Watts Water Technologies : 2023 Annual Report to Stockholders

Watts Water Technologies, Inc.

2023 ANNUAL REPORT

Our Mission

To improve comfort, safety, and quality of life for people around the world through our expertise in a wide range of water technologies. To be the best in the eyes of our employees, customers, and shareholders.

At-a-Glance

We are a leading supplier of products and solutions that conserve water, and manage the flow of fluids and energy into, through, and out of buildings in the commercial and residential markets of the Americas, Europe, and Asia-Pacific, Middle East, and Africa (APMEA).

For 150 years, Watts has designed and produced valve systems that safeguard and regulate water systems, energy efficient heating and hydronic systems, drainage systems, and water filtration technology that help purify and conserve water.

Our 5,100 employees are incredibly proud because our products and solutions directly improve the comfort, safety, and quality of life for people around the world.

Founded

Our company was founded in 1874 by Joseph Watts in Lawrence, Massachusetts, U.S. as a pressure relief valve machine shop.

Headquarters

Americas & Corporate HQ:

North Andover, Massachusetts, U.S.

Asia-Pacific, Middle East

• Africa (APMEA) HQ: Shanghai, China

Regions

We have approximately 5,100 employees on 5 continents, located in 21 countries, and they collectively speak more than 18 languages.

Solutions

• Plumbing & Flow Control
• HVAC & Gas
• Drainage & Water Re-use
• Water Quality & Conditioning
• Commercial Washroom & Emergency Safety Products
• Municipal Waterworks

Focus Areas

Our solutions offer customers benefits in 3 key areas:

1. Safety & Regulation
2. Energy Efficiency
3. Water Conservation

Patents

Watts has a portfolio of over 1,000 listed patents worldwide.

Corporate Strategy Our strategy focuses on

5 key pillars:

1. Growth
2. Operational Excellence
3. Commercial Excellence
4. One Watts
5. Diversified Talent & Performance Culture

Customers

• Contractors/Installers
• Wholesalers
• Engineers/Designers/Architects
• OEMs
• Consumers
• Facility Managers/Owners
• Government/Municipal

"Every effort, like every drop of water, has a ripple effect"

- Robert J. Pagano, Jr.

CEO, President, and Chairperson of the Board

Our Brands

R

To Our Shareholders

Watts Water Technologies achieved record results in 2023 through continued focus on our customers, driving lean process improvement across the organization, and our commitment to advancing our strategic initiatives, including our digital strategy. Reported sales increased 4% to a record $2.1 billion in 2023, and organic sales increased 1% compared to the prior year. Adjusted operating margin improved to a record 17.8%, an expansion of 140 basis points compared to 2022. Adjusted earnings per share rose 16% to a record $8.27. Free cash flow increased to $281 million with a 107% free cash flow conversion rate.

Total Net Sales	Adjusted Operating	Adjusted Earnings
($ Billions)	Margin*	per Share*

Over the past year, we successfully navigated a challenging macro environment and continued to execute our long-term strategy, including protecting our core business and investing for future growth through balanced capital deployment. We expanded our global addressable market and cross-selling opportunities through strategic acquisitions, while at the same time, we continued to focus on improving our customer service levels globally. We are proud to provide our customers with solutions that ensure and promote water safety, energy efficiency, and conservation. We excel at identifying customer needs and developing innovative products and solutions to uniquely meet those needs.

For further discussion of "organic sales," "adjusted operating margin," "adjusted earnings per share," and "free cash flow," which are non-GAAP financial measures, and the comparable GAAP measures, see the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K included in this Annual Report to Shareholders. See last page for a reconciliation of GAAP to non-GAAP items, including adjusted operating margin and adjusted earnings per share.

Operational Enhancements

Our One Watts Performance System (OWPS) drives continuous improvement by aligning our culture, strategy, and processes through a standardized global system of tools, plans, and behaviors. Through OWPS, we have adopted streamlined, consistent processes that are deployed to all Watts offices in the 21 different countries in which we operate. OWPS also allows us to examine, simplify, and automate our processes more effectively over time. This has resulted in improvements that directly benefit our customers, shareholders, and employees. We

continue to find opportunities to enhance efficiency in our operations, which also improves safety and sustainability. In 2023, our OWPS accomplishments included the deployment of automation in dozens of key projects, delivering hard savings; the development of a robust 2024 automation pipeline; and the creation of automation roadmaps for our key locations. OWPS is also guiding the integration of our new acquisitions, bringing the power of One Watts and the use of standard best practices to these businesses.

Investments in Strategic Growth & Innovation

Organic Growth

We continue to generate organic growth through our smart and connected strategy with ongoing investment in Internet of Things (IoT) architecture development to enhance the functionality and security of our smart and connected-enabled products. These investments helped us achieve our goal to have 25% of our revenue come from smart and connected-enabled products in the fourth quarter of 2023.

Two examples of our newest smart and connected offerings:

• Freeze Alerts - freeze detection option for outdoor backflow units
• Smart Steam Boiler Control - allows for remote monitoring and control of standard steam boilers

We are also driving profitable growth through innovation and our robust new product development process. Our customer intimacy enables us to advance solutions that directly address their needs. One example is the updated Under Sink Guardian, which helps building owners reduce the risk of waterborne bacteria by allowing them to sanitize their hot water systems at the point of use.

In addition, we continue to strive for a best-in- class customer experience through ongoing enhancements to our external website and ecommerce sites, as well as by conducting extensive training of product development and other customer-facing employees. In 2023, we were particularly focused on sustainability and updated our website to highlight how our products help customers in their sustainability efforts, i.e., our Handprint. We also added numerous sustainability- focused eLearning segments to our Watts Works Learning Management System, as well as our first Continuing Education Unit (CEU) on sustainability.

Acquisitions

Over the past few years, we have focused on optimizing our core business through organic growth, innovation, and operational excellence. During 2023, we expanded our focus to include several acquisitions. Watts has a long history of growing the business through the successful integration of strategic acquisitions, with 14 in the past decade.

The following acquisitions made in the past year are expected to drive growth through end market diversification and increased cross-selling opportunities:

• Enware Australia Pty Limited - In March 2023, we acquired the primary assets of Enware, located near Sydney, Australia. Enware is a leading supplier of specialty plumbing and safety equipment used in Australian institutional and commercial end markets. This acquisition aligns with our strategy to expand geographically into countries with mature and enforced plumbing codes.
• Bradley Corporation - Acquired in October 2023, Bradley is based in Menomonee Falls, Wisconsin, and is a trusted provider and manufacturer of commercial washroom and emergency safety products serving institutional, other commercial, and industrial end markets. Bradley's comprehensive product portfolio includes plumbing fixtures, washroom accessories, and emergency safety products marketed to a diverse customer base. This acquisition expands our addressable market to include front-of-the-wall products and increases our exposure to attractive institutional and industrial end markets. The acquisition also enhances value creation potential through greater scale, growth opportunities, and cost synergies.
• Josam Company - On January 1, 2024, we acquired Josam, based in Michigan City, Indiana, and a leading provider and manufacturer of drainage and plumbing products. Josam offers a comprehensive portfolio of high-quality customized products to a diverse customer base serving commercial, industrial, and multi-family end markets.

Our Sustainability Journey

Our mission is to provide high-quality products, systems, and solutions for the conveyance, conservation, control, and safe use of water. As a result, sustainability is an integral part of our business mission, practices, and operations.

Our 2023 ESG actions and achievements included:

• The Watts Americas leadership team participated in a joint training session on Water Stewardship conducted by the Boston College Center for Corporate Citizenship. Leaders engaged in determining how our products and services could not only meet the needs of our customers, but also of our communities and stakeholders.
• Our ongoing partnership with the Planet Water Foundation provided clean drinking water to nearly 15,000 children and community members in Cambodia, Indonesia, Vietnam, and the Philippines in 2023. Our sponsorship of an emergency water system following a devastating earthquake in Turkey provided clean drinking water to an additional 10,000 people in critical need.

• Our corporate headquarters was named a Top Place to Work by The Boston Globe, which identifies the most admired workplaces in Massachusetts voted on by the people that know
  them best - their employees. This award is a testament to who we are as seen through
  the lens of our team members and recognizes Watts as an engaged and people-first organization.
• Our annual Sustainability Report illustrates our commitment to consistent, transparent sustainability disclosures. For more information, view our report at https://investors.wattswater.com/sustainability/ sustainability-overview/default.aspx.

• We were recognized by Newsweek as one of America's Greenest Companies, which names the top 300 companies in the U.S. based on their greenhouse gas emissions, water usage, water generation, waste generation, and sustainability data disclosure and commitments. For a fifth consecutive year, Newsweek also listed us as one of America's Most Responsible Companies (2024). USA Today named our company to its inaugural list of America's Climate Leaders - comprised of U.S. organizations that achieved the greatest reduction in their core emissions intensity between 2019 and 2021, specifically, Scope 1 and 2 greenhouse gas emissions in relation to revenue.
• An integral part of our goal to build a high performance, values-driven culture is creating an inclusive environment that welcomes and celebrates employees from all backgrounds. To support this objective, we have incorporated inclusivity into the Watts strategic pillars, cultural behaviors, and global performance management. We have established partnerships with and conducted recruitment activities at universities to drive female and under-represented minority outreach and rolled out leadership and inclusivity training throughout the global organization. In 2023, we established a diverse candidate slate policy to assist in our outreach efforts and expand the pool of qualified candidates for positions.

Looking Ahead

We are continuing to monitor the macroeconomic and geopolitical trends that may impact our operations in 2024. Watts has proven its resiliency over many decades under a variety of conditions - and I have great confidence in our team members, our ability to execute across economic cycles, and our capacity to adapt to meet our customers' needs in any environment. We remain a recognized leader with global reach and leading market positions. Our balance sheet remains strong after our acquisitions of Enware, Bradley, and Josam and provides ample flexibility to support our capital allocation priorities as we create value for our customers and shareholders.

Embarking On Our 150th Year

As we head into 2024, I'm thrilled to officially kick off our company's 150th anniversary celebration, which will include a host of exciting events around the globe. Since 1874, Watts has been delivering innovative water technologies that make the world's most precious resource safe and accessible. This is a proud heritage that is well worth celebrating, and one that we continue to build upon. Every effort, like every drop of water, has a ripple effect, and no company reaches 150 years without the tireless efforts of its employees and support of its customers. Together, we have achieved so much, and we continue to see tremendous opportunities ahead as we look toward our next 150 years. Thank you for your support in the past and in the years to come. We look forward to updating you on our continued progress.

Sincerely,

Robert J. Pagano, Jr.

Chief Executive Officer, President, and Chairperson of the Board