Watts Water (WTS) 4 May 222022 Q1 Earnings call transcript

Ladies and gentlemen, thank you standing by. My name is Brent, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Watts Water Technologies First Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise, and after the speakers' remarks, there’ll be a question-and-answer session. [Operator Instructions] Thank you. pleasure Vice today's President my Diane over now Senior McClintock, of is to call turn to It Investor Relations. ahead. go Please

Thank Welcome everyone. conference good first and earnings call. to quarter you our morning,

Bob Pagano, CFO. Joining me today President CEO; Patel, and and our Shashank are

second first call, our provide discuss an and the current quarter and the the quarter overview will outlook Bob will today's operations. of Shashank the of full quarter details state discuss the provide year. markets During performance for our and first of for and our

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

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

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

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

you, Thank Diane and good morning, everyone.

investor been finance Diane you communications. As and team has retired for assumed Watts key has McClintock contributor and part responsibilities XX Tim of his an many to Investor years, month and integral our know, Diane with of last has over within Relations. MacPhee earnings a been

overview the and Please seamless. I'll quarter. will We provide are the transition turn to confident slide three of an be

difficult for Central The double-digit the despite first first better-than-expected remained and start freeze in and disruptions, contributions teams of inflation. despite up margins. delivered prior year, South key their our labor chain strong, last several with record to the year. markets quarter team shortages impact as year growth thank to have a operating lockdowns New to the manage underlying Europe quarter they and supply the the entire in Americas We through results APMEA, strong the I want unprecedented held with in our Zealand including the our of markets, China. of war the the U.S. in comparisons Ukraine. In due impacted half during Demand

and still double-digit the delivered However, incremental offset quarter. expectations, line exceeded inflation, than more normalization. teams in and margin investments the volume Adjusted growth productivity, top supported by operating which price, cost

strong June. announced earnings cash increase a starting we dividend As a expected and of flows, our XX% in result

Our balance sheet remained strong.

We have in second commodity see will logistic costs, ample announce of second steel increases, affords we to capacity, especially quarter, Operationally, start have flexibility benefit to copper, the capital us effect our increases together increases with should quarter. price of costs globally. increases strategy. energy, during us the which and into additional in in driven the those end the price go Those and at allocation

worked chain availability manage increases. to cost component supply teams to and sourcing have and Our diligently facilitate

to better us customer built We meet enabled have inventory higher proactively demand. which levels,

automation smart $XX During to initiatives. connected million, projects. smart spent plan future. for quarter, which growth, spend the of We additional incrementally connected the to half and our and products invested we to invest an We continued in during was approximately over incremental XXXX support $X million and

end update markets. Now, to provide on I'd our like an

starts. and single replacement have demand. well. is indicator first This the positive in repair market would been up In several continued holding to constructions, in single-family late multifamily with as an Through ABI North Momentum Index, months. Dodge new and low for future new been ABI and digits starting residential the the XXXX now, construction construction new grow commercial is including starts indicators, residential industry America improvement has strong the the pretend quarter, construction, have For up new of non-residential

and triggered shortages rising and rates, inflation we in of interest rising the and energy material GDP the impact labor has both war by the on higher are reduction markets. costs. driven the monitoring forecast However, inflation In new Europe, construction

direct We the estimate have of to Russia. stopped The which XXXX. our shipments $XX approximately of million be impact to for we rest

energy a than shipments half Germany second be subsidies of these we provide Italy we should continue and all sponsored As near-term. our to indirect previously could support Russia, that at best of thought. result XXXX in slower the factors estimate and of Government to anticipate home least the in

expectations be war Ukraine in Asia-Pacific reduced the in first region, In headwind. the markets However, and our China resilient quarter. could the the a of GDP impact were

impact anticipate of oil, the fueling we construction unfavorable the China could positive higher an business. on note, quarter, Middle second recovering a in East have in particularly lockdowns is in nicely However, price in heating the region. On the with cities the a various spending

the Now the for the remainder an of update year. our and on second quarter outlook

second the in first our performance for freeze and the from despite margin a quarter, we are year and the solid investments. war incremental Price more our of expect in the impact inflation operating anticipated should full half, headwinds XXXX. increasing offset We year-over-year expansion. strong than outlook Ukraine, in productivity the to Due

February. economy headwinds and outlook to around quarter the the particularly the growth should increases offset with Our on first in and potential consistent in is in year its price strong Europe. half, second our performance in impact full The organic additional war able be sales guidance Ukraine

important be and to Annual the will ESG Shashank, latest this turning will want The Report our we I Sustainability Before to mention over summer. accomplishments report call initiatives. our enhanced issuing some discuss

to that, and over full results quarter second With year outlook. Shashank? who quarter tuned. our first the our and call will turn address revised stay Shashank let So, me

growth everyone. and Please to the organically. on saw results. turn a were review reported million all from and despite up regions the and four saw quarter's United X% States. fees We good strong tough Central to XX% $XXX in basis Bob the South able morning, that in drive the will benefit of Sales comps Thanks double-digit I slide XXXX realization. demand up consolidated first solid and We quarter included first XX% a we're price

effective year-over-year by $X weaker a profit XX% price year, sales stock roughly of offset euro, resulting of X%. million, of XXX EPS of last than the reduced from tax million or XXXX. driven of operating as primarily Adjusted the accounted XX.X% mix incremental points and to restructuring was a was from compared operations, earnings $XX to adjusted tax XXX benefit tax operating impact XX%, supply relates first to awards, decrease resulting million geographical Mexican lower Adjusted the exchange basis manufacturing adjusted investments. higher $XX volume, quarter and up inflation the contingencies. Foreign productivity primarily our year-over-year. than was margin rate was points incremental and The compensation up and vesting for $X.XX. chain sales Acquisitions XX% by of The favorable up more basis

the than and quarter higher negative last restructuring cash offset decrease income. as compared for in our to of free and incentives was which first flow more employee cash Our due capital quarter invest was year. higher payments, million to flow of positive higher spend, and cash million The proactive net $X inventory, in customer to the $XX decision

free flow flow communicated. cash free drive more our and net XX% or to income as at our goal conversion in improvement sequential of expect cash full is year We previously

of some in And price by XXX,XXX Organic a points full The on with for execution. all Scandinavia China a intercompany headwind offer growth volume provide double-digits, recovery, and quarter, also was $XX Slide The turn to tough XX% third-party markets dividend. growth in a and platforms growth and driven approximately despite increase Italy with and which heating. of tough as except sales and Adjusted our first comments freeze. the productivity, volume continued primarily impact XX by offset five compared unfavorable of marine price double-digits. New as food for had market a operating Bob to operating war the let me which be quarter a than compare the by all Americas saw the by price strong heating robust. U.S. were in XXXX. up few U.S. Middle driven We million beverage impacted due driven by exchange up our stock saw The government and or and in repurchased Germany assumptions due of our perspective, from the Operating the not we high strong inflation, foreign increased investments. impact and to increased growth electronics saw affiliate higher to by a approximately sales saw platform subsidies. drains of more end XX During impacted China growth Europe shares sales. quarter quarter freeze basis the volume our adjusted a Reported XXXX. about OEM first more and investments and margin regional margin China's first and freeze HVAC, growth strong to Central announced X% Zealand business approximately Ukraine outside and down in a region XX%, reduction underfloor volume, results. in South outlook. mentioned, movements. organic of double-digit to incremental and expansion the from strong XX%. delivered organic XXX significant. provides than sales net million. Please to in The demand in business growth. reported resulting sales our DIY, quarter productivity slide margins strong volume quarter, From approximately strong the XX% and the plumbing, basis inflation the Reported price, in return sales had inflation. with from We due in by quarter foreign grew Adjusted a valves primarily commercial due also than all margins was APMEA X% channels, was the was common were the increased profit second approximately delivering X% had operating $X growth unfavorable year was XX% offsetting more from was basis digits due and X% exchange sales added the and operating organic East. to points sales, normalized by Acquisitions costs. movements. single six points. Australia, expanded quarter, productivity, the organic which also in up up from

outlook. the second First, cover quarter let's

the benefit in year-over-year freeze XXXX to solid the compared the despite a the We in of U.S. headwinds second expect quarter related

scheduled globally offset a incremental mentioned, and in chain total, Bob price we have additional have and estimate announced to are later second may organically will In between impact As minimal X% supply quarter, inflation. on results. an increase XX%. consolidated sales so we effective grow These to become commodity and the

second investment return the spending of and quarter, driven of approximately acquisitions. operating million range estimate from drop million and to costs incremental sales volume XX.X% by In XX.X% we approximate to estimate expect and $X the could related prior adjusted partially All-in, We margin should Corporate offset XX% of of addition, normalized incremental through $XX for $X XX%. between price costs. from and by we cost incremental $X million. productivity to million the business our

We debt end The rising of expect second should be due million the rate XX%. approximately first the an increase tax versus quarter in interest that XXXX, rates. $X effective interest outstanding to approximately an adjusted increase should quarter be expense in

X% of This We second in euro/US our year-over-year X.XX versus the reduction EPS implies with million a a and second average versus share in $X.XX we previous the rate provided average a share reduction second a our year, X.XX prior of XXXX in equates in sales and $XX are now February. euro versus reduction quarter, X.XX and versus a for of million the dollar sales a in and guidance. quarter a $X.XX in EPS which assuming quarter to $X the guidance FX rate of in the

year cover let's Now the outlook. full

prior X% expected the full to the quarter in half outlook able price start weakness that war are consolidated Ukraine. organic believe and in due We Europe to to in the year XXXX, growth. For our increases the in offset first incremental the maintaining our X% stronger-than-expected we second be of will

basis sales organic XX.X% of to to our now our outlook, points. a to While previous our We full XX.X%. year are adjusted of flat range increasing we maintaining outlook to our expansion and expect between operating be points basis operating margin we XX growth are to margins compared XX XX

will inflation in than productivity. by increase and the more expect be We price offset

XX% expectations cash line with outlook in are to Our of February flow be previous should free approximate our in income. anticipated net and

reminder, restructuring we incremental in a payments expect XXXX. As CapEx and

reduction our the $X.XX roughly share $XX for $X.XX and in could guidance We sales in versus provided are Interest year, the versus be in a reduction equates rate $XX average euro/US assuming euro previous year-over-year, versus versus regarding a FX in XXXX for to costs now sales year, the of million would full year the in key and X.XX of dollar reduction a imply X.XX million in the of should $X we rate X% February. X.XX year with corporate prior the a EPS EPS a average full in the of This share full guidance. million we for and a million expense year. other $XX for our for approximate And sales year. and inputs expect and

$XX tax million XXXX expected Capital range. the and Depreciation XX%. approximately for for to be rate should be Our the estimated million $XX spending should adjusted in is year. also amortization approximately effective be

the for We expect count to year. our share approximately XX million be

we begin Bob? turn before me back Q&A. Now, call let over to Bob the

summarize On Shashank. questions. address we discussion your seven, our to Thanks before like I'd slide

we The all continues and that underlying to organic stronger by to double-digit regions stronger accelerate, additional in growth with was announced first price quarter cost demand. increases. than price supported anticipated, increases offset and we've was Inflation

hard non-residential should situation Strong daily. working North top America on a good both stay monitor and dynamic price/cost are demand replacement support and of in first We residential the the repair half. to

expect we a a As strong result, in demand price. with second solid quarter favorable

maintaining strategy full investments and expectations increasing and incremental our make smart product headwinds We margin incremental continue to Ukraine. offset outlook, in are drive to from strong our second to new drive in increases year plan half able connected development and our are growth year organic We war with to price and to expansion the operating our in automation start full productivity.

We With for well-positioned please And lines take the ability and they operationally advantage opportunities operator, I'm in arise. our environment. financially, that execute uncertain are to commercially of team's market in confident to as questions. open this

Instructions] Jake Jarnigo question Your from first [Operator with Baird.

open. is line Your

Jake again today everyone. morning, for Halloran. Jarnigo good Hey, Mike

lowered first demand how your primarily this guess in? So, but business to into we've it yet? following try about see -- as potential specifics of that guess, products? just, materialized I expectations And weakness question, here. Are I Is secondarily, impacting to Not touch question. could it non-discretionary rolling of any twofold the of know the where any you see thought GDP, kind your weakness seeing kind I'll then will on you I Europe you're and thinking side? come Is to but there, that

exited. only Yeah. to Good is change seeing we're of right morning, seeing -- the Jake. we're lack now, and is the What orders shipments Russia that we've

So, feedback on at but are hearing time, we're that begin point ground in optimistic, to this now. teams right slow our the we're to from things cautiously going

we're that's now. So being where cautious right

a on shuts it Russia off think what's going I the of gas, dramatic impact. to just that and I extent depends happen. If would have war think the

still visibility cautious at until early. It's happening time just point a to have being we're in Russia. So, this in better we what's

Yeah. related understand. Totally then, And to somewhat that.

the this to see typically, sequentially Europe? back to making in it. half back relative thinking margins half. first how looks year, guys that Is logic the implied it primarily the are with are the think I at isolated year, like we decline of half Americas, sure you expand the as that guidance in thinks Looking the here, margins just of about expected

a away Yeah. why leverage we in a -- have that And spend versus about. half, and half. volume we the kind you half the we the normalized second that in you have of then, see incremental investment in the margin little function first of And have goes first second incremental half. talked That's obviously, that's costs -- incremental profile probably bit

jump All the back for right. in queue Great. now. I'll Got it.

Thank you.

Jones is Stifel. with the question of line Nathan from next Your

open. is line Your

morning. Adam Good Nathan. This Farley for on Yeah. is

the the European lockdowns potential down Following understand COVID revenue guide, up in on slow impacts war any Are in from Ukraine on expecting the in growth. you given China? APAC,

their been weeks second lockdowns the know five We're created team Certainly, China China, That's the for closely. locked I Yeah. has very piece. in watching has Shanghai uncertainty. our now. homes

heating in shut that because -- we're in our business construction impact is particular, So, down that'll area.

there very cautious watching we're of -- one that that China. closely. are That's these we're large uncertainties out outlook and So, that our in in being another

larger Watts majority the -- have leading share And some believe much is that availability and you this environment you think sophisticated you competitors. that's better Okay. more that's products Do and gains and in in? then, markets more which market its than product of do occurring

invested we certainly, we've money a available to Well, lot inventory into of products. sure make have

both you as where America Europe. We manufacture and vertically where and we have know, North integrated sell, a strategy, in we

So, we the helped. demand certainly uncertainty in believe and environment in spikes has that this with

taking we're think places I market various our and own share. certainly in So, holding

we're believe losing sure. for market So, we any don't share,

taking for Thanks questions. my

Thank you.

Your of Giordano Joe with line is the Cowan. question from next

Your line is open.

This in for is morning. Joe. Michael Good

Good morning, Michael.

Good morning.

Yeah.

As market, multifamily, What's on there? be your housing the that outlook how we look should specifically forward? about towards go thinking we

code positive. products larger has we multifamily And homes, Multifamily been very more more homes. driven like have because than they're single-family and

be in cautiously by watching that that but So, although, market, we single-family in being than more we're very so closely, optimistic might multifamily, home that market. peeking offset

Great. Thank you.

Your comes [Operator Jeff Capital next question Instructions] Hammond Markets. the with line from KeyBanc of

is open. line Your

Hey, live in-person. and guys. Jeff It's

Hey, are you? Jeff. How

Hey, Jeff.

Good. Good.

pricing. wanted of of terms And a looks just Just out quarter. what seen to kind America or It get better in it was price of the you've putting like been was growth. in been you've of what most North follow what on sense

Yeah.

XXXX. through little we So, then in just was XX% a our -- realization, first Europe bit we the in you price as -- of kind and less in in there. price the expectation bit know, as more our a forward little quarter, approximately announced And the in go APMEA, middle globally, about of growth sequentially Americas, the increases,

this get the comps half harder second So, in of year. the

what we that's anticipate. So,

forecasting actually quarter-end, job another realizing prices, but a it thing have teams it's because future, in the done far the them. the so far, as approximately till as thing we XX% realization. The one announcing of was QX wait the Now, great

your the you has of you Okay. quarter. any indication the or back, I are Great. a of didn't know being pulled as what opportunistic pipeline. that's I up noticed of aren't function stepped stock in And the kind buyback then, guys seeing M&A if --

Yeah.

let that. I'll the M&A. So, talk take I'll about Bob

we've one stock -- that there issued an back stock also market did for On we stock quarter, QX. there's buybacks in was and we stock dilution. We've offsetting and it always historically, but equity, opportunity buyback. certainly if opportunistic in the first go buy was back buy in And yes, the purchases, an in the said

And front, disciplined from we're you Jeff, on regard. the M&A as very at, look know, that

So, we're watching.

have pipeline. solid but to be And We -- going we're a disciplined.

So, we've felt we not of the any small done allocation And best done some that bolt-ons. now, acquisitions. was major right in cash the We've quarter.

seems HVAC, sorry, I'm of building America, being think give just And Great. commercial commercial or Okay. in And us sense the are seems I But back labor. in what by most kind more then, construction like landscape. people you're Hey, robust. held quite still we're seeing North saying, And still we're a backlog. commercial of

labor you look of comments, the right further think that. on backlog everywhere, think But right had And spending -- there the at I highly by segments, We agree similar large that's as except I the for the impacted in that But in indicate in the would the head. seeing construction, of all with continues. expansion. projects We're And we all We They and hit a even growth it would prepared need commercial across like leading Yeah. now. indicators, then, that expected was given the board talked was I things. retail, that constraint. about some my freeze. we which

-- our need lot shortages, Our just overruns. delaying They they're cost there's and projects discussion work causing material a more contractors and which labor are is there. of with having out

one. then, in channel. talk And Maybe just the just about Okay. last inventory

you've but product, quarters, I said light. maybe maybe or better there's think the are couple still inventory's competitive items past gotten that over for your other

Yeah. the inventory in We're same. I the -- would say growing seeing same channels.

particular need don't a products that They have what the the inventory all we the builders suppliers. spotty where wholesalers help them. need But I and it's believe they complete to give think the them they their from the have we need needs solid to backlog think need we to when in regards have they in jobs. I to visibility are. continue And all

to that it we'll and So, monitor continue very watch closely.

guys. much so Thanks Okay.

Thanks Jeff.

with [Operator Instructions] comes from Sachs. next Lee Brian Your Goldman question

Your is line open.

the you follow-up guess, question Hi, first will margin the the team. or half America guess, be implied in I the second XQ about This suggests year? to I your indicate low-point the that the the XQ think also, by back is should second just for full than -- can for is you previous then, segments? And be talk expect to low-point of last do expect we you year Europe I on margin down for you're in Like, flat potential question. year still those lockdown given you questions. still to APMEA? Thanks taking on margins, the APMEA. up on those Grace up Like and be of -- taking trends, half year lower. and the expect in do the Are to XQ Russia/Ukraine on margins of conflict Thanks. quarter Brian.

be another second that felt in region. we that between still first your the of stated. good would margin get commercial it's half, point, QX to little less lower it's quarter the we'll be it's equal there, down there. and as the looks and that look question with our right in by so with right, be of -- margin with second the QX down this the we'll kind as is APMEA, fixed and for like. greater cost take But accretion this multifamily, -- -- -- the so volume the say North roughly look Certainly, more between will update Breaking I On strength that basically a of probably at And we decline and But point. profile then has quarter Yes. margin third in QX impact QX, at and Europe. the bit reasons should is now, through end which as margin the structure decline about like margins of the at talked that I what at and to in should as Europe, markets, America, we noted, Bob it. Back Ukraine goes your the the heavily war the first question,

Europe, decline talking the sequential And margin Understood. like you Okay. are or decline? in declines year-over-year about Thanks.

what second talking first it'd about. Well, right? half, That's half, we're be

second from be half first it'll to half. So,

Okay. Got me. think, And question growth, it. like organic segments. I then, about, last growth quarter then one And for on you talked last revenue by the

you updated Thanks. lockdowns Just given and the conflict on an Russia/Ukraine views in give us Asia, the can organic segments? growth by

clearly, guidance. So, got and the numbers you QX second the quarter

I the second is at war, to question where regarding think second -- the impact half. Look And half the we expect would Americas the look mid the Europe. digit decline we the from your be at relatively of flattish low in would we the the second, half standpoint. impact probably growth. high as Europe APMEA digit and in single single like the mid second be in growth be would Ukraine a

it pass will I you. Thank on.

Thanks.

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

you taking speaking We you a today. in safe. quarter for in stay early earnings And day continued join call interest to forward us in good with again August. Thank Have look and appreciate Watts. your our the second time to

today's Ladies and for thank concludes call. your conference This you gentlemen, participation.

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