Watts Water (WTS) 4 Nov 172017 Q3 Earnings call transcript

Good morning. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the Watts Water Technologies Third Quarter 2017 Earnings Conference Call. [Operator Instructions]. Thank you. Mr. Vice Investor and begin you Treasurer conference. your MacPhee, President Relations, of may Tim

good and his global on morning, third and CFO. in and you, Thank everyone, the Trapp, Todd our earnings are Pagano, our call. third CEO; today results and quarter will welcome conference With on call markets. me provide the Bob Bob President perspective XXXX our to quarter

Todd, our Before more we'll outlook call turning to address in of offer over quarter remainder detail third the and latest our for results the XXXX.

covered questions sections Following Investor the our will accompanied can we webcast prepared which by the in of Today's remarks, our related be address to a found presentation, website. the information call. is during

reference of financial the We reconciled in presentation. is the to non-GAAP will slides remarks. reference these appendix information throughout our Any prepared

Before statements. to we during that that differ results to of this everyone making forward-looking materially. we numerous cause the actual and These constitute to statements course that comments begin, will subject risks be like call, forward-looking could remind I'd uncertainties are

of statements, events these call as information now over update Watts with filings or available Pagano. obligation company uncertainties, any the intention SEC. and or The revise otherwise. forward-looking For I publicly the disclaims result to future see a any risks new turn concerning information, or whether will to Bob

I the the excluding Overall, year-over-year. Slide the in presentation in Organic quarter. sales, turn very where our X and some increased Tim, product to everyone. provide commentary morning, X% quarter. Thanks, on Please good pleased third I'll exits performance was with

half the improved rate As of line as anticipated, growth top this year. to first compared our

for profitable growth. growth. record half an and earnings another another and the delivered strategic margin quarter. the Watts. actions Based restructuring including to double-digit excellent a of our working. delivered quarter strategy many and is momentum We focus $X.XX all-time operational the We at key record continued record of EPS, results, initiatives, the and adjusted XX.X%, also the QX results execution transformation Operating commitment These from reflect of the first was for and continued on

comments Now saw and let strong continue the AERCO's nonresidential improve. as in as growth product AERCO's We in a saw boiler regions. we me and In growth recovery and continued make market well. Americas, plumbing about the organic and healthy the delivered the markets few to to we remained sales residential grow Americas, drains

to expansion account As development, I'd many reinvigorate continue product mentioned key to seeds through and times, geographic we new plant growth management.

against We've by improved which prescribed planting, a the few leaks, applications both gas Americas. at flow and taking gas should provides a our and our of off And new gas recent just the product shuts the Let me sales adding examples. has benefits the into protection America, many and be introduction early line a in kit, process development automatically a commercial gas in range These stainless the new enhanced Latin capabilities drains marketing temperature are our settings. compromised. some illustrate connector of European markets. hold We've in Americas examples SmartSense, seed residential with steel resources. SmartSense successfully offering of drove introduced

with into competitors mid-single who addressed that increases announced our copper also price of a higher QX. as Americas, in announcing commodities, costs number increase effect a spike in digit Regarding price well. input seen the latest we've by We've goes are the dealing in

of for upon the this affected first welfare natural touch the safe. series our concern was quarter. I'm Americas disasters past employees me happy to let are and that employees Certainly, Now report our that all of the

damage, back minimal quickly. were Our facilities in those regions sustained online

these third ensure difficult in quarter The negative regions growth demand. our believe and over impact our reps predict. will with place the to recover suppliers the medium is to timing We to to working but long term, future right are meet to in inventories also was the minimal. We

with as near-term softness our may potentially some affect upside that we continued XXXX. head expect We business in to

GDP Turning operating and We top due European fairly In Todd to to QX, growth. flat is China's continues continued our With the experienced grow margin to to to that in GDP we about which in sales certain just regards France more the in high market Italy, growth albeit GDP line, exits than and be the Outside headwinds offset our focus in regions, continues see color as latest we as a pace. Korea profitable pockets lower Asia-Pacific, will concerns saw is levels. to Europe, in on larger more growth there slower sentiment with the is a demand, volatility. country's China, performance, stabilization construction Drains. still Germany estimates like at are revised for but of see market been team East moments. positive. the to growth region softer Even provide were oil but the have known by in we debt and down. markets market in countries we mixed. a delivered saw softness and solid, product down record especially in solid few the in reasonable China somewhat the Middle offset HVAC due Australia,

this the are product Asia-Pacific exits also from Similar our known benefiting top to Americas, We expansion. top performance is robust timing geographic from fourth line quarter. a more During the growth expecting in initiatives, the key believe including impacted growth comps. issue quarter, primarily Asia-Pacific is third and was and

selling region up a this East, we offering. the products, Middle In during water heaters Our Watts into Korea year. double-digits business sale made in of our first Korea, is that quarter. only third are boiler which Sales In broader previously the now sold

X our to we to close growth. of in the months line the with So with a in level. confident we again, example XXXX over positive guidance half more line August to At left our August. a strategy back and in note in generally beginning achieving year, on With are ability provided growth just second out in drive consolidated the some at puts expect we've regional the be level, the and takes outlook rate top

margin We the expect free convert a XX%, And for flow and XXX% company. be net for also income our would good which cash story approximate of full the the at be should year should a operating year. for record

quarter call Now talk I'll to about Todd, turn and performance third Todd? to operating the on over provide our outlook. color quarter some our fourth

PVI X, results. Thanks, which $XX of I'm were the $XXX the good third X% million the quarter or on which added morning, quarter. up Reported Bob, Slide approximately and by in shows mainly acquisition, X% driven sales million everyone.

million sales were Organically, by X%. sales up impacted positively or exchange $X X%. Foreign

we negative communicated, about quarter from and expected both impact in As and Asia-Pacific. the X% $X in saw Europe rationalization a of million or product

$XX up sales X% our regional performances in in organic few strong a with rationalization, Americas, I'll offset the the into last Adjusted was XX%. by all-time minutes. growth being decline This and in operating record increase quarter a for up margin Excluding more about an were talk profit an basis company. operating points Europe. the an million, of versus adjusted XX.X%, year, translated XX of

operational This productivity, the new PVI, performance. of this points. invest the our primarily over for worldwide adjusted initiatives. to lower the rate benefits tax The strong EPS and due EPS to restructuring margin increase year drivers last quarter over margin mix improvement year, Volume, was and XX.X%, the than while record was driven earnings. by third the attained company. slightly main was margin impact grew operating the effective Excluding in transformation were continuing record XX last Adjusted quarter performance. a a We XX% growth in basis of dilutive of from mainly $X.XX

cash, fund timing a this is We comments, free due margin spend flow new our year quarter expect for quarter, of same performance. cash in cash capital spend. the on was are reiterate pleased do expect pick in that the very highs XX% future we Bob's productivity quarter QX adjusted Historically, the to year-to-date and Turning we and the Watts. the continuing and we continue committed capital flow while period $XX this was Setting remain improvements trend invest company improvement operating a third adjusted well. To as across EPS basis, to a with future. will to as up to over the year, mainly fourth to last million, strong

U.S. from as Turning driven healthy by largely to let's our the Americas our strong our $XXX in some well. sales we of key quarter. Sales demand basis, up review both on acquired Slide X% HVAC quarter. to the in drains was the business saw reported PVI. million X, on up were the the and Organic growth in as Canada, results a are a and regions were of up initiatives. XX% see benefits We sales AERCO's in mid-single-digit early in starting products, valves, continued

market also boiler improve well. first-half. performed convincing the anticipated, As to slow a after PVI continued

quarter in the points XX.X%. condensing up our XX% were profit Our by XX demand Americas $XX.X increased million, margin water sales the a year-over-year. in Operating was basis for driven mid-single to operating heaters. increase digits Adjusted gas

comps. were the dilutive impact volume, XX productivity investments from top offset operating by than Excluding impact Margins more margin from driven which dilutive growth points. transformation grew PVI, PVI, basis higher some over and adjusted and seasons, incrementals the

included initiatives. as operating inventory absorption for build QX year's points of support the one-time with a margin XX last associated transformation a basis reminder, to benefit the Just approximately

the sales for on summarize, good both very to lines. So quarter a the Americas profit and

up X% turn to of on Sales organically. reported down basis Slide move were let's X% Now Please a Europe. million X. $XXX to and

Excluding the product declined to sales impact X%. of rationalization, organic

or the Foreign about quarter. tailwind was million Euro, X% of a $X the exchange, mainly in

some the solution at HVAC saw lower the platforms, product of Looking by driven softness and rationalization fluid sales. we in impact

by associated in affected products more to demand efficient was slowdown business a HVAC use Our energy directive a in Italy. with

commercial in increase productivity, in Conversely, a side, product to releases restructuring another and strength softness due business growth was management, Benelux introductions through The I margin saw mix volume by Italy favorable increased segment. in and some we and expansion was demand. its in the geography, for loss. $XX continue for last driven in the we electronics Germany XX.X% key account debt Adjusted profit our Drains benefits, over had Sales within the sales sales the margin to the lower were XX than France and quarter quarter, flat initiatives. was more reason in and a and offset Operating by operating marketing basis offsetting product OEM with some a By expansion efforts recovery, increased On the solid new mentioned. bad in stronger and regions product Europe new rationalization. essentially million, year. for geographic points saw electronics which quarter XX% well just the Nordic Drains business of Europe. driven record strong from in perform positive

the top operating line a Europe, team for delivered record the So despite QX, headwinds. in margin

quarter. fourth the expect return region in We the will growth to

Moving let's X, to the and $XX.X XX%, both were million sales results. In a review of down basis. Slide on Asia-Pacific's reported quarter, organic

had up East. product were QX performance, we in sales organic comp and in XXXX weakness with rationalization, QX Asia-Pacific's was up sales Middle Keep offsetting the a Australia XX%. X%. mind, continuation first-half growth China a Excluding top of strong of also in were in

Excluding strong product X% products, rationalization, sold applications. China's valve sales into to our in demand grew due commercial

Our the demand products some East, see another quarter, the timing well than also in in the more which Sales project de-stocking to channel. we Middle residential in the performance performed some driven strong in releases Australia, underfloor however, down by of Korea. and X%, offset retail softness China heating mainly were in of outside are starting

pay in unfavorable made soft profit dividends, mentioned, well. intercompany decline as lower Adjusted Bob have operating As in which impacted In we a Korea which Asia-Pacific margin by growth saw negatively volume, to margins were is adjusted see. a incremental quarter are operating great investments. also volume, investments quarter, the and and starting sales to for Asia-Pacific. mix significant summary, In the pressured

will line attribute this top to and in growth region timing expect we QX. However, the of we most solid, deliver

QX. in on turning rationalization I'd expect Slide sequential that a rate level, over few expect comments and PVI like consolidated Europe from should included growth $X to calculation Product note QX. to On X. to the we in And basis rebound QX Finally, will the a on approximate we both improve quarter a in in important organic QX. make rate million. should growth the be It's our also organic to Asia-Pacific performances. sales

execution expand be estimate of As prior million. a volume transformation about growth which will and acquired, continued be result, by sales X-month should $X considered QX year, in margin to there we the supported productivity Operating initiatives. versus only our and

it our investments and We we be to volume is review material anticipate we'll will expect aligned QX fixed expectation, cost QX and prudent be into in higher growth as headwinds continue with to well. as structure more versus ensure cost And head XXXX. we our

expecting with QX, past strong generation years. flow are consistent cash several performance our in the we over Finally,

we capital range mentioned, the I year. the capital that, in $XX Bob? over spend in As turn Bob, will higher million will estimate begin previously We Q&A. be are spend we QX. I to call the back anticipating With for before

Todd. growth, summarize, geographies. beyond. delivered initiatives in Thanks, products, technologies while many continued will momentum invest To earnings our The investments as the new margins quarter. and another We're XXXX from future drive our positive double-digit record and in to new driving expanding continuing and help performance we

for So with questions. that, line operator, please open the

Instructions]. [Operator

Your of and Ryan Connors line Scatter. question comes from Boenning first the of

and you level products expect of you mid-single-digit, top you talk some on is of usual sail various through, lines is would that in truly and of if uptick? little where I this talk more driven kind pricing some through down kind I to a opportunistic really know and materials see much how the that and through expect the you where that mentioned raw challenging much you about to So might wanted pretty initiative can but to business nicely of the And it bit more of talk by as mentioned that nature. how and

Ryan. Thanks,

perspective. Let me try in to put that

that always not. copper the pricing. probably is whether given suit have price competitors related the increase looked really out, about So to and of The prices to that we going we is issue normal our follow is half at remember or half

to that contracts, see do hope do they When a based certainly wholesale you realize OEM OEM that to opportunity of of retail, deals the and our price, is at When let's on followed that is lot based So suit that. in best pricing. look look I at continue channel, it we was that. LME a usually that our on are tougher, lot in where that's to nice our they

and to hope our really it's can pull follow prudent believe we thing So that, the And right we that I but so, with just let's we're look as at that's through able usually Wholesale said, how it. do. to competitors we suit.

and impacts situation, a it that wanted mentioned Okay, dealer the online, like channel take, then initiative distribution my get relates this? of on to continues wholesale. evolving that issue in and your Obviously, the channels specifically be, there more in I follow-up would Bob, you of are pricing evolution related and to then terms how as general consolidation then and channel major

look backflow we've exited a an I of be larger which lot some When commoditized type to easy the online IntelliStation of initiatives. of undifferentiated in look project, items, products, are susceptible channel, as more our at or were at nature. not or those some When our retailer through you they

to always it, the at were I think products look I when we're So be susceptible more that, watching exited that that. but

a we'll a and we difference bundling we really So that's providing as through. where it's forward, our we our customers, that's go to to push make where differentiate and believe price around and us ourselves into believe initiative solutions solutions we'll components allow

the flow on continued but talked mentioned is balance generation. been about one mean -- not Todd, you aggressive hasn't share what's going may buyback forward there whether then I on deployment? or cash budget you count your more may side? And is really much. strong now mean expectation Got significant. and I just just of a has cash the you've cash -- on really it final buybacks, cash get specifically, view

Yes.

share year million communications, minimum strategy, to option think back capital and that going we we about focus and is shares forward. M&A we're on And going we is goal marketplace So, at creep think stock deployment this balanced We have with to in $XX spent return to our to and When just in opportunistic and our again issuance with with consistent that. forward, we're think share bought approach. I via count going our XXX,XXX I but over this share continue dislocations, approach capital flat. we'll opportunities purchases. a where be Obviously, are our doing offset and I going to believe the dividends growth see repurchase remain a and associated to shareholders continue and past allocation our internal

the Your next comes of of Jones Stifel. question Nathan from line

question. of an Like you do a follow when get if Just Ryan's you you increase, a realize Historically, pricing that get Xx? get through put pricing increase? you to up through there percent average kind put you an is X.Xx, do you do X.Xx, x

the of but look we usually again that more what of out out varies look usually each differently. probably what it's we comes we we half So XX% that it put normally one of I you it, have Well by to see, of say would channel. by again varies channel, at wholesale those right? put channels When through. is at

look the cautioning depends it. our on that's The but on competitors do. what way better So at it keep -- everybody, I to

So stuff, we to are lose don't have and share. market follow promotions if they offering unfortunately we suit, so

that So it's always balance.

And Okay, quarter? in could prices the you other copper on and increased had impact got third material you. raw the margins that quantify

don't nature because global on headwind, as than that. normally that our offset as it it. initiatives but talk sourcing the well a pricing our We initiatives about of competitive was Certainly, more

the wanted seeing we and But seeing why which that's first mitigate been do. more able X normally half than second to is in about price increase, we've we're to earlier the So we of in would it. put half that. We're months year the certainly, it than a

initiatives a here. got Okay, growth strategically then just maybe little more And it. discussing the

how clearly there further growth of of begin about we should you in Would to investments the on will increasing see Are for that? growth and next XXXX been plan level growth investments? probably more over investing that plans evidence You've initiatives XXXX in think year.

our talk as heard I about Yes. in these product new and at half lot starting A We're development, budget XXXX see of them investments. are we're would starting the planting Well you've process. probably the same really second geographically, me just to about seeds. But starting -- looking expanding just we're to seeds here. think

new So on we'll focus traction development. some that product some initiatives. of We're and on getting gaining at continue we're it better these

feel we it move next half the of makes confident as us year year. So into this forward for part and remaining -- of

of from of line Jeff And question comes your next Hammond the KeyBanc.

This was drop this apologize line the quantify My if bad did in Picariello. question is you recovery Europe? so debt already Did asked. I James

the I in should points about actually or quarter a headwind was It tailwind reported. we XX versus say what basis

probably impact. about million $X.X So

Europe, HVAC growth trend then quarter? called regulatory fourth Does Italy. in quarter? issue Okay, that gives go you the just fourth Or a correct in in out got that in the returns doesn't it. headwind you itself And the is that that confidence away? then And what that

Let you on me little a that give directive. background bit Italian of

had to And the a better seems European of go lot of energy was directive specific XXXX. So December to that of to June confusion to was of still have directive to Italian some installed supposed manage a And that for what for in effect point of government there's extended order at multidwelling be into was and in terms units Italy consumption. by there time, of XXXX all regulation in in energy the allocator that this called directive the heat deadline noncompliance. cost sort around the

also impact QX quarter. clarity going forward. significant had we rate until us, headwind in product did this Italy, fluid sales a saw solutions It's a our So line on in for on there's QX more impact the and the isolated but on same this in directive expect in growth we definitely in direct

get return comfort would far order I as Your more look Europe exited I at that comfortable second Europe and we're growth we in in October, gives how you our September with QX. would it our seeing us QX. is supports if say, in get to say, as it do what so rates we into we question

once Got it. Italy And just on the more. -- on

position guys product So that? the codes works Do have uncertainty once typically favor, right that building clears regulations for and well you the does that guys in your the out? you

margins, hole sales product that QX. year, started we they But it's that's stopped and will codes, control last the Well, view, to can is our of happened and for can and market to can't And have What on and makes that. people that even look change. push where point push sense. QX we're in cost a we based that. and hopeful us it. product, from down that right that the continuing code had they not really but hopeful clearly and that slowing in push We as seeing But code the control and next effect we push robust right into we because year. codes we're they'll do code we'll we're based code that it. our our continue will we here, now, go buying was reinstitute see the next clear We're will a year that it's again, on we again, But help what forward and

watching we're closely. So it very

been for year. just then like the Looks for year? then just outlook nice And competitive quarter. all And PVI, next backdrop fourth strong the and on pick Understood. What's has specifically? you your quarter, assess how AERCO PVI saw in these up AERCO business early would a general in AERCO

growth in condensing there. actually Yes, particular water for competitive a basis nice businesses see is look that very you heater in sure. business, saw on in when position, down. go And at it, the these a it's forward competitive market out we and that The we mid-single-digit

look starting the gaining very is So AERCO But teams share. the product you traction market on our we've and are side to business, competitive boiler the gain been and the is that. executing of at new

question Cowen. next comes Your Joe Giordano line of with from the

Joe. have This our answered questions is few a for you guys. i for of actually Jacob Most but Seide already, have been on

products as health renewed in one Europe. on last certain broad-based just in So rethrough? more of seeing Drain that the you're growth, just follow-up seeing what Is are some in on strengthening about the the you're I then sort a or And on regions? color strength end-market wanted or order

Yes.

into steel pieces of the bringing So really when we it, X where look stainless on there's drains U.S. been business, at our executing drain is the market. we've

very positive. been that's So

good cast as drains Drains seeing we're Our and you know us the we all Europe. momentum drains on cycle leads feeling, as our at that. on because and iron normal at When business, positive a gives positive that look look in business, business, that later are plumbing our you that know we're positive nature construction impact, feelings seeing positive you new Europe. where in uncertainty French always lot political is Really at the and very the that it's and cautious when the my belief in happening. We're look not on timing seeing the we I'm regular traditional the and the a of orders. given

cautiously positive Europe. optimistic. are translate But we we're in revenue believe quarter So we fourth positive seeing into orders will that the for

And at there back questions the closing for Bob to time. this are further turn no remarks. I'll call Pagano, over

today look you Watts. with We time February. us forward in our for in call, earnings appreciate in and for third join your again to taking fourth continued Thank quarter our quarter we call the to again. you, speaking interest you Thank

And this call. concludes today's conference

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