Watts Water Technologies, Inc. (WTS) Earnings

Management highlights

- Strong start to the year with record first quarter sales and earnings. - Portfolio spans diverse end markets, reallocating resources to strong demand areas like institutional and data centers. - Approximately 60% of sales driven by repair and replacement activity. - Maintaining full year outlook despite macro and geopolitical uncertainty. - Balance sheet strong, providing flexibility for capital allocation. - Reaffirming full year 2026 outlook presented in February, assuming short-term Middle East conflict, current tariff structure in place, no IEPA tariff refunds. - Second quarter estimates incorporate negative impact from product rationalization under 80-20 initiative, incremental sales from acquisitions, and foreign exchange benefit. - Data center sales expected to offset direct impact of Middle East conflict in second quarter.

Guidance

- Reaffirming full year 2026 outlook presented in February, maintaining consolidated and regional sales outlooks. Consolidated organic sales growth between +2% and +6%, reported sales growth between +8% and +12%. Maintaining full year adjusted EBITDA and adjusted operating margin outlook. - Second quarter reported sales expected to increase 10-14%, organic sales up 4-8%. Americas mid to high single-digit growth (tough compare to last year's pull-forward sales), Europe low single-digit decline, apnea low to mid-single-digit growth. EBITDA margin expected 22.3-22.9%, operating margin 20-20.6%. Price and volume leverage in Americas and apnea offset by acquisition dilution of ~70 basis points. - Anticipate foreign exchange benefit of approx $5 million. Incremental sales from acquisitions projected at 25-30 million for Americas and ~5 million for apnea.

Segment performance

Americas segment margin increased 80 basis points to 24.2%, apnea segment margin increased 120 basis points to 18.7%, while Europe segment margin decreased 20 basis points to 13.7%. Adjusted earnings per share was $3.04, a 28% year-over-year increase. Free cash flow for the quarter was $7 million. Consolidated organic sales growth expected to be between +2% and +6% for full year 2026, reported sales growth between +8% and +12%. Second quarter reported sales expected to increase 10-14%, organic sales up 4-8%. Americas mid to high single-digit growth, Europe low single-digit decline, apnea low to mid-single-digit growth. Second quarter EBITDA margin expected 22.3-22.9%, operating margin 20-20.6%.

Risks & headwinds

- Macro and geopolitical uncertainty. - Middle East conflict impact on sales and margins, with expected data center sales offsetting some direct impact but still a factor. - Product rationalization under 80-20 initiative negatively impacting sales in Europe and Americas. - Inflation and related costs affecting pricing and margins, with need to monitor and potentially implement additional price increases. - Uncertainty regarding the duration and broader impact of the Middle East conflict on various regions and business segments.

Analyst Q&A

• Q: Dumb question about full year guidance, any reason second half might be weaker?

  A: Being prudent, depends on how long war goes on, if over quickly there are opportunities in second half, will reassess in three months.

• Q: Details on data centers, addressable market, growth?

  A: Over a billion dollar addressable market, goal is high double digit growth in data center for the year, teams innovating, accretive to margins.

• Q: Margin cadence, price costs?

  A: Staying in front of price cost, international units put in additional price increases, evaluating U.S. for possible additional increases, second half volume assumptions flatish with opportunities if outlook increases.

• Q: 80-20 initiative progress, sales drag, benefits?

  A: Expect ramp up in back half of year, ~$15 million in first half, will significantly increase in back half, started with price increases.

• Q: Price mix vs volume in North America, need for incremental pricing?

  A: Watching costs closely, international units impacted more, price cost ~8% in first quarter, preparing for additional price increases if needed.

• Q: Order book, inventory investment?

  A: Order book in line with Q2 forecast, inventory strategic investment for data center lead times, net net expected to work through by end of year.

• Q: Impact of Middle East conflict on sales and margins, first quarter vs second?

  A: $8 million sales impact in Middle East, margin headwind from price decline, pull forward last year, Middle East conflict margin headwind.

• Q: Europe margin, why not strong expansion?

  A: Seasonality, volume down, 80-20 piece, small mix issue, relatively stabilized now.

• Q: Resi market demand trends?

  A: Resi a little softer than anticipated due to uncertainty and fuel costs, repair and replacement holding up, remodeling softer, new construction soft.

• Q: Institutional market growth areas, Nexa uptake?

  A: Schools and hospitals in institutional market, Nexa continues to grow, being put on all products to protect core business and command higher pricing.

• Q: M&A environment?

  A: Strong pipeline, disciplined, will continue to cultivate, watch for strategic and financial sense acquisitions.