffordability, we're seeing projects in the multifamily, um, but it's not, uh, and there's, there's shovel ready projects ready to go. People are finishing what they've started. I think they're waiting for some certainty on the tariff front and making sure that calms down as well as waiting for some lower interest rates. So we, we think it's close to bottoming out and, uh, we'll watch carefully through there, but it, but it's not been a robust market, but, uh, We're hopeful that it'll begin getting better as interest rates start coming down next year.

Great. Thanks for the color, guys.

Thanks, Jeff.

Thank you, Jeff. And again, a reminder, folks, if you'd like to ask a question, it is star one on your telephone keypad. Once again, star one. And our next question comes from the line of Ryan Connors with North Coast Research. Ryan, please go ahead.

Good morning. Thank you. Most of my questions have been answered. You've been pretty comprehensive here, but I did pick up there, Bob, through the phone on your tone around tariffs and the increased uncertainty there. I think you're kind of alluding to the SCOTUS case, which I don't follow these things too closely, but apparently it didn't go all that well and there's a chance that maybe the whole thing could be just disallowed. So obviously that would be a very disruptive outcome given all the price you've taken related to tariffs. So Without getting too detailed, I mean, just conceptually, if we were to hypothetically assume tariffs just go away and SCOTUS says no go, what does that conceptually look like? Do you keep the price that you've gotten? Do you give that back? Just curious conceptually how you would look at that kind of a scenario.

Yeah, Ryan, that's a great question. Fundamentally, I have a hard time believing that the government is going to give anything back to any of us. And even if they lose the case, it'll be interesting to see the appeals and the potential adjustments. So we're watching it carefully. It would be very complicated, as you can imagine, because our pricing has not just been because of tariffs. Copper prices have been up double digits. General inflation has been high, labor, et cetera. So it's a very complicated situation. item and uh we're watching this very closely and uh and we'll adjust based on what the market does at this point in time but it's a it's a very complicated as you said and uh you know i think a lot of people are trying to figure this out and uh we'll just have to wait and see how it plays out yep i mean just as a follow-up to that would it would it be would it be crazy to think that okay the price you've put in the market's been accepted in the market it's been

you know, it's kind of there and you can sort of keep that. And even if you don't get any retroactive credits that, that maybe that, that scenario could actually be a margin positive going forward. I mean, is that, is that, is that my way off base there?

Yeah, that's, it's such a difficult question, right? And it just, there's so many different variables from that point of view. I think we're all going to have to wait and see. And, and have many different scenarios to understand what market pricing and what's happening on this. So, again, stay tuned. I think we're all watching carefully.

Got it. Thanks again for your time. Thank you.

Thanks, Ron. And our next question comes from the line of Joe Giordano with TD Count. Sorry about that, Joe. Please go ahead.

Hi, good morning. This is Chris on for Joe. You mentioned the uncertainty surrounding the government shutdown. Just just wondering if you could elaborate on what parts of the business that you are seeing or expect to potentially see impact from that that shutdown.

It's primarily on the residential side, right? Anytime there's uncertainty, people withhold and, you know, slow down things. So I think it's just one of those things, just an added variable. We're watching very carefully. Nothing big to report on at this point in time, but something that's certainly out there and it's just normal process. People pull back when they're uncertain and, you know, we'll see how that goes through. Hopefully they'll get that resolved very soon.

Great. Thank you very much. And with HAWS, is there any difference in how they go to market versus your predominant channels and any opportunity to sell through your existing channels?

It's very similar to our current process, you know, through wholesalers and distributions. And so, yeah, no, it's very similar. We can leverage our channels. The nice thing about HAWS is they have more international exposure than we have, so that's an opportunity for us to leverage.

Great. Thank you very much.

Thank you.

All right. Thanks, Joe. Excuse me, Chris. Hey, one final prompt, ladies and gentlemen. Again, star 1 on your telephone keypad if you'd like to ask a question. Once again, star 1. And our next question is from the line of Andrew Krill with Deutsche Bank. Andrew, please go ahead.

Hi, thanks, Martin, everyone. I want to ask another one on HAWS. Can you provide any sense of the historical growth rates there, what you expect looking forward? And then on margins for the business, I think if we do the math on the dilution, is it correct it's around like 10% even margins initially as you integrate the business? And then Like over time, any reason this can't be a Watts average or better margin business? Thanks.

Yeah. So in general, I would say they're similar to the institutional growth, which is above, let's call it our growth of our traditional portfolio that includes residential. I would say their EBITDA is in the mid to high single digits right now. And we certainly believe over the next several years, we'll be able to get them to the Watts overall margin. So teams are on it really early at this point in time. We're mapping out great brand, great quality, and great people. So we're excited to leverage that going forward.

Great. And then switching back to Europe, I know the margin improvement is encouraging a pretty nice inflection. But more medium term, I think the prior high watermark was about 16% even margin. So just, like, can you get there? Do you think if volumes remain sluggish around where they are, you know, just with the new initiatives you have in place? Or I think we're getting back to that. Like, one, is it possible? And do you need volume leverage to get there? Thanks.

Well, certainly volume leverage would help, and certainly we're taking cost structure. I think the team is relooking, as I said earlier, at the 80-20, because the markets have changed significantly since we did a very detailed 80-20 on that. We're reshuffling that, and we'll provide more guidance, but that should help our margins going forward, but it takes a while to unravel some of the contracts we have with customers. But team's on it. We're looking at it, I would say, You know, our aspirations are to get back up to those levels. But as you know, I'm always cautious on Europe at this point in time, given the market dynamics and given the uncertainty with the conflict in Ukraine that's having an impact on local incentives, et cetera. So watching it very closely, the team's on it. But it's nice to see. I think we're starting to hit that bottoming out at this point in time.

Great. Thank you.

Thank you.

Great. Thank you, Andrew. And there are no further questions at this time, so I will now turn the call back over to Bob Pagano for closing remarks. Bob?

Thank you for taking the time to join us today. We appreciate your continued interest and watch and look forward to speaking with you again during our first quarter earnings call in early February. Have a good day and stay safe.

Thank you. And this concludes today's conference call. You may now disconnect. Have a great day, everyone.