Q&A with the CEO of Watts Water Technologies Inc.
Robert J. Pagano, Jr. was just days into beginning his second year as CEO of Watts Water Technologies, Inc., when we conducted our interview in June.
Pagano joined Watts Water on May 27, 2014, the year the company celebrated 140 years in business.
Watts Water reported record sales last year of just over $1.5 billion. Upon arriving, Pagano quickly set out to reexamine the strategic direction of those sales dollars.
“The company was trying to be everything to everybody,” Pagano said. “That becomes very difficult. It remains a great organization, but when you start building a portfolio of brands that just gets bigger and bigger and bigger, it’s easy to lose focus.”
The new CEO and his team conducted an assessment of Watts Water’s many products in the Americas and developed a plan to move away from “non-core” products that, while still solid products for other businesses, aren’t ones that fit into the strategy for Watts Water going forward.
The most visible part of Pagano’s first year came at the end of last year with the acquisition of AERCO International, Inc., which fits well with Pagano’s overall plan to provide not just the components of a system, but the whole solution.
As Pagano noted, Watts Water always had the ornaments on the Christmas tree. Now, with AERCO, the company has the tree, too.
Prior to taking the top post at Watts Water, Pagano, since 2009, was the senior vice president of ITT Corp., and president of ITT Industrial Process. His ITT career started in 1997, and he moved into several management roles, including vice president of finance; corporate controller; and president of ITT Industrial Products. Pagano, a CPA, started his career at the accounting firm of KPMG LLP.
SS: Sum up for us your past experience at ITT and how it prepared you for the top job at Watts Water Technologies?
RP: I spent 25 years at ITT and its subsidiaries in a succession of expanding leadership roles including most recently as senior vice president of ITT Corporation and president of ITT Industrial Process. While at ITT, I learned an enormous amount about what it takes to run a large and diversified company.
I was always involved in the “water technologies” business at ITT, working with familiar brands, such as Bell & Gossett and Gould’s Pumps. So in a manner of speaking, other than the first five years out of college when I worked at an accounting firm, I’ve been in flow control my whole career.
I became known as the go-to guy in the company. Any time there was a challenge, I was sent to help. No matter what the product, I learned that most challenges can be fixed by reexamining the strategy. You start by asking: “What was the strategy? What should it be? What were we focused on? What did we lose focus on?”
One of the businesses I was sent to was ITT’s Gould’s Pumps Industrial business, which was notable to me since it’s in my hometown; my grandfather retired from there. That was my first opportunity to really run a business, and in this case turn it around. Turning around a company means re-energizing a company. When I started there, it was a $400 million business with some real challenges. And when I left to take this job, it was $1.2 billion.
SS: What was it about the Watts Water opportunity that made you consider making the move?
RP: Well, it was a tremendous opportunity to become the CEO of a strong company with an impressive past and future. I wasn’t looking at the time and ITT was growing, so I was happy. When the recruiter first called, I said no. When the recruiter called a second time, I said no. Then an ITT colleague I used to work for – who’s now on the Watts Water board of directors – called and told me I was an idiot if I didn’t at least interview for the position. So I did interview, and then I got excited.
SS: What was it that got you excited?
RP: Brand strength. Everyone knows many of our brands. Just look in your basement! Plus, the company has had a strong growth history over 140 years and the issues felt familiar. Gould’s Pumps was around for 160 years. So after looking at Watts Water more, I thought to myself, there is great potential here for the future: we may need to refresh our strategy, but we are in an excellent position for future growth and, brand loyalty and brand recognition are vital to that growth equation. This is a company that has even more potential than we've had in the past. I looked at the opportunity, jumped at it, and never looked back.
SS: What was needed at Watts Water at the time you were being interviewed for the CEO position?
RP: We were trying to be everything to everybody. That can be very difficult. It is a great organization, but when you start building a portfolio of brands that just gets bigger and bigger and bigger, it’s easy to lose focus.
That’s why our refreshed strategy is all about getting back to the basics: What do we want to be good at? What are we going to be the best in the world at, versus trying to do everything? For example, customers didn’t really see us as adding much value to something like a garden hose attachment or a washing machine hose. But a pressure relief valve? That’s something Watts is known for and is vital to the safety of customers. We need to focus on the products that are the core of our business, and where we add significant value.
In general, our prior strategy was growth, operational excellence and the One Watts Water concept. I think those are all excellent themes, but we are now defining them even more clearly.
So, we want to grow strategically and smartly. For example, in our business, we know that there is a direct correlation between profitable growth and code enforcement. India, however, doesn't enforce plumbing codes. So we need to ask ourselves, should we put all our efforts into going after business in India? The answer is no. Of course, we'll still serve India, but now we will do it through a partner, instead of building sales offices. That's just one example.
SS: Can you give us another example of your strategic thinking that might be closer to home?
RP: Sure, take a look at our original emphasis on operational excellence. It’s important, of course, but it tends to focus just on the factory. Now, we have added the element of commercial excellence to operational excellence because I believe in looking at the whole value stream.
You can't just look at the factory. We need to be able to develop more products that are innovative and have the potential to become market leaders. We need to continue to work to better understand our customers: How do we get closer to our customers to get the right input to drive the factory? How do we determine the best price for our products? What are the right customer incentive programs?
We are looking at all of these issues for clarity and consistency. Now we are synchronizing commercial excellence and operational excellence, and that is very exciting.
SS:You’ve described in your quarterly and annual reports about initiating a transformation process. Tell us more about the transformation.
RP: I want Watts Water to be known for more than just being a producer of widgets.
The first part of the transformation involved reviewing our existing product portfolio in the Americas. After that thorough review, we started looking at removing these non-core products from our offering – products that are certainly great products, but ones that don’t fit our strategy any longer. We are exiting these products and we’ve got to exit them in the best way, which is a win-win solution for us and our partners.
Writer’s note: In the company’s 2014 Annual Report, Pagano noted that the company expects between $175 million to $200 million of such non-core product sales will be eliminated from the Americas product portfolio by the end of 2016.
The transformation isn’t just about selling off businesses though.The next part of our transformation is to be known as a company that provides real solutions to its customers.
That’s why last year’s acquisition of AERCO International was so important. We owned all the components around the boiler; why not own the boiler and the water heater, too? The acquisition took place right around Christmas, so we kidded with the AERCO team that we had all the ornaments on the Christmas tree. Now, we have the tree.
The AERCO organization has just a wealth of talent. Having them on board allows everyone to think differently about more complete system solutions.
I'm doing my own system solution test, by the way. I moved to Boston when I became CEO, but I still have a vacation home in central New York. At the moment, I'm doing a complete renovation and am putting in as many of our various products as I can.
It's a test for me to understand, overall, how do we work? I've got my plumber working with us, and our designers with my architect. I've actually seen some product gaps on a total “Watts solution,” which are potential acquisition opportunities. It's been actually a fun exercise.
SS: You mentioned acquisition opportunities. Can you elaborate more?
RP: I can’t say much about that right now. Keep in mind that we’re also coming out with some great new products ourselves. I want to move beyond small product line extensions. Don’t get me wrong; we need to do that. But I think we also have to budget the time and energy to figure out what we’re going to be selling in five to ten years. There’s great opportunity there.
Globally, too. It's not just here in the U.S. We can do this in Europe and Asia. The biggest thing for us is how do we just harness everyone in a cost-effective way? The hardest thing for me has been to prioritize all of the opportunities.
SS: Can you tell us anything more about the transformation?
RP: One thing I can tell you is that much of the work being planned now as part of our transformation will concentrate on lean manufacturing. Most people think of “lean” as cost reduction. I don't think of it like that. Instead, think of it in terms of “speed,” as in speed to the customer. The shortest lead times. Fastest customer response time. That’s what wins. That's what we're striving for. By doing that, waste has to be taken out of the system, and there's a benefit. Then you use the money from that to reinvest in innovation, product development, et cetera.
SS: You talk about the importance of feedback from your customers. What have you heard in your first year as CEO?
RP: It’s amazing what you hear when you just listen. I’ve had dinners with many people we do business with. Often, the first thing I heard was, "Wow, you really do care about the customer." And of course we do, but I think we need to show it more.
Another time I went to see a wholesale customer in Arizona in August. The customer expected me to stop by in January or February – if at all. "Why are you coming to visit me in August? It's 120 degrees out here," he said. I replied, "Because I wanted to hear your voice."
In one other case, we developed such a strong relationship with a key player in the wholesale market that their CEO even spoke at our sales meeting, which is unusual for them. I really appreciated him doing that.
I think it’s safe to say that what I heard in many of these discussions was that we needed a clearer strategy. Previously, we had acquired as many companies as fast as we could, but we really didn't know what we wanted to be yet. Now, we are fleshing that out.
We have always had an incredible heritage. Not many companies can say that. And part of that, of course, is the other thing Watts Water has always had – its people. We’ve got a lot of great, dedicated people.
But great companies, if they don't continually transform themselves, go by the wayside. We have the Kodak’s of the world to look at. Fortunately, this industry doesn't change as quickly and we are working on our transformation to create our future focus.
SS: What’s next for Watts Water?
RP: Training. When I talked to our rep council and our customers, the other feedback we heard was that we used to spend a lot of time and effort training the industry, and then backed away from it.
We’re currently building a state-of-the-art training facility right in our headquarters building. We're going to put an AERCO boiler in there and integrate all our products together and begin training and retraining the industry like we used to. While I was at ITT, I knew the importance of training and saw the impact of the "Little Red Schoolhouse" at Bell & Gossett.
All in all, I think we’re getting positive feedback from our reps and customers. They see the difference in our focus, which is great. That’s when it all matters – when the customer feels it.