Watts Water (WTS) 8 Aug 242024 Q2 Earnings call transcript

Welcome to the Watts Water Technologies, Inc.

Second Quarter 2024 Earnings Call, hosted by Bob Pagano, President and CEO; Shashank Patel, CFO; and Diane McClintock, Senior Vice President, FP&A and Investor Relations. At the end of the presentation, we will open the line for questions. I will now turn the call over to Diane McClintock.

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

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

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

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

We prepared risks like be differ and statements. comments actual that non-GAAP the to will numerous this remind presentation These reference reconciled results cause to to making certain statements appendix this during throughout may to remarks. Any in we forward-looking is to information our uncertainties constitute everyone reference subject presentation. I'd materially. could are this that that financial call

SEC. filings Bob. these concerning forward-looking risks, information otherwise. With the to of revise as or to statements, turn For undertakes new publicly whether any events will call a the see available no that, future or update result over obligation with The information, Watts' I company

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

APMEA, of to timing, were The sales results solid to in dedication was to of my Americas weaker-than-expected with their ahead quarter. Organic gratitude due extend customers including to Americas offset for Our record the volume exceeded to in to growth entire income record earnings Josam, which which European like project and primarily half. in sales and also I'd team sales, our more were Americas than due region long-term our Bradley incremental solid, for are another cash drive performing in expected, cost quarter ahead first acquisitions expectations better than worldwide incremental help in in flat expectations seasonally operating and be our by flow Europe. benefited and second and to which quarter, expect and second share. margin continue the of the adjusted operating both the was in per income controls, delivering investments and deleverage. Free serving Watts and incremental our sales half from offset from the success. Adjusted expectations, the partly APMEA, stronger productivity volume we

will capital sheet our remains facility and allow along in extended balance Our continued allocation with disciplined robust, flexibility our credit strategy. for

operations. schedule, Synergy Enware to are Bradley, for identification all financial well. ahead criteria Moving to on meet realization The acquisitions and of integrations our are Josam acquisitions. and progressing of our and are track

in have a productivity our and done offset to investments. Additionally, job price teams driving good inflation

previously system APMEA our we mentioned, and process are of ERP Americas SAP As across new implementing in a the regions.

the equipped a budget. have with productivity system and highly schedule We we on team this will executing connected strategy. best-in-class The SAP drive smart our ERP resources implementation, reduce currently and support our and instances, and capable are new

construction further the in double have to leading until a and to for new at Germany quarters the strength. half especially a a to been and steady These down including multifamily in key considered expected end Europe's several markets. the lower is Industry construction note, been due Construction quarter replacement GDP, markets. to residential back be markets continue Growth pump trends nonresidential past positive quarters of in East the continues continue programs XX%. project below to softness for and in in June ENR centers are for digits we the retail, Americas XX second single-family drive light starts expected for several ease. repair impact Multifamily centers activities markets interest update new XXXX, in decline holding show Middle construction unfavorably market. In of incentive certain down indicator second and to has like be new end soft to below I'd Americas, was our and remains least which industrial, heat by data is in Pacific including an of region, remain provide projects challenged. In construction construction to driven OEM institutional Americas half on new strong and the Global Next, XXXX. half are to our XXXX. On in second activity. nonresidential Index to in growth begin continue indicating rates The and construction but destocking volume our the indicators, and new ABI activities, and portend positive mega in of expected for and year. the new permits office get China second is down sequentially recreation Confidence continue and is the reductions subverticals, Asia indicators including the energy have data anticipate compared The to weakened. Italy

Australia New positive institutional. in GDP We growth with in strength also Zealand in and expect be expected to

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

continued pump in our in construction heat and from and are volume energy maintaining OEM We We destocking. reductions incentives first the related solid believe half outlook. Europe, year performance offset lower our weakness full will new

that continue U.S., we're uncertainty our operations. to geopolitical and proactively developments in any East, to the positioned Europe the Middle may monitor the impact address and We

fund published additional progress we connected which accelerating XXXX we're sustainability to XXXX, development, million investments X governance. early like our Slide on the handprint; product X, In initiatives. On of comment million $XX our will responsibility; into In and $XX and full million incremental I'd increase pillars: most accomplishments corporate have will the made. to we July, smart sustainability highlights report we've progress our report, within sustainability communicated. which recent from made social Footprint; the and investments year and investments new $X addition, including previously The

remain our solutions addressing we of We top in We goals to safety have worked the believe energy priority regulation, play enable for our a and conservation achieve their exceed and water Watts. and goals hard XXXX. efficiency triple to sustainability established customers back

Additionally, new an absolute advance proud a Watts which reduction Shashank? Relations results our improving and can third will the at I'll invite has operations. which read extends the who in made call we that, quarter our commitment, it quarter all our turn long-term aspects outlook. of over Sustainability and full website. With including our will report, core established our our to team commitment into and you while our found is more about progress to I'm that carbon mission sustainability global help be Investor second on goals, our Shashank, sustainability business. of address year emissions

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

operating offset down XX% second in from basis from in of to $XXX decline In which decreased investments million quarter increased XX% adjusted million in million margin Operating volume $XXX basis was or growth second and down contributed in organic profit XXXX the period, and $X $XX by adjusted we by was by XXXX. euro driven XX.X% and the APMEA Europe. million points of when EBITDA second of primarily and margins quarter Bradley than Americas versus mix dilution margin is a operating and of was approximately the a of to acquisitions adjusted timing Americas prior of of comparison due quarter EBITDA margin APMEA, incremental Compared of XX% year points. Adjusted the third approximately a project increased sales productivity, the did deleverage, million. points. more price challenging Solid benefit margins from of very inflation, quarter. The XX%. foreign XX acquisition X% The and quarter XX Josam $X the XX operating approximately benefited exchange, and and exceeded into also partially basis offset difficult weaker

Adjusted with to occurred XXXX. up earnings with the effective period, of and by growth of contribution the performance of from XX.X%, versus quarter primarily our funds that rate associated the due repatriation foreign year share year, operational increased to was The the taxes in XX $X.XX driven basis of acquisitions. prior tax solid reduction adjusted points compared second per X% last

we building in a restructuring offset charges. $X acquisition-related and charges a were For sale These Americas. the approximately GAAP by partially of of incurred on the $X million million purposes, nonrecurring gain

working free million primarily flow was cash compared last the increase and higher Our our income, acquisitions. contribution investment flow period comparable the capital net $XXX year-to-date to cash million year. lower due to in $XX from was The

sheet remains cash of ample or as track are sequential and and free our flexibility. us equal conversion income provides goal expect achieve flow in XX% flow improvement The full our to communicated. previously balance We net year of greater than free cash to with robust on

end leverage to our was quarter X%, negative was capitalization Our net debt ratio and negative at X.X%. net

to and acquisition impact. Operating than sales offset up to of inflation productivity. Europe hot volume, sales our shipping year-over-year. year in decline sales unfavorable and well a were which which valve pump flow, high turn driven than deleverage Slide Americas the sheet movements. the and and we offset offset Germany was Bradley points. through of inflation decreased were facility partly allocation destocking sales due expected. and impact added and us decreased sales foreign significant extension basis was and healthy in investments, to volume to base leverage, significant Zealand included primarily exchange and higher was result growth XX% exchange the movements. the in were saw Americas by operating growth XXX million in was unfavorable increased of impacted XX% quarter. up contributed productivity of regional as capital Adjusted to were X% than had acquisitions and East. outlook. XX% offset East. our X, assumptions more due the in of July declines optionality. Please negatively XX a XX% acquisition. Slide volume sales growth as OEM income of adjusted than as give dilution, XX% our earlier operating reported our up basis continued New full Benelux the timing Price and wholesale Our about XX%, and margins growth X% I'll and income more heating Josam increased water than sales in comments business where mix Australia, balance The the were Reported basis impact plumbing expected. third on France, provides and We dilutive Adjusted results. Middle saw effect cost favorable the or in core Drains our and mix points. and businesses of worse in China were operating investments slightly by sales operating our Growth the did across ahead points solutions. The project margins our incremental organic volume by a X% strong a China, and Europe. APMEA heat to Middle margin operating down quarter while down margin our fixed products incremental organic Italy, cash and productivity Project recent from more XX price, foreign few Enware as decreased XX%, Organic We solid and inflation, favorable XX% provide our and $XX organic XXXX reported credit of X expectations and not Scandinavia

X% expect in cover sales On to we down sales expect in X%. we to new and X%. a digits. In single weakening to between X% low offset Americas multifamily and double the are between increase by down let's expected which quarter Europe, third in reported outlook. we digits be nonresidential partially construction. Organic sales decrease expected to the low be single Organically, anticipate basis, and the is First, low Americas, and up digits APMEA,

remain the includes includes where third project which the unfavorable APMEA, we in to deliver the than It anticipated. to to partners in saw our resulting channel in also times. Europe related in was Americas partly of In are addition, continued lead of projects at safety a our some the soft impact a stocks destocking. due our earlier product quarter, reduction quarter to soft, second markets the and and quarter, normalized timing guidance heat pump due expected from Americas start

from acquisitions million. We $XX expect and million $XX in the Americas between incremental be to sales

points. XX.X%, XX.X% Third down quarter range margins the are adjusted be to basis or in XXX down to to EBITDA of XX expected

points approximately Third to in be the approximately $XX or approximately The the to investments unfavorable basis Corporate be $X to points. XX effective range basis items rate volume should should basis costs related tax Europe, million net and down in be XX.X% of quarter will all expense million have points, of adjusted operating XXX XX%. few should an incremental $X should dilution third of deleverage, XXX other margin adjusted XX.X% particularly down and impact. A million. Acquisition be quarter. interest

compared a dollar estimating third X.XX XXXX. which exchange rate, are euro-U.S. to of We is the quarter flat

the Now year let's full outlook. cover

For are maintaining X%. expected are outlook XX%, sales full Reported to with up are X% down year XXXX, our to guidance. and from organic previous we sales to to consistent our expected X% increase range

year million between $XXX and $XXX should Full Josam be incremental sales acquired Bradley million. from and

year Our EBITDA between XX.X% XX basis adjusted basis down full should to points. up XX.X% or margin points be and XX

be Our down points. to XX to XX.X% between full or year basis down should XX XX.X% adjusted operating margin points basis

acquisition previously to quarter, Europe, mentioned. better-than-expected Our performance second expected as including is second in offset weakening half

of investments points. acquisition the As $X an margin operating dilution includes and basis XX million incremental in a and EBITDA reminder, of guidance increase

previous expectation greater Our equal than flow as net free to expect flow free of outlook our conversion of cash to or we income in with XXXX. deliver cash line in XX% remains

the $X the million we would rate in For versus equate increase year found X% in per for dollar full to imply $X.XX EPS share in full X.XX be an versus an a year, increase appendix. of average the assuming full euro-U.S. Other key average prior the and are and XXXX. the for in would This of can year. FX X.XX year year-over-year rate of sales inputs the

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

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

Americas record was we better better-than-expected due sales, anticipated, our APMEA earnings to quarter operating adjusted and income with than in share performance regions. per and second performance Our

in with to We year outlook full especially are Europe. performance offset maintaining half first our a solid half expected second weakness,

markets, agnostic we as to well and is pivot needed. end portfolio positioned growing Our are to to subverticals

integration base a revenue includes at durable and repair Bradley, component model and efforts large and provides replacement drive cash Enware and are steady a business The Our well. Josam that flow. going

about with their date to progress excited and pleased We the are growth potential.

robust, sheet allocation capital our disciplined with to remains balance our priorities. Our extension of proactive provides flexibility facility, ample a and credit support

for please well We certain creating despite to confident for execute positioned our us the environment, which continue I'm line will value commercially our to are financially, but questions. team's down shareholders. With enable operator, operationally open in ability and that,

Instructions] Your of first line comes [Operator the Connors question Research. Ryan from with Northcoast

issue. this to wanted I about talk

think don't both And the except something APMEA. the timing strength being quarter recall little You the much mentioned back, a project bit of driver as don't I Watts as a behind you've mentioned timing project and a maybe centers in project-oriented in and in Americas think if I generally past, around data company.

So just projects types pulled that of what were the quarter? on you second exactly that into forward were expand is, what can those

double small been X, APMEA we've business, nothing in Ryan, data a was growing Yes. X years center we've and actually, ago, virtually growing from base the but at been digits.

globally, So quite APMEA our it's business part a significant. of significant region. the It's reasonable in

scheduled we the were business, and and in So the primarily water into projects quarter into [indiscernible] that those large it's. the about second both that some million quarter. sales quarter. in is There customers are in shipped quarter. And second those got in the third region, Americas, centers we heating the APMEA projects it's data $X Combination solutions had in for pulled hot second were commercial they million needed water of China, pulled in the $X the quarter, of to the second of that

Got it.

projects center in or are related, those Okay. of general? not what And more nonresidential those Americas, data types construction really

get centers America. in We're into Yes. starting to North data

heating heat business. we're our mainly little of this section pump and a in seeing was water, but hot bit the So that of

Heat pumps.

Any on any some there It's business the just going lines out there topic, other been and you around of to And platforms my any Okay. companies or deflation. pricing product on was some a gets your have sales also hot price about to a Backflow like more -- discussion, discounting shift Direct? -- in pricing. shift as online any update talking and some one

point quarter. pricing so large they on projects, very are general, In competitive. X Yes. favorable in about was Certainly, the

So certainly, And up. our Backflow business with we is that. online see Direct

it has to like our continue pricing where quarter. in said, drive I need up been, X% we customers but the e-commerce So

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

the color quantification. and Appreciate Okay. forward on pull the

a of some nonres, multifamily, maybe maybe destock, talked a impact. think kind to headwinds little order I rank about XQ, of you more that destock headwinds color number XQ and those just on

this with So of Jeff, stock side saw safety happened on on had on -- far so been is the we of the we our multifamily, the the customers is lead times, reducing month double-digit in rest there the third normalized it, We levels. they've quarter. million because now expect declines the in that destocking, approximately that's in probably million have starts a what that's basically $X wholesale their $X July. to our That's channel, it the of in lag. we new all The construction because

in to that of to we what on set part that. And we in factored the was which expect early downturn the when and the see we expect still second We had guidance again? the half, question third

nonres I general. guess in just

Yes. flashing XX in, the those seen we've institutional -- strength indicator, a office, right? of ABI red side, on retail, below And They've but in Nonres the again, subsegments restaurants, side. the those that's sort been all again, for weaknesses nonresidential and year. over

that factored as we well for second into again, So guide the the half.

side? is bottom if any European see double-digit weakness. one, sounds or then continue guess, weakening heat the half. Can destock of Europe any And -- the pump? in you're going second to I were hitting this the into else Europe, just stabilizing hold then signs heat that you or And margins besides Okay. it like to pump What finally, on

heat think take at to heat they've check channel cetera. that uncertainties, just pump. I'll of end new There's the get inventory side, stock going clarity is bleed In and first look the to the off. in about first. pump to geopolitical that next year -- our bunch construction quarter general, think pump showing any given you're et the heat a potentially of heat of we related the to issues, very on or don't the channels, the So there, got Europe, economic when challenges, limited I

some QX, something easier again comparison some channel So they expecting it everybody see saw and once QX. But we concerned we that's to certainly for of year, while we're about starting out as checks and believe heat this in it of exit else, pump goes our to a bottom through in the been they're year. I've here, next to this and

And our area In had strength, just to side the as the note, there second one commercial marine right? well is and a in good of business Drains beverage, Drains as on quarter. quarter food actually

So albeit we pockets of do opportunity, see small.

how enter a in finally, an looks requires And to Okay. mentioned product opportunity a then can how of size if in how incremental seems -- -- you as water, to be you final -- it which Asia, or and data there, there it sales then center you? cetera, one, the percentage shift center you traditional business Can move this data sounds we data market? you that et liquid growing. cooling, wondering bring to there's And just if most that's of speak And air how we been -- you you cooling. big content as Can North center I'm like for America versus just it's you now? that

Jeff. Yes,

several and America did of bringing data Europe. start we've in and ago, even centers North years So that to initiative China certainly, our been

So growing can than And of X% less would it's you I years ago these from sales. say, but our to sales Watts business. about X nothing as of lumpy overall in went it our imagine, total, opportunities, are it's X%

our for gamut products. cooled our liquid -- products. bundling view, into leak there's from backflow, we're get and it just of our of not versus cooled, you air point content detection, And certainly, whole It's valves solutions. our includes As more the

seeing been growing it's quickly markets opportunity been something flexing in So to and on the we're in that very offset traditional we've towards an some softness small of we've and a base. the

market shifting the you said, is as liquid to And cooling.

bit we of cooling liquid liquid the China's a little already developing the products We market in there. are for So cooling. saw

market. that So we're into

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

to in recovery. little little channel of have I'm I question. want back still for inventory just this to thought the surprised destocking been on follow times that a normal. that already there's would I a the up point in bunch at would your the to have a certain products -- lead hear

more products the to in anything any what there's those And has seeing maybe on are? So destocking lead that some in still if times lead your extended could future? color portfolio that us

I was just the board. think across Nathan, it

it's July, spiked at quite inventories, like think are. a I I thing. though, out. and natural we It's think in just saw just interesting, reducing is is it everybody we looking it And

XX So to I start their everybody looked they inventory. and at June think balance said, sheet reducing need

carefully. it So we're watching

are best probably they've Our pre-COVID. lead even ever times the been,

we're no major closely watching accordingly. but there this adjusting So and things

than we out So call just July. expected something because we had wanted to softer a

a reset of kind And onetime working capital optimization.

question and Follow-up repair of business. replace the the on side

towards general that the quarter slowdown the GDP. what repair baked the year, the get a macro guidance I correlated of specifically. as know you from about from to of I guys expectation to talk Can think into replace? is fourth your kind you business we is and end in the you're GDP the going see

give color thinking what there? on just So can any you're us you

GDP X% and range, probably lower to it's single-digit way going on we softer, the low put very a numbers continue from And that's it. It's maybe right? what X.X%, is that guide into And You're our is best to Nathan, remember, right, X%. factored will Yes. tracking GDP.

So It's big it's number, small not a law numbers. right? of a

next Instructions] of question with Mike Your the Halloran line [Operator comes Baird. from

understand the Just swing way. in where things and a half the the the and projects guidance, the -- OE Europe how comments of how on back terms weakening in the thinking previously then about year and question then of sequentials had you either certainly also you're can

Curious the your Has at look a focus you change And that the on going quarter. into back kind you you the you dynamics, that's the I everything, half? just for all back at know to sequentials had changed? let's move here. been to thinking of in outlook year? if the you half normalize in If then Americas underlying already some you second are normal as if move there thinking embedded as of concern

So the think in Americas adjustment this were same, X% we expecting. of most a maybe the destocking for part, and is little softer happened July. kind on you But at want I quarter everybody, the issue had when overall, that look will in impact right? we quarter. just first remind the negatively that of softer Mike, the in I Europe than year, us fourth in And based days to a

So of that's growth the fourth X%, in points X quarter.

So just keep markets leading we general, adjusting slow based and that expected accordingly. the in we're on the indicators, in mind. But to

guidance. So it's we all the not kind seeing of a major were that in previous It's of anticipating shift. along our some things

that Yes. Bob, some out they seen And all think are year? are have some more the we've things leading relevant Or you concern. those Are year? for would point at there this those indicators this at that impact seen that you of the about even to point, point next when guys where

second I Well, think And some the the holding and that's probably we'd wholesale of that multifamily, we're we're of We this seeing the true. of -- in said that's happening. think year. see I some half that's that, destocking

of are inventories. which think lowering in boxes business, our the a very is the retail or low OEMs I retail, big percentage their

right, in we defined. and commercial uncertainty I construction, people this slowing in and So anticipated, think market, new construction down to it's think markets, any general, projects, always slow in as I leads

the until some So the risk. interest clarity elections over, are of rates, I geopolitical maybe think on

some until there's just being at in being shovel-ready of a and this on held is this I But at there deferred projects stuff hearing think projects next are time lot point out released some in to be of time. point we year. hold are but

hear the first solid think, to everybody. a of that So we're backlog versus, that see was starting there I half year, the and with

is think catch of up. some to I starting just this stuff

last my side. on And one

shape. do Just this is at And the would is pipeline that great sheet outlook? does you the you look? point? pipeline what see how Obviously, How how your balance in M&A think in --

Yes.

strong pipeline. the work pipeline. to continue we It's a So

have the you of -- you we all know, continuing timing predict never discussions I we but you like And be been -- in can As can is acquisitions. have we're and always disciplined to we'll assure space.

your Joe line with next of TD Giordano from question the comes And Cowen.

mean, incremental I tell it Can reduced little take synergies to small finding I like change acquisitions what's like that that? it's better of you're being you're us the a noticed dilution advantage execution, is on you able the is a earlier? finding M&A here but just here? Just bit. what you're driving Or

Primarily better the we right? synergy slightly a synergies, $XX It's ahead. If Bradley XX% for of you X. target about remember, year with had in million realization running acquisition,

guide. we a Josam on as And little baked more the into that the So bit acquisition well.

Better execution I all around, would say.

incrementally in shift, getting some kind like we're On the the Like ground? positive pretty at seeing like the at territories, if like you it's you what I put U.S., definitely with but that if trending worse? Is progressively of that noticed in in institutional mentioned -- the Are even I of you're down. seeing in for you construction positive look side place mean, like it's on holding well. like that census the for institutional, consistent least

business held up has at yet. well institutional seen point this in time. that seen haven't We've fairly We

certainly us the So but are -- you that's we're indicators, with and leading right -- bright like watching but spot a just now. for

[Operator Liptak Instructions] Our next question Walter from the Partners. Research with comes Seaport of line

ask about business. to Europe Wanted the

heat been it Europe, been would? some that destocking of have the that thinking guys expectations way the slowing it for have pump kind been about we've you Or below and the talking going is the quarter? your Was in You -- time.

looks right, it it's have now -- we gave like you're going guidance, destocking when the Early happen. to So Quite we in year, right? frankly, we to longer. be expected the

view latest QX than worse the we is we XXXX is said, And anticipated. Bob As have. it

when but it balance quarter anticipated. the anticipated. is Europe, and recalibrated at why we look the worse softer second of in come quarter than year had that's you had did we in the Europe than third the We So

that Okay. Great. market -- is of the I Or those of products? incentives Are And back positives another incentives. coming driven pump, consumer normal like is there European can you -- round to was a think, sort are we heat incentives remind for by those us around the through?

No.

We to -- et XXX%. but March, levels dropped incentives Italian incentives them the obviously, X-year XX%, the So period, of right? cetera. change, earlier tax they a they And incentive they then had over were instant, last talked weren't

there So with But of market. even they've pumps and pumps Similarly there heat of they're in X-month where France, Germany heat different inventory and got that's solidified huge the was are why and a their buildup the think less. a European a I program. incentives incentive across situation was in about the situation Europe, we today, but there's

that's got comes incentives through, and still the XXXX in. there, So be to QX that there. they're they're where that's bled but are less But number

And there to you. I turn this at further no over questions the are Bob back call Pagano, time.

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

conference today's concludes call. this And

may disconnect. now You