Watts Water Technologies, Inc. Q2 FY2025 earnings call

• Bob Pagano expressed gratitude to Shashank Patel for his 7 years of service and welcomed new CFO Ryan Lada. - Second quarter results were better than expected with record sales, operating income, and EPS due to strong Americas performance, price/cost dynamics, and volume leverage. - M&A integrations of Bradley, Josam, I-CON, and EasyWater are progressing well. - Published 2024 sustainability report highlighting progress in 4 pillars: footprint, handprint, social responsibility, and corporate governance. - Free cash flow year-to-date through Q2 was $105 million, with expectations of sequential improvement.

Sales for the second quarter were $644 million, a record for Watts, up 8% reported and 6% organic. Americas organic sales were up 10% and reported sales up 11%, driven by price, volume, and pull-forward demand. Europe organic sales were down 8% and reported sales down 3% due to OEM and market weakness but benefited from favorable foreign exchange. APMEA sales decreased 1% organic and 3% reported. Adjusted EBITDA was $153 million, up 22%, with adjusted operating income of $139 million, up 24%, and adjusted operating margin of 21.6%, a record. EasyWater acquisition is expected to contribute approximately $5 million in sales in 2025 and be neutral to adjusted EPS after purchase accounting adjustments.

• Increased full year sales and margin outlook due to strong first half, incremental price, favorable foreign exchange, data center strength, and EasyWater acquisition. - Now expect organic sales growth flat to up 3%, reported sales growth 2%-5%. - Adjusted EBITDA margin outlook range up 60-120 basis points, adjusted operating margin expansion 50-110 basis points. - Estimated direct tariff costs at $40 million, based on tariffs in effect as of today. - Expect free cash flow conversion greater than or equal to 100% of net income in 2025.

• Uncertainty around the impact of tariffs, including effect on global GDP, which affects the repair and replacement business (approximately 60% of total revenue). - Continued softness in the European construction market.

Q: Can you quantify the pull-forward effect on volume?

A: It was approximately $20 million of sales pull forward pre-price increase shipped in the quarter.

Q: What's the breakdown of the margin decline from Q2 to Q3?

A: About 100 basis points from price/cost dynamic, 170 basis points from seasonality, and balance from volume deleverage.

Q: How is the integration of acquisitions going?

A: All 4 acquisitions are integrating well, with costs being a key focus and 80/20 actions being applied across businesses.

Q: What's the outlook for the Nexa platform?

A: It's a long sell process with pilots, migrating smart products to the platform, and expected acceleration as proof points build