Watts Water (WTS) 5 Nov 182018 Q3 Earnings call transcript

Good morning, my name is Denise and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Watts Water Q3 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. VP Relations, and your may Treasurer conference. MacPhee, of you Investor begin Tim

good to everyone. XXXX you morning Thank and Welcome call. earnings our conference quarter third

On global provide his Pagano, on our are Shashank me results our perspective the and quarter CEO; the Patel, will and and Bob Bob CFO. third call with markets. President today

outlook our detail and more Before call to over in XXXX. turning of Shashank, our results for latest the remainder he will review the offer

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

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

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

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

over turn now Pagano. Let me to Bob the call

that any and since growth performance sales, the margin we the in morning, sales, adjusted earnings in quarter. turn our everyone. in Thanks, overview not Tim, and at The good where performance operating with a by to the Slide team led delivered first I'll the Overall, third XXXX. Please have quarter with I performance pleased our X share. quarterly in quarter. Americas. per presentation levels record again of an provide was very was grew Consistent seen half Organic

commitment Operating adjusted key growth. continued and was quarter momentum customer delivering from our double-digit maintained margin to of another value initiatives and time record These all improvement. the half. strategic also record driving the execution results a EPS of for profitable We with for growth, Watts continuous was QX first including the an earnings reflect

XX investment full year. to projected We Given our originally for additional X our increasing million from strong to about million performance, plan the million fourth third XX And quarter investments in contemplated. our than was spending we X more million increase spend by spent million approximately quarter for X X we're to the million. an

are future growth productivity. We believe help that projects aggressively funding will we and

drains water me expansion and sales let few organic price a about heater In Americas by of growth, make regions. the in lines. Now volume comments we product and delivered and driven boiler key plumbing, many the our double-digit

nonresidential our especially Looking end we US rates lead at starts, US vertical remodeling the markets. see steady strength. markets residential which more a to be regarding cautious institutional us the higher little indicators, including market is the permits, continuing, all housing market remained activity end and residential forward. healthy, interest in growth going

Regarding an increases. that which costs, tariff inflationary have the address raw into increase freight include went and we effect mid-October the latest the Americas additional to Americas in price in materials, announced

they get as investments. We and In margin was strong, operating adjustments mix reaction relatively enacted. unfavorable competitive further pressure, to but to incremental will due market topline address gauge any Europe pricing and continue sales tariff growth declined

and of slowdown serve. predict European in Shashank market growth a few provide growth seen we forecasts size benefit this from GAAP earnings in was realized to QX in moments. charge nonresidential the restructuring expect took the more months XX payback in expectations we Recent in one year, color August the initiated effort QX structure, some little a have of we next many right easing similar announced we economic quarter, a overall in As over we restructuring the just action and residential to cost will a in over regions our with a

this regarding So but growth. has markets see pricing. solid broadly still also continued where markets and Outside strategy. and a could slowed. some we In commercial The flattish concerns is see China geographic the and mixed construction the our commercial competitive other of we softness end are country's residential in Southeast quarter, trade market China we market impede saw growing East remain of Middle Europe. in bag. result general, Asia parts as GDP cautious Africa past in expansion China's a we APMEA seeing

outside During the a third included in pacific digits double sales by China being Asia offset growth performance double partially China. quarter topline digits decline

platform. drains regarding to would development expanding moment capabilities like I steel global our two of drains We're stainless important in an our manufacturing Now take a you to inform locations.

trench driven additions drains be additional growth. solution, stainless We've investing the in training working stainless already which North capacity one in manufacturing will markets. we will branded both Watts aid steel us PDI meet provides and our and equipment with And market. our for Fort makes in the future in in and a our The European steel addition delivery facility for Denmark These branded in products. expertise in Worth making have drain Blucher our marketplace commenced hot American support our First global we production should steel investments global heaters. Fort location Blucher requirements flexibility and Texas mid-XXXX where invested for Worth at stainless and a are we consumption have of plant project-based Denmark should to water already the customer custom completed and drive new

year are confident not. the positive our Finally, in remaining close months two with ability to on a we

our is for At X% to for operating convert than puts earlier, of back for Given performance be should at the takes and sales a incremental in now level. we be consolidated X% year and now the range to costs. in we We quarter mentioned additional company goal net regional the margin the August level, topline cash the beat I our adjusted our for income full the third lower the the flow adjusted a expect growth year. approximate corporate we to due This should second-half XXX% marginally growth outlook expect investments XX.X% with and free to some expect August. would record outlook provided consistent margin

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

Thanks will good driven quarter organic strong and of discuss the everyone. Slide Please X%. of Bob, and by X% turn Reported we million, third to up X sales results. morning, $XXX were growth

August in markets. drive a and the organic The was during in exchange in to in to Foreign strength due Americas a outlook quarter. Europe X% lesser $X underlying headwind as the million or growth our to compared extent over was

XX%. income in headwind, attained primarily in rationalization continuing totaling XX of record was non-operating an and I XX.X% operational per a by quarter productivity point lower margin logistic in growth the line for charge our driven a the $X.XX partially costs. impact the benefits earnings expected, minimal, profit XX our will into XX% minutes. was performance basis this or margin from was and strong basis and This new of a while $XX few productivity As improvement for product Adjusted translated year over investments tax up performance quarter more Europe. adjusted a the points third volume main record initiatives. of equally the operating last about Adjusted versus $X by performance. and talk and margin costs, below last in company. restructuring Price Earnings share share lower million about record million and of lower all-time offset per company. of increase operating increase drivers to the an We was year an including the a inflation and expand higher were commodity regional

third last quarter the same quarter was Foreign of the exchange period benefits driven effective by the was in tax as below points tax in rate XX.X% basis compared reform. headwind year. year a The last XXX $X.XX to the

a minimize the The XX% due Turning expect as continue incremental on year-to-date increased company free to cash spending. $XX was a flow is growth to higher to tax to that impact, and year capital year. payments due million cash strong additional quarter inventory same organic was build mainly law we cash to changes support period and QX flow this decrease, compared well. new decrease the trend Historically a to basis, and the a for as tariffs to tax last

goal free conversion. flow mentioned, cash As our XXX% Bob obtain to is

quarter, $XX $XXX a During debt. for adjusted part at we shares In the third in we new the performance, cash. shareholders we and operating have a using our margin dividends as strategy. million. a repatriated XX,XXX of highs repurchases stock while deployment our earnings pleased share of Bob's in of repatriated share, third comments, million total about to Year-to-date To balanced million setting quarter pay approximately million adjusted continuing $X.X invest cost down Year-to-date, the purchased quarter returned we to approximately and majority we third reiterate with capital of common of per approximately future. sales, our are that in to $XX

let's the regions realization, the the heating geographically organic delivered quarter. of the in broad during both water increase on drains, Americas strong The quarter. Sales was strong a and for price to organic strong $XXX were and performance growth reported volume on XX%, hot up wells, driven by quality, Now plumbing sales water and Canada both US million products and X, Slide results basis. review

We’re small also a albeit, seeing very strong America, Latin base. growth in of

$X about the in price X% sales. ahead impact or August the of of the of quarter we mentioned second As customer approximated pre-buys increase million

prior pre-buy the October Our increase best third of quarter $X price to million. estimate the approximates

growth lines. higher points To in was third net operating and year-over-year. driven So offset quarter and costs. materials XX about by both quarter very million the increase basis, and Americas pricing, more on than pre-buy million. Americas profit $XX incremental inflation approximately increased sales impact an good was were a productivity, sales for should margin $X impacted the by in to XX% XX.X%. margin $X on Americas investments, the the volume Adjusted increase the and basis operating logistic sales a profit Operating QX summarize negatively million negatively which The by

on basis please to $XXX X% Moving Europe and reported Sales a organically. were to of million X% up up Slide turn X.

a demand. continued of The sales within to or fluid marine within solid and increase the partially Foreign the by strong OEM growth platform. euro applications Drain was the project electronics due mainly was in in exchange drains $X electronics million, strong headwind platform our about timing quarter. experienced driven sales and X% into solutions

France channel strength saw electronic Benelux regions. better markets. slightly demand. Benelux and and drains, in OEM excluding We we drove in expert was sales export Nordic region And sold in increased. Sales products Germany, wholesale down, geography market By along also OEM rationalization. strength drain the were stronger product performance. Germany all Marine the and and the flat Nordic In but OEM saw driven into the by with in

as decrease was were operating commodity quarter X% the decreased Operating more quarter. for volume XX.X% compared Italy was benefits and points last unfavorable in offset last sales flat year. the to approximately of basis price, Europe productivity, The incremental Adjusted than XXX Finally by versus million of $XX restructuring investments margin and incremental QX mix higher for year. costs. profit volume, and

be that to August, third In Regarding we the we expect GAAP discussed approximately to $X.X program for costs. cost Europe charge, $X.X total U.S. related reporting, million. restructuring primarily took million in we pretax severance quarter the

within be next We $X pretax to XX are approximately incurred fully million. expect the remaining savings months. Annual cost estimated will at six the

balance of realize recognized $X.X personnel of rightsizing of balances the expected quarter $X our payback years. in about the locations expense approximately X.X the Europe. the adjusted approximates noted the benefit XXXX, involves in in savings in The was accrual pretax fourth half statement and principally in second restructuring various the million of restructuring expect to already we for as previous quarter including XXXX. $XXX,XXX million about income The third across million Total quarter the in We for program, programs. $X.X in

other solid a to organically. top actions performance. X% quarter review of erosion up APMEA's Europe X, results. action. on and to taking a a let's approximately reported with operating and On minimize weak basis Slide sales flat the cost for So $XX We're million In margin margin line restructuring were

solid within Australia products a rationalization on weakness Excluding with double-digit were were Sales up growth product final mainly line favorable top productivity. incremental strong during were China impact favorable China, QX up the quarter volume, the both material was of margin declined heating quarterly profit under-floor muted China. and intercompany continuation residential Korea. partially of adjusted China, double-digit by driven performance commercial China favorable significant increase a growth through profit volume Africa, by seen In growth should operating good half organically, offset APMEA. outside summary, with sales sales of in mix, outside inflation drop product a by Adjusted products. East operating weakness and in and This and APMEA's positively the and foreign productivity first investments. additional rationalization with exchange, APMEA country valve the and offsetting X%. savings of be outside in affected intercompany and and Middle organic

on year, in turning to supported expect be QX $X to few mentioned to sequentially our offset growth, I should quarter X% partially X%, like approximately Europe be comments entirely relates compared fourth approximately X, expected should versus by a QX. organic initiative, year-over-year operating should growth should AMEA's volume fourth and inflation. million. range and the QX. Slide while quarter of quarter pre-buys in and productivity fourth we the Finally, should as in Europe, million rate in On QX, higher expand restructuring decline make continued from the a of execution consolidated would basis, by as to should Adjusted growth Product rationalization $X prior of margin in the growth the Americas to increase impact be

by We corporate $X expect had increase investments We approximately total the slight quarter last investment Partially year timing operating incremental will to headwinds these originally due anticipate our XX.X% offsetting other spending in expected an run and million is driven additional costs. of outlook, incremental from incentive million previous cost of than restructuring versus in in last which year, full and plots $X approximate fourth Europe. are corporate the $XX of forecasted. approximately quarter million expected X growth we more million the the now is our cost. savings from margin - Adjusted a for reduction rate, margin of

consistent in past performance over We year. our million capital years. range $XX from full the will are now $XX We expecting QX, the for to flow generation million strong spends cash with estimate several

given impact in rates. fourth The we before exchange I'll last XX% turn effective fourth that, With back quarter. approximate Our tax Bob. current be Q&A. the rate over quarter the Bob as year begin to should negative FX should compared call the foreign to

momentum delivered future and invest record Thanks, earnings as margin we and double-digit and Shashank new performance and in while quarter. expanded new geographies. our will products We increased drive to initiatives operating The to the many technologies another positive sales, beyond. summarize, drove in continued from XXXX our investments growth, help continuing

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

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

Your open. is now line

questions to the on market with, Europe start Like a couple here. got

this You up a are are you growth. to this is saying guys that growth and first, investments America's the ton organic in guys seeing you’ve made a Americas ramp of in year, drive tremendous

think in your Can up of the maybe market similar imply a underlying that Europe stayed Europe or market Europe, for European some share way gaining kind would repairs still flat. in has, that safely pretty some where growth Americas, the haven't the of a you these drive potential has the say markets can share doing about market, some in the could like the but which there looking investments taking out I situation are year we same revenue you two you the you've start in ramped out talk year you’re to that at of growth we seen the Americas. all know in this have kind I you but

breakdown parts. a businesses our Europe. got Yes we look at when We've into two

business. business my And we're prepared of as well our I drains capabilities is Third electronics Europe. expanding as remarks in our as in drains said

difficult in do market. than feel particular, we're growing those So the growing sometimes and a third in because that's other regarding is are businesses related, believe that are of good the about at little we OEM we we two performing those businesses bit how time. the the more those thirds OEMs at of the we in two faster mercy those that and -- because business, of point

other we developments markets. not additional those in as those as product sectors, having So new are in much but near

more Europe. follow growth those inside of So markets to a tend GDP of

electronics believe our where is So side in drain we going investing and that's to and more we are be. growth

minus XQ your You with sounding about turnaround Can this in organically geographically product the sticking you Just what still 'XX. there? versus plus by or quarter drove X X Europe talk pretty is increase Europe color little guess forward? going the what which market of I you on the cautious a more on is maybe Bob? just and typical caution the drove But where

if third in OEM negative flattish basically so Yes, margins. lower like really are I and you and And And it the nice quarter German QX the business. we had was know electronics the an but growth in back at said our our drains because the QX their we business, in saw are QX. margins bounce look OEM you we from performance

saw and basically France that bounce we Germany Italy was basically flat. back. was flat So But was up

again, leading think of the were out So these there's markets you again, when at some indicators look I and caution still cautious there.

am focus in sure make So business and is product platforms to you in are electronics I in size cautious new our drains. with of the want and those accordingly, most we two then correct and is development right because other our I spending of the proper

in be 'XX? $X the of restructuring should at rate you by Europe savings that end the On annual run million

million think Yes to as I the the 'XX X the close its million full of in half X we 'XX we million said and or X.X see will then second run in rate.

X incremental XXXX $X an million which is about be will that but Yes, over savings, million.

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

line Your open. is

or some China And it you are 'XX I thing? as you in Com reacting into Res shape new that some through you seeing the we look do looks macro some how up? just res, on like of and flow just out Just getting new data are are currents Europe mean the cross you actually things think

in weeks Jeff, little so early February. inform you the reviews Yes, in upcoming so we our are through we a operating will going plan 'XX it’s

about our residential, hearing Regarding it's we right now up think and understands everybody that. should residential break little more what I are so bit we

is XX% at and XX% repair know replacement. business of break is if residential that XX% is at our you single-family residential. our is As commercial, multifamily of the and is you you homes up then third and piece it, exposure two But when thirds look

look fully. not same are and about new hearing are Resi everybody but cautious dependent that America we things is reading else expansion significantly construction if we but North exposed new not at are construction the and So you single single-family on we

Okay, great. latest to up XX% includes you then increases additional me list you does section the And X step XXX, your then do about that of supply Bob and on changes these peers. some result chain as talk any contemplating to the or and price to pricing contemplate a have just are

price that phase. and increase the On third you’re right,

our Our price X on then was XX% going XX% increase in air another is up price increase that includes to in contemplates, kicked the contemplated moment at that that but XX% there's it present Jan and those. September. And up the

From our in well our capabilities as a large supply including actively working our North North foundry have producing on other America here. suppliers know in we're here can point you you America the we chain as more places stronger based locally of we know view as looking produce dollar, many and

America you more just the market plan to you going size, what’s opportunity? opportunity, and driving one market in market North How understand what's then landscape. about what’s do competitive can that penetrating the on And the the talk

expert as stainless capabilities is players lot we an not ability have of local a steel stainless you local what that tell steel is that specifics region the larger decent that in I as where primarily facility standardize to but a in can customized PDI the it's and for market that into we we going well sized would is market, I'm So automate do leveraging customers. our welding get a it market in believe

the and expand that look on food from and there's the importing industrial opportunity that know more and we as focus with we really other type now in we but is stuff we we that products ramp well and So continue lighter beyond in food brewery on really we've done to our Denmark market in believe right market focus beverages beverage up. craft you and the at been the can

capabilities we Denmark so been and we build nicely our again to from by PVI at it now So stuff we facility. bringing in going comfortable and local tested in that, growing now we’re are

Sachs. question Lee comes next Your from with Brian Goldman

Your line is open.

kind few several be if in a some just past how us a out of the slowing, this it's related quarter I here past the you and there and broader quarters, to are been not know stands for the On it this maybe into exposures you China you your way watermark the quarters this share can this there. relative to huge trend for low and it now read but for is thinking outlook weakness seems the has when double about as you digits the set characterized market the you level I and somewhat or called recovery

our strategy exposed of outside happening its given things China, is when inside look inside are you of we first expand outside we I all careful, our that were of I so inside XX% when as the business, of business So first are China, China, about started in wanted XX% XX% China of well in our we margins of as felt and But be China. to China lower APMEA to China has China. and been political too to

a in let's residential which from whole because marketplace for it that ago, the purchasing it of high-end break handled when the look average. really it is really let's versus building. to changed heating very have you or shift on it's market we that in in first the So piece the call is it, call then contractor of individuals are some of market we low-margin but so shift has is different I at how purchasing a pieces, you we talked more the the to there and our by And under it changed are which was several the floor has that two down quarters piece, think

is the that's that profitable competition some side lot when lumpy really The a to we have commercial I'm that’s definition, in losing quarter. share would but by at and you saw and more the related jobs growth business start of we centers competitive of that's looking know we some data be project So focus. market buy

again to area. in remain focus a for So we tried still us. disciplined It's that

focused believe out but probably focus we'll growth and more low similar high Our in that we somewhere teams X% in a outside range, and in maybe see digits in of we X% APMEA is mid-single China less that on our we growth are decrease and of profitable then growth region. something be up a more -- on Again, or market will QX growing little to flattish the somewhere in to believe and finding China. profitable we of are that

question was price the these Second on just cost. is everyone's topic -- day

forward? we as Just going you. to thinking year operating then in you be seems should from points the more about capture of think XX can Are spread sort price but could own here the you but seeing I of you to more peak we about Or opposed related and a be how that to do about you here if is I thank we realization? know that’s that guess context? to there the investments how basis down should dynamic trend thinking be are margin speak your cost the

impact the see you tariffs we on think of been cost, a will year. our when really us into have next tariff lot the turns is have think Brian based minimal inventory seen price I I inflation to heading really

set have future. to getting in up invested we Again in us we front been to that have why grow price that's of more. we've thing for advance been the this proud So

we stay our investment. So our chain and why in this we're increasing us that's our between our price allowed supply thing front believe to productivity and of that's

the So that's been focus.

see now, some I price, XXX get think those more increasing to look you everybody at saw you when but and going start of this and QX into some next these think as increases of you're year as in bigger tariffs hitting QX think year. everybody lap price of will I that price probably price you I

was but and have last in could And line if one, that might there XXXk I this Okay, on fair of one maybe future? to persistent enough. some housekeeping that you then what income other was elaborate the item the missed around quarter

Chinese that it similar transaction in is favorable saw foreign bulk the on getting think quarter. so the primarily the lower the X.X But the happened Chinese level the currency. I situation with second had We it's in of our perspective. the by currency as we driven almost exchange we exchange foreign so at had FX from quarter a

Joseph with question & comes from next Giordano Company. Your Cowen

Your line is open.

is Rob wonder you terms I you us give American commercial left just about This how And see in color in for steam Joe. some much market distributor of levels. North the could in inventory your if growth?

channel Yes, from a it's perspective I think healthy.

still based I that pretty it's our think quotation, also however as our market the there. it's front in decent discussions believe average on well field environment, inflationary probably the you know out this backlog, with channel commercial slightly of buys above tariff as I our our activity as

And about good the share than more are of feel commercial fair get into that going the heading we business. So to market XXXX. teams our

[Operator Instructions] Seaport Global. Your comes Walter with from question Liptak next

is open. line Your

to you did the that Want may how XX% Americas to ask be about volumes versus and contribute price in much the quarter, organic. specific price about

over Walt. X%, Little

some cause holidays things carefully to went I comments you the is through in there things numbers turning something to that fourth how trend look then quarter Europe. know in follow-ups you the you quarter. the wonder think longer some the cautious bit that would little have Europe about if wonder that tends and if The And on third as to just quarter I changed there made were I more

the during look it quarter we in of quarter way the the and So at second third Europe.

last We are you down a couple look percent, year. at we're And up if then X%.

Europe for Our X%. was up fourth quarter

we year. difficult got So a compare next

fourth quarter. modest we're in the growth So thinking that's why

So that's how we are framing it Walt.

during along quarter, kind in you you And see the able were China. on to great. a same month the with change month China Okay, lines

it's is to has market Again, and there, maybe soft of an oriented the China be project sensitive. The change uptick. no a and real continued lumpy little bit soft, been residential market so commercial is very

teams hard to spending of believe again, focused are and do commercial the but it's side go not But is going see any our to on trend there. after that growth projects on money. profitable were again, We focus there's that. our to So on market lose

So our that's clearly, focus.

comes Halloran question from next with Your Mike Baird.

open. is line Your

So one one clarification clarifications, question. two

is number that clarification first - expecting there on out an Was India, threw China, APMEA X% Bob. The all that to inclusive FX number that or that X you of fourth growth quarter. that rate organic is you’re

was It organic.

help we transfers bit and a you for move think quarter, where that about to intercompany quite the tracking. are next year. And then quarter run think depending should and those margins it APMEA grew then rate Obviously second for other on the about that can fourth stronger could right what’s size How good this factors. around

helped transfer tariffs APMEA as significant some our that quite third in was the in buys did very third ahead solid then drive so margins, we we have margins a you higher of that as saw volumes, driven factory The some well had and intercompany the China pricing in by some we quarter favorability. frankly which that foreign and productivity as exchange aren't quarter

the favorability, up the third as FX rates quarter. quarter happens in down intercompany will the hold is fourth quarter volume long come still get versus what that the but we exchange the in So as fourth foreign does

lower So than sequential fourth still slightly healthy basis. quarter, on a quarter the the margins in but third

the final And queued call turn no up further I'll time. this more over for to Pagano there are at back questions Bob comments.

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

call. This today's conference concludes

You disconnect. may now