Watts Water Technologies, Inc. (WTS) Q3 2025 Earnings Report, Transcript and Summary

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. [Operator Instructions] 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 Lada, 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 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. With that, I will turn the call over to Bob.

Thank you, Diane, and good morning, everyone. Please turn to Slide 3, and I'll provide an overview of the quarter. We are pleased with our strong third quarter results, which exceeded expectations. Watts' multiyear 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 the decline in Europe. We also benefited from incremental sales from our I-CON and EasyWater 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 Haws Corporation, a leading global brand providing emergency, safety and hydration solutions for use in industrial, institutional and nonresidential 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 dilutive 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, Josam, I-CON and EasyWater, which are progressing well and 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 and full year outlook in more detail. Ryan?

Thank you, Bob, and good morning, everyone. Please turn to Slide 4, 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 APMEA. 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 I-CON and EasyWater acquisitions added another $11 million or 3 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% and adjusted EBITDA margin of 20.9% increased 140 basis points. Adjusted operating income of $113 million increased 22% and adjusted operating margin of 18.5% was up 140 basis points. Adjusted EBITDA and operating 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 Americas segment margin increased 180 basis points to 23.7%. Europe 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 pretax 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 5, 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 in data centers. We are also benefiting from incremental sales of approximately $10 million related to the acquisition of Haws Corporation, which will be included in our Americas segment. We now anticipate organic sales growth of 4% to 5%, a 3-point increase to the midpoint from our previous outlook. Our reported sales growth is expected to be up 7% to 8%, a 4-point increase from our previous outlook. This reflects incremental revenue from the Haws acquisition and favorable foreign exchange impacts detailed by region in the appendix. Regionally, we anticipate stronger sales growth in the Americas and Europe while APMEA is projected to be slightly below our previous outlook. We are raising our full year adjusted EBITDA margin outlook to a range of 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 APMEA 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 I-CON, 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 deleverage in Europe and dilution from the Haws acquisition. The sequential margin decline reflects normal seasonality and the impact of the Haws acquisition. Other key inputs for the fourth quarter and full year can become in the appendix. And with that, I'll turn the call back over to Bob before we move to Q&A. Bob?

Thanks, Ryan. On Slide 6, 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 are increasing our full year sales and margin outlook. We successfully closed on the acquisition of Haws 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.

[Operator Instructions] It looks like our first question today comes from the line of Nathan Jones with Stifel.

Maybe just starting on the $11 million of demand pull 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 Americas in 4Q will be somewhat higher due to those tariffs?

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 to cover that tariffs.

Slightly higher than that.

Okay. Fair enough. I guess the second question I wanted to ask was on this Haws acquisition. Obviously, the questions are going to be around the drinking water business. It'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 Haws revenue, pretty low market share for them. How do you go about competing with the LK business in -- specifically in that drinking water business and look to grow the market share for that business?

Well, Nathan, as we talked about it, Haws 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. So 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 synergies out of those businesses.

Yes. Yes, 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.

And our next question comes from the line of Mike Halloran with R.W. Baird.

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 out over to next year in North America as well as maybe generic comment on Europe as well?

Yes. So let's look at Q3, we basically saw similar markets that we saw in Q2. So we'll be watching, I think, in general, multifamily, residential, 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 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 something -- 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 this war -- the war in Ukraine subsides and each one of the government's understanding how much they have to fund that. So again, continued slow growth assumptions in Europe.

And then secondary question, just maybe the puts and takes 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 sort of 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?

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

And our next question comes from the line of Jeff Hammond with KeyBanc.

You talked about kind of pricing through Q4. I'm just wondering, as we look forward into '26, what you think carryover prices at least into the first half? And then as you contemplate your normal course pricing for '26, is that a 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 -- starting in April, et cetera. So there will be some carryover because we've had multiple price increases during the year. With the adjustments of tariffs, with all 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 of some of those and you know, we had both prebuy 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 we talk more and more about data center, obviously, booming. Just wondering if you can, I guess, size that business for 2025 year, what you think -- for this year. What you think it can be in a few years? And I think most of your exposure historically was Asia, a lot of the demand is happening in the U.S., and I'm just wondering about your success bringing that over to the North American market.

Yes, Jeff. I would say our North America team is going to surpass Asia Pacific this year. 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, and you're seeing it come through our results in Q3.

Okay. And then just last one, multifamily, just update there. It seems like maybe some bottoming and things getting better. And I guess it depends on where you are in the build process, but just an update there.

Yes. On 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 are seeing projects in the multifamily, but it's not -- and 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 comes down as well as waiting for some lower interest rates. So we think it's close to bottoming out, and we'll watch carefully through there, but it's not been a robust market. But we're hopeful that it will begin getting better as interest rates start coming down next year.

[Operator Instructions] And our next question comes from the line of Ryan Connors with Northcoast Research.

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 the -- 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 how -- conceptually how you would look at that kind of a scenario?

Yes, 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 will 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 item, and we're watching this very closely and we'll adjust based on what the market does at this point in time. But it's very complicated, as you said. And I think a lot of people are trying to figure this out, and we'll just have to wait and see how it plays out.

Yes. I mean just as a follow-up to that, would it be crazy to think that, okay, the price you put in the market has been accepted in the market. It's been -- it's kind of there and you can sort of keep that and even if you don't get any retroactive credits that maybe that scenario could actually be a margin positive going forward? I mean, is that -- am I way off base there?

Yes. That's -- it's such a difficult question, Ryan. And it's 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 have many different scenarios to understand what's market pricing and what's happening on this. So again, stay tuned. I think we're all watching carefully.

And our next question comes from the line of Joe Giordano -- sorry, Giordano with TD Cowen.

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

It's primarily on the residential side, right? Any time there's uncertainty, people withhold and 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 we'll see how that goes through. Hopefully, they'll get that resolved very soon.

Great. 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 through wholesalers and distributions. And so yes, 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.

[Operator Instructions] And our next question is from the line of Andrew Krill with Deutsche Bank.

Want to ask another one on Haws. Just can you provide like any sense of the historical growth rates there? What do you expect looking forward? And then on margins for the business, and I guess, if we do the math on the dilution, is it correct, it's around like 10% EBIT margins initially as you integrate the business? And then like over time, any reason this can't be a lot to average or better margin business?

Yes. So in general, I would say they're similar to the institutional growth, which is above, let's call it, 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. Team, we're making 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. More medium term, I think the prior high watermark was about 16% EBIT margin. So just -- like can you get there, do you think that volumes remain sluggish around where they are just with the new initiatives you have in place? Or I think we're getting back to that? Like, one, is it possible like and do you need volume leverage to get there?

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, 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.

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 in Watts and look forward to speaking with you again during our fourth 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.