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WATTS WATER TECHNOLOGIES INC (WTS)·Q4 2024 Earnings Summary

Executive Summary

  • Q4 2024 revenue of $540.4M (-1% YoY; -5% organic) and adjusted EPS of $2.05 (+4% YoY) delivered record Q4 adjusted operating margin (16.8%) despite volume deleverage from fewer shipping days (~5% sales impact) and Europe weakness .
  • Mix/price and productivity offset inflation and acquisition dilution; Americas margin expanded 160 bps YoY to 21.8%, while Europe margin contracted 480 bps to 10.2% on OEM/heat pump destocking and fewer shipping days; APMEA margin rose 490 bps to 17.5% .
  • FY25 outlook: sales growth -3% to +2% (reported and organic); operating margin 16.7–17.3%; adjusted operating margin 17.7–18.3%; Q1 2025 sales -3% to -7% with Q1 operating margin 16.9–17.5% as fewer shipping days and Europe remain headwinds .
  • Strategic actions: France facility exit (est. $22M pretax costs; ~$1.5M 2025 savings, $3M run-rate in 2026), continued portfolio 80/20 rationalization ($10–15M 2025 sales drag, margin accretive), and I‑CON Systems acquisition (closed Jan 2, 2025) to expand digital/IoT water management reach .

What Went Well and What Went Wrong

  • What Went Well

    • Margin execution: “record fourth quarter adjusted operating margin and adjusted EPS” on price/productivity despite volume deleverage and acquisition dilution .
    • Americas resilience: segment margin +160 bps YoY to 21.8% on price and productivity; acquisitions added $23M to Q4 sales (6 pts reported growth) .
    • Digital strategy scaling: Nexa intelligent water management solution gaining traction; “feedback from customers has been positive” with value in risk mitigation and reduced water consumption .

  • What Went Wrong

    • Shipping days/mix headwinds: 5% Q4 sales impact across regions from fewer shipping days; some project pull-ins ($4M) into Q4 may pressure Q1 comps .
    • Europe softness: segment sales -15% YoY and margin -480 bps on OEM heat pump destocking and channel destock; management remains cautious into 1H25 .
    • Acquisition dilution and inflation: continued drag on margins offset by price/productivity; Europe fixed-cost base magnifies earnings impact on lower volumes .

Financial Results

Quarterly summary (Q2→Q4 2024)

MetricQ2 2024Q3 2024Q4 2024
Net Sales ($M)$597.3 $543.6 $540.4
GAAP Diluted EPS ($)$2.44 $2.06 $2.02
Adjusted Diluted EPS ($)$2.46 $2.03 $2.05
Operating Margin (%)18.7% 17.1% 16.5%
Adjusted Operating Margin (%)18.8% 17.1% 16.8%

Q4 YoY comparison and deltas

MetricQ4 2023Q4 2024YoY Change
Net Sales ($M)$547.5 $540.4 (1)%
GAAP Diluted EPS ($)$1.67 $2.02 +21%
Adjusted Diluted EPS ($)$1.97 $2.05 +4%
Operating Margin (%)14.4% 16.5% +210 bps
Adjusted Operating Margin (%)15.8% 16.8% +100 bps

Q4 vs prior quarter (sequential)

MetricQ3 2024Q4 2024
Net Sales ($M)$543.6 $540.4
GAAP Diluted EPS ($)$2.06 $2.02
Adjusted Diluted EPS ($)$2.03 $2.05
Operating Margin (%)17.1% 16.5%
Adjusted Operating Margin (%)17.1% 16.8%

Segment breakdown – Q4 2024

MetricAmericasEuropeAPMEATotal
External Net Sales ($M)$398.0 $108.6 $33.8 $540.4
YoY Sales Growth (%)+2.8% (15.2)% +4.0% (1.3)%
Segment Margin (%)21.8% 10.2% 17.5% 19.2% (segment basis)
YoY Margin Δ (bps)+160 bps (480) bps +490 bps —

KPIs and balance sheet

KPIValue
FY24 Operating Cash Flow ($M)$361.1
FY24 Free Cash Flow ($M)$331.7
Cash & Equivalents (12/31/24) ($M)$386.9
Long-Term Debt (12/31/24) ($M)$197.0
Net Debt / Capitalization (%)(12.5)%
Q4 Share Repurchases~20k shares; $4M cost
Quarterly Dividend$0.43 per share (declared 10/28/24)

Estimates vs actuals

  • S&P Global (Capital IQ) consensus for Q4 2024 was unavailable due to data access limits at the time of this analysis. As a result, numeric “vs. estimates” comparisons are not shown. Values would normally be retrieved from S&P Global.

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Net Sales Growth (reported & organic)FY 2025N/A(3)% to +2% New
Operating Margin (%)FY 2025N/A16.7% to 17.3% New
Adjusted Operating Margin (%)FY 2025N/A17.7% to 18.3% New
Regional Sales OutlookFY 2025N/AAmericas: (3)% to +3%; Europe: (8)% to (2)%; APMEA: 0% to +5% New
FX & Other ImpactsFY 2025N/AFX ≈ ($28M) sales and ($0.11) EPS; acquisitions +$25M; 80/20 rationalization (sales) ($10–15M) New
Sales (reported & organic)Q1 2025N/A(3)% to (7)% New
EBITDA Margin (%)Q1 2025N/A19.4% to 20.0% New
Operating Margin (%)Q1 2025N/A16.9% to 17.5% New
Dividend per ShareOngoing$0.43 (Q4’24 declared) $0.43 (no change disclosed) Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q-2 and Q-1)Current Period (Q4 2024)Trend
Shipping days / timingQ1: extra shipping days drove ~7% of sales; Q2: no extra days; project timing in Americas supported growth Q4: fewer shipping days reduced sales by 5%; some project pull-ins ($4M) From tailwind (Q1) to headwind (Q4)
Europe demand/OEM destockingQ2: Europe (15)% organic; OEM heat pump destock; margin pressure Q3: Europe (12)% organic; continued destock Q4: Europe (15)% organic; margins down 480 bps; destock to persist into 1H25
Pricing/productivityQ2: pricing/productivity offset inflation and dilution Q3: pricing/productivity offset inflation; margins mixed Q4: pricing/productivity offset deleverage, inflation, dilution; record adj margin
M&A integrationQ2: Bradley/Josam contributed; dilution manageable Q3: integrations tracking; margin dilution noted Q4: Bradley/Josam exceeded profit/synergies; exiting lower-margin accessories; I‑CON closed 1/2/25
Digital/IoT (Nexa)Limited explicit in Q1/Q2 press releasesQ4: Nexa pipeline “growing nicely,” protecting core, scaling through 2025; SaaS currently negligible Early-stage scaling
Tariffs/macroNot highlightedQ4: intends to pass through aluminum/steel tariffs; manufacturing largely local limits EU tariff exposure Manageable via pricing

Management Commentary

  • Strategic focus: “We finished the year with a solid quarter that exceeded our expectations, including record fourth quarter adjusted operating margin and adjusted EPS.” — Robert Pagano, CEO .
  • Cost actions: “We drove significant productivity savings through investments in automation… and selective restructuring actions… mitigat[ing] the dilutive impact of acquisitions and… European volume deleverage” .
  • Portfolio and M&A: “Completed the acquisition of I‑CON Systems on January 2, 2025… expand our digital offerings… in the correctional facility niche… Integration is underway and progressing well” .
  • Europe restructuring: “Board authorized a restructuring program to exit from a manufacturing facility in France… majority of costs will be recorded in the first quarter… full year run rate savings should be realized in 2026” .
  • Outlook tone: “Monitoring ongoing geo-political uncertainty and mixed global markets… confident… well-equipped to navigate current market conditions” .

Q&A Highlights

  • 80/20 portfolio rationalization: Exiting niche accessory/locker products (primarily Bradley-related), “basically breakeven” margin; ~$10–15M 2025 sales drag; possibly ~$5–6M further in 2026 .
  • Project timing: ~“$4 million” of project pull-ins into Q4 in Americas commercial/boiler side .
  • Tariff strategy: Intends to “fully offset any tariff impact with price,” continuing track record; EU exposure limited by manufacturing where WTS sells .
  • I‑CON acquisition: EBITDA multiple “clearly less than 9x”; primarily direct sales model; cross‑sell opportunities via Bradley reps; cost synergy focus (global sourcing) .
  • Europe recovery and margins: Expect most of FY25 Europe down ~mid‑single digits concentrated in 1H; targeting margin rebuild via footprint actions, including France closure .

Estimates Context

  • Wall Street consensus (S&P Global Capital IQ) for Q4 2024 revenue and EPS was unavailable due to an S&P Global daily request limit at query time. Consequently, explicit “vs. consensus” comparisons are not shown in this report. Management stated Q4 results “exceeded our expectations,” but this reflects internal expectations rather than Street consensus .

Key Takeaways for Investors

  • Margin discipline remains the core driver: price/productivity repeatedly offset inflation, deleverage, and acquisition dilution; record Q4 adjusted margin underscores execution .
  • Americas is the earnings engine; Europe remains the swing factor. Expect 1H25 Europe softness before easier 2H comps; restructuring/footprint actions should aid 2026 run‑rate savings .
  • 2025 guide is prudent: flat to slightly down revenue at midpoint with flat to +60 bps adjusted margin expansion driven by price, productivity, and restructuring savings despite volume headwinds .
  • Portfolio optimization continues: 80/20 exits (low/no‑margin SKUs) should be margin accretive despite ~$10–15M 2025 sales headwind; watch for further pruning in Europe .
  • Digital optionality: Nexa adoption early but strategically protects core and could seed future SaaS/recurring revenue; I‑CON expands connected footprint in institutional niche .
  • Cash flow and balance sheet provide dry powder (FCF $332M; net debt/cap (12.5)%): supports M&A, capex, and shareholder returns while navigating macro/tariff uncertainty .
  • Near-term trading setup: Q1 guide embeds shipping-day and Europe headwinds; any upside in 2H volume or faster Europe stabilization, combined with cost actions, could catalyze estimate revisions upward through FY25 H2 .