Watts Water Technologies, Inc. (WTS) Business Profile

What it does

Watts Water Technologies makes products that control, protect and conserve water and manage the flow of fluids and energy through buildings. Its customers include plumbing and heating distributors, equipment manufacturers, specialty distributors and retail chains. Those customers serve commercial, industrial and residential users. Robert J. Pagano, Jr. is president, chief executive officer and board chair.

The company’s products include valves that regulate water pressure and temperature, prevent contaminated water from flowing backward and detect leaks. Some connected products can send alerts to a building management system or a personal device and shut off the water supply. Watts also sells boilers, water heaters, heating systems, drainage products and water filtration equipment.

Its Nexa platform combines connected equipment, sensing technology and software to give customers visibility into building water systems. Watts expanded the equipment integrated with Nexa in the latest fiscal year. Its products can be used in applications ranging from a home’s plumbing system to commercial heating and industrial drainage.

Watts operates through geographic segments covering the Americas, Europe, and Asia-Pacific, the Middle East and Africa, known as APMEA. It manufactures products using processes that include metal casting and machining, plastic molding and assembly. It also develops products and tests them against applicable plumbing and building standards.

How it makes money

Watts earns revenue and income almost exclusively by selling products. It reports results through geographic segments rather than as separate product businesses. Within those segments, it groups its offerings into flow control and protection, heating and gas, drainage and water reuse, and water quality.

Flow control and protection is the largest product category. It includes backflow preventers, pressure regulators, leak protection and commercial washroom products. HVAC and gas products include boilers, water heaters, radiant heating systems and gas connectors. Drainage and water quality products cover applications such as rainwater harvesting, filtration and scale prevention.

Customers buy through wholesale distributors, equipment manufacturers, specialty channels and DIY chains. In the Americas, commissioned manufacturers’ representatives primarily market the product lines. Watts also sells directly to some wholesalers, equipment manufacturers and private-label accounts, primarily in Europe and APMEA.

Watts says a substantial share of its sales comes from repair and replacement activity. That describes the use for the products, rather than a stated subscription revenue stream. Nexa includes a cloud-based software platform, but product sales remain the company’s principal source of revenue and income.

Net sales increased in the latest fiscal year compared with the prior year; organic sales also rose in the latest quarter. The annual increase reflected pricing across all operating segments, higher volumes in the Americas and APMEA, acquisitions and foreign exchange, partly offset by lower European volumes. Watts said quarterly growth benefited from data centers, pricing and demand brought forward from later periods.

Customers and how it sells

Wholesale distributors are Watts’ largest customer channel. They supply commercial and residential applications. Equipment manufacturers’ needs differ by region. Americas customers include water heater and water systems manufacturers, while European customers include boiler and radiant system manufacturers. In APMEA, customers include water heater, air conditioning and appliance manufacturers.

The specialty channel includes high-efficiency boilers and water heaters, water treatment, leak detection and other products. DIY chains buy products including valves and some water quality items. In the Americas, independent representatives, dealers and distributors also sell specialty products. Watts provides training to channel partners, installers and end users through online courses and instructor-led programs.

Watts serves thousands of customers beyond its largest accounts.

The Americas, Europe and APMEA are Watts’ reporting segments. In the latest fiscal year, Americas net sales increased, while Europe net sales decreased. The company attributed the European decline in organic sales mainly to lower volumes in its equipment-manufacturer and wholesale channels.

Suppliers and costs

Watts buys components and raw materials from external suppliers, including bronze, brass, cast iron, stainless steel, steel and plastic. With limited exceptions, it has multiple suppliers for its components and raw materials. An interruption at a supplier can nevertheless affect its near-term ability to meet demand while an alternative source is qualified.

Manufacturing includes a foundry, machining, plastic extrusion, injection molding and assembly. Watts also fabricates metal for heating and hot water products. It has manufacturing facilities in China, Bulgaria and Tunisia and uses a contract manufacturing facility in Mexico. It continues to source materials and components internationally, including from Asia.

Material, labor, overhead and tariffs affect costs. The company says tariffs imposed on imports have increased product costs, and that it may not be able to fully offset new or increased tariffs through sourcing, productivity and pricing. If component or commodity costs rise and Watts cannot offset them, profit margins could decrease. Falling commodity costs can also lead customers to seek lower selling prices before Watts’ own costs decline.

Watts is also investing in systems and manufacturing facilities, while using Lean methods and restructuring to reduce costs.

Competitive position

Watts competes in markets for water conservation, energy-efficient products and equipment that controls the flow of fluids. Competitors vary by product line and market, and Watts says some have greater financial, marketing and other resources. It does not name individual competitors in describing these markets.

The company identifies quality, brand preference, delivery times, engineering specifications, plumbing codes, price, technical expertise and product breadth as competitive factors. Smart and connected products are also among the factors it identifies. Watts maintains product development teams and testing laboratories in its operating regions and invests in connected products.

Products representing a majority of sales are subject to regulatory standards and code enforcement. Watts tests products and maintains quality-control procedures to meet those requirements. It also uses established wholesale and other distribution channels, including commissioned representatives in the Americas. The company says no individual patent or trademark, or patent or trademark protection generally, is material to its business.

Our reading: Testing capabilities and experience meeting codes provide a meaningful competitive foundation because many products must satisfy prescribed performance standards. Our reading: Distribution relationships and a broad range of products provide customer access, but their protection is limited by competition on price, delivery and other factors. Our reading: Intellectual property protection is a less distinct moat source given the company’s assessment of its patents and trademarks.

Growth opportunities

Watts plans to grow through new products, expansion in existing and selected new markets, and acquisitions. It targets acquisitions that can add market access, distribution channels, technology, production capabilities or complementary products. Its acquisitions in the latest fiscal year included boiler manufacturer Superior Boiler and drainage-products manufacturer Saudi Cast. The company says those acquisitions expanded its portfolio and market reach and increased its exposure to nonresidential markets.

Connected products are another focus. Watts expanded the range of equipment integrated with Nexa in the latest fiscal year and continues to develop products with sensing and remote-control capabilities. The platform is intended to give building operators information about their water systems and help them manage water risks.

Watts is also pursuing data center cooling. It says data center sales grew in the latest quarter compared with the prior year and represented a share of total sales in the first half, including some sales brought forward. The company sees more product opportunities per megawatt in liquid-cooled facilities than in traditional air-cooled systems.

Watts says it is developing stainless steel products for the shift toward liquid cooling. It is using Superior Boiler’s capacity and its Texas location to make large thermal storage tanks. The company expects data center sales to represent a share of overall sales for the full year, while noting that project timing can make sales variable.

Structural risks

• Construction demand: Economic cycles, particularly lower levels of commercial and residential starts and remodeling, can hurt revenue and operating results. Watts says residential and noninstitutional new construction markets remain challenged.
• Costs and supply: Tariffs, commodity inflation and disruptions in internationally sourced materials can raise costs or limit availability. Watts may be unable to offset all cost increases through pricing, sourcing and productivity measures.
• Data center project timing: Data center sales depend on projects whose schedules and specifications can change. Watts says customers may finalize designs late, affecting piping and valve requirements, and that sales timing and volume can vary between quarters.
• Acquisitions: Integrating acquired operations, systems, processes and cultures can be difficult. Acquisitions can also bring liabilities, expenses, loss of personnel or disruptions to supplier and customer relationships.
• Technology and product liability: Cyberattacks, information technology failures or failures to protect confidential information can harm the business and its reputation. Product defects or failures can also lead to claims, and insurance may not fully cover substantial damages.
• Regulation and international operations: Changes in regulations or standards can adversely affect the business. International operations also expose Watts to trade restrictions and foreign exchange fluctuations.

Leadership

A single stockholder can exercise substantial influence over Watts and its affairs.

Bottom line

Our reading

Watts is primarily a product manufacturer whose business rests on water and heating equipment sold through established distribution channels, with repair and replacement accounting for a substantial share of sales. Code compliance and testing support its competitive position, while data center cooling offers an additional growth avenue. Its results remain exposed to construction cycles, material costs, tariffs and the variable timing of large projects.