Watts Water Technologies Reports Record First Quarter 2023 Results

Chief Executive Officer Robert J. Pagano Jr. commented, “We continued our solid execution into 2023 and delivered another record quarter. We drove organic sales growth in all regions despite the challenging comparison to a very strong first quarter in 2022 and generated record operating earnings, operating margin and EPS. As a result of our first quarter performance and our second quarter expectations, we are increasing our full year 2023 adjusted operating margin outlook to a range of 15.7% to 16.3% from our previous outlook of 15.4% to 16.0%, while maintaining our incremental investments. Although we continue to anticipate softer market conditions as 2023 progresses, we are maintaining our full year 2023 organic sales growth outlook of negative 5% to positive 2%. This would not be possible without the strong execution by the Watts team, and I would like to thank our employees who have remained focused on delivering quality and value to our customers.”

Mr. Pagano continued, “I would also like to announce that at the beginning of the second quarter we acquired the primary business assets of Enware located near Sydney, Australia. Enware is a leading supplier of specialty plumbing and safety equipment used in the Australian institutional and commercial end markets, revenues of approximately $30 million USD annually. The acquisition of Enware aligns with our strategy to expand geographically into countries with mature and enforced plumbing codes. Enware will enhance our product offering and channel access in the Australian marketplace. We welcome the Enware employees to the Watts family and look forward to integrating Enware’s strong brand into our portfolio.”

First Quarter Financial Highlights

First quarter 2023 performance relative to first quarter 2022

• Sales of $472 million increased 2% on a reported basis and 4% organically due to low-single digit organic growth in the Americas and Europe and double-digit growth in APMEA. Unfavorable foreign exchange movements reduced sales by approximately $9 million, or 2%.
• Operating margin increased 260 basis points on a reported basis and 220 basis points on an adjusted basis, primarily due to price and productivity, which more than offset inflation, lower volume and incremental investments.

Regional Performance

Americas

• Sales of $323 million increased 3% on a reported basis and an organic basis with growth across all platforms, primarily driven by price.
• Operating margin increased 400 basis pointson a both a reported basis and an adjusted basis as benefits from price realization, mix and productivity more than offset inflation, lower volume and incremental investments.

Europe

• Sales of $128 million decreased 1% on a reported basis, which included unfavorable foreign exchange movements of 5%. Organic sales increased 4%, primarily driven by price, with sales growth in plumbing and HVAC products, offset partly by a decline in sales of drains products. Sales growth in the quarter was negatively impacted by approximately 1% due to our decision to exit all direct sales into Russia effective April 1, 2022.
• Operating margin decreased 120 basis points on a reported basis and 250 basis points on an adjusted basis as benefits from increased price and productivity were more than offset by inflation and lower volume.

Asia-Pacific, Middle East and Africa (“APMEA”)

• Sales of $20 million increased 4% on a reported basis, which included unfavorable foreign exchange movements of 7%. Organic sales increased 11% driven by growth in China, the Middle East and Australia.
• Operating margin increased 420 basis points on a reported basis and 490 basis points on an adjusted basis. Reported and adjusted margins both benefited from increased trade and affiliate sales volume, price and productivity, which more than offset inflation.

Cash Flow and Capital Allocation

• For the first quarter of 2023, operating cash flow was $33 million and net capital expenditures were $5 million, resulting in free cash flow of $28 million. In the comparable period last year, operating cash flow was negative $2 million and net capital expenditures were $6 million, resulting in negative free cash flow of $8 million. Operating and free cash flow increased due to higher net income and reduced working capital investment. We expect improvement in free cash flow throughout 2023 due to normal seasonality.
• The Company repurchased approximately 22,000 shares of Class A common stock at a cost of $3.7 million during the first quarter.