Watts Water (WTS) 3 Aug 232023 Q2 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 Second Quarter 2023 Earnings Call.

All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. Instructions]. [Operator you. Thank

turn Vice now Please over Diane to ahead. I Financial today's Planning Senior President, Relations. Analysis McClintock, will call and go Investor

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

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

our and and on During call, and our for of discuss product will update for you quarter and operations. smart will provide current and state initiatives the of the third an the performance He efforts. today's the overview of our the connected second will full-year. quarter our outlook second and Bob Shashank discuss sustainability the markets also our provide details quarter

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

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

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

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

will I Bob. the call that, turn to With over

X, turn quarter. slide Please Thank everyone. and provide you, an Diane, good and of to I'll overview the morning,

outlook. we better share, operating expected earnings in quarter comparisons for quarter finished diligently the our a and to XXXX tough our decision like to with per serving another record their the Watts strong margin thank than Together, sales, to to hard worldwide. year I'd raise to We full very the work XXXX. and leading second despite team First, entire quarter customers dedication delivered

tough in up digit price. primarily Europe were grew due at second and were mid-single sales Sales strong resilient XX%. we the very were where expected XXXX single-digits to down in regions organic low Americas to a a pace, as The comparison a APMEA sales quarter organic region to as due

Strong gas which declines heating valve commercial operating inflation, core radiant more more applications, double offset our marine favorable nonresidential supported productivity, in and investments. incremental in realization, products margin than offset than connectors, digit instrumentation. by and by expectations growth our mix solid price exceeded volume, lower and Adjusted was

strong balance and Year-to-date of free to our is the been sheet. cash flow strength has added

half XXXX expect us strong of We generate to flow afford balanced allocation capital which ongoing flexibility will free in the second our into cash strategy.

To that on This important part existing will approved board our follow program. of allocation million our a $XXX strategy. repurchase repurchases stock remain program as end, capital plan an new our share

CapEx competitive such high priorities. buybacks As with a investments, as and our reminder, M&A recent stock strategic ROI Enware our capital acquisition allocation remain along dividends top

seamlessly operations. Moving integration with of we to integrate system cost the is efficiently actions and our ahead going well performance schedule. The the to of Watts and leveraging have been By and are acquisition our collaborating team, organization One operations. Enware align Enware streamline able and

excited Enware of operations our to We're about Australia. in the as we future continue scale

still normal historical is above While is inflation levels. it moderating,

offset price capital spending to relationship our increases price productivity. is drive shortages continue will is for and focus cost and labor a We our address to needed. assess big and as Automation necessary

our continue in these enhance investments to to factories. expect productivity We

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

and in contributing markets, is and positive in compared repair as is our Benelux. activity. to solid remained it the key Germany, While GDP XXXX, quarter Europe and continued continued to replacement remains in France down growth

incentive is impact half have new and up. Italy. additions by Eurozone slower the construction Americas, and a new residential in marketing out program the of expect potential energy do we market, to PMI multi-family appears the In declining residential construction holding changes single-family driven However, the softening bottomed in the second year, to of

Non-residential dating the mixed, and readings new recent expansion. to construction indicating industrial in indicators XX have expect of are XX, continue back regions XXXX. but The index Momentum year, May Index last year-to-date above fall solid suggesting June remained the Dodge ABI continue. will still this multiple The have to is bounced through resilience. shown After back projects non-residential we institutional growth verticals below and

decelerated in Asia the in In region, growth recent Pacific has China months.

and gives strengthening oil we'll Australian acquisition to Middle the East markets resilient that continued interest continue to markets in prices. grow our increases due We seeing us higher Enware confidence are recent Australia. continued rate remain despite in

our on year. third lower as our quarter and strong for comps third Due a a sales to update remainder quarter an the the growth challenging expect of third we be result XXXX, year. versus the quarter organic Now, to prior outlook of

operating to due and anticipate incremental We declining volume also margins normal seasonality, deleverage. investments

increasing performance than a full-year half due our first While mix. to well price in favorable comps are we as as we outlook strong and expect difficult better expected QX,

Americas residential expect continued weak offset in be to and We softness but certain non-residential solid by specialty single-family remain business channel products.

construction. second the weakening to due be half in softer macros. Europe Inflated may lending have interest impact on and to an anticipate also also tightening new rates We

including communicated our million into product In to increasing accelerating from previously investments addition, new and X enabled the are we $XX investments million XXXX and full-year products. smart development fund connected $XX million to of

I’d offerings. and reached percentage XX%. On connected and connected slide sales on Year-to-date sales total to smart of like X, our smart update the product enabled to

been the goal. XXXX, Our has expect that smart we of XX% goal meet to products by of sales from enabled and achieve to and end connected

operating smart you and mixing connected risk bacterial smart like developed meter The of the comfortable risk and patient with and ensuring that was system by and the flow delivery management to SmartFlow scalding and vertical new other costs also team reduce a The hardware system proactively asset will at health provide share more incorporates into Enware. and longevity, manage platform to the provides experience. SmartFlow valve, enhance capability. a while monitoring water care products visibility serves help management tapware one that performance would I and thermostatic

products the offering. and SmartFlow as continue other smart new grow our about excited connected to are We product and we

On recent slide sustainability to on most I'd report. like X, our comment

In the we've published sustainability which XXXX we footprint, and made our responsibility, our accomplishments progress governance. ESG four pillars. within corporate May, the report, highlights social and imprint,

to Our value play sustainability smart water we us efficiency safety and to customers triple has as focus to solutions. our transform deliver regulation, and on our traditional allowed energy efficiency, products continue and into and tremendous conservation enhance our connected

is at into Watts and our commitment all of and people our Our that core approach focus business. making communities stronger. people a aspects responsibility commitment extends Sustainability on to and first reflects safer, social healthier,

in sustainability I'm our read be report, global team can proud has our and which our of from downloaded the investor made to website. about progress it relations more you invite

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

Bob, everyone. organically. will Thanks, Please were quarter's I review $XXX up X, second results. good and of basis X% morning, Sales million slide on the turn consolidated and flat to reported and a

and impact reported organic Sales $XXX quarter. profit to region. operating in totaled adjusted had single-digit in was $X in immaterial an Adjusted a and acquisition within Unfavorable $X.XX. X% low offset are APMEA the XX% was our Americas. from by Mid-single-digit up foreign EPS APMEA were approximately movements million, Europe last compared the indoor exchange up the year, organic million decline to growth and

million expansion of margin the and comparison quarter points Adjusted despite basis operating We which as more a of to mix productivity the XXX price offset approximately of able onetime deliver volume was and cost favorability the price, XXX investments. XX.X% XXXX, quarter. tough the points inflation, margin up were dilution acquisition of and basis of from to lower $X Enware second benefited than incremental in

taxes of The the points The associated relates favorable adjusted basis was of XX.X%, rate tax the of quarter second reduction with the repatriation to to effective funds. decrease primarily XXX XXXX. foreign

cash year-to-date to was and the million was due net as cash flow flow in $XX to first free amount increase of year. primarily $XX lower of higher million months investment. working a capital Our The last six income compared

of cash our achieve our cash flow, full-year improvement is in more communicated. sequential goal conversion income previously expect flow We or net and free of XXX% free to as

approximately for Class remaining A XXXX. approximately common shares approximately year-to-date, million $XX stock quarter, repurchase $X current Class authorized and our There for the $X we million in repurchased the program our XX,XXX XX,XXX stock repurchased of was shares common under we of stock is A have During million. that

(ph) As shareholders. part as repurchase that will dividend Bob balanced continued focus we on [ostality] capital our returning our demonstrates May $XXX to the in mentioned, of million new a us XX% we just allocation capital early Furthermore, provide with strategy. program increase announced stock announced that

were on a year as down me provide due to turn results. and Please expected let America's sales a the tough comments regional slide organic we to few comparison. prior X X%

Americas valve products reminder, in XX% heating core grew of XXXX. was offset in marine than the quarter by declines instrumentation. commercial non-residential applications, more Strong As graded gas in connectors, and second our a growth

mix contributing and In XXX new profit addition which incremental productivity, increased was points. price increased investments. single Adjusted than volume margins and comps, basis a operating more the to factor. adjusted in expansion was X% tough The inflation, family construction operating by weakness by residential driven declines, and offset margin by

in primarily up by Europe with Benelux were favorable wholesale activity. demonstrated an declines our due Germany growth from Reported X% was government foreign Italy OEM reduction approximately sales in had exchange Growth France subsidies and impact. and partly resiliency by by price of organic impacted driven The positively X%. by growth solid sales with movements. and offset a with business in was Scandinavia unfavorable to

XX delivering offset investments, had productivity declined deleverage. and basis quarter and organic growth. X% points volume a as price to APMEA were margin by Operating also unable inflation, solid

exchange sales. by was of or acquired impacted $X X% sales unfavorable favorably Reported foreign negatively million and of growth Enware XX% from XX% by impacted movements

by organic Zealand offset sales up the while digits were in single China's Middle the partially flooding. with East grew a in decline low due New of and to in historic outside double Australia sales by digit China after-effects organic the growth

points than margins productivity, dilutive the Enware volume, effect volume, price operating the XXX affiliated offset of investments more inflation and basis higher due acquisition. to and third-party sales Adjusted increased which

provides assumptions X our operating third Slide outlook. about full-year and our quarter

quarter First, the third let's outlook. cover

decline XXXX. tough X% third sales market Europe. in is quarter As may single-digit Bob and in growth We estimate by rates a mentioned, anticipated softening offset to This being to we'll with organic X% consolidated low up have low a due Europe APMEA. a Americas growth to by very digit comparison in to single moderation down be partly strong in conditions flat by underlying

radiant As previously gas applications, connectors, commercial heating we Americas, the and in expect continued mentioned weakness marine in instrumentation.

continued residential weakness anticipate construction. also new in single-family We

X to contribute is third prior the of $X from margin basis could operating adjusted of basis our XX% quarter versus million APMEA, estimate for points Enware In down expected XX We acquisition points the range XX.X% to sales. to year.

decline XXXX. in we $X price third to The prior incremental due $X reduced year of spoke the volume, cost is the a quarter benefit about of one-time investments versus and million approximately million of

The volume in margin decline typical driven QX sequential deleverage seasonality. by operating of the and incremental investments impact from primarily is

we we cost expect Enware operating acquisition margin the dilutive to be to In adjust structure. to addition, the as continue

be and $X.X should expense cost million approximately Corporate interest the approximately interest million of income be quarter. should in $XX net third

should approximately rate tax effective be adjusted XX%. The

are increase to in We the rate a $X and which approximately in of of This euro a equates FX QX rate year. of versus average X.XX versus $X.XX third sales the a quarter EPS US in increase year-over-year, prior QX share million of X.XX for XXXX. average assuming X% an dollar implies

outlook. full-year updated the cover let's Now

For the a to full-year sales plus we range our X%. to growth are minus XXXX, from X% increasing organic outlook

approximately by of was range from on this to X% our first based of minus plus in of year the stronger X% by expected X% effect, In expected bottom guide our million of previous third acquisition now outlook. start sales Enware. expect the We and a raises and the from of our midpoint the range quarter the half Our than X%. $XX

of of to to are XX also outlook points XX points a be increase minus We basis basis expansion plus between plus margins compared our our now to XX basis a margin points operating basis an increasing XX to adjusted to full-year previous XX.X%. to basis range We This represents and previous operating of expect guidance. our XXXX our minus points points. XXX XX.X%

half dilutive of and incremental first lower the solid the in acquisition. half the deleverage, Enware our mitigate due to volume expect margins partially second seasonality, impact investments We the will

also increasing reminder, million from investments $XX to are million. a we $XX our As full-year

line in or Our expectations should outlook to free of previous exceed flow cash are and XXX% be anticipated net income. with our meet

X% XXXX. for We prior This increase of in dollar equates in a are average $X.XX increase sales assuming in sales to share the X.XX the a for versus FX the $XX would full-year and US full-year in an euro year-over-year EPS rate of an X.XX imply average year. euro versus of million rate and the

Regarding other for the full-year. key inputs

for interest expense expect We $X for costs million approximately $XX income the to full-year. million Interest now corporate should be full-year. the approximately be net of

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

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

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

Shashank. turn I'd we before Please X. summarize discussion your Thanks, questions. slide to like to address our

anticipated increasing The and strong favorable sales, earnings supported our record with mix. second we outlook. margin Due half quarter per to by our full-year we price operating was better than performance, are first share and

staying are We our close indicators monitor the Europe customers. to and economic continue to slowing in

in this environment. We execute are uncertain ability in to confident our

and investment to prioritizing We $XX smart increasing connected from total from on-track $XX full-year are initiatives of XXXX. are our the of our are sustainability revenues connected believe products million. coming and to by end and hit XX% and We million smart investments we in enabled

Our balanced $XXX capital program a stock strategy. repurchase our free to allocation flexibility we announced cash the million over balance to years. maintain generation sheet ensure repurchase coming flow and flexibility provides execute strong us new We

With that open questions. line the operator, for please

[Operator Instructions].

Research. from comes with of Connors Northcoast question first the Your Ryan line

is line Your open.

Good for morning. taking question. Thanks my

something the price really, of gross kind want picture costs we to and one wanted So margin kind margin that look gross kind and is be able I would about of on well I that relative I hold moderate. interpret sustainable debates Can to how gross happening start good. margins that to that. step on the raw we hold materials forward? be and to on input just mean, that margin. some going And line big what's of term lock-in back the and Obviously, would of is price at look as of longer to, going these really big that's here

good of that. Ryan. the first Well, morning, part

First of down. OEM business down, Residential and is businesses. which all, margin right? our it was lower mix, favorable up commercial's are our is

so of margin we've good. of a hold that's backdrop, that's From So pricing in from in reductions a pricing far. able seen we've to our also view. view, been point good And, input point costs. some that

up. point in altogether, favorable favorable at as cost well that price So is mix, holding as favorable this

any or environment And pretty changing no that evidence that's real any It there that is in early there major any that's sign price that is solid of crack pricing? is evidence the looks going forward.

I on Yeah. as price of second the usually, quarter. forward We don't looking up comment but as in it's holding It in said, quarter. the up now, held

it. Got

just Okay. last then one. one And

If prepared the much on remarks. inventory you of could hear kind didn't your channel I -- you from situation in just

if that the helpful So, give could us just on as Thanks. you an situation, kind update well. inventory would channel of be

Yes.

on continued as think Italy. big, residential in focus to inventory inventory channel And them we've the the a OEMs destocking I well OEMs America. right with now been seeing North from in wholesalers, think, starting I we've the is healthy, destock destocking as which in some there's seen but with Europe

So, destocking we're last year, the especially it order continuing more with trends but we're We've Europe. in starting QX Europe. see to see in in to seen it,

Got it.

Okay. your Thanks for time.

you. Thank

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

Your line is open.

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

Good morning, Adam.

to volume positive, Good replace be still and repair should With expect, GDP Hey. morning. we global positive? modestly

Yeah.

that. replacement's Repair expect and been up. holding We

instrumentation, declining the talked water. prepared of -- really related way. and specialty which areas third have comments to some think to niche heating, quarter continue gas which was our I then really them ballast that our a market, Those you've been expect that in we and is radiant we connectors, seen about around in commercial

a at And still more And color showing into non-residential helpful. to are in businesses. on looking strength? which strength still provide Can are then That's your Okay. markets you non-resi showing little end you continue expect would within weakness? institutional XXXX? ones Which

Yeah.

low from in commercial hospitality albeit there. normal I has offices, hospitality, there. I is a been the think, market's quarter, to the a think last first bit, holding in institutional really back the comps coming Strength off And year. little similar but been

in prepared the holding So, talked in this index general, is we Dodge remarks, also my as about up in point ABI supporting that. at And time. and it's

So, have can as there. that holding in so we half so we're year. it's we're And some this of But tough very against, you far comparing watching and good, again, imagine, carefully. comps second the in

Okay. Thank you for taking my questions.

Thank you.

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

Your line is open.

morning, guys. good Hey,

Jeff. morning, Good

morning. Good

decrementals, there, I half else, mix you be would if to can just anything And investments. impacting year unpack otherwise that the that. May in or quantify understand seasonality first to want maybe there's I some the second there's guess, and Hey, on incremental half.

Yeah.

part half, half second to half, second is a seasonality, of XXX, of first we Jeff, right? half. it So, a bps XXX see Typically, decline first

volume year, the at other got impacts absorption got you volume well we deleverage, The part some this there. the only line, deleverage some not right? standard So, as but margin affects

incremental The is the third investments. thing

versus We which investments, about fixed had of And other growth Europe. base, with Enware HX. And see Bob lastly, deleveraging in And have point, some, $X talked our Europe, XX cost million the there. is HX dilutive about incremental by is then got we've high about, we bps. negative

Okay. but out. if know the boilers? you I that, destocking Great. don't is? guys that Is one else? any that specialty you something channel mentioned competitors you clarify Can seen in just or of had what DIY Have called the

Yeah.

hot is -- HHW, the On holding platform, heating water I think up. our

our residential, water that specialty business. it team a heating have a The destocking combination is doing overall, radiant been the call connectors of that and some in there in nice gas we is in think particular. channel job. heater might commercial But I side of

gas are and etcetera. generators, those connectors So grills,

radian that tough heating. which by, that with impacted the is some residential, area. last year comps we being had of And part that's in same market, So

ships last the ballast have and got So, year, several by probably requirement. to we large ships the their measure done again a our off. call what earlier that pretty was water. years have our marine channel, seeing much movement tail than a All the the of over which ballast there water is the we're where commercial that the end specialty expected last we year And also we ships, of was there instrumentation all

with of that, goes the XX% this big also our gas that this of But of But less side a than specialty expected, again, product – through all of is OEMs. residential of business. part overall some in decreasing obviously, a our we

I just I pieces you're starting then worried And finally about orders. a mentioned showing but to on Europe, up in moving you But the that continues guess you've been think of Italy better growth. some that's to in up change, business kind a destocking for are see regulatory think dynamic. that's put in time

economic both -- it first later market, were just, that of a mean, us but in I bit. Yeah. little indicators than some over leading given in the up, especially and quarter expecting happened little are side as we starting tip It But a surprised that residential and see the It's to quarter. held the we expected, that. second concerns expected. seeing we

So, to fair to I getting that. do the And of team's expect of continue them our the than market done share nice job a more there.

Okay. Thanks.

you. Thank

with from Baird. comes Mike the question next Your Halloran of line

Your line is open.

everyone. Hey, Good thanks. morning,

morning. Good

Good morning.

of questions. a So, couple

about of projects as some of the on I out Bob, backlog as that of any curious know activity was the that the level working of funnel of of opportunity what far the you guys the talk you some or that the sub a talked and and within across base. non-res replenishing things, variance are of project past, the look non-res out there. and we've could there as what verticals funnel off funnel seeing replenishing First in you side maybe, backfill, to

said is holding of that quarter, as up has like I've been in institutional As the centers still holding as strong. well data prior some area and up

markets the like the I And result say I backlog But shortage country, it it's the field. inside and Our continues there labor would of was backlog of on of those some out in general, to anything. which or be of out there. part still of teams in out are a think like there. healthy country, depends some It

but So it again, optimistic, cautiously we're watching we're closely.

lot like how the new you the and about here. build And back quarter I high in But I there's sequentially here? understand high I on think half. other headwinds longer that off established mean, America to a it like should North I horizon, as new from just a little certainly that what’s that mix as a commentary right think we're to reaching. a when it mean, thinking you're look segment? every of on base feels for you margins feels

we've of that range business. the Yeah. the Americas I obviously would was to in very time. goal, as including mix before, in is because forward, and to over XX which long-term mix, second say, our our in But basis so XX that's the continue beyond favorable point going adjusts about the the XX% quarter, expanding talked

Mike, have do you any other questions?

Oh, apologize I I'm for thanks. been mute. might appreciate good. I that. on I said I it. have

Okay. Thank you.

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

open. line is Your

on Michael is Joe. This morning. Good for

morning. Good

Good morning.

Apologies. the late. I’d call joined

asked, So, been previously OEM if roughly third European are mentioned this related a has you your of already apologies business. sales but

you this half. And have there, So, basis? you. if first just on on And any curious a then the it in your I for Thank very helpful. color would has margin sequentially thoughts are was what trended global OEMs how be

destocking tied we which area is in nature and Yeah. Europe, mean, North has that soft both I residential to usually markets, to that continue continued the business, to in residential given is see OEM the and business. America really of be

that is So, of can to And, lowest this our business. we're business margin the year. rest expecting OEM continue imagine, as you through

with So, being obviously of mix helps in margins from that total that down, view. point our a

the in quarter. continue will that assumes third guidance our again, So

Thank Great. you.

Thank you.

the with next from Walt of Your Seaport comes Liptak Global. question Instructions] line [Operator

Your open. is line

Good you. guys. morning, Thank

morning. Good

Good morning.

products. make I doing ask the underappreciating we're you're what on sure to to not And want like, spend wanted that I incremental with smart about new the products.

might might the us the help that be best be might you've about And maybe incremental kind a you wonder some so, what growth that products if seller, of categories a from points with you developed, how could be many I investments. getting these product data

Yeah.

we So, we developments we're developed talked continuing that XX% smart new XXXX to that on connected. get connected. journey in product products XX And of our in that smart and and

So key a initiative that's for us.

products. highlight to those continue We

to is also overall So, smart Enware, that it's nice see to connected. quest in be and

to believe there. future of those We products our of into the invest future. all to in continue in that's invest marketplace. continue the products And the differentiated we'll we'll So, to

Okay. the commercialization calling? they Great. Are do or these same more through doing -- them through require going they as going you're channels training are the now? Like of how's

Yeah. They our definitely point as require as customer a network view rep of both training from well our channels. and

the So, continue we training.

training Works know, Watts Our initiative, very you as is strong.

We continue that. and that, continue to grow do to we'll

that always So, sure is smart say etcetera. to and produces, it's data easy make have it do connected, it's business regard the what to we how we're within connected, we to

of the that So a COVID is but everybody think I is it's outbreak, And of, part during an key part future plumbing. here. those I realizes realizing think Training of the shift key a areas. in, it's that. are the And everybody's shift. important

able Okay. Yeah. yet? excited. measure much? It you do. sure progression seems I products. you I'm your It seems like, Are guess How you obvious an for to very

your is incremental or to maybe point think you do up You already? it's do what At quantifiable, point but what at showing what think adding to you measure it's going the revenue? it's sales,

products we taking So, making them, cannibalizing right, connected. them and our smart are and and existing

we're and still a I are think us products general, that the new smart faster -- on. think capitalizing connected gives than say differentiation market. it's in continued So, I that And having growing we're would just I

it. that's we yeah, So, how see

Thank Okay, great. you.

Thank you.

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

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

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

You may now disconnect.