• Sales: $544 million, up 8% reported, down 4% organically.
• Adjusted Operating Margin: 17.1%, down 90 basis points.
• Adjusted EBITDA: $106 million, up 5%, margin at 20%, down 50 basis points.
• Adjusted Earnings Per Share (EPS): $2.03, slightly down from last year.
• Free Cash Flow: $204 million year-to-date, up from $182 million last year.
• Net Debt to Capitalization Ratio: Negative 6%.
• Net Leverage: Negative 0.2.
• Americas Organic Sales: Down 3%, reported sales up 14%.
• Europe Organic Sales: Down 12%, reported sales down 11%.
• APMEA Organic Sales: Up 8%, reported sales up 10%.
• Fourth Quarter Sales Outlook: Reported sales expected to range between -4% to flat.
• Full Year Sales Outlook: Reported sales expected to increase by 9% to 10%.
• Full Year Free Cash Flow Conversion Target: Increased to 100% or more of net income.

• Warning! GuruFocus has detected 2 Warning Sign with CPSH.

Release Date: October 31, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Watts Water Technologies Inc (NYSE:WTS) exceeded expectations in the third quarter with an adjusted operating margin of 17.1%, driven by productivity and cost controls.
• The company reported strong free cash flow, with year-to-date free cash flow at $204 million, up from $182 million in the previous year.
• The integration of recent acquisitions, Bradley and Josam, is ahead of schedule, realizing solid synergy savings.
• The company's smart and connected product line, including the new Nexa water management solution, is gaining traction, with 25% of total sales now comprised of smart and connected products.
• Watts Water Technologies Inc (NYSE:WTS) has a robust balance sheet, providing ample flexibility for capital allocation, including strategic M&A, high ROI capex, competitive dividends, and steady share buybacks.

Negative Points

• Organic sales were down 4% in the third quarter, with declines in the Americas and Europe offsetting growth in APMEA.
• The company anticipates a sequential decline in operating margins in the fourth quarter due to normal seasonality, incremental investments, volume deleverage, and acquisition dilution.
• Europe's market remains weak, particularly in the heat pump sector, with continued de-stocking impacting OEM volume.
• The Americas experienced a decline in organic sales due to project timing and inventory safety stock reductions within the wholesale channel.
• Watts Water Technologies Inc (NYSE:WTS) is facing challenges in the multi-family and non-residential new construction markets in the Americas, which have been down double digits since the end of last year.

Q & A Highlights

Q: Can you provide an update on the bottoming for heat pump de-stocking and inventory adjustments in the US, particularly in North America? A: The heat pump de-stocking is mainly in Europe and is expected to continue through at least the first quarter of next year due to inventory build-up. In North America, de-stocking in the wholesale channel was observed at the beginning of Q3, but it is believed to be mostly over now. The only significant change from Q2 is the softness in multi-family construction, which began in Q3. - Robert Pagano, CEO

Q: What is driving the strong performance in the European drains business, and how sustainable is it? A: The European drains business, particularly in stainless steel drains, is performing well due to demand in the marine market, cruise ships, military, and food processing sectors. This demand is expected to continue, providing a positive offset to the softness in new construction and heat pump markets in Europe. - Robert Pagano, CEO

Q: Can you discuss the strategic perspective on the European footprint and the potential plant closure in France? A: We are always looking to optimize our footprint and cost structure based on market demand. The potential plant closure in France is part of this ongoing optimization process. We are currently working with the Workers Council, and no final decision has been made yet. - Robert Pagano, CEO

Q: How is the go-to-market strategy for Nexa, and what role do distributors play? A: Nexa is being marketed through a multi-faceted approach, including channel partners, strategic accounts, and direct sales. It integrates smart and connected products into an ecosystem to address critical building issues. Training and support are provided to ensure effective deployment. - Robert Pagano, CEO

Q: What are the expectations for the institutional and light industrial new construction markets in the Americas? A: Institutional markets, such as schools and hospitals, have been steady and are expected to continue growing. These markets are less volatile compared to others, and we anticipate ongoing investment in these areas. - Robert Pagano, CEO

For the complete transcript of the earnings call, please refer to the full earnings call transcript.