WTS Watts Water

Timothy MacPhee VP, IR & Treasurer
Robert Pagano CEO, President & Director
Shashank Patel CFO
Nathan Jones Stifel, Nicolaus & Company
Jeffrey Hammond KeyBanc Capital Markets
Ryan Connors Boenning and Scattergood
Bryan Blair Oppenheimer
Walter Liptak Seaport Global Securities
Call transcript
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Ladies and Gentlemen, thank you for standing by and welcome to the Watts Water Technologies Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, Operator Instructions. Please be advised that today's conference is being recorded.

further Instructions. any require you assistance, Operator If Inc. I to - your like to Water Treasurer conference over hand the Technologies Watts speaker of Vice Investor would President, now and Relations today Timothy MacPhee Thank you. Please go ahead.

Timothy MacPhee

Thank you to quarter Earnings XXXX everyone. Call. our third Conference Good and Morning Welcome

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

discuss Shashank I our financial views of preliminary will and quarter offers quarter Xth the provide While, for third XXXX outlook a will markets, quarter. the results the business and overview for address the

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

to measure information relevant non-GAAP to the We the in reconciled financial our refer will these reference slides is GAAP to to throughout the appendix presentation. Any prepared remarks.

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

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

now turn Bob. over me the Let to call

Robert Pagano

I'll and Tim, overview an provide of and X Good the presentation, Thanks, Morning the everyone. Slide Please to in quarter. turn

employees all First, adjusting must I our the for challenges applaud of efforts the the to of pandemic. again

are they to initiatives. update times. also in engaged is diligently, teams most tours protocols on operating we travel and virtual on-site customer recent training, remotely, while The to products or engagement employee and to a to fulfillment, and tours promoting remained come have close drive time have contact chance working expect safety local we've helping deeply quality productivity the adhering while expanded delivering customer employees responding to inquiries. difficult through These management our plant with maintain solutions. these senior worked whether order on which customers to And Our allows restricted, ensure Watts' virtual with our leaders and greater their during have

Our third was our again exceeded internal expectations. results we operating delivered that performance as solid, quarter

management the critical proactive that in on focus environment, decline quarter have driving a tough our role macro the smart team less market strategy. had sales has of seasoned The Americas the was Despite connected despite Europe. Our performance played taking our challenging and the we both actions pronounced in in optimized and maintained business, anticipated, than conditions. underlying we the

adjusted increased flow the We driven operating adjusted same also In remains out we undertaken lower as the by in operating cost volume. was to last sales cash actions by increased a last profit now compared discussed and the also year. despite focal the year. free period margin this aggressive we've This expanded we've response Cash to all QX Operationally, cost versus programs earlier pandemic. we've year-to-date year primarily point. XX% instituted

$XX totaled total we million. have quarter, run-rate estimate at savings approximated Year-to-date million. third $XX the of savings During

the We actions in to will Shashank cost detail continue more support additional review financial review efficiency. operational to momentarily. results

normal, as our replacement home in growth sales continued Now and was back online demand we third strength DIY through market. the record are adjusting construction to driven being provide completion. sites the Americas, quarter support there. construction like channel under existing of while and our already September's industry the saw the views were encouraging I'd In to to is that continued new and the Residential repair current job

project saw on housing been The and migrate permits residential continue up mid-low-interest homes. new applications working realize backlogs to restocking performing a there that and government ongoing Covid-XX construction holiday impact to starts the all especially Europe, since perform German and demand higher-end, markets August people rates have customer and seeing focus Covid-XX the is subsidies suburbs. catch OEMs the are are we strengthening the pandemic are we residential benefited end-market well. are some into support trends and Our degree of vacation lot from We'll are to the current stabilized from single-family a companies June lead uncertainty. of should driving world in pandemic. In products China continue in go I developments Many Conversely, is energy but well the continued still and we Year-over-year market months of X and as hydronic our on around also opportunities and many to heating concerning. efforts. into and are have up. worrisome home efficiency rebounding that single-family capitalize number through electric positive irrigation to markets. is traditional this the to

data macro construction So and a into backdrop we've other currently as the assessed worldwide markets and with competence index like in that recently our are markets portending Traditional industry XXXX. slowdown a information commercial ABI mixed. our our

expect office, data and commercial food the continue and will to marine growth As multifamily verticals commercial be a retail, there will beverage be markets. centers that continued new in do the sub construction that however, and a in we expect challenge; building result, healthcare, of we hospitality,

be in magnitude activity discretionary and activity commercial smart how replacement hospitality are in submarket. confident to unmatched provide softer, meet as shift Regardless transition driving connected and the renovation the the in to of to markets the growth that that growth that new installed will In focus leveraging verticals. critical impacted to Break-fix challenged our given channel by during next we given regions capabilities of prospects grow sub flexibility reach the differing products, breadth we these and GDP, should the pandemic. the demand solutions and especially we'll replacement being normal. repair year, our follows and in markets repair teams traditionally see diversified and the are portfolio us And retrofit the non-residential into time. large we us we growth unfold product renovation believe especially replacement difficult our on of our continue our in Our those and should expansive may product whose offer distribution focus base best this be

about causing are year. overall market see So pockets of currently outlook but initial the for we of next our cautious by is opportunities, pause. We continuation the driven to Covid-XX uncertainty, pandemic the markets growth

at construction markets. in activity during said Middle of point uncertainty we're this As North slows and American, the clearly European I've East and before, commercial periods

view flux year. operating Call. February team formulate their further continues expectations on evolving our to in during provide our Earnings the remain markets growth Our for as next XXXX XXXX is We'll as plans

relative As Xth expect back the to and to into below sales outlook, partially compared quarter at levels for margins temporary quarter but last last year phases operating business. year our we cost as the are soft will anticipate third to we reductions improve be

over to now outlook. me call our our Xth quarter the turn discuss who Shashank third and detail Shashank? performance quarter Let operating will more provide on

Shashank Patel

to driven impact Thanks, quarter were down Sales X Slide consolidated the organically, third basis the of results. a by down to Bob. of X% X% Covid-XX. continued reported and review primarily Please turn on $XXX million

sales the of of sales. as of Adjusted compared increased the favorable cost of impact by tax despite points XX.X% of were higher The productivity and the allowing and XXX to acquisitions operating earnings profit adjusted share divestitures rate last margin basis and action income. Foreign lower million year-over-year. The incremental per adjusted the quarter adjusted XX year-over-year cost $X is and is main in on in more for million to US year XX.X% Adjusted that final exchange X% foreign-sourced than driver of operating exceptions tax volume incremental the a accounted and points operating margin improvements. effective and investments. both year-over-year. reduction actions issued of for loss $X basis had being Incremental million lower increased offset as $XX savings of profit due regulations adjusted impact

GAAP approximate we to from restructuring announced a expanded million For of should the related that expanded of and most programs recorded severance. $X charge being million these initiatives, previously Savings annually. purposes, $X.X primarily

these additional to and $X We classified expect cost as quarter in relocation per be special to of write-offs when These will the million asset relate $X programs. items to Xth that incurred. also book asset costs

flow Bob to the is compared year. up same free cash XX% to $XX period noted, million as last year-to-date As

laser-focused resulted in The categories capital incremental have teams have optimization on invested results in We includes strong an on or spend productivity expenditures and CapEx upgrades and receivable last working and including our product year. declined efforts versus enhancements. been the improvement by million manufacturing incremental DSO XX% in Year-to-date, as accounts we've spending key in capital expansion $XX year-over-year. X%

full net year. cash We conversion flow expect more for to at free income the of XXX% maintain or

and gross provides Our ample respectively. balance and these at was September in net end ratios times uncertain The and of the strong X.X flexibility leverage sheet X.X times. remains

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

common $X.X aligned our a at During share the quarter dilution. quarter, cost of repurchases longstanding received we and purchased approximately shares of stock are million. third approach of the on with offsetting the at beginning focused We XX,XXX

of expected products, and plumbing, traditional water X% results. less the slide during America's slightly reduction and anticipated products. X% than softness We by more an electronics quarter, in heating but regional in expected our than in organic than we X Turning the declined regions, our in to XX%. quality better in decline sales Organic sales had offset Americas better to performance water which hot saw all Europe. and

restocking especially XX% and better X% also were much by fulfilled the had second sales as product inventory resiliency organically, quarter within the down orders electronics. customers XX% depleted decline than sales we We Europe replenish to driven anticipated buying solution were fluid levels. to

COVID regions the of Europe's clients in load impacted the quarter As marine with the an recover. third Europe digits, sales over ship summer as to by closing to of were year work second wave. traditional fears an within XX% the low key as in organically many period with improvement exception expected, were France China builders single commercial economy sales last only continues Sales the digits. holiday down cruise our single on companies production. sales remained by a of which driven China's level in with grew versus soft platform low through France, unexpectedly were sales down by drains temporarily quarter down APMEA second busy

including Middle Australia were to However, Southeast double-digits continued COVID. the and East of Asia due down impact the

contributed than the investment. points the third plumbing $X.X offset acquisition to during lower of sales in Australia Americas was sales due operating X% ADG were adjusted than last XX of X% margin than XX APMEA New in productivity and to aggressive adjusted on XX.X% more performing was better million volume margin sales quarter reduced demand, cost Adjusted productivity, better actions. more expectations. the Europe's actions operating incremental the operating anticipated and operating Europe's the basis higher XX.X% domestic were adjusted than year. higher moderately flat in points than volume and quarter in decrements loss Zealand and above while volume, year driven as Cost cost on volume. basis aggressive for of volume from positive the actions. in expected due increase a cost is actions reasons last than in was a offset reduction profit increased which to sales XX.X% third-party affiliate by Americas basis XXX similar Americas. points margin

and Moving X to operating fourth general assumptions quarter about outlook. our Slide

quarter As operating margin reduced the as depend fourth Bob last mentioned, on compared year. of expectation is our sales should to volume

uncertainty fourth to organic regarding fourth the around cost $X XX%. of quarter range that to below fourth for XXXX. XX.X% approximate We the adjusted to Corporate margin quarter million quarter. This anticipate are the at fourth estimating operating X% sales $XX should to Covid-XX. range for some from should includes be X% caution quarter We

The expense adjusted interest XX.X%. approximate quarter. should rate sequentially flat to effective be will expect the We tax third

rates Foreign the year be should quarter. to last exchange would positive fourth current persist throughout

the reference, the was quarter average X.XX. XXXX exchange a rate foreign fourth As of for euro-dollar

capital end Total to year. We million at $XX is estimated spend seasonally the flow cash for expect strong full the year.

call with So begin me Q&A. the that, Bob we let Bob? to over turn before

Robert Pagano

Employee key Thanks top service Shashank. engagement in To summarize, themes. remain with customer few a priorities. leave safety, I'd you like to

needs. customer expand We safety our our simultaneously employee continue to maximize while to protocols meeting

Third activity year-to-date significant in provided improved cost to quarter were results. than expected as actions the second better when quarter results third quarter compared our benefits and

We continue review for cost to our further base opportunities.

to Our execute allocation balance strategy. and sheet flexibility provide capital balanced remains our solid

during ability has generate to times Our cash turbulent critical. been these

smart solutions spending. for and in in We enhancing term and both the capital invest continue to productivity connected long

certain market in improvement continued reduced volume leading is on margin fourth year-over-year uncertainty to commercial and expect quarter outlook indicators especially We due in our mixed given the covid-XX. markets cautionary and

positioning with strategy. We open mitigating recover questions. quickly portfolio will as Watts on a continue executing focused to pulse changes and our smart for finally, to prepared our And operator, our With our actions that by keep we and remain close capture connected markets. on markets market and to the lines to are with diversified react opportunity please


Instructions]. [Operator

of Your first Jones Stifel. question from comes Nathan

is line Your open.

Nathan Jones

in restocking Thank you the lot further expect And you event could you. quarter, do restocking going on then Just more that color a could XXXX write on the to go and Xth took well. into that any possibly see as place that. Americas, into the

Robert Pagano

So July. July, we and versus steady that as with saw American in their in that July and construction most in that we late a some late through saw of we up a sales big down saw and May, a October, middle channel of big to we restocking bleed of restocking in North stock that result of May in restarted now was inventory, up saw

see into XXXX, will look think shelves. the quarter, Xth their what's -- we I on So seeing think heading what in I that's what it's the and market wholesalers in the we're

think soon in point I view, still the of it's market tell as discussed. that continuing the previously there's us from to COVID-XX time, we've think in So point with restocking continued here, uncertainty too I this

Nathan Jones

you quality, to as Improvement, there. of Okay, know other companies a piece favorable are but you in improvement portfolio, the water seeing any quality presentation water it's highlight I trends from a did and then favorable turning heard trend. home We've smaller

Robert Pagano

so related Yes, our actually that, marketplace most the as positive been we're of of market. market our as residential seeing piece piece our We very water of commercial in our quality in up residential that has double-digit saw some favorable but well to quarter. residential has

continue the single-family with we focus will growing. that homes the renovation So believe on and

As one I this cautionary said, the about markets the we're very closely. we're more That's at commercial in point watching time.


Your from Jeff comes next KeyBanc. of question Hammond

Your line is open.

Jeffrey Hammond

just, temporary this if is the third structural that, mentioned some to impressive. the know as for some about look normal into and year kind savings decrementals be, can that of versus temp and back cost think we how 'XX, don't about creep temp then quantify mix you to So, unpack. much are versus trying I'm quarter Bob, you think second of cost how going should as just I costs really half think in. you incrementals how of much of I

Shashank Patel

Jeff, so, Yes, you're as saying.

$XX to get cost the had cost of mark-on the might rest and so year third quarter, at things available it we're vaccine and million that $X we'll we look and had with savings at in for fact a and and is we we're Out exactly XX phases six that as was basis. and XXXX beyond much costs be right early of XXXX. $XX be which planning $X restructuring, travel as the activities And million know for back, the talked of out through the especially in out. of permanent additional that, be we're months what is restructuring in in the stages period million of So the that $XX three in not another of $XX time, $XX $XX you million with was million that same about ago some to by but planning those the coming million when like Year-to-date clearly will the XXXX. million are We things million look going like $XX pretty cost now on months, fourth noted first February the quarter. approximately was not to rest of as roughly million the $X third was the nature, that million, actions million of the Bob took, to we in quarter, $X in of we next into permanent we number

Jeffrey Hammond

normal bit think temp as necessarily? look a costs back or come than you incrementals Would little lower in just not

Shashank Patel

beyond obviously got the op overall get target, we margins, think still of the right. long-range I we once expanding COVID

So drops, XX-XX% when still on incremental looking at look the you we're at volume.

managing a job the nice we've decrementals the Our cost done of actions, decrementals. with

Jeffrey Hammond

replacement as has you look if of RAAS. mean resilient, certainly mean to Okay, XQ and you then, been business to great. here, just I outside the we And pretty speak I XXXX, your look

as you comp lingering 'XX. snapback some just I'm of So kind balance kind commercial of versus and 'XX into how think these snap you businesses this to, trying like easy much in back from look of uncertainty we into

Robert Pagano

March been just steadily who October something at lot what been here actually down is out commercial has and we not we a this activity we're our strategic is indicator, people That continue our of however, is any pocket they what double-digit. where Jeff. analyze and air Yes, we've customer, Drains and are which support completed the a that existing we doing We of down seeing that planning gone seeing analyzing and as buildings; process a have completing seeing look an an external to lot we're including right? happening engaged Drains in build saw we're has early push so business been construction voice new

next next most to and we're America So into we will the everybody extend honestly to next to area overall year. going is think and North be up. year believe year. Europe of, going because is flat we're Overall thought I believe continuing best that's We be at down concerned and APMEA be as looking than getting going for of into COVID the longer

you to residential going we're focused is is and to continue those basic be a which year. not seeing soft next that, the know fine, also that residential of it building but offsetting So that kind is that and commercial down to is construction, into in be projected rebound on commercial is multifamily doing soft from

Jeffrey Hammond

like versus so, your those those are, for of right. and markets business, each commentary the And market are

business projections? of how much better can that with side if replacement So in you those of I and you market outgrowth, do kind the the maybe mean balance

Robert Pagano

projection. market our both, I and think well, it's Yes, our

I think thing overall seeing we're of is traditionally other has when that What our replacement dug followed break-fix repair deeper down here, recently it seeing that in away. about and right is right the we're GDP. is XX% replacement, now repair where we they repair

hit because and that and some point pushing At is maintenance long up. and up that's delaying renovation with XX% is troubled to very other COVID-XX catch still again that a some preventative and our hold that and next markets we're that going of The we are case they with them But seeing we these what term hard, COVID, and no year the hold as bifurcation that of we're the health seeing out stimulus, had and GDP. for into now repair-replace now pushing should right of that all no and this is year. rest of

again, So compare to us that be we to. think will difficult


Connors next Boenning Your from with & question Ryan Scattergood. comes

line Your open. is

Ryan Connors

how are I channel on Good any encouraging, market, I situation marginal little impacting the topic to mean evolving realize down Great. picture your to wanted to the from virtual Is there channels bigger selling morning. model if which channel this a customer. wholesalers of you at evidence a can to talk perspective, does disintermediated, just actually normal. to sort about how drill direct destocking, or is a you the ones a at have of picture market just I of all but bigger new a being least more all. and

Robert Pagano

in of go any our we're mean, smaller seeing not under regard. I any wholesalers

have point wholesalers. to with smaller we have online longer-term be in capitalizing on smaller the a I opportunities time, do I think larger again consolidate ones. that the ones but been that that seen within that, consolidating the the this will bankruptcies into larger capabilities ones ones, At think any I lot think more larger smaller but have the not a our that ones are continues, that think I market,

Ryan Connors

forth, if Is guess of restocking and be a that? limited issues because on sheet were of a and I good they'd inventory read that capability in would Okay supports so there way that more and balance take models. they to kind be the right adjusted to

Robert Pagano

agree. Yes Yes.

Ryan Connors

pretty their then I as deal follow a to but know mean was more as smaller it And Okay. had name a be into my that, not of other all just virtual hand they I timely more online would more on on in direct to driven deal a guess maybe Backflow obviously suggests that Direct, I model, timely which the of commercial this seem timely, one a sense. distribution the but

regular an that gone, or model just us product how side folded been of on, can how there? how you you integrated on distribution has maintaining that, So distribution selling lines then still that that into give and are has online the update that's your

Robert Pagano

is, The answer your the question all to above.

and our first we So of through various offering to performing well, product online channels. very it as capability we're are well the given fully is integrated Backflow that offering build Direct business all business traditional into line as our

capitalizing So are the answer we that. is

for We continue very go to to add overall continue of market direct the website want that and that pleased that. parts to products that we'll the we're and with that leverage like capabilities to But acquisition.


from comes question Oppenheimer. Blair next of Bryan Your

open. is line Your

Bryan Blair

So caution could order color the organically. into I'm you to trying a little on baking you're October much more gauge provide XX% rates, how outlook QX

Robert Pagano


order what flat, restock we're is October which quarters. beginning were So seeing the of at traditionally people rates the basically

with the to upcoming So, usually in in follows Europe gets softer and particular and there's is that what the have season you three concern after and spike the when then then and later think up, marketplace. Americas concerned, I we're four holiday in Covid-XX weeks happens it

expected to it it where aligned we right is be. So with now

little We this. a out get expect and to December as of softer November we come

Bryan Blair

drill be for all are little and the willing APMEA expectations makes year-on-year Americas, sources fourth assumptions, any sense. more Europe, bit trends And regional margin color down that about to how the on And also thinking of guiding would helpful. That across, you Okay. a on the expansion and planning then quarter. you're if you're the topline

Robert Pagano

expecting to APMEA to down down X we're Americas the as to Yes, down looking X-X, will at breaks overall X%. be so and be Europe X, quarter, line Xth for X the what up we're top it, XX

our what's continued on that on and it and with all planning internal COVID again depends is So assumption market uncertainty. going

Bryan Blair

you wondering bit so model in Okay, you've in any, very we the and direct could parse how of lift, if helpful impact far detail, contribution a better third seen through the was much than Korea. and if versus were of a then margins the ABG I quarter, transition from distribution so out Shashank expected quite APMEA sale

Shashank Patel

year pretty Yes, it go volume of margin ago and nothing forward. the but will is volume it as immaterial, obviously intercompany drives the as APMEA there margin were quite accretive of improvement absorption Korea a so story The intercompany significant frankly, rest sales be part well productivity. as we the

we've really lot the from that rest factory of and through then margin got was in on Xrd-party of So a intercompany expansion it favorability went volume the our Ningbo sales.

So we was did lastly, see be we had and so that margin business expansion as East-Africa you as centers margin favorability know, and down well. in margin in tend accretive which China, overall, as margin year-over-year higher there we our well target to data typically then was Middle

So those contributes that it's helped. so is bit. margin really a a combination business little as our higher ABG of that well

noted $X.X about the and higher those we were quarter inorganic margins in from As there came sales ABG third million well. as at in


question Walt Global. with next from Seaport comes Liptak Your

open. Your line is

Walter Liptak

geographic to that ask that question wondered follow-on look with morning Hey, I was a guys. good helpful.

been remarks You maybe sounded guys businesses. know that come government subsidies I Europe bit with little government a and situation of some bit, the programs has to your up able prepared think you it political helping because the little support a to in were

may a little Xth than So support for Europe. think that and do about the if more wonder why looks government US? little and talk a there be more quarter the that for could wondering you in Americans stable the the I'm bit you I bit outlook is

Robert Pagano

some question. manufacturers you German efficiency Germany, a and we've lot -- so that. have in to answer OEMs, know, to they business manufacturer related energy helping In been subsidies first going supporting Germany residential our as of been that's and German also, those is in your Yes boiler on boiler

why better the them in to were has than that. worked overall do is Right. we Europe we that through So they and expected The expect didn't helped. months things biggest summer

bars marketplace in breakout, through mainly are seeing that worked is but concerned and seeing they're the the little obviously that shutdowns, subside it current in think that's time, we shutdowns manufacturing they slow we're wider at shutting a etcetera going and we this now and spread the down. down right will not are uncertainty restaurants, So point -- to with that that,

that stimulus I So more been government some think area. in there has

the we're However, certainly the I I quarter. said to was uncertainty said there's Xth market remarks, in indicator is we're people Covid in what And there normal well. market Americas, residential in which us when our in think were some again and said leading call closely, my prepared of it's the not the as Drains as out October starting stuff I people down in happening I as earlier got the, be double-digits a but I In guess cetera, that's building outbreaks on QX. aren't and the steadily may worse into that before been renovations, we're seeing leads doing to cautious repair on in some the et that a now see slowdown the watching pushing subsidies repair and of replacement and been very that, but uncertainty have hospitality helped let's it type is not that of

point continue go to we the we they're question at pocket not going building then that and how complete will that they the into year. means second that and long half air and it's pocket finishing this So in at new what got of air buildings is least believe next time,

Walter Liptak

Okay. Understood on that.

With reduce just digital you're saying have for the better there customer to make or we're employment continuing or it technology smart of where a Is are control trend there investments is your looking their the is systems? smart customers voice technology, building digital solutions water about to over sounds what there the like and

Robert Pagano

think I there the Yes, is a clear trend in industry.

a is and owners do they going can to become of shortage before, and shortage is issues there building people monitor we of to plumbers, we help this in As environment. issues said there's maintenance anything before a identify big

on So, focus more more we're getting and that.

more think than right So, in that I ever current environment. important and on strategy is the


at back further Pagano. no There will the remarks. to Bob call I this closing questions turn for now time, are Bob Pagano

Robert Pagano

we you look fourth call. full February to our us and join appreciate taking you the XXXX your interest today speaking our discuss again We third quarter forward Watts with year thank for to in for and continued results. and Okay, quarter everyone earnings time in to

and So enjoy upcoming holidays you. the please safe. Thank stay


today's gentlemen, concludes and call. Ladies for calling. this Thank conference you

disconnect. may now You