Watts Water (WTS) 6 May 182018 Q1 Earnings call transcript

Good morning. My name is Mariama, and I will be your conference operator today. At this time, I would like to welcome everyone to the Watts Water Technologies First Quarter 2018 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Tim MacPhee, Treasurer and VP Investor Relations.

You may begin your conference.

morning, good and you, everyone. Thank First Welcome Earnings Call. XXXX to our Conference Quarter Pagano, today President. me is CEO With Bob and Bob will tariff provide results, you offer his the perspective on color on the our on markets, search. discuss CFO implications update some and first quarter detailed I outlook. first quarter full of results will review our revisit and provide our a year

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

We our will prepared remarks. these slides reference throughout

For performance have purposes and an unless to are of of today's metrics call, presentation. the indicated reconciled been all adjusted metrics references key in non-GAAP otherwise and section included on will information and financial be appendix basis, the

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

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

over turn now Pagano. Let me to Bob the call

We expanded increased margin the margin sales EPS with in operating QX and Organic morning, turn growth regions EPS. adjusted everyone. record Thanks, of Tim, and good briefly to sales, quarter. let Slide provide contributing. first and XX favorably and We Please strong XX% started operating delivering basis a note, X quarter. me trended the rundown by by adjusted points, a XXXX on all

driven was strategy cost invest in top growth the Europe line a favorable year, delivered our comps in the while our discipline is product expectations. and in versus number future. growth business. broad The financial lines, driving internal above with mainly to our boiler especially timing. operating performance line, was of our Drains profitable and result top in of line which aided last the and project QX Americas sales continuing executing slightly in organization, had Regionally, productivity for by was a growth solid part delivering Our of by on forecast

replacement was growth expectations. results we although, Residential market product a with softness. headwind the data a much continues to more In a quarter. few Europe detail Americas, certain and Tim rationalization the believe new signaling are healthy, some of signs key the year. during macrodata repair total, tailwinds recent modest nonresidential forecast nonresidential growth, construction internal and review the in remains is the anticipated with given will pace for positive the Asia-Pacific's line verticals. in is grow indicators are lumpy, show in end-markets residential moderate some at but data construction in minutes. our our little with consistent quarter's of the to continue in performing anticipated The should

Asia-Pacific markets moderate growing at are levels.

In issue much China-imposed products. is monitor is intercompany Europe, the potential by on purchases. not to have China of input that may into affected regulations our affects regulations. cost. tariff continue We through U.S. impacting currently are We this believe tariffs impact the not new mainly our activity our which

products. aluminum that steel final many the to tariffs. unknowns sanctions are imports of resolution require on China-sourced U.S. including impact Regarding clarity, There and potential a and

import we and tariff much the So accordingly issue the will very regulations. final react is to in flux,

the input seen our have inflation material issue. of a affect cost We result already as tariff

The July. anticipated these shortages. effective transportation We've increases cost increases addition, concerns should addressed and price price rising week this to become we labor incremental are costs due expect increases in by the inflationary latest announcing oil that cost. In cover

should provided. and for outlook February. in grow now and margin top previously full growth start to line and price line are we recently expansion higher-end reaffirming organic the the in the quarter Asia-Pacific, Further, expect increases, Europe in first year Turning we Americas' at we announced reaffirming sales provided of our the full Strong given that year range original with outlook; Americas' our we the assumptions

few on our transition. words a Finally, CFO's

Todd First, important I'd a initiatives serving three his like efforts investment member to was to the our drive over as with thank leadership key for team, helping He years. past the of global community. and an our contact

we him wish best. the So

the new quarter. XX Todd's is well As CFO is for press conducted. assumed successor the third The and CFO in interim release, sometime board while March underway, on we to I the have in noted have a outside the role, search search hope

Tim Now I'll over more first results detail. in operating the quarter call our to turn to about talk Tim?

first am Thanks, X% with up growth quarter's the million record Organically, reported results. X, comparative basis were Watts. a Slide first up I $XXX sales of on all on quarter shows X% in which were for a regions. Sales Bob. in

$XX operating QX roughly rationalization, and XX.X% Foreign X%. headwind profit $X than more or offset productivity cost. up driven Volume, year-over-year Product XX and XX $X million increased record. from commodities and Adjusted operating a transportation was approximately and euro, points was expected, the margin million exchange, pressures growth price million. $XX to a inflationary basis of basis primarily of points by XX% as represents investment increased in a sales million Adjusted or by quarter. stronger

EPS tax XX.X% or QX year, the to Watts. than by X% rate for movements million driven XXX lower the and increase of The about of to favorable points X% compared increase basis reform. year, The $X.XX of another relates contributed XX%, tax quarter over was profit of Foreign and tax Adjusted record as operational primarily last and of improvements year-to-year. $X was XX% favorable about of benefits FX is effective increased X% year. last a first exchange rate last of

historically, out flow, QX cash played expected. a is that Turning to cash; period you slower as and know, as for

payments. year. of capital QX majority in the year achieve outflow to $XX the while the particular to relates quarter timing in greater slow, as improve Our million cash cash incremental cash we quarter of than million first inventory last free XXX% fully The the note, for and our $XX is seasonally progresses, outlays, a year. working expect incentive outflow flow as to outflow for conversion was generation to compared Important to the

During repatriated that cash. The was majority used approximately in our million the $XX to of quarter, we credit. down cash of line pay

the In $XX addition, returned stock shareholders our of of of cost of shares QX In total, XX,XXX to million we and approximately purchased a we as share our at $X.X deployment repurchases in common dividends strategy. approximately million. form part capital balanced in

XXXX. positively. continue growth good organic trend delivered We see a sales overall, and operating sales, start record and margin we to So to EPS,

in strong growth product $XX.X Operating price over was basis. commodity year the costs, review were some saw the last Adjusted point the performance Americas tempered investments. with X% on the $XXX key let's was margin X, growth Regions; reported to for number XX basis was a results turning platforms. productivity. Slide the mix up continued driven and cost, Now for strong and and by million, organic million, the both a year. up quarter. We on Sales lead start higher X% from digits products of operating increased products favorable volume, well by partially quarter XX.X%, during sales core comps. the and solution and low regulated AERCO Margin was our increase aftermarket backflows, It and like the Americas plumbing Water and QX profit sales over double a Hot boiler valves. transportation relief last and by Heating expansion

organically. review on basis, Now Europe's $XXX and let's of X; X% reported to on a were up Sales million Slide results. up XX%

and was Drains project known and those and and offset to million, improve product key which incremental to full driven increased due as was Drains had due sales by by continued affected we cost, that and increase industrial be Drains to partially quarter business flattish Adjusted by offset expansion shipping end-markets, positively our such rationalization. as into in regions of plans do in benefited in shipyards. which check X% pricing both exit. increase for line the or Fluid foreign From an at margins approximately Regionally, the by we from of Europe unfavorable exchange saw and solid last investments. valves, by softness higher as tailwind. U.K. product volumes, driven of growth lower $XX.X exchange a to in Stronger We Foreign perspective, a Drains low-end stronger We Scandinavia sold XX%. France Recall project were Within with year overdrive expected for XX% $XX Europe's as as solutions, growth sales strong our Germany Germany. the we the mix fluid project and operating Italy. software X% of Margin slightly and a timing sales backflows solutions. rationalization platform headwinds pressures some XX.X% and quarter Operating driven down of fewer digits higher was by helped expectations. year products, expansion was had by margin timing to associated product and compared expect product to including range the well into to valve sales was the profit electronic growth saw days. million volume in productivity, QX double QX marine-based progresses. hospital, XX%, sales year. commodity includes mostly driven the sales

a $XX the the X, and over basis, year. were quarter, let's up organically last same million reported over X% Slide Moving to Sales review up on results. Asia-Pacific's just in X% period

into X% of Sales plumbing by margin offset centers product due in and was demand affiliate country products. the our quarter, by Heating and profit and semiconductor lower markets, adjusted our The were Asia-Pacific demand key up third-party sales valves HVAC X.X%. Middle continued increase partially operating rationalization, commodities, over margin increased X%. drivers by China higher investments. million and by New were offset the product data for QX, under as represents to translates outside The $X.X in which the Zealand, volume, of XX%. cost-saving, mix excluding sales sold strength Adjusted Excluding increased which softness and products. was of for driven China, organic sales to in expansion higher sales, product was organically rationalization, of operating mostly floor commercial in X% and East Korea

quarters. growth slow a start out to Asia-Pacific. As of year think than accelerate more We in timing bit little is a as for the it the anything else, should expected,

a on will X quick Slide year points. I details, just update highlight a our provides few the full outlook. Now and

that line much falling with with provided the other Bob Sales the our are are regions except higher-end our X% X% should Americas' in February, we at of original organic to discussed, the assumptions outlook As in in aligned outlook. be common we growth now expect pretty previous growth range. sales

that out XX our we are should points, to growth includes XX between at and I'd XX%. rate We to margins grow future basis investments tax which support effective expect approximately point maintaining initiatives. year currently operating full like incremental

However, XX.X%. rate QX flow the become free information adjust additional rate in I at at in was we available. analysis income. new further future We the converting may cash mentioned, on little above the the XXX% higher as bit regulations or just as guidance based year of the on anticipate for And and to a have net

Before rationalization second I the million regarding million few expecting should to and back year in a Europe in growth $X.X full mind organic to $X.X call Bob, QX, Asia-Pacific. over our line in million expectation. the items to with the Product be $X consolidated quarter. second turn in quarter We're approximate in keep in

Americas, QX, approximately each in operating margin in million Consolidated line We Asia-PAC. by Americas QX Europe in million million incremental partially The restructuring about $X of expect will our offset approximately expectations. be in $X in million investments and savings, in the in Europe. year and million investments full should grow $X approximately $X with incremental $XXX,XXX $X $XXX,XXX to in

exchange also last foreign to year when euro-dollar the rate. Finally, current exchange a may compared tailwind be given QX

turn the begin Bob? Bob call before we So to me with over that, let Q&A.

adjusted in on like to started Thanks, we for operating questions. Tim. EPS, to plant and a continued QX summarize record note. year we I'd margin The the sales, delivered results and seed positive address your before future. out We

to expect growth. look we another Overall, of concerns. profitable sustained forward progress inflationary and solid year addressing make proactively also are We to

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

Instructions] first with Jones comes [Operator Your Stifel. question Nathan from

cost, given Bob, start price the the moment. market the like that's out I'd of a about just off to talking at there all inflation bit little in

half at be increases, color that line in little said of may you that start you second can price of You first Just Does half make announced year in margins expanded the catch the up were it of quarter? price Did in of that looking around you bit implemented and the kind that. first with year, you've else? on you in mean give you're up somewhere behind cost a any for what XQ. the the the us

the as believe the year. it. price last you ahead Nathan. know, fourth And of been curve. quarter of been top we've of increase staying announced We Sure, on we And in we've

As pressures inflationary we we of see continue mount, we'll game. continuing to the ahead believe the to be

it's expect we So continue the for been that net-net, positive through to the to be for year. -- of rest And be us QX. positive

commented comments had in give And how mix a in little Tim's you had out also You quarter. of beyond? that the in plays bit in and and press color you expectations for a release negative there that? can impact mix Any us on the XQ

than in Number play There's expected. of overall, out the a mix issues Drains we had couple was the think, one, better we quarter. I as year. so had will mix Yes, through was fine ship is go Europe. It We we it what the Marine normal. we in QX. margin was call it going in lower was and project it's project in, shipped business, which thought to more than And we a during related QX. --

QX. and America was that into with that America nice in really So some smooth some we should even side, out Again, in retail itself the quarter. In itself in should in second North mix small growth we about levels wins the quarter. first North the talked stocking also, had that out

as but again, quarter. quarter. or go points So itself issues, or the and a XX mix in impact, the third small that into so probably minus, should second XX clean plus up But basis not significant we

or cash you back, expectations was that? bit it like have that Then you you worse than cash a more just like little about growth just It little for when timing. and it is. doesn't guys usually think year than seasonally that's flow sound a any we any maybe flow; this talk get on inhibiting anything Can

XXX% last it Certainly, we'll year. certainly initiatives. income. we'll operational we convert than again, we through concerns have believe But as growth with capital that a believe it at But of was still progressing we'll Well, the Yes. at we little through less our look year, working some excellence net here. mitigate

it's So timing I issue. think a

in this. of get was inventory initiatives and this of tariffs we in want behind it's for with to ramp-up front have, that on front inflation, the felt given it better growth we Some our it. than and And of be we some future curve to

should normally probably the are. So net-net, by it will smooth in back itself alignment out we with we third where quarter, be

Okay.

So you bit buying a ahead little of price anticipated of increases from there?

pieces It's maybe between It's bit. one it's little Nathan. A here, -- a lot timing. of initiatives, some pre-buys, normal little not growth thing, some overall

You had but pieces of just that nothing Good lot Friday. worried here, I about. moving mean a we're there's

comes question Scattergood. with Connors Ryan & next Your Boenning from

I have you versus already if Tim, of addressed price you've breakdown Did increases I you the growth. organic from missed might that achieved X% of volume it. the apologize this. a give that there? proportion But But the

percentage the quarter. had point detail. X about -- didn't We price is we of didn't We that give this Bob. But in

was So rest normal growth. the

it. Got

one. Okay, good. then other And my that's

a product water Americas. exactly tailwind quality business, that is the the treatment as line? in that else? residential or it something the called Is is business, What water You premier out that

Yes, exactly lumpy. residential I the nice that -- It's and on is. think business it We again had what is wins side. yes, the in that's quarter, some

start with So -- early good the team. but a

that. you're side; do deployment buyback of is side, pipeline? you cash it you bit into too don't see you returning one the mean, like that there seeing, the we -- be Got like shift from the or see that Is dividends, there's a seems to I valuation should mentioned on it. just capital shareholders. stuff M&A a last really How whether then or towards me, just And M&A much the you read it -- that in from the in what the that a

look and continue We're as shareholders. do going model. that. disciplined potential it's there some I Certainly, Yes, are higher multiples for in deployment our into said, to repurchases I out I capital our think acquisitions, we reading think M&A been cultivate bit in We have thing a share the right but an balance dividends the there. mean to and overall be you pipeline and consistent. little believe

Your next from Capital Hammond with KeyBanc Jeff comes question Markets.

in This Jeff. for is Brad [ph] filling

like Just growth maybe there. a impact see more some on when detail bit look there? update the investments? you on provide nice in Americas, first if to not, Could quarter? just growth any expect And the some yield And you

for Yes, the I whole mean quarter had our and the definitely growth an impact in company. investments

we've they our the seeing seeing our and initiatives, impact look products. that upgrade growth do we're in geographical products here in our the on four continue our to the ago in and starting to four many the impact We them This to invest accounts product impact years, products strategic some had to tenure initiatives future. our with since results. the of you're started to existing invest new over largest growth, expansion we're Certainly, for new and we regards. cannibalize of and my between the But years and rationalize see is we continue continue as and our

just so cost. back Seems absorb the based on then market's you're from on through -- confidence what that around pushing far price XQ? the What's a like mid-year ability in on back increase your And seeing increase. to

same industry believe many companies transportation everybody the inflation, particular in Yes, I it. is understands the is cost, seeing read it. market in thing. We've the industry with our And outside of think everybody anticipating and I our about doing

curve believe right thing be there. to given on do this. that's cost So inflation We're we the of aggressive, we're the out to the going be going it's to in front and

Your Brian comes from Sachs. next Goldman question with Lee

conservatism, division consolidated a organic like the the in rest sticking year, is or if rounding achievable, X% organic off, the Americas it we it on you XXXX that how the just of the you're basis at through would X% versus characterize Maybe then X% that seems grows pretty with be but first rate read? could assume

look at that when of towards to think higher-end in year my it, stated the that comments X% range. guidance full our is moving Well, you we're I And X%.

it's think I are be quarter believe we again, of the But change the So that higher-end we'll going are on. to optimistic first the and cautiously given range. that early the certainly in too range at things all geopolitical

to again, I change we're, the early feeling said, too numbers, optimistic. cautiously like So but all

Fair enough.

comps? the side, easier I'll was Can easier past? it improving, question was Water Heating also Second it on speak pricing discern Hot could quarter. growth if to then a and with seeing is, comps. respect dynamics segment you on I there, the in And for there just have how of pass maybe been mentioned know the bit and underlying from me it you much in trends to between then which I know the issue that and an what you you're good

Yes.

is seeing first So in we that the marketplace. are strong what very the it's of are backlogs comps, it and our but also we're market. all, was But easier in seeing competitive growth

net even was of So positive. that, very it

the job. good is doing AERCO team a again, So

Our and new -- good doing feel things about. are we're products the we

what and and positive, seeing the good in very overall, with we're So about we it. backlog the market, feel

with Your next question Giordano comes from Cowen. Joe

and to [ph] Joe. how address evolve rest for the markets? And what the seeing This of Chinese the housing expect you're currently Tristan you you in this do in year? in during is maybe commercial Can

Yes.

now strong recommendations, by out really -- et the new the that and condominiums apartments of developer. In would that more in under housing cetera. would channel. marketplace. floor And the So are Based out fitted and retail project-base in the there's in fit a guidelines the consumers shift a past, on moving was put market, the their to been is heating, and Chinese their

it, and play. So more builder of less play retail a, call commercial let's of a a

pricing shift is much you And retail less is is, and that imagine, So more can becoming about the side. as competitive.

be So side, us. doing the the many within to we're market as data valve a as in the shift chip is seeing We're our and good big there, probably areas. a Chinese manufacturer. particular But well that's going center space impact on market in

moving competitive So in we'll outside playing nature it, And in going We'll of of a that it. more to continue because shift grow still the space watching marketplace. of we're look We're but the again, another at to it's be areas. it.

Drains seeing leading growth. the helpful. believe I mentioned then, indicator you're that what in That's a Europe in that you for Is past are currently? your commercial And

market based up overall. drains, A stainless the steel are. European nice we've on our BLÜCHER, it We pick as seen are well Again, is account with focus lot Drains, a focus of specialty as there. our strategic our which

So Europe. we I indicator would leading a for share indicator. we're it's America. say do see, believe more gaining leading in a is in North I that

one of quick percentage at if one, can. are last So international your PVI and point? What I this sales

you shipping for low at very always low increased in very number. look freight an opportunity is also air would It's PVI, with It's number, but big them, a it's of lot difficult a The components a I us. cost because when you're say.

key of cost transportation is that. part the So of a

However, we boilers water commercial believe we have in one of heaters. in the or marketplace, the best

you extra those want both for do pay amount of have companies to that. So -- some that that

small a We've little us. is growth. it's Latin again, we which an but -- continued America, had some But wins in percentage for opportunity it's to believe and a So closer growing.

comments. time. There to this I Pagano further over for back final are call questions no will now the turn Bob at

our results much. forward speaking for to you We on Well, look Thank us QX very thanks in with you joining today. everyone August. early

This conference concludes today's call.

now disconnect. You may