Watts Water's Q3 2025: Contradictions Emerge on Tariff Pricing, Haws Acquisition, European Margins, and Data Center Growth

Date of Call: November 6, 2025

Financials Results

• Revenue: $612M, up 13% reported and up 9% organic
• EPS: $2.50 adjusted EPS, up 23% YOY
• Operating Margin: 18.5% adjusted operating margin, up 140 basis points YOY

Guidance:

• Full-year organic sales now expected to grow 4% to 5%; reported sales up 7% to 8%.
• Full-year adjusted EBITDA and operating margin expansion now expected to be up ~140–150 bps (includes ~10 bps dilution from Haws); assumes $40M direct tariff cost.
• Q4 organic sales expected 4% to 8%; Q4 adjusted EBITDA margin 19.6%–20.1%; Q4 adjusted operating margin 17.0%–17.5%.
• Free cash flow conversion expected to be >=100% of net income.
• Haws contributes ~ $10M incremental revenue full year and ~ $20M incremental Americas sales in Q4; ~ $10M FX tailwind in Q4.

Business Commentary:

* Strong Third Quarter Performance:

- Watts Water Technologies reported record sales of $612 million for Q3, up 13% on a reported basis and 9% on an organic basis.
- The growth was driven by favorable price, volume, and pull-forward demand in the Americas, as well as incremental sales from acquisitions and foreign exchange movements.

• Improved Profitability and Operating Margin:
• Adjusted operating margin increased to 18.5%, an improvement of 140 basis points from the previous year.

• This improvement was due to favorable price leverage, volume, productivity, and mix, which offset inflation, volume deleverage in Europe, and tariffs.

• Impact of Tariffs and Acquisitions:

• The company's global direct tariff impact for 2025 is estimated to be $40 million, consistent with previous guidance.

• The acquisition of Haws Corporation is expected to be modestly dilutive to margins in the first year while integrating, but is anticipated to enhance the value proposition and broaden capabilities.

• Regional Performance:

• In the Americas, reported and organic sales growth was 16% and 13%, respectively, driven by favorable price, volume, and acquisition benefits.

• European sales grew 4% with a decline in organic sales due to market weakness, while APMEA sales decreased 1% on a reported basis, affected by declines in China and New Zealand.

• Outlook and Strategic Investments:

• Watts is increasing its full year sales and margin outlook due to strong Q3 performance, incremental price, foreign exchange movements, and the acquisition of Haws Corporation.
• The company continues to navigate uncertainties related to supply chain disruptions, tariffs, and their impact on new construction and global GDP.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management said results 'exceeded expectations' with 'record third quarter sales' of $612M and raised full‑year sales and margin outlook; adjusted EPS up 23% and adjusted operating margin improved 140 bps, and management highlighted strong cash flow and a healthy balance sheet supporting capital allocation.

Q&A:

• Question from Nathan Jones (Stifel, Nicolaus & Company, Incorporated, Research Division): 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?
  Response: Price contribution in Q3 was about 6%; management expects Q4 price contribution to be slightly higher.

• Question from Nathan Jones (Stifel, Nicolaus & Company, Incorporated, Research Division): Do you have an expectation for 4Q? I assume there's been more price to cover that tariffs?
  Response: Management reiterated Q4 price will be slightly higher than Q3 levels.

• Question from Nathan Jones (Stifel, Nicolaus & Company, Incorporated, Research Division): How do you go about competing with the LK business in the drinking water business and look to grow the market share for that business?
  Response: Haws is modest in hydration (≈20%) and regional; Watts primarily acquired Haws for its safety product line that complements Bradley rather than to immediately disrupt the large drinking-water competitor.

• Question from Nathan Jones (Stifel, Nicolaus & Company, Incorporated, Research Division): How does Haws complement the Bradley business and can you marry those two together to generate revenue synergies?
  Response: Haws fills product gaps (larger safety showers and equipment) complementary to Bradley, providing a fuller portfolio to drive revenue synergies.

• Question from Michael Halloran (Robert W. Baird & Co. Incorporated, Research Division): 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?
  Response: Expectation is 2026 will be slow growth similar to 2025; NA single‑family/multifamily growth remains slow, data points will be watched, and Europe is bottoming but new construction growth will stay subdued until geopolitical uncertainty eases.

• Question from Michael Halloran (Robert W. Baird & Co. Incorporated, Research Division): The puts and takes that drove the sequential margin improvement in Europe and is that the right run rate into next year?
  Response: Restructuring is complete and cost structure adjusted; management aims to sustain improvements but says it will take time and volume leverage to fully restore margins.

• Question from Jeffrey Hammond (KeyBanc Capital Markets Inc., Research Division): 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?
  Response: Most price increases began earlier in the year, so some carryover into early 2026 is expected, though ongoing tariff developments will influence pricing decisions.

• Question from Jeffrey Hammond (KeyBanc Capital Markets Inc., Research Division): Can you size the data center business for 2025 and what you think it can be in a few years? Also comment on bringing demand from Asia to North America.
  Response: Data center sales are growing high double digits; North America will likely surpass Asia in 2025 and is one of the company's fastest‑growing end markets.

• Question from Jeffrey Hammond (KeyBanc Capital Markets Inc., Research Division): Multifamily update—are things bottoming?
  Response: Multifamily is soft but showing signs of bottoming; some regions remain active and improvement is expected as interest rates moderate and tariff uncertainty clears.

• Question from Ryan Connors (Northcoast Research Partners, LLC): Hypothetically if tariffs are disallowed by SCOTUS, would you keep the price taken or give it back—how would you conceptually look at that scenario?
  Response: Management views this as complex and unlikely that prices would simply be reversed; pricing reflects multiple factors (tariffs, commodity inflation, labor) and they will monitor and adjust as outcomes unfold.

• Question from Ryan Connors (Northcoast Research Partners, LLC): Could maintained market price become margin positive even if tariffs go away?
  Response: Possible but uncertain—many variables affect the outcome and management will model multiple scenarios before drawing conclusions.

• Question from Unknown Analyst (TD Cowen): You had mentioned the uncertainty surrounding the government shutdown. What parts of the business might be impacted?
  Response: Primary impact would be on residential demand, where uncertainty typically causes customers to delay or slow purchases.

• Question from Unknown Analyst (TD Cowen): 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?
  Response: Go‑to‑market is similar via wholesalers/distributors; Watts plans to leverage its channels and Haws' greater international exposure.

• Question from Andrew Krill (Deutsche Bank AG, Research Division): Can you provide any sense of historical growth rates for Haws, margin expectations, and initial dilution math (~10% EBIT)? Any reason it can't reach company averages?
  Response: Haws' EBITDA is currently mid‑ to high‑single digits; management expects to raise margins toward Watts' averages over several years through integration and synergies.

• Question from Andrew Krill (Deutsche Bank AG, Research Division): Europe medium term—can you get back to prior ~16% EBIT margin or do you need volume leverage?
  Response: Volume leverage would help; cost actions and 80/20 reprioritization should improve margins, but recovery to prior peaks depends on volume and easing regional uncertainties.

Contradiction Point 1

Tariff Impact on Pricing Strategy

It highlights inconsistencies in the company's approach to handling tariffs and their impact on pricing strategy, which can affect financial performance and market positioning.

Can you explain the $11 million demand pull forward in Q3, particularly related to copper tariffs? What was the price contribution in Q3, and what are the expectations for Q4? - Nathan Jones (Stifel, Nicolaus & Company, Incorporated, Research Division)

2025Q3: The $11 million pull forward demand was about 6% due to price. We expect a slightly higher price contribution in 4Q due to further copper tariffs. - Robert Pagano(CEO)

How can the company's manufacturing footprint drive market share and margin growth? - Nathan Jones (Stifel)

2025Q1: We've implemented tariff-related price increases in March and May...we are focused on maintaining our competitive position. - Robert Pagano(CEO)

Contradiction Point 2

Haws Acquisition Strategy and Market Share

It reflects differing views on the strategic value of the Haws acquisition and its impact on market share, which are crucial for growth and competitive positioning.

How do you plan to compete in the drinking water business given Haws' low market share? - Nathan Jones (Stifel, Nicolaus & Company, Incorporated, Research Division)

2025Q3: Haws is known for quality and customer service, and our primary focus is on their safety products, which complement the Bradley business. Haws' innovation in safety products will enhance our value proposition. - Robert Pagano(CEO)

Can you discuss pricing adjustments and strategy in response to tariff reductions? - Nathan Jones (Stifel)

2025Q1: Some have questioned our ability to compete in the drinking water business, which is dominated by a single player with about 20% market share and the remaining players, including Haws, with 5% to 10%. - Robert Pagano(CEO)

Contradiction Point 3

European Market and Margin Expectations

It involves differing expectations for the European market and margin recovery, which are important for regional growth and profitability.

How should we assess the sequential margin improvement in Europe, and is this the appropriate run rate for next year? - Michael Halloran (Robert W. Baird & Co. Incorporated, Research Division)

2025Q3: Europe is advancing, with restructuring complete and cost structure adjusted. Future outlook looks positive, but we'll continue to monitor and provide updates for next year. - Robert Pagano(CEO)

Are lower second-half margins expected due to volume weakness or other factors? - Michael Halloran (RW Baird)

2025Q1: We are cautious about the second half due to potential demand impact from tariffs. We're closely monitoring Q2 to adjust expectations as needed. - Shashank Patel(CFO)

Contradiction Point 4

Data Center Growth Potential

It involves differing expectations regarding the growth potential and size of the data center business, impacting investor perceptions of the company's strategic direction and market positioning.

What are your expectations for carryover and normal course pricing in 2026, considering inflation and tariffs? - Jeffrey Hammond (KeyBanc Capital Markets Inc., Research Division)

2025Q3: Our North America data center business is growth is high double digits and surpassing Asia Pacific this year. It is a fast-growing market for us and complements other sectors. - Robert Pagano(CEO)

How big is the data center opportunity now? - Joe Giordano (TD Cowen)

2025Q2: Data center sales are growing high double digits, offsetting residential market softness. The opportunity continues to expand. - Robert Pagano(CEO)

Contradiction Point 5

Europe's Margin Recovery and Market Conditions

It reflects differing perspectives on Europe's margin recovery and market conditions, which are crucial for understanding the company's strategic focus and growth prospects.

How should we view the sequential margin improvement in Europe and its sustainability for next year? - Michael Halloran (Robert W. Baird & Co. Incorporated, Research Division)

2025Q3: Europe is advancing, with restructuring complete and cost structure adjusted. Future outlook looks positive, but we'll continue to monitor and provide updates for next year. - Robert Pagano(CEO)

What is the sustainable margin range for Europe post-restructuring? - Michael Halloran (Baird)

2024Q4: The margins in Europe are lower... It's going to be lower... Our goal and drive is to get it back up to where it was pre all this decreasing... We'll continue to do that, and the team is focused on that. - Robert Pagano(CEO)