Watts Water (WTS) 6 Nov 222022 Q3 Earnings call transcript

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Watts Water Technologies, Inc.

Third Quarter 2022 Earnings Call. [Operator Instructions]. pleasure Vice today's President my Diane over now Senior McClintock, of is to call turn to It Investor Relations. ahead. go please Ma'am,

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

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

During Shashank an of the will quarter details our quarter will discuss the end markets performance provide on for the and third our quarter for update the fourth you our Bob initial and and today's third call, year. overview and our outlook provide operations. of full

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

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

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

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

the our wake Hurricane also sympathy in start would supply thanking an suffered customers outstanding I'll Florida, you, and our provide shortages. our challenges Thank by and colleagues to continued turn like Watts QX of I like Diane, to and who good overview the have of who provide Southern to express and to losses I Please escalating have X, to and inflation, Water my morning, significant Slide in Ian. chain execute service despite everyone. support performance. team would entire to labor

with damage, sustain our and impacted, in providing Although are them not our did Myers support. many we site significant of Fort were employees

operating able were share. were third we earnings In record better quarter, than with terms to and we expected significantly adjusted that per deliver of the margin sales, adjusted results quarter third

and us We meet tailwinds higher-than-anticipated pricing continue to the benefit availability, from demand. to which inventory allowed

Our able And mid-single-digit of in impact quarter deliver driven organic inventory were Europe and another war, crisis. we team Russia double-digit of by price to availability. despite the growth and Ukraine Americas delivered the exit from the energy the growth,

markets nice bounce business a saw cash Year-to-date resumed impacted in our lockdowns free quarter. to additional second than also inventory. as capital due was meet after flow We needed key to in demand in expected APMEA in back several working of and China the our softer investment

will due flow We versus the expect seasonality, our I conversion a XX% strong cash fourth think but closer we to see normal guided. quarter XX% to previously free

to flexibility in continue invest automation M&A. balance with inflation Our the and in strategic us and labor through From provides remains the perspective, to despite our commodity operations strong for in energy significant continue projects, overhead to investments factory and we costs. see an smart some future easing R&D, sheet connected

optimization. working secure cost supply are and teams Our to drive diligently

by shortages possible. labor adding managing are automation we addition, In where

seeing in supply are We chain. some our improvement

last quarter, is we electronic as about availability However, challenging. spoke still component

Now, Global trend markets. end to update downward. I'd provide continues on to like GDP an our

new repair GDP. Rising However, markets. reduced and our rates single-family remains North currently despite interest well key The residential holding GDP in America slowed market positive up construction. replacement is have

concerns be Index continued multifamily single-family construction to suggesting to rising Europe, continue a should are home in In Eurozone negatively reduced new food support The territory, grow. nonresidential ABI Americas, economic including and costs expansion demand. resilient, as Dodge beverage. continue and is sectors industrial the war, growth on the affordability activity. impacting into will GDP nonresidential Certain recession data Momentum remain inflation XXXX. of more energy projects in In in have supportive. and However, indicators the been projects downward center trend

Russia. approximately this China In shipments Asia-Pacific to we the direct stopped risk from zero million The impact markets our third the annualized in of rolling and policy third a growth. was $X have our is the reminder, approximately in lockdowns continue rebounded region, estimated a quarter. economic the quarter, pose COVID As to nicely $XX to million the but be to

and residential In seeing are markets. rate on addition, both interest Zealand increases New of the impact Australia

full Now, an update fourth outlook year. our the the quarter on for and

fourth with increasing versus the expect prior growth high We sales year our margin and we outlook results quarter year. and the single-digit organic full to are our strong year-to-date a fourth improvement quarter, Due for solid our outlook.

$X outlook. fourth In increasing over $XX quarter to investments primarily XXXX incremental the who third our to to The smart connected $XX addition, and million that, quarter communicated. call address the previously year million and results full of million revised Shashank? our investments from With let is into projects. our Shashank, and accelerating me increase full we're year and turn will related

Thanks, and Europe. Bob, third had to turn Slide XX% the on of million organically. quarter and strong a up and in consolidated Sales in I were review with everyone. will a growth and morning, mid-single-digit X, $XXX X% basis reported We good double-digit the growth results. up Please both Americas in APMEA regions quarter's and

lower operations. year-over-year. in Mexican basis Adjusted The to margin tax points investment $X estimate to per XXXX. and XX% to for roughly of approximately operating from XXX weaker we incremental Consistent with by incremental third were last offset price chain up million, to accounted Foreign reduced basis cost. We million than $X effective lower XXX exchange, inflation investments. primarily not to second impact of profit million do which up as adjusted and operating expect benefit be earnings our supply of was adjusted rate productivity more continue X%. this than a in recur. the XX.X% primarily restructuring decrease quarter up to XX.X%, share margins Acquisitions to our was relates quarter, The of and year-over-year the points year, $XX inventory euro, was our by million sales $X quarter, Adjusted the XX% million sales at $XX compared or driven the $X.XX.

flow cash free last in well incentives. incremental was as $XX of employee income free to outflows increased restructuring, The year. and fund year-to-date an as flow to primarily million year-over-year Our due to million the in payments as cash decrease third quarter cash compared taxes and to $XXX related inventory customer increase was

leverage now free strong and remains was XX% expect provides leverage fourth in X.Xx net and seasonally of strong quarter flow year net balance expect Gross We negative with ample to full be sheet and conversion flow us cash free X.Xx. income. The cash the approximately was flexibility.

capitalization quarter to also debt net end Our negative ratio at was at X%.

million and The few quarter quarter, XX%. our increased was sales. more channels. across X, than and margin organic which shares Acquisitions profit margins we platforms primarily realization approximately approximately a price increased During basis by driven approximately points. driven we growth to will reported incremental or price XXX operating $X investment Adjusted by strong primarily the purchased another added XXX,XXX I The and to with by productivity, expansion for $XX Americas was offset million XX% by shares of The to adjusted all operating an offset Slide approximately inflation X% and and have provide sales all stock investments. at million. up Year-to-date, results. turn dilution. regional the comments repurchased of XX,XXX Please $X strong on common had

by driven from Scandinavia had costs, beverage demand end negatively and organic in foreign growth proactive to OEM realization, also strong markets. Our exchange to unfavorable impacted across energy sales due growth with investment double-digit platforms our approximately sales all Italy, XX% government inventory expansion. our combined contributed was strong margin with in with by continued at growth was also and growth business lower organic We saw price food and Reported marine movements. Europe's Germany in incentives. X%.

estimate our a Russia, shipments approximately impact that million we As quarter. be third to we the stopped $X reminder, in of the to direct and

our However, COVID full sales of points affiliate as by as XXX increases, XX% basis to fourth outside investments. China in second impacted were the due heating offset inflation, productivity productivity growth lockdown exchange and decreased valves points in deleverage energy and and organically our margin underfloor sales by volume, rising the margin double-digits outlook. sales X also strong organic growth X% up was the assumptions unable double-digits investments. movements. XXX quarter. negatively reduction price operating declined volume unable price from grew operating and unfavorable China's both quarter XX%. after to in Organic cost New fully about a Reported in by was operating APMEA basis rebounded year Slide were provides Zealand. Adjusted offset foreign and inflation sales growth and to were as

First, outlook. let's cover quarter fourth the

to deleverage rates Russia the moderation direct offset price quarter grow between X to of in comps incremental challenging quarter by the through and in implemented the $X year is of and increase driven year $X decline million. XX% in price are consolidated XXXX. X% versus productivity due first sequential third is million increases prior multiple operating could XX% versus estimating margin the softening the the drop This exit and investments. market margin The estimate range to primarily by sales of fourth underlying the estimate quarter, year. XX.X% from organic growth incremental over We and adjusted volume by the We months investment partially due period. Europe, approximately for operating incremental in our to XX.X% fourth conditions of more prior for sales spending and volume to X% the prior with We at in to from driven

with XX%. be the expect Corporate quarter expense will price/cost we headwind be The normalize the to fourth balanced. $X becomes addition, the line tax favorable quarter. is Currency should be quarter continue rate expected $XX to million. In approximately should third a effective Interest approximately in million. more to between fourth and XX% in dynamic price/cost be at as costs the in

rate This $XX to reduction We which fourth in sales a X.X implies a dollar prior a of the euro-U.S. FX versus assuming share the quarter year. year-over-year, fourth XXXX. reduction in of EPS $X.XX average X.XX the quarter rate of million and are the for EUR versus of average equates a in XX%

full Now let's cover the outlook. year

For to XX% of our year sales XX% increasing growth XX%. are the a to X% range organic we outlook of outlook previous full to our from XXXX,

full outlook operating range a to year for points increasing basis of our XXX XXX plus adjusted also points. to the our margin XXX are to points of compared to expansion basis plus basis XXX view points basis We previous

We be and to are XX.X%. now operating expecting our margins between XX.X%

revised strong quarter, the performance quarter plus third our outlook is through expected by fourth Our outlook. supported a

XX% now to flow Our of net income. approximately free cash is be expected

inventory incremental levels flow investment. to year and higher cash conversion and restructuring, payments We supply due is CapEx, our inventory begin as income to free do plan Our the tax lower prior chains reduce than normalize. to incentive

$X.XX year, the year. a year. the equate of imply $XX for rate of year-over-year the year, and million in inputs approximate are key a full year This average assuming other we dollar for should a euro-U.S. X.XX corporate versus X.XX share XX% expect to average sales full expense and in reduction $X would million now costs rate And million For approximate the for would FX reduction prior in should a year. the EPS the of regarding Interest $XX versus full we for XXXX.

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

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

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

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

was quarter third realization stronger as inflation. price drop-through productivity The double-digit anticipated and growth with organic and than more we than offset strong

manage to continue effectively price/cost dynamic. teams Our the

driving and our year investing fourth in remain increasing end, quarter. our future start are connected To increasing the and a solid the and expectations our on smart based We for innovation that strategy. full outlook fourth quarter. we strong are focused for investments on We our by our

are economic channels conditions We real-time customers. in monitoring and our getting feedback from our by markets

handle to conditions. operator, macroeconomic Our With team positioned these the that, open lines for is please well questions. experienced challenging

Instructions]. [Operator

Hammond Jeff of line KeyBanc. the from comes with question first Your

start the growth but organic Europe. hit. by I maybe margins resilient the on surprised get how So, I to just was mean, seem was, to

uncertainty then just just maybe and expand what a lot -- on of -- don't on So, know the Europe. you're seeing we that's see in I if rates expand as order mix or

Yes.

was Jeff, So, that grew of price. bulk The at Europe X%. approximately

In out, volume price actually negative. was fact, strip when you

fixed margins impacted high had we obviously So of of factory European business, And negative. and our volume unit the because cost down. why that's efficiencies, we that nature had

We slightly unfavorable also business in French had as mix our well.

for contributed bit decline in Europe. little those but a unfavorable mix, there's the So, of margin

we're rate, seen. October, order similar And rate we've Jeff, on seeing the what order patterns through

resilient. up holding it's more So, a little

focus I going on think lot energy-efficient and a of a repair products. on replacement lot of

discussions past real levels time channel, I of couple But just inventory we've Great. chain in about seen seeing side. product of over around had Okay. improves, then, quarters in a inventory and lot think -- the we've the around residential And clearly just supply you're as your your destocking destocking set? levels the anything and

Yes.

not et the channels, level it cetera, that's but very think related OEM that significant, to serves I past, the some primarily And destocking head hit seen wholesale right but depends, on destocking and that we're we've of flow-through, of So, closely. we're in seeing an We're watching some monitoring. closely residential And on you in it inside as Europe, we said the obviously, in area the single-family. residential.

your Can you X? remind mix, your what us within mix then, you is multifamily. -- commented just And think your between versus single-family the resi about I

half half. about and It's Yes.

resi and half half that. is to is -- related Our mix

be interest the look you to somewhere. pressure at if So, But single-family the shortage, rates. under people live given housing will given higher have

we and it's positive multifamily will forward. positive, be So going been believe maybe

So, remember, our been well. Also our split. holding in has a And it's nice the serve -- of higher-end the point view, business, from we primarily homes. we of probably side we that, replacement pretty up XX-XX repair again, have that single-family

our XX% single-family. is than it's Bob so at total you then, of as our XX% less new And XX% new is of the Jeff, business so of residential. that, that, when of construction. said, -- business single-family side And look construction roughly half But is

Perfect.

Cowen Your question is Joseph Company. the & from line with next Giordano of

is for This Tristan in Joe.

volumes region? talked positive You staying and in volumes Europe about just Were negative. any

positive APMEA the positive, -- Americas, Unit in volumes volumes. in were volumes slightly part, for the most unit and, unit

price down? And price like should price obviously. And Okay. so to contribution contribution about going starts mean we price it then, once -- forward? for does strong slow the starts think contribution How what from margins to

Yes.

$X second had favorable. was quarter, price/cost about talked incremental third quantified favorable, the to million. as In $X million in we that as quarter, So, price/cost and we the an was

cost the Americas, And Going the elasticity tested of a in the forward, still job market. as earlier, on price. Pricing, doing we talked obviously, always we've But the understand it's good market. our about we elasticity we're the position. so, European In comment we until the but on, to -- our that all elasticity. what results at that's it end working on quarter, depends teams quarter. it on we see of And the the are fourth happens obviously hard something actually we don't the

Got it.

products. also trend -- mentioned Connected investments Smart you incremental Okay. to where And And should some is you in now? we your about sales going how right much like us and contributing think the your how remind Can that forward?

markets. faster be Smart a and to part regular our larger Yes. Connected growing of it's continues portfolio, than our and

So, Connected. we're continuing to and goal our drive hitting XX% for of Smart

back on So, we're upping accelerate trying that. our and investments get to track because we're with

next with Your of Sachs. Lee line is question the Brian Goldman from

the out into bit potentially Nice know you again. back a around had called execution. in I challenging to kind wanted Europe I the off, here. backdrop half dive of first comments little more So, a

making pretty like in front Europe and like that that in regions? that does across margin going It up you bit? the looking the a near-term, all that you're into Europe comment, on But portfolio all still navigated price/cost maybe gets neutral, Or price. has Shashank, You the Is to sound lagging be well. more Because challenges XQ. additional looks if the it is not XQ. positive, across made on some not the

-- in mitigation that other any efforts for of margins. there's on your to kind if region recover wondering specifically So

price/cost from bigger price. the harder bit on down. lagging go European And to Yes. Historically, our in is the little a it so it's certainly, unit -- we're But Europe cost is get standpoint, stranded price. issue a region, as volumes

less third factory a yes, inefficiencies the do price/cost that's So factory think it's of price, long get the to the inefficiencies, that is and about price/cost as we hurt And that a From in and challenge, standpoint, Europe. but in unit hurt us volume quarter. continue. us going as combination a

as we Yes. in large high to know, our fixed continue review facilities But have And structure costs. Europe. you cost we with

So, and But we're Europe. it while adjusting those it's accordingly in to ones fixed the on large smaller a work takes difficult on with our costs. working teams

color. enough. maybe as you sort be kind of order more she near-term steady Or similar of maybe pretty you guess, anticipating rates seeing at in recent we the volume? you here healthy, goes? kind of helpful Okay. running to mentioned are Fair after recovery specifically, an that's actually challenges? what That's of that, a of In more Should I uptick related XQ. seeing some through that sort to you've are Europe been

it's point don't you go I think We're -- compared this closely. as is uptick say I any steady watching at -- in time. there QX. in that I QX wouldn't to

question comes with Michael from Baird. Your next Halloran

to first one questions, So, question is single-risk just follow-up a of earlier Jeff's multifamily.

the you for comment the to home on you construction more On little are Or seeing positive markets a a multifamily trends from of on that expectations rotation already? that the multifamily maybe is more bit on the side, serve? the prospective single side guys

No. and QX, saw will continue. No, believe in it it QX, we it definitely We Jeff. saw we in

some margin side, reasons. I really, favorability And a healthy. performance. Okay. really for Two Last row built in strong on been the of couple quarters obviously North pretty in that's know then a America you quarter, of had

what's So the about essentially? year, right, we it, us next of level building sequentially. year still strong more in start for seems should the really revenue think a talking the strong trend to base quarter, the about with And how downward. the to there. through call year? importantly, about segment I despite talk step margin think that This have lower for the Guidance you're Maybe off performance exiting

the the continued dynamic, in favorable quarter. starting a we've Yes, quarter I in had would second third especially say Americas, in the cost price that and

probably we cost know favorability rate. We've had, we we testing of and in will up end be elasticity as able as million quarter why about we another in into fourth as the As in the -- guess to therefore, million the the the guidance the as $X we the little quarter. we'll teams we've I you that we've the bit, end that price/cost what on of Clearly, we year add million And of a on tested much said, works where our elasticity, And exit third quarter, between $X second is will there's far million base, your go and is million marketplace. quarter. to question fact, in can. we had as get I but price/cost quarter, the that's to -- answer as try million of onetime. the our to $XX Most third guess, $X the haven't don't then $X in of Most and more favorability. all see $XX that given to the Obviously, we've is how they we'll and comment pricing fourth Americas. if

give So, we'll color as that's now, that. the the year, for But more third end on the we quarter. through stories

you all cost. that inventory have we to lower And Mike, prepurchased have obviously discount know availability, at at Yes, in point inventory as and at time. from benefited Mike, -- didn't we

really our and helped again, So, in QX. both margins that QX

And provide numbers perspective on help a basis. those way dollar forward either to

nonetheless. there performance great it. So, Appreciate

Northcoast of from the Ryan Connors line Research. Your is of next question

I going And a fourth I elasticity to angle. question even the different words, there's much value your that price/cost short-term focus been from the question economic in anything In markets historically of extracting would structurally the you're other chain. years run my be of at is, of the bit XX%, enable to structurally there from been guess, you in has level margin you Has I consolidation? price/cost know the so guess, anything there things and have exited, structural look sort can sustain rent dynamics higher my you of I the like about last that couple XX%, the that and has of question you're 'XX. confident So, is that quarter if more is, come a higher around? this here a on that, companies wanted margin margin over you that at moving it But changed gives business that really forward? the like is Or are just confidence been XX%. really talking rate, north smaller

you Ryan, about, talked when XXXX/XXXX. the that the you look in was at lower margins

from was of to and cetera. value which structure, we're et of detection, our cost looking been customers a doing we've structural Some cost providing R&D know, Connected what leak with at But and initiative we've taken a and spending et around Smart out, as our innovating, in cetera. our that you lot lot really

benefits stronger So, better, we to structurally, much we believe, that's customers. our portfolio have providing a

from to So and that's that's go big a shift at. we the were I think where in continue we where past,

as a of you in got million point that products from we view. and also, to about of We know, our $XXX $XXX exited portfolio, commoditized lot of rid million

So, price/cost value our to that has price. been favorable. justify We've to been disciplined, customers but we're providing

something and our we're we're watching, is strategy. driving, that's that's So part a key innovation why of

Okay.

then. no quick no terms there's anything the around -- the or or mean answer or consolidation the specific of question was so, consolidation the that. scene in like competitive is been So, movement I

dynamics competitive the same. are So, the

you've that that can you kind regarding my structure, none talking changed. wonder it from question you really if of of has But address which is great. internal read You're I standpoint. the of about that is said I guess, market self-help done, the what And

significantly. Not

market has as there been you consolidations, think small not I but consolidations. significant know,

[Operator Instructions].

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

kind see decent in for and still I out revenue baseline seasonality the a quarters will is X start and outside those quarters? to X of in Even million of the for you XQ stronger any are there that again. in $X the million why you horse called plus to XX% a 'XX. the XX% XQ to reason quarters Is some that of those margin X -- margins with Americas XXXX not try benefit. The being $X $X for the beating adjust we Americas as margins if that last million

you that's to the gave price/cost reasonable, favorable you obviously, we QX, out and I you try know are. No, plan needs -- exactly in that's to Nathan. on forward. XX going always baseline order dynamic is I XX for Watts, think we points. at to reset path, QX, know, if improve basis that continue as in always so to our the margins Americas But those mean, continue what long-term to take And think the numbers, -- I that

I decline maybe one strategic operates in Bob. you've issue the in and has high cost in been the Europe 'XX? Europe offer how some around business [indiscernible]. you then, take And base you fixed had cost demand Is more for know an to base that perhaps the to opportunity the 'XX, actions

Nathan, next at year opportunities. And know, into seeing benefits year. from over continue that We'll closure takes a of And to next begin from our do as our to we to looking do, continue you over that. benefit. closure, plant have the we'll plant Mery if do at But you know, we're footprint. well it look as a year always falling you

our the in demand teams looking So, are that. we'll you to call. at meet and We're out evaluating during be that, update trying all customer we'll February but there,

And restructuring The bulk little did about some restructuring third $X.X in we that was of more a we of take Nathan, a did. million. charge quarter, bit European the

across the been off plan cash line? the absence the sheet getting Acquisitions expectation balance in balance the moment. the sheet? debt there's M&A, And Lastly, and on have what's no sheet, for there on balance clear at some Is far M&A between. the the that of the you can pretty get net

balanced Well, strategy. know capital Nathan, believe you we a in allocation

we'll it count do And healthy timing We of as to from have a know, But can here. be We're deal M&A the past, you in never as [indiscernible] that. you a disciplined pipeline. the of we've an because view. M&A reviewing takes said point

So, discussing we'll have But we'll be to strategy. continue at pipeline balanced and capital We're evaluating this and that, allocation that we'll is it, full. that, be watching point, monitoring other options.

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

We and interest forward fourth with Watts, in XXXX full join appreciate in today. and speaking you our the Thank discuss continued stay and holidays, care. the to Enjoy time look year Take us February taking please we your to you safe. upcoming results. for quarter to again

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

You now disconnect. may