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Watts Water (WTS)

Participants
Tim MacPhee Treasurer and Vice President-Investor Relations
Bob Pagano Chief Executive Officer & President
Shashank Patel Chief Financial Officer
Ryan Connors Boenning and Scattergood
Walt Liptak Seaport Research
Jake Jarnigo Baird
David Tarantino KeyBanc.
Call transcript
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Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Watts Water Technologies Third Quarter 2021 Earnings Conference Call. All lines are in a listen-only mode to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Tim MacPhee, Treasurer and Vice President, Investor Relations of Watts Water Technologies Incorporated. sir. ahead, go Please

Tim MacPhee

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

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

year quarter an During for our of the initial offer third markets. XXXX. the and of will quarter call, discuss and discuss a provide fourth will for of today's the current quarter Bob operations the third revised outlook details results Shashank state performance, and the our full overview outlook our provide

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

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

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

information update I For disclaims limited obligation events new otherwise. see or future filings questions available that a forward-looking intention any The has publicly to the information, Watts' SEC. opportunity to everyone to revise whether with one, an because company any or statements, to of these be plus follow-up request or concerning risks, ensure participate.

If you have additional the rejoin questions, please queue.

to call Bob. me now turn over the Let

Bob Pagano

morning good and everyone. Tim, Thanks,

while sustained and First, all with recognize the their employees commitment, supply dealing variant. must chain I the of logistics delta efforts continued for and challenges our

entire work. My sincere deliver and team worked the to them. our a on promises focus customer team to hard to for their maintained have has Our thanks diligently

record another the team organically in and provide third by digits. Now, earnings quarter I'll please operating double and delivered All adjusted logistics supply adjusted an sales per produced overview despite presentation quarter. margin of regions' the quarter We and share. grew chain to sales, challenges. three turn The strong slide

review price XX% with we flow electronics Sentinel purchased an as many will have the Watts. Cash logistics Hydrosolutions remains as last the cash economic business, solutions, designed Since Shashank to we're technology. generation welcome expands market. acquisition colleagues a mostly We a Year-to-date, pipes, detect from when compared used continued Sentinel's benefited the and results This a and by chain gotten late volume Sentinel, plumbing Like companies, focal as recovery, and our $X well logistics all-cash dynamic. free Our more financial momentarily. mentioned we leak issues In and provides to in automatically detected. leak focus our have sales systems year. water point. leaks tailwinds. high-end in I'd million in to fixtures dealing detail results products. our September, like detection more appliances further supply will to Sentinel residential transaction. in off are shut is components involving detection our challenges. leak supply developing to previously in then, chain concerns water and increased

components. many are to in problems and maximize Lead the have labor We our other are doubled all constraints. these raw addressing on seeing and materials daily average regions customer suppliers times fulfillment. across core impacting with board We're than more order and disruptions of dealing

logistics and that Our disruptions into expectation is supply chain continue XXXX. will

this We issue are monitoring closely.

and both replacement well. GDP new single-family both remains solid starts in In In in continue replacement markets skilled Contractors again Italian German residential for Repair repair project and benefit in end finish projects, in portend expectations was the costs. multifamily while general, to OEMs addition are let lagging. project XXXX strong nonresidential in at with new Europe, markets. some on have sites shortages replacement older are still and demand me residential see pent-up and to labor starts the in continued business Repair materials job In to markets a inflation strong. subsidies. and remains most we've government construction seen and France. about Americas, strong residential to from efficiency talk also positive. end We pickup Now, in still regions commercial substantial and dealing be as markets. energy and

project We well are projects team delayed shortages, costs. heading more feedback In watching as this trend is hear impact beginning improved, QX closely. customer pandemic. an is labor the by APMEA, is to underlying being impacted to that across-the-board as and but demand as into due being uncertainty material inflationary there are on market has The

had Australia further market Zealand been housing exasperating in correction steady, impacted caused supply also which that economies. has by which is outbreaks the being but power affect outages recent China suppliers potential customers. their lockdowns the COVID in New lockdowns is have both both and impacts is experiencing China and market demand chain. a

are raising our given third sales for year expectations in Finally, our our performance full we quarter the QX, outlook. and

full over to who discuss third detail quarter provide performance quarter revised the fourth call turn Shashank Shashank? outlook. expectations me Let will year our and operating more and the on

Shashank Patel

by the Please Sales global and $XXX results. economic XX% Bob. reported were Slide of quarter the to X Thanks million turn up up a XX% basis third and let's recovery. review organically driven on consolidated primarily

currency and lower effective adjusted points normalization operating the XX per by impact price adjusted XX profit basis offset increased lower year-over-year. costs. reduced cited interest of XX% margin favorable supply inflation, combined basis for challenges, business just acquisitions foreign incremental XX% increased $X incentives rate than XX.X% share is The as year-over-year logistics tax productivity addition $XX operating million. impact and and the losses. had reasons of of investments, Adjusted XX.X% and of million expense chain transaction more increased earnings and in exchange Adjusted points to Foreign of a volume,

of facility restructuring For announced Méry France. related million our $X.X GAAP purposes, charge the to we a of recorded in previously

million plant upon to restructuring in $X incurred respect this million the We in XXXX approximately will costs another $X expect in more anticipate completion. We closure with quarter. $X million be fourth to

cash net capital lower is $XXX year-to-date same driven spend. XX% last flow compared up year. the million and noted, by was period income to This to free Bob As as higher

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

sheet respectively. ample negative ratios and balance The Our September and leverage of X.Xx strong flexibility. were net X.Xx the at gross remains and provides end

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

XX,XXX During million our common dilution. the purchased of quarter to we stock shares $X approximately offset an of at investment primarily

results. digits continued sales recovery. exchange to and favorable the Reported from double all Slide regions movements. by regional the X increased regional strong Turning foreign Organic also primarily during quarter from benefited sales our in economic

activity increased volume APMEA investments Germany an were from energy strong volume COVID-related by growth its in quarter and sales. declined as regions, and price. Italy, broad growth than continued with Sales the all expanded the Adjusted points a most replacement and from points operating down France quarter sales basis Americas' investments, than basis Drains APMEA had quarter offset categories driven Europe, inflation OEM Americas' wholesale and points to price up due normalization another in as sales Zealand In price more quarter subsidies single-family increased over and local Solutions to $X of by marine trade all more was costs. productivity costs. XX% which costs. key in XX% both in and by delivering due of minimal shutdowns. the Scandinavian inflation, margin approximately up and productivity in XXX in margin Americas during strong with driven organically operating in addition, by saw demand locations and incremental region million platforms. had benefiting gradual operating and margin during adjusted major benefit XX% business from by sales residential the by government product market. expanded and strong inflation in US normalization Europe's for We incremental XXX gross quarter were uptick recovery The freeze. across productivity in more except the continued the the where adjusted commercial New Italy volume sales XX incentives sales and the margin and and business expansion than normalization by business our Fluid the with expansion intercompany offset offset South solid performance and markets basis repair acquired organic Central driven organically. and in double-digit

outlook. Moving XXXX to full Slide X and and general assumptions year our fourth about quarter

for to impact costs as investments. to well continued $XX logistics especially should chain incremental the in XX.X%. for costs XXXX. due and quarter Our quarter. the inflation, normalization XX% to Corporate million costs is expand the expectation anticipate We be adjusted to may should operating XX% challenged of quarter Margins by sales range quarter XX.X% fourth million from the and growth from fourth fourth as fourth margin business should $XX supply that approximate over of

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

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

As a average $X exchange exchange euro-dollar by rate impacted that euro-dollar our quarter for by annual recall of $X.XX was sales Please are reference movement in EPS XXXX X.XX. the every fourth or the million impacted is $X.XX. rate, for the annual down up foreign European and approximately our

strong seasonally cash flow end the to expect year. We

Other we in outlook adjusted at our year margin inputs year full about previous are or operating XXXX, changes basis margin, on anticipated anticipate expansion line in in to some be midpoint previous XXX Full right and the free are cash year full with the than August. growth outlook flow higher August. For since August. XX% our XX% organic expectations to minor points the adjusted to with be noted

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

Bob Pagano

like a I'd with summarize, leave To key Shashank. Thanks, points. to you few

demand than results by quarter market. aided a global was and strong anticipated replacement better repair and Third and we were continued

the drive many chain proactively to to We price continue customers. manage issues our and support supply

invest solutions. the including smart continue for to long-term and connected We

line have Adjusted in revenue previous remains year We expectations. our full margin with raised XXXX expansion outlook.

smart well Finally, and strategy sheet, arise. that given healthy positioned our the and we our on strategic as to strong opportunities including our please executing open balance our drive With offerings are operator, lines they M&A results expanding and questions. already connected for today

Operator

Instructions] your now Ryan [Operator you. The comes of Connors open Thank questions. and is question Boenning floor from first Your Scattergood. for

Ryan Connors

you're want I capacity. peer at idea to saying numbers. things Bob, I'm do is you like you things strand curious don't Obviously, a capacity long a of the that just picture great today get need capacity actually demand We to out this philosophically, think really of increase couple expanding curious sustained some looking you the capital how companies some do good big in terms other in questions off. are you're point expansion. behind of some to I'm and committing at and commit is capital types it's just they posting normalized just be I'm to this your invest backdrop. environment or to had had be investments? how those just start going going is do, it and to enough case, But to that this going -- you

Bob Pagano

we good time morning. complete factories of in at been we and And I in capacity. have network when Ryan, look ample think here. spending yes, capacity, and automating have our plenty effort a lot of We've our we capacity

So inside additional to of I'm our I'll factories. going automation add in but invest not capacity,

Ryan Connors

Okay.

capacity, I to -- say the bring less supply guess shorten globalization your about guess reverse of lot I Okay. a you're chain of altering along back sort make I'll things supply home. the capacity mean things your when I chain to the have reading -- like to it complex, I

is just just versus what's above you of investment Fed settle in the you there? So philosophy to think to is and talking last is you're terms do of to back kind will old -- buybacks enough of going so down where kind I going -- monetary guess the to I long this do, mean, things capital I'm the everything and reconfigure going or policy of normalize Watts. just all go this your you about

Bob Pagano

back Well, we alternative stuff know and at philosophy as capabilities we our produce integrated come more some most But outsource shock looked point else supply based in vertically here. and is you started ship. and I will the got everyone like general, we we've than do where on We're Ryan chain in you usually in crunch. the some people It's freeze. with -- think normal at demand during -- to we look it time

hurricanes, abnormal increasing You've pricing. had got demand, some you've got you've

in I back product. will manufacture down. where settle always eventually, to you will it that believed normal. of ship think we've So come But the philosophy your And

been our -- So it's right line in with all along. strategy

Ryan Connors

hop much. back queue. I’ll in Okay. Thanks so

Bob Pagano

Thanks.

Operator

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

Unidentified Analyst

Hey. for Good is morning. on Joe. This Robert

Bob Pagano

Hey, Robert.

Unidentified Analyst

It Hey, And these good a a seem also during then in doesn't look just what does another due chain have that one. pushed been on ton. any question to guess quarter just logistics morning. supply pricing I backlog? Hey, specifically. quick like And issues? the or would like out the Were sales there

Bob Pagano

shipped mean Yeah. little I certainly, a a more, we not could have number. bit look probably but huge it's

think were a a supply a great I teams to and little we that chain it's there we not want And executed flex take flexible to if you price? do that. moved Shashank, the bit another to area volume allow yeah, our us big where have but But the workforces huge is. number. to more, do issues,

Shashank Patel

Yeah.

On the you was are obviously, quarter X asked September And price third price we X. QX. X%. increases realization our between then announced the third and pricing, in the about And approximately there October

in realization QX in Our XX% the is on expectation X% to range. price

Unidentified Analyst

queue. jump back I’ll Okay. great. That’s much. you Thank in very

Shashank Patel

Thanks.

Operator

Your from Research. Walt next question Seaport of Liptak comes

Walt Liptak

the of Europe inflationary operating about good even above how with logistics. business increases from just tough operating same Are on is pretty and environment your ask looks I mentioned? you at just about going. the guess little to cadence you could if the that talk price they -- a profitability Europe wanted is I pricing segment and The thanks. I Thanks. wonder the in a and leverage. point view XX% Hi, bit of how shipment production

Bob Pagano

Yeah.

Walt, So morning. good

we in third up volume significantly the those base leverage you have Europe. costs. as As fixed fixed And goes like cost the quarter, significant in get we of know a

done, margin as expansion job on it, it we the a did know as have of harder price in been for did teams As the lastly, commercial the OEM the in last get the but Europe far then we commercial over with right? Europe good years a they've several get side Secondly, price, is doing good And channel. we side in get price example on to well, all Europe. of as management little

So we continue that. to work

combination of those a of got operating nice fees we all So it's that that leverage.

Walt Liptak

Okay, great.

Okay. Thank you.

Bob Pagano

you. Thank

Shashank Patel

Thanks Walt.

Operator

Jake comes from Your of Jarnigo Baird. next question

Jake Jarnigo

I'm in Yes, good guys. Halloran. morning for Mike

Bob Pagano

Good morning.

Jake Jarnigo

morning. Morning,

implied follow-up Just in the I price achieved comments. was the XQ. appreciate for a and on quarter cost on what detail the

plans at to guess, So type there single talking into you low what year? and point into number as that? is next year? carryover are as a potentially looking for to then determine And I does price go Are digits do buffer, one that some next at we what imply you another

Shashank Patel

Yeah.

announced increases will we've increases have And and that three depend region. we depending of will So on as on said, But carryover X X of into Jake well the we depend had it the price on October next price some those. between year. there's September realization as clearly sets

goal to piece. Our the always cost is be on price positive

to what we'll So look we'll like. price are slated increases January next that. increases. over And watch months, we decide for price in now, the the continue three January Right

Jake Jarnigo

And helpful. then level here. Great. That's high

I at reconciling And on high starts a demand a are the You good. on isn't to the indicators and XXXX construction what be to would at to thoughts thoughts the love We are variables for the there? are the want that? impediments look but be cycle residential see talked about out? of on new pent-up non-resi related this do that Thanks. you How of specific playing necessarily still being that this tailwinds the you Leading type could pretty your side. how look environment what mostly housing that outside get ahead potential side or your the could question, level,

Bob Pagano

very both replace you has new really has construction Jake side replacement I What we've and also the at when commercial is strong. mean been on and look repair and strong. it, seen residential been repair

let's we they side, all at were of In before quite taking a a commercial the they're seen that delayed longer of now expected, honestly -- probably than that They're point construction there we've the online. coming view. pandemic, started on than it but call addition, the backlog projects and lot look new when you thought from stronger the was higher

still levels point et look malls, in XXXX markets So lodging, at view. stores, from of below a construction when cetera of we difficult certainly they're buildings, new construction office the significantly

air So those of down. the thought these and look just repair we of related that is leading and construction to absorbed by pocket new the replacement But overall started construction previously been some this commercial strong still some some of again projects. you when indicators, has at construction new

look next looks into So background we the GDP next certainly year, into coming as strong, year.

price with got freeze. stock beating some chain also capabilities freeze are and there a However, look we've cetera. increases, headwinds a of at And et We in people the we've not were building expecting to supply got happen. to -- lot

year. So be channel head there next will I believe we some destocking as into

now. we'll we So And earnings when we're call. do right to next reconciling guys provide our you more input all that

Jake Jarnigo

Great. queue. Thank you. back in I’ll jump

Bob Pagano

Thank you.

Operator

Your from Jeff next of KeyBanc. Hammond question comes

David Tarantino

David Hey, is Tarantino on for this Jeff.

Bob Pagano

David. Hi

David Tarantino

you, like so? the an channel much touched constraints dynamics, you it on kind a overview given give all but chain if little of, destocking just the logistics could So of just just supply how more happened has on bit then, and and

Bob Pagano

I'm sure we're destocking. not seeing

I lot is two the of now an they're to for and point jobs number from stocking the reasons. they're channels to seeing increases right trying happen. think Number future grab before channels we're inventory different view; price of are two, a what in inflationary one, trying beat

warehouses dynamic So we're a we're in projects. for to upcoming contractors inventory seeing actually starting just seeing to have wait to put even where

here right So but an what's mix inventory. necessarily, inventory, not is, happening there's the of

three-quarters have need quarter. other everything a job but of you're So you may that you for missing

can the and So they're for additional up stocking they as components they waiting what come.

in in doubled because this. lead prepared out there my demand of times of remarks As have right general talked some now, earlier in we this

closely watching we'll advantage with chain. So supply opportunity the we're our very that take of again, and

David Tarantino

are your forward? what more Great. M&A thoughts And going acquisition then following just the just on on incremental Sentinel, of any M&A,

Bob Pagano

time you Well, never M&A. can look,

as And make got in some has now disciplined. and be -- M&A. there and out at and makes we've It pipeline our continue it opportunities to sense. arise to we'll right but but certainly we're sense. takes high and The be going financial We full look we've got continue they watch it multiples make continues sure, to to going disciplined strategic financial tango to We're to to it. be very to two

sheet, So as with our leverage healthy we'll that appropriate. balance

David Tarantino

Thank Great. you.

Bob Pagano

you. Thank

Operator

comes and of Your Instructions] Scattergood. next Ryan [Operator Boenning Connors question from

Ryan Connors

but for extend, whole. Have ordering Thanks on there? economy One times necessarily that lines, of lead just cancellation effects you more the evidence Hey, great. to I not part by bullwhip wanted as follow-up. product any and couple double ask was to backlog more. or thoughts taking -- that of any like about your things specific seen any these as double in customer be starting a your that, a and we're sort hear subject order a of to could be that to a could the

Bob Pagano

cancel we're of it. seeing But that seeing been we've that losing than material. that. It's from And we're placing not with more think hitting been some Ryan, we've not it's people of I if But some they'll orders. potentially delivered, then regard. Yeah

in vertically strategy our again, helping integrated supply is environment. this out So chain actually

Ryan Connors

Okay.

last connected And just my was one the then strategy. Okay. on

go content the you things pre-COVID, ago, be how and sort presumably It more still of technology lines out. of was that. issues product you. you're significant like mentioning there, I years in terms those components you're of that you're having that. rolled would the back where initiative some couple know in You given investing of a But for very a

kind of and impacted that that so the about if penetration the or that out do to has right? normalize? this of of you all kind strategy, and things the reaccelerating And has it if when pushed how go how rollout So connected

Bob Pagano

to good point shortages a and our reengineer of we've taking because you chip a back off how watch XX% right and of letting change Listen existing a to right? of impacts existing I'm And our the have products you that. XXXX of XXXX. change some right? is allocate engineers on get on new some had chips hook, away. by we're have also key take couple not we've to now, here. the them people some boards, and off years We'll circuit developments. connected to shortage of had We So that. product when some still Yeah, Ryan, the products this focused team goal But, chip the But

is So percentage smart I'm impact products that planned in out, I'm that still an we put target. on as one certainly, but when mid-teens target that But our of the not connected on giving still on certainly proud sales. it we're the of up a we that and having yet team never

So we've a the last several over long years. come way

Ryan Connors

Yeah. That’s great. Well, thanks again for time. your

Bob Pagano

you. Thank

Shashank Patel

you. Thank

Operator

have the we now for no I over time, Pagano remarks. any back or floor this Bob additional will to closing questions. At further turn

Bob Pagano

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

Operator

does call. gentlemen, and today's Ladies participation today's conclude in your for This you thank event.

now may disconnect. You