Watts Water (WTS) 31 Oct 242024 Q3 Earnings call transcript

Welcome to the Watts Water Technologies, Inc.

Third 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 third quarter earnings conference call.

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

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

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

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

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

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

results, We pleased which our are third with quarter expectations. exceeded

and healthy, and to operating more expectations, competitive quarter, stock due acquisition primarily inventory remains capital destocking continues European margin channel. flexibility XX.X% our offset balance capital margin through to the remain our Strategic by operating as the result free CapEx, solid Americas and partly year, productivity to top OEM of buybacks growth generate basis wholesale a by of continued and cash our was our sales last disciplined in cost was share and down timing Strong heat than pump weaker flow strategy. Europe organic expected and primarily The The within was which strong than compared exceeded offset controls, During seasonally safety cash in driven decline and channel. Adjusted expect were to allocation dilution declines dividends in Europe to APMEA ample flow Americas in X%. down deleverage. Year-to-date steady Europe. in be the we we reductions priorities. ROI due was free volume sheet year-end. allocation our XX have volume points high M&A, Adjusted project deleverage.

schedule global teams. to integrations Moving operations. our to with regarding synergy We acquisitions sourcing in Bradley, The being largely of the savings operations announced and of and remain recently a closure our France. Josam by execution of manufacturing Enware due project realized ahead solid strong plant a the

yet appropriate have making with would this for be As to locations. currently costs from the a the authorities, local to plant determined to and existing government is France close the our in approved. If or French move and plant be plants are we the project related the final other Council and production consulting to decision approved, timing Works plan

other optimize actions cost our initiated further have structure. we addition, In cost-reduction to

begin realizing toward savings We the XXXX. of expect to these end

GDP note, teams muted which our and well a this positioned double-digit participate year. industrial construction indicators since down and Global new new will have The drive continues a to OEM of support end Americas, new to replacement energy light end-markets. impact mega positive programs and weaken. institutional single-family digits America's pump XX% projects, in unfavorably be and solid. reduced remains repair the On the been to represents the multi-family incentive construction our continue double Global and new each tailwind We market. In pace. market. continue markets centers, on continue activity, account continue strategic volume heat in to growing comments data are destocking are including activity, a non-residential in at believe construction to region provide growing positive business. remains especially few our a Now, and residential of and Europe's approximately to construction last

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

shipping As we'll a calendarization fewer days days the now reminder, in due we extra in quarter in have to had and first prior our fiscal quarter to shipping compared year the XXXX, fourth year. the

to single a decrease result, days. to we X% down be organic As sales expect quarter estimated of in with that mid-to-high fourth the digits an shipping attributable fewer

our incremental anticipate sequential normal to volume operating dilutive seasonality, We impact in a and investments, margins due of also Bradley the deleverage decline acquisition.

at solid profitability QX our of adjusted acquisition we softer, are to EBITDA benefit mid-point due cost the of initiated operating Europe offset we the be full-year OEM energy further reduced year-to-date our increasing destocking. new construction expect than heat we the more from lower will and of expect end improved and and the While performance, in which actions the outlook volume to and quarter, incentives margin pump third weakness

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

to talk and on Moving about Smart next journey. phase our I'd of X, to the Slide like Connected

of Over solutions the have our we digitalization the a X strategic and last priority. business made years,

We being comprised XX% have Smart total XXXX. reached Connected of critical milestones, of sales and including by achieving our goal enabled of products

technologies testing smart thrilled excited user address our unique been I'm including critical around base. the usage industry, are and about very rise to facilities in Nexa next our and and a about We talent potential shortages infrastructure. have spaces, continuously and and concerns field talk adoption water year solutions details our skilled to Today, excited what's in plumbing over its within across of trends building We've aging intelligent for the Nexa, remain increased customer focused digital management our to growing share journey about of this water on entire solution.

long-term water is insights supporting plumbing strategy, sustainability into solution which equipment, systems water and Nexa and a risk Smart with unprecedented legacy efficiency hardware, offering and focuses and Additionally, customers systems our for and provides building Nexa's cutting-edge hydronic sensing of directly in water energy integrates value software purpose while into uniquely on conservation, significant a expertise aligned and regulation. safety commercial space. This and management the unlock targets. powerful on-site operations in new Connected

campuses challenges, impact goals. spectrum critical properties management in key be assets, mechanical care is continuously existing and of to of value risk buildings. If it franchise -- damages, deployed services detection an core, against in and yielding historically monetized is associated pivotal water water-related multinational step commercial risk tool, while Nexa towards actionable educational and of the chains. From an many with while its the that to adoption what can turn early value customers, time commercial systems creation will visit empowering geared Watts undeniably more is brands, models from protect compliance business for provide Nexa active a it. complex what encourage subscription ongoing customers' by we to or commercial to such through address will about of systems issues, customers Watts measurement, see our It water leak sustainability its has to to and able monitor It properties including uniquely performance usage create complex tracking. Nexa build our feedback helps solution immediate expert reoccurring unlocks system as in fee have and results Nexa a and solving every we its optimize their the professionals examples on and team's modular is in compatible experience addressing saves and used for property management goal operational out can in costly on water water-related X, revenue. can to sales. new facilitates restaurant building provides property comes already support balancing we as to been business to industry a of meet improving powerful room a nexaplatform.com our nearly solution management users, be or use, deploy to At owners offers. a managing Based for to have any valuable valuable in value properties that occupants wide solutions. own to a easy water provide. positioned is be to hotel Slide the and as reinforcing are that our managers this needs equipment most, hard and effort solution to and It We you of about equipment It water with retrofit, created. increasingly core builds customers, is complement building solution either delivered with deploying for intuitive find insight We new automate. Nexa of

a ensure want to he our transition. We CFO discuss call I I comment results, to will take that successor financial named CFO retiring is turn until XXXX, on as transition. on Before March a a be to Shashank XX, will our announced moment to to yesterday over although continue Shashank the smooth

Watts. external We leadership been quarter discuss an third to of both year grateful a fourth I'll will address results his has significant leadership our made X have will success. With the call and Shashank, candidates. Shashank? the full years The for successor, over more partner incredibly to team during executive Board, are invaluable quarter search CFO turn comprehensive a our and has contributions that, your than He outlook. who begun and which and include and the Shashank's identify as to I internal

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

and challenging or Josam sales expense. to of XX.X% incremental year operating another Americas, Europe the per rate X% Bradley XX points from stock channel. The than in by and approximately were of points. Adjusted and acquisition project by with of of versus million quarter was and offset year, and offset by $X the adjusted XX.X%, tax down to XX down deleverage, was $XX compared XX adjusted incremental in operating profit productivity, XXXX. EBITDA and of safety margin acquisitions prior we and acquisitions margin slightly basis inventory by effective down interest XX% share which APMEA year, adjusted $X.XX increased XX% quarter million. Adjusted million within earnings was period. decline controls, adjusted The in and timing cost in $X XX points. versus X% EBITDA points inflation, unfavorably favorable benefits were where Adjusted down benefited Compared million growth organic $XXX margin increased decline prior increased the contribution from are $XX basis operational basis our investments exchange the impacted approximately of of wholesale and foreign last and a by volume approximately of more Solid of operating price, was offset million third contributed a dilution mix EBITDA basis reductions

pension $X.X a on plan. more than non-recurring were approximately charges charges. incurred we by the in purposes, Bradley GAAP gain the million settlement offset of These million and acquisition-related For terminated restructuring $X.X

cash free was year-to-date from contribution the year, primarily acquisitions. period comparable million million, up to Our in last our flow due $XXX the $XXX from

fourth free and seasonally expect of ample increasing sheet us flow are we consequently, the remains strong full previously net free capital conversion or flow robust We the conversion cash target flexibility. balance in cash to quarter, more XX% from continue the XXX% income our and communicated. The with year to provides

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

by offset Benelux productivity mix available were favorable demand safety declines decreased and sales inflation, plumbing from few margins balance income favorable wholesale grew deleverage reported to up were and continue were while operating normalized in and and our exchange and XX added our and Middle to which dilution, a which price was business operating X% decline or inventory inflation, Bradley I'll impact had down sales comments income adjusted Price, our centers. data timing increased Growth optionality. Please organic reported driven than We in across by X%, stock included benefit in in primarily between give of second and times. due incremental and in adjusted to impact. Adjusted incremental us the driven and by declined volume operating Adjusted million from healthy where sales income X% China, XX% favorable Zealand down operating sales sales decreased to sales Josam East. while $XX points. foreign a as quarter. Adjusted reported XX% Americas' sales and offset Scandinavia strong up acquisitions a increased XX%, on saw and movements. investments. APMEA demand were points. X% acquisition the Organic inflation, volume China offset productivity communicated Our project provide X% growth foreign OEM New quarters XXX operating more the were by and operating sales Germany exchange sheet margin organic movements. reductions strong margin XX% and and XX% year The a basis regional cash well our lead as within Enware France, X deleverage basis Italy, down heat adjusted the was and in increased driven turn and the operating than increased volume the flow, third outlook. The allocation Drains margins results. previously capital XX%, provides basis investments, than wholesale pump destocking Americas acquisition. Slide more offset about Slide was effect healthy channel, the and X, XXX negative assumptions our full productivity. Europe partly in dilutive to XX% significant quarter credit points our and business more and as and due growth sales of organic incremental year-over-year. our investments Double-digit fourth

On let's to we between to basis, range quarter sales reported expect First, negative cover flat. fourth outlook. X% a the

We to and expect decrease organic between X% sales X%.

are we shipping to digits. quarter reminder, is in low Americas year. Organic be of versus approximately down the digits low double mid-single a digits X% have fourth sales offset partially down last be to expected in APMEA, decline due and fewer up days single in by our the in expected which will year which As calendarization, Europe, result fiscal to

In product addition and construction softness days, continued multi-family to weaker in the fewer heat and we pump due European partly related continued anticipate and markets, in new to destocking. non-residential shipping Americas

$X $XX $XX adjusted to XX.X% up or and range should quarter the in points XXX basis to mix price, incremental from XX are impact or approximately between of by investments to million. Fourth Americas increase from prior up deleverage favorable acquisition. The of to driven dilution decline are to basis margins volume in We points Bradley XX.X% investments. year points. offsetting operating be is margin in and basis expect versus points million quarter operating incremental basis productivity the and acquisitions range expected the to EBITDA of adjusted basis than The seasonal is that more of due XX of approximately volume, primarily million be reduced in margin sales XX incremental the XX.X% be points. the from the XX% the to and Fourth sequential QX XX

the approximately versus the exchange rate $X X.XX sales This the a rate for prior an fourth the of We fourth XXXX. X.XX year. to of are dollar million estimating EUR euro-U.S. equates average than quarter and in in $X.XX quarter of versus increase less in EPS

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

are expect we XXXX, our sales year X% range to full outlook to XX%. For sales narrowing reported and by increase

sales with between midpoint We minus expect X% for Josam Full year of be previous X% decline should Bradley X% million. and between to the to X%. consistent acquired guidance incremental plus and our $XXX $XXX organic million with sales to

of our a XX increasing full points. range XX are basis up to margin points We year outlook basis to up EBITDA adjusted

expansion points a increase margin points XX basis XX basis XX guidance. The points, an to year of to than to down previous are both operating of our this range our to adjusted along year, XX We points. offset increasing represent dilution basis full down our and the acquisition also solid in are fourth with Europe quarter far so midpoint anticipated of weakening expectations, basis more of results

conversion XX% conversion increasing from cash flow or of also our more net previously are the income We target to free XXX% communicated.

full an rate an assuming versus in year, X.XX for to $X of per for years, XXXX. For in versus sales average would year-over-year the share would the we the the the of fourth full appendix. With X% Other has of regards a and year for to prior This be and a be in euro-USD privilege the a and can million increase X are quarter announced the in X.XX EPS increase past rate team. FX of key average equate inputs $X.XX my imply to year the found retirement, leadership Watts year. full the been part it

to our forward pleased successfully global looking am retirement, ensure to smooth the While to strategy. identify transition. I am and next CFO will I mission our I a confident continue our and long-term our fulfill execute process team to support that am my

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

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

Our and our quarter in third exceeded performance regions. to better-than-expected Americas due expectations performance APMEA

adjusted and of and the in our and We journey Nexa, margin year are midpoint forward to full the to with are performance, outlook. proud progress year-to-date Connected in look we Smart strong our additional EBITDA our increasing success digital of newest solution evolution. Due operating the our

other have and long-term optimize will planned our to which margin regions, through proactive cost We taken across reductions contribute structure actions measures cost our footprint expansion. to

cash flow flexibility disciplined provide to to strategy. allocation execute free strong balance Our continue sheet capital and generation our

We and by economic softening continue to customer capture controlling successfully navigate to costs near-term and conditions excellence demand. challenges delivering

be continues questions. to favorable on and and water secular investing please positioning strategy efficiency. With safety to open long-term future ourselves long-term for that, regulation, the market Our the from conservation, on operator, capitalize for energy and lines trends, including opportunities

Instructions] of comes Jeff And question KeyBanc. Hammond your the [Operator first from line with

Just you bottoming America, in the heat the you're speak you're pump destock in just maybe seeing -- the inventory just where an adjustments destocking? where And and where U.S. think specifically on are North maybe we update for in

Yes.

that's talked heat et because America, the year of Europe. North least let's continue similar of expecting in we -- in saw multi-family in point we And most time. And are the the we I that's Back that's the going seeing QX, that about to build, in construction. QX. last mean, pump, started to first regard your it's destocking the start with off next at the as quarter of about to the on cetera. -- we for we were the seeing last We So, the mainly at through to of is the first talked at in and softness on believe except inventory call, question beginning believe what QX. wholesale start the part all final this exactly your to over channel part, markets call, most we

only is in rolling through QX. the would QX. say, started softness different We that's area than So, that seeing I

Okay. And then, the demand lot of pieces moving to environment.

Just early look inflections positive-negative you thoughts any you into see and of where 'XX? as might kind

of But there of out in that go to GDP. falling is always business the haven't repair replace and continued our the presidential Well, election, should get follow back given guidance once I expectations. XX% as rates certainly, some we uncertainty And we yet. as well general,

there's I and lot now, in pause right new for to just of construction unfold these of a out. So, think waiting uncertainties some plays

So looking -- we're at and it. that's how

Congrats Shashank. of Best retirement. luck. on the

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

Shashank. It sounds congrats you, decision we'll with call have the on retire. like But, one more yes, to

Thank you.

-- for to about couple Europe Wanted a actually second, a just talk of aspects.

a tactically, really little and beyond? we to worse. seems it how driving exactly product that as that, and XQ that what's was that sustainable drains buck like particular trend there, bucking business trend to about mean, talk you seems the just can can and preventing of be like be I kind strong that move from the being things and line First,

Yes.

Europe that they really I sales that entire just and as cruise leadership around ago, a in come the weeks in drain over well the steel business team, is back. Denmark feel those at with in stainless team location confident has Our And and markets. in a military ships, they processing. market, drains, food lot meeting marine few And as and play was

to the are really incentives in heat out So, for overstock to uncertainty is around well People new waiting construction, right? now, -- call, finalized. pump I and which new construction so Europe, some as still much it's the the the be that There's softness would a then as there. of right them are nice offset

it. Got

as kind from you still this this second, then years then talk does staying or more given there, of a a Can perspective? structural a about mean, significant few for Okay. look in obviously, have move more one surgical at of one kind the the France. a European on and last of issue if I be And ahead this move? wouldn't well. strategic have first should we restructuring footprint I the action your But Europe do over headwinds Europe in we a just as

No, I our to looking to optimize footprint when think looking cost market our can We're and always adjust we always demand. structure on we're based footprint our there.

through like workers' you the No we're been this set working So, has council. point time. agreement at said, in

not all that footprint, process, we'll working review our over and in and but Europe, to North we're continue So, always only the America world.

can then role this the market. on real actually great for about thanks go-to-market play bringing the distributors for sounds But interesting. strategy in to Nexa, And you a I will that Bob, interesting the talk assume It there. central that? update

move them can take ready and with getting confirm needle So, speed, the how really training to channel of talk you it will that the up get about partners and the long that? to aspect to really

multi-facet Yes. We're using a approach.

we're we're using strategic the using well direct partners, we're channel our using as it. as So, sales accounts our for

really tying different, it's Smart and to and inside unique, an but way is most into of it's So, our issues the some critical building. overall products ecosystem a Connected of all a solve it it of pulling together

but excited innings, something working we're long a been about on time. it. we've Early So, for it's

Good it sounds that. Yes, luck with interesting.

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

different process maybe Pez that the for just And pretty about about receptivity? it's a that? the I more SaaS customer announcement. ] to existing you talk some on maybe products, Nexa. think then that about sales This on Seems [ your is like adoption Can talk process would very and than given Mike. of I a platform. sales ask exciting for wanted imagine of you how is

Yes.

pinpointing it. it have leveraging a or we're of problem locations, what that's of is this capability the we we way. issues. with relationships traditionally strategic lot our along sold, we're training When and different than but customers where issues account and customers And a to So, really have solve lot right, you're

this year over test as stuff, a now. slow So, move you're in our to is But as out have technology, new with all know. this pilots we had for providing value we've to we industry this like

pretty than has year X every learned thing. less single and much we've this payback lot on had So, property a

to connect of then model market SaaS we we the So, and go is, a sell the original equipment it put that. way to on top

as That's new of you've the organic opened for that's areas investment, interest that And and the capabilities, about you're super then learning testing as whether up future done as maybe more investment of maybe more helpful. field has become you've and gone into interesting has that more anything internal kind down or path there Is customers M&A? and this problems? gotten your their potential insight

it we getting a really as lot putting mean, Yes, we locations, has. customer us in lot issues of multiple go gives time of just and there's database. of our for spend learning in voice another I what our new system, product our we're This learning development. And a that to avenue. we're similar

So, not they well as yes, sell get lot any the helps teams to have inside issues facilities. it's as helpful. are of core our it learning specifics, but into when I'm products going a

that, And able we've the residential, into we've tie have learnings well. been to able we leak commercial to this from and been the product buildings tie-in in platforms detection as

Walt from Seaport The comes with next question Global. Liptak

quarter, And Shashank, guys. Great congratulations your decision, too. on

you. Thank

your has difficult I talked just to things. of X ask competitors One, one about wanted European pump, heat how the been. that about market

it's now first maybe wonder I And how us some the So, also with or calling could a right the for in of bottoming declined. size, around you were if details, quarter. more provide they much kind

low the So, XXXX? a XXXX about market and recover I you off base talk this if can in little you're wonder bit can thinking if

on the a local believe But on you do that put market, about earlier it's and share we the product. depends it just we yes, talked that question. I that in said, and place an a of comments move lot to governments the incentives Yes. tough

control. we control what that. look at can't we So, We can

much provide certainly. we see -- how will we'll of during some guidance destocking what's the February of we'll that has impact as further So, call our happened, -- happened, elections that,

bottoming that and first hopefully, -- half So, next year. will the we're begin but things, of out in watching closely,

ago. obviously is Walt, at obviously, the process a right, rate And comping And, be heat pumps. on finalized on about a next lower incentives Germany year, in year we Italy incentives, weak of their finalizing comps. the And will

how have the the but it comps So, weak help, as we'll destocking. as out just far do see to pans

I the Okay. Were on in about you relating are that consolidation some Great. coming you just optimizing get the some to of France, the And that on that footprints? there's to -- out. are a thinking France moves clarity consolidation more comment more specifically or then wanted you made globally

misinterpreted what productivity you I at maybe -- not always said. look around. We all driving we're No,

So, doing all. I'm at not plant we're consolidation saying another

to continue our sites of one drive and at productivity. everywhere We always productivity look footprint, every our at

this bring this is only the to this we're So, time in workers' the on one the local working plate council fruition. that's at and with point to

the question Farley next Your from comes Adam line of with Stifel.

your Farley business? Adam that to It's Good centers with in see on to data demand APMEA. data driven start growth Jones. strong on business. centers for China want I double-digit Nathan solid being there, Is the mostly by

well growth the as is Middle been in East, The both data centers as which Yes. the China our in large strong. has growth

how looking then any of do and strength highlighted you in those at construction. light And expectations What's you Okay. have driving going play on that kind will institutional out? Americas, markets and new industrial forward

years been schools we've in hospitals and in been Well, many the us has continues. usually it. spending Their for institutional over steady very

that of continue. the parts as expect not market. So, It's the we volatile other to as

we'll continue been So, watch trend. that's a to that, but long-standing

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

thinking Joe. how kind you It direction. elongated was the guys Do Zane cycles? about how Are wrong long be versus moving for of This in up the can now dip [ come? concerned the and how long are more far ] so building I think given previous it's maybe you it institutional up check is you -- just wanted to about on cycle? for we've

held the in institutional goes we we about that talked grow. and based and growing, steady Institutional continue and feel to But you it When just institutional, say projects. last call. general, in on has downs ups will it's

XX to XX the Over next months.

Yes.

the Okay, of in side just in guys any the length? more cycle, understood. in cycle terms market terms of broader the on building generally way you like changing But that do envision

is institutional, new non-institutional, referring think about? you're I what the not non-residential the all is that right? So, So, construction to you're asking that

Yes.

non-institutional, yes, sorry. Sorry,

you below the continue. we third they've Right. last they but for some And the expect portend to XX, XX challenged months, certainly time. and look that look, we'll at the that quarter, leading indicators for is, right? in the been indicators So, Obviously, softness ABI year, next when for guide were give

there questions it And back CEO, at to this Bob Instructions] remarks. turn and are time. more Pagano, I closing over no President for [Operator will

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

you. conclude conference. today's This does Thank

You may now disconnect.