Watts Water Technologies, Inc.

tariffs, and acquisition dilution of 80 basis points. Segment margins were as follows. Americas increased 80 basis points to 24.2%, and apnea increased 120 basis points to 18.7%, while Europe decreased 20 basis points to 13.7%. Adjusted earnings per share equaled $3.04, representing a 28% year-over-year increase with operational performance acquisitions, tax, and foreign exchange gains outweighing higher net interest expense. The adjusted effective tax rate in the quarter was 24.2%, down 30 basis points compared to the first quarter of 2025, primarily due to a higher tax benefit from the vesting of stock compensation awards that occur in the first quarter of each year. Our free cash flow for the quarter was $7 million compared to $46 million in the first quarter of last year. The cash flow decrease was primarily due to the increase in accounts receivable due to higher sales volume, increases in and timing of our annual customer rebate payments, and an increase in inventory related to incremental tariffs and our strategic investment in inventory. We expect sequential improvement in our free cash flow and are on track to achieve our full year goal of free cash flow conversion greater than or equal to 90% of net income as previously communicated. We have a strong balance sheet and solid cash flow, giving us flexibility in executing our capital allocation strategy, including the announced 21% increase in our dividends that will begin in June. On slide five, we will review our outlook for the second quarter and full year 2026. We are reaffirming the full year 2026 outlook we presented in February, which reflects the market factors Bob discussed. It assumes the Middle East conflict is short-term in nature, The current tariff structure remains in place for the remainder of the year, and there are no IEPA tariff refunds. For the full year 2026, we are maintaining both our consolidated and regional sales outlooks. Consolidated organic sales growth is expected to be between plus 2% and plus 6%, and our reported sales growth is expected to be between plus 8% and plus 12%. We are also maintaining our full year adjusted EBITDA and adjusted operating margin outlook. Next, a few items to consider for the second quarter. Reported sales are expected to increase by 10 to 14%, with organic sales up 4 to 8%. We anticipate mid to high single-digit growth in the Americas, despite the tough compare to the second quarter last year, which included an estimated 20 million of pull-forward sales. into the second quarter from the third quarter due to the timing of price increases. We expect a low single-digit decline in Europe and low to mid-single-digit growth in apnea, with our expected data center sales offsetting the direct 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 25 to 30 million for the Americas and around 5 million for APMIA. We also estimate a foreign exchange benefit of approximately $5 million. Second quarter EBITDA margin is expected to be between 22.3 and 22.9%. Operating margin is expected to be between 20 and 20.6%. Price and volume leverage in the Americas and APMIA are anticipated to be offset by acquisition dilution of approximately 70 basis points. In addition, last year we had a non-recurring price cost benefit of approximately $6 million in the second quarter, in addition to the volume leverage on the estimated $20 million of sales pull forward that together are a 120 basis point headwind to margins in the second quarter. Additional key assumptions for the second 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 had a strong start to the year with record first quarter sales and earnings. Our portfolio spans diverse end markets, and we're actively reallocating resources towards areas of strong demand, including institutional and data centers. Importantly, approximately 60% of our sales are driven by repair and replacement activity. which provides a consistent foundation for revenue and cash flow generation over time. We remain nimble and are confident in our ability to execute through dynamic market conditions. We're maintaining our full year outlook despite the macro and geopolitical uncertainty. Our balance sheet remains strong and provides ample flexibility to support our capital allocation priorities. We believe we are well positioned to deliver on our financial commitments create value, and drive profitable growth over the long term. With that, operator, please open the lines for questions.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to star your question, simply press star 1 again. We'll go to our first question from Nathan Jones at Stiefel.

Morning, everyone. morning i guess i'll ask the dumb question about the full year guidance um i know you said bob you're you know it's only one quarter in there's a lot going on uh but you did beat the first quarter by a long way and the second quarter guidance is is a fair way ahead of consensus as well is there any kind of assumption in here that you're making i guess maybe the mro business slows down a little bit with global gdp boy said it's pretty well correlated with that or Is there any reason to think that the second half is likely to be any weaker than you thought it was going to be three months ago, or this is just purely being conservative given the macro environment that we're in?

Thanks, Nathan, for the question. Look, I think it's being prudent right now. I think we've dialed in Q2, and we feel really confident about that. And it just depends on how long the war goes on at this point in time, and does it impact future demand in the future. But If it's over with quickly and everything else, I think we have opportunities in the second half. But let's talk about that in three months, and we'll have a better answer for you at that point in time.

Fair enough. My second question is on the topic du jour of data centers and what's exposure there. You said it doubled in the first quarter. Can you maybe talk about any details you can give us on how big this is, what the contribution to the overall what's growth is, You know, how big the addressable market is, how much you think you can grow it over the next few years, any more details you can give us around that kind of thing. And thanks for taking the questions.

Yeah. Regarding data centers, look, it's an over a billion dollar addressable market that we have in front of us. We ramped up last year. You know, so the first half of this year is going to have better, easier comps than the first. You know, last year we ramped up and the second half was stronger. than the first half of last year. So our goal is to do high double digit increases in data center for the year. And we believe we're well on our way to do that at this point in time. Teams are doing a great job. We're innovating new products and the customers are happy with our performance. So we're excited about this opportunity and we're doubling down on it.

Is it accretive to the company margins?

It is. Overall operating income, very much so. Some movements on the gross profit margin with lesser SG&A costs, but overall accretive for overall watts.

Thanks for taking the questions.

Thank you.

We'll move next to Mike Halloran at Baird.

Good morning, everyone. Good morning, Mike. Hey, so certainly now is the answer to the first question Nate asked there. on the conservatism in the back half of the year. So just keeping that as a backdrop, maybe just help understand how you're talking about margin cadence and price cost, et cetera. Guidance the back half of the year implies lower margins front half, but it feels like if this trajectory continues, there's room there. But maybe just talk to how you're thinking about price costs, particularly in the context of recent inflation and then what you're doing on the pricing side.

Yeah, so we've been, as you know, we always stay in front of the price cost. And we believe with all the movements and tariffs and everything else, we're still ahead of that. Regarding, let's call it the cost of inflation as an impact of the war, our international units have put in additional price increases because they're more impacted than we are in the U.S. And right now we're evaluating in the U.S., we're watching very closely how long This war will continue in fuel costs, et cetera, going up. And we're prepared to put an additional price increase if that, you know, if required. Now, regarding your discussion regarding margins, certainly with the second half volume assumptions, which is flattish in the second half, If there's opportunities there, that certainly should have opportunities from a margin point of view if we increase our outlook in the second half. Again, all depends on the war and the longer-term impacts of it. As we said earlier on the call, about 2% of overall watch sales is in the Middle East. We've addressed that in the second quarter, about an $8 million headwind in Q2. We're just watching to see the bigger impact in the second half if this war continues.

Thank you for that. And then maybe just an update on the 80-20 side of things, both in terms of the progress with the initiatives, expectations for drag on the sales side and how that plays out through the year, and then where you're starting to see the benefits so far.

Yeah, from an 80-20 perspective, we'll expect to see that ramp up in the back half of the year. So that's another piece of our decline in the second half. I think we had about $15 million of that total in the first half, and you'll see that significantly increase in the back half. Things are going well. I think we started in terms of price increases. That's always the first piece of it, getting a good response around that. But we do expect that to ramp up in the second half and then clearly wrap into the front half of 2027. Thank you.

Appreciate it. Thank you. Thanks, Mike.

We'll go to our next question from Jeff Hammond at KeyBank Capital Markets.

Hi. Good morning, guys.

Good morning.

Can you give us price mix versus volume in North America in the quarter and just how you think that's going to pace through? And then I think you said on price, you're pushing some internationally. What do you need to see on North America prices? to kind of move forward with any incremental pricing, whether it be moving pieces in tariffs or copper inflation or some of this fuel transportation inflation?

Well, you hit all the categories we're looking at, Jeff. I mean, we're watching that very closely. Certainly, our international units have impacted more. They're seeing higher charges, so we immediately went out with that. Likely the impact of that won't be seen probably until the third quarter by the time that all the way goes through. But overall price cost, you know, approximately just a little shy of 8% of price was in the first quarter, which was strong overall to cover our costs in that during the quarter and stuff. So we're on top of this. As you know, we watch it. We stay in front of it. And certainly, you know, we're preparing if need be over the next few weeks to be ready to put in additional price increases if this continues.

And Jeff, on your question of sequentials, we'll see that price realization come down sequentially across the year as we start to lap over the 2025 price increases.

Okay, great. And then just back on the, you know, kind of the uncertainty, if you look at kind of your order book, through the quarter and, you know, into April, May, like, are you seeing any pockets of slowing or is this just, hey, we're going to assume this thing continues and it's going to, you know, start to get more disruptive?

Right now, we're not seeing it. At this point in time, we've seen some drain business that's been lumpy that was waiting for some BABA funding, not material. I mean, we're off some very difficult compares on an order rate in Q2 of last year because of the pull-in with the price increases. But overall, the order book is in line with our Q2 forecast at this point in time, with certainly data centers offsetting a lot of the softness in particular in the resi market.

Okay, just last one. This inventory investment, can you kind of quantify what it was and kind of how you think working capital use is going to look like for the year? It doesn't seem like you're really changing your free cash flow guidance, but it seems like a change in tone a little bit on inventory.

yeah it's really around the strategic investment and from the data center point of view right our customers are asking for quicker lead times and adjustments and uh we want to make sure the inventory is on hand to support that but overall net net by the end of the year we believe it worked its way through okay thank you thank you we'll take our next question from andrew krill at deutsche bank

James Rattling Leaf- And I think good morning everyone wanted to see if there was any more than any meaningful impact from whether this quarter and one of your main public peers call this out as a point. James Rattling Leaf- benefit for the first quarter, and I think that continues in the two key just historically and losses even over index on this versus them so anything you can provide their thanks.

Yeah, it was not a huge impact, a little under 1% in the first quarter. We're not expecting it to be meaningful in the second quarter, but the freeze that happened in the first quarter created some incremental demand. But we don't expect that to carry over into the second quarter.

Okay, makes sense. And then following back up on the 2Q margin guide, and again, it implies just a little bit of sequential expansion, and you went through some of the year-over-year headwinds, but any reason we're not seeing a bigger sequential expansion? I think you said $8 million of Middle East costs. Was that a cost number or sales there? Any help why that's not a bigger jump into 2Q? Thanks.

Yeah, sequentially, first quarter to second quarter on the margin side, we're going to have that decline in price. So that's going to be a little bit of a margin headwind. And then, you know, if you remember, we had a pull forward last year in Q4. So that that's a margin headwind for us as well. And the Middle East conflict, that'll be about five to six million on on the margin side. So that's also going to be a headwind. It's a challenging compare as well.

Yeah. The $8 million I referred to was the $8 million of sales we're negatively impacting in the Middle East. And certainly we're keeping our team fully aligned inside the Middle East, so we'll have some net negative absorption costs as a result of this. We believe it's timing, and we're going to ride it out with the team because we've got a great team and a growing opportunity in the Middle East.

Okay, great. And just one last quick one. You said 5 to 6 million cost, 8 million of sales. Was there anything meaningful in the first quarter on both of those metrics?

Not on the cost side. On the sales side, a small number, you know, a few million dollars of sales at that point because most of the conflict didn't really happen until March. You know, so we were able to, you know, get most of our shipments out that we were expecting. Thank you.

We'll take our next question from James Koo at Jefferies.

Good morning. Thanks for taking questions here. Good morning. I wanted to touch on the guidance here a little bit again. So are you assuming that Middle East conflict continues for the remainder of the year? and it potentially impact other regions like Europe, or are you assuming that it ends by first half? Because most of the companies I think are guiding that Middle East should be over by first half, but it sounds like it's going to be more elongated for you guys, so just wanted to get clarification here.

Yeah, so we really are not assuming a long impact in Q2 right now. We've not made a full assumption for the rest of this year at this point in time, given we don't know the duration, et cetera. As I said earlier, certainly if this conflict gets over and the spray opens up and things get moving, I think there's opportunities in the second half at this point in time. But we didn't want to – there's too many geopolitical uncertainties at this point in time, so raising at this time just didn't make sense. But we'll look at it in the next three months because I think we'll have greater clarity at that point in time.

Great. Thanks for the caller. And I guess I wanted to touch on the Europe margin here. It was down a bit in the first quarter, but the last quarter we had like nearly 500 basis point improvement. So can you kind of parse out kind of what changed like sequentially? Like why aren't we seeing like a strong margin expansion like we did like the last quarter?

Are you looking at Q1 to Q2, James?

No, I'm comparing Q1, what is it, margin performance versus last quarter for Q on a year-over-year basis.

Yeah, there's typically a seasonality in Europe in Q4. It tends to be our higher margin quarter. So really some volume leverage there. Volume is down in the quarter. So that's a piece of it, 80-20 piece of it. And so those are all sort of contributing factors to that margin decline.

There was also a small mix issue in the first quarter also. So, again, nothing to really read into that. The team's doing a good job. We're relatively stabilized in Europe at this point in time. So two decent quarters in a row where it's more flat. We're not seeing the decrease. And it just depends on how long this war continues and the knock-on effects inside of Europe at this point in time.

Got it. Thanks for taking questions. Thank you.

We'll move next to Jeff Reed at RBC Capital Markets.

Good morning. Thanks for all the details thus far. So last quarter you characterized North American and European residential construction markets as remaining soft in 2026. As you sit here today, are you seeing any meaningful change in demand trends or customer behavior relative to those expectations?

No, I would just say it's a little softer than we probably anticipated, only because of the uncertainty and the fuel costs. I think just people are holding back on that, and you can see it in the starts, et cetera, on the resi side. So I would say resi is a little bit softer, but all the other markets are kind of in line with what we expected.

Got it. And maybe within that resi, is it single-family, multifamily, repair model? What's tracking worse?

I think it's all of the above. I mean, it's, you know, in general, I would say repair and replacement is holding up in resi. Big remodeling is probably a little softer because people are deferring that. But, you know, the new construction markets are still soft and we're carefully watching that. But we are more than offsetting that with our data center growth. Got it. Thank you. Thank you.

We'll go next to Joseph Giordano at TD Cowen.

Hi, good morning. This is Chris on for Joe. Thank you for taking my questions. You had mentioned institutional alongside data center as showing growth and just wondering if you could elaborate on which particular areas within that market that you're seeing, and if you could also discuss what you're seeing in terms of the next attach rate broadly in both data center and institutional, if it's applicable. Thank you.

Yeah, so schools and hospitals are primarily inside of the institutional market. They've been holding up on that, as well as data centers are really strong at this point in time. Your second question, was that on Nexa, did you say? You broke up a little bit.

Yeah. If you could just elaborate on what you're seeing in terms of Nexa uptake, you touched on it briefly.

Yeah. So Nexa continues to be a favorable story for us. We continue to grow that slow but surely. Team's making great progress. And I want to remind everybody, Nexa is going to be being put on all of our products, right? So all of our you know, main products are going to be Nexa enabled. So it's also something to protect our core business and allows people to hook that up on a proactive basis when they're ready to do so. So again, you know, Nexa is also a play to protect our core business and help that to grow and command higher pricing based on the value it's doing to our customers.

Great. Thanks. And have you seen any evolution or change to the M&A environment incrementally over the last 90 days? Any change in terms of the attractiveness of the targets or what's taking place in M&A?

Yeah. So M&A, the pipeline, there's still a strong pipeline out there. As you know, we're disciplined and we always say we have to make a It has to make strategic and financial sense based on our criteria, and we'll be watching that. As you know, you can never predict timing of acquisitions, but we'll continue to cultivate, and we'll keep you posted as we make progress there.

Thank you very much.

Thank you.

And as a reminder, if you would like to ask a question, please press star 1. We'll pause just a moment. And that concludes our Q&A session. I will now turn the conference back over to Bob Pagano for closing remarks.

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

And this concludes today's conference call. Thank you for your participation. You may now disconnect.