Watts Water Technologies, Inc. Q3 FY2025 earnings call

Key Points

• Strong third quarter results with organic sales up 9%, adjusted operating margin 18.5% better than anticipated.
• Acquired Haws Corporation, a $60 million sales company, expected to be modestly dilutive to margins initially but enhances value proposition.
• Integrations of Bradley, Josam, I-CON, and EasyWater progressing well with synergies tracking ahead of estimates.
• Proactively managing tariff challenges through strategic pricing and supply chain optimization.
• Raising full year sales and margin outlook due to strong Q3, incremental price, favorable foreign exchange, strong data center sales, and Haws acquisition.

Sales reached $612 million, setting a third quarter record for Watts. Reported sales growth was 13% and organic growth was 9%. In the Americas, reported sales were up 16% and organic sales up 13%. Europe reported sales up 4% but organic sales down 2%. APMEA reported sales down 1% on reported basis and flat on organic basis. Adjusted EBITDA was $128 million, up 21%, with adjusted EBITDA margin of 20.9%. Americas segment margin increased 180 basis points to 23.7%, Europe increased 160 basis points to 12.2%, and APMEA increased 90 basis points to 19.4%. Adjusted earnings per share were $2.50, up 23%. Year-to-date free cash flow was $216 million, with strong expectations for Q4. Balance sheet remains strong with net debt to capitalization ratio negative 15% and net leverage negative 0.5x.

Outlook

• Raising full year organic sales growth to 4%-5% (previously 1%-2%), reported sales growth to 7%-8% (previously 3%-4%).
• Adjusted EBITDA margin outlook increased to 140-150 basis points from the midpoint of previous outlook.
• Expect organic sales growth of 4%-8% in Q4.
• Aim to achieve free cash flow conversion greater than or equal to 100% of net income.

Risks

• Uncertainty around supply chain disruptions and tariffs impacting new construction and global GDP.
• Complexity of tariff litigation and potential retroactive adjustments to pricing.
• Impact of U.S. government shutdown on business operations.

Q: 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?

A: Correct, it was $11 million, as you said -- as we talked about, and about 6% was our price. Slightly higher than that in 4Q.

Q: You talked about 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?

A: 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.

Q: 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?

A: 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.