WTS - Earnings call transcript Q1 2024 | Watts Water Technologies, Inc.

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Operator

Ladies and gentlemen, welcome to the Watts Water Technologies Incorporated First 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, we will open the line for questions. And I will now turn the call over to Diane McClintock.

Diane McClintock

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

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

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

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

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

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

Robert Pagano

and discussed by last the for shipping Watts call. X, overview largely hard on as and began sales earnings Diane, everyone. you, was sales, to this margin operating first entire to that share. the record provide adjusted first of XXXX possible. for quarter quarter. per earnings morning, team their like better-than-expected Slide Thank turn with growth quarter express and appreciation our Please extra in the good an I'll We results, my I'd to including driven days Organic outperformance work X% made

Enware, due to from benefited Bradley incremental of also We Josam. and acquisitions our sales

acquisitions them productivity, realization shipping from and exceeded than operating and which to We offset pleased continue inflation, new solid primarily to investments. our volume of price success.Adjusted lower and expectations days, volume the with the to extra margin long-term contributing European expect are due these very performance incremental more incremental

our remainder expected strong beginning of increase we As the with earnings a announced flows for cash June. XXXX, and in result a XX% payments dividend of

remains an capital we with Our and the perspective, and Bradley, capacity are in strategy.From the allocation sheet strong Enware to provides integration our operations progress flexibility pleased support balance of ample Josam efforts.

together are opportunities. on teams Our capture growth working to additional and capitalize synergies

acquisitions to both expect accretive in adjusted EPS We XXXX. to be

seeing Regarding raw inflation, we're see cost across overhead, we material increases continue renewed labor of to and costs. escalation and

inflation rate While moderated, still is levels. has the normal it historical above

only done driving our helped a operations not have the walls, factory but job inflationary great in productivity, offset outside teams has Our some pressure. which

invest we continue to in digital and vital and believe connected improving energy water conservation providing efficiency. solutions our safety strategy and as is water regulation, We smart to

our June. year.In update and We'll own meeting you priority. end with the sustainability We initiative enabling of by issuing their our customers to achieve later addition, on our be an annual remain top report this will provide our water smart sustainability goals a

goals, Additionally, absolute commitment. including reduction establishing emissions we'll an be long-term carbon new

and initiatives, strategy we to this you. made Our sharing and with sustainability team looking progress tremendous has are our advancing forward

tuned.As I stay XXX-year So XXXX is last anniversary of our the Watts. discussed during call,

this customer this proud tremendous events hosting the of are are to globe and employee and across We milestone celebrate accomplishment.

of decline Ukraine progresses. an incentive and Our Multifamily is the in East. GDP, residential are key flat, Germany the well-received.Next, a impacted and update our the digits Americas rates indicate single-family indicators, Nonresidential been been markets. Italy down connection is The replacement XX at proxy Momentum new to multifamily and OEM Middle and heat customer indicators months the until programs in new The been markets least energy soft permits Europe's in remains Global new for as to double than lower ease. negative like in have nonresidential since repair starts expected unfavorably and which our anniversary construction remain XXXX, in reductions and I'd new construction year construction by XXXX be and and in continue in but positive new construction to interest market.In remain begin volume, conflicts are has the turned in programs ABI recent have markets. training the construction impacting Index the business particularly July new is Dodge Americas, XXXth last in our a below end with mixed. including introduced pump our March. on and provide to

grow. the recent are most projects and expected region, will rose Industry Index years. to expected but X in Confidence XXXX, the first ENR Pacific still to office Industrial Asia China However, including in end tempered supportive remain by be and retail, subverticals, resilient for are Construction time mega above but are recreation.In challenging XX moderating be the a markets

continued seeing East New is expected oil prices. interest to improving new be and GDP are impacted Australia to in higher positive. have in the Middle but construction markets due We rates still Zealand, Elevated

our to of year. We address for as or any arise.Now the expect supply the impact direct and geopolitical the outlook in monitor proactively indirect the they uncertainty to our chain to continue and remainder Middle update an customers East on

margin our outlook strong first quarter due increasing sales performance. year operating are to full We and our

decline in weakening OEM as a continued slows, in construction incentives. including new energy in expect the We from volume Europe reductions

expected that, longer. construction revised will earnings first due higher unfavorably quarter a XXXX significant I to the for will who and of mentioned remain decline me fixed Shashank, rest second the half the have for let quarter turn address the impact to now Shashank? the in new residential year.With cost our and of outlook. our base Interest more nonresidential Europe. over This in our volume higher full second call are in on year may results to As before, impact and rates

Shashank Patel

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

acquisitions. first The of shipping quarter. more compensation million increased volume adjusted of including extra EBITDA Compared basis Bob per shipping Benefits and was days basis we the sales to increased Josam in approximately million primarily in purposes, the the XX.X%, million.Adjusted XXXX, primarily of foreign extra benefited XX% EBITDA versus acquisition-related Earnings a and and shipping in of XXXX. incremental $XXX GAAP charges. effective operational of growth sales growth Enware quarter. last up that operating XXX year. of benefit exchange, to of points increased of up operating $X Adjusted $X vesting dilution driven investments XX.X% of versus our compared XX% As lower adjusted of XX% offset acquisition adjusted performance, XX of from quarter million the tax than the was points. $X the euro, driven per last was was primarily solid $XXX basis of X% due performance stock XX% of from million productivity approximately strong and the from XX.X% contributed share up incurred Bradley, million the points occurred increased of first days mentioned, quarter tax adjusted we margin year, days earnings price, margin points. the in The a XXXX.For awards XX rate basis stronger nonrecurring and profit approximately share by by to benefit XX extra from estimate by acquisitions contributed $XX and We $X.XX of approximately extra inflation or days

nonrecurring of charge million a by $X.X the cost restructuring recorded in were of We office charges building also sale to related on an actions. Europe. gain the These partially offset several

in of The cash due quarter last free flow to flow million $XX net and compared working the quarter Our first capital increase cash was year. for was higher income $XX to investment. lower the million primarily

are cash on communicated.During million. of improvement year quarter or in shares our conversion to equal previously repurchased of cash expect as XX% track of full A free stock net free we We approximately Class goal common income our than $X the for achieve XX,XXX sequential greater and our flow to flow

XX% we will in provides our announced and Bob dividends in Additionally, as The June. increase remains mentioned, strong us flexibility. a ample balance sheet begin that with

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

sales flow Americas organic results. X, us XX% XX%. capital acquisition by me better and sheet allocation balance from increased up slightly Slide up let single and the healthy high were give on optionality.Please Both additional due and reported sales turn cash were were to regional of continue comments to digits. sales benefited ahead solid price. to days provide performance. shipping The sales Our expectations better-than-anticipated a Reported few

primarily decline Americas to of by of by The expected. in in dilution, The than our a as or adjusted heating reported included X% were acquisition was X% in were declines while operating more partly driven extra Josam investments, organic products. down incremental operating profit productivity sales shipping X% impact the added leverage million offset XX% $XX increased was movements. growth we points. and core by operating valve water margin days.Europe quarter. radiant from the and down quality price, which and favorable decreased inflation foreign by acquisitions sales products and offset exchange margins and Bradley The Solid Adjusted basis XX%, XX sales

by Italy our France with and X%, shipping offset Drains well of line the as year and by outlook. digits. $X by in East APMEA points digits. reported Adjusted than foreign of operating mix, and OEM movements full offset Additional offset had and days investments than in by residential our declines quarter acquisition, days sales heat Enware our data were shipping in plumbing and volume in productivity.Slide The to Enware productivity up as unfavorable by a acquired million reduction growth in floor from in weak which due more extra impacted price as The and of X%. favorably days mid-single effect operating timing in heating Germany sales or Australia subsidies XXX and sales the pump increased were price was basis impact.Despite a Middle decreased was declines investments business operating and unfavorable challenge, XXX impacted more business by an sales of partially under and increased as and negatively China and assumptions sales XX% inflation increased approximately extra second destocking shipping diluted increased project X% Growth the of wholesale volume provides exchange government favorable top centers. about deleverage. basis more Growth profit operating organic mid-single XX% by than inflation our margin the points sales. margins offset Benelux X and result

while flat, between decrease to the Europe. between First, sales is quarter a X% to to second low let's are digits, we in increase X%. expected by to reported Americas X% we be sales single a sales and cover offset expect expect decline and Organically, low APMEA in On outlook. basis, the Organic expected up be XX%. double-digit

acquisitions. in addition, expect of approximately from incremental In we the sales $XX million Americas

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

XX.X% basis XX%.Additionally, points unfavorable of Second XXX due in quarter very the in XX.X% all to adjusted is volume a an particularly quarter incremental points. basis down operating XXXX should down to exceeded This have to second range investments to partially will and margin the margins impact. Europe, deleverage, XXX difficult acquisition points be basis dilution or comparison of of when XXX

should Corporate approximately rate million. be Net should $X be incremental approximately XX%. million. $X interest costs investments The of approximately million. $XX expect approximately should effective adjusted be expense tax We

a rate which of share in XXXX. million per estimating approximately imply the versus in versus sales, dollar second X% outlook. full year is less decrease cover $X.XX a quarter the EPS We of let's $X would in exchange are $X.XX than or the $X.XX This year.Now average euro-U.S. the updated prior of year-over-year rate

of increasing plus growth to year For outlook XX%. the range a plus new we full reported XXXX, our are to X% sales

previous guidance XX%. to X% plus plus was Our

we Additionally, X%. growth to sales our a X% increasing of outlook range are plus organic minus to

our stronger-than-expected Our was reported by this growth points to and previous first basis our plus the range a guidance raises start effect, organic based in midpoint range quarter. the of X%. XX In X% of on minus

margin We full-year previous outlook increasing to range a of guidance adjusted to are to EBITDA compared to XX%. XX.X% XX.X% XX.X% our our of

reflects margin previous to XX.X% outlook. of expect Additionally, margins we are our and our operating now raising XXXX including and EBITDA quarter, adjusted be our increase an better-than-expected XX.X% updated year our adjusted basis guidance acquisition margins adjusted for and to We XX.X% guidance of points margin XX.X%.The compared between of XX performance. represents to operating our full from outlook flow-through operating previous the first

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

This is down our guidance $X.XX year, previous prior versus for euro-U.S. our million the For now are sales $X.XX in reduces by and share rate. $X.XX assumption rate, euro-U.S. full which our a assuming XXXX flat of dollar $X FX by guidance year. and dollar change the we year full versus FX the versus sales EPS a

other costs should the for the to which million in Regarding $XX corporate year. the Net be approximately be full expect key interest $XX can we for appendix, inputs year, expense be about million. found

Our estimated is effective tax expected adjusted XX%. approximately be rate to

We expect is be anticipated approximately approximately million. be our to spending $XX share XX.X CapEx count to million.

Finally, begin me over call approximately turn Q&A. the let depreciation Bob the be year.Now and $XX Bob? should amortization for we before million back to

Robert Pagano

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

quarter operating earnings and than was performance first to sales, share quarter performance. First per adjusted better-than-expected due record price anticipated and with margin acquisition we better

first of result increasing outlook. margin full sales, solid quarter, a margin our operating we and are our As EBITDA year

of reflects progresses, conditions the Our especially XXXX outlook our market softer as Europe. expectation year in

As as needed. portfolio we have said, teams agnostic and is we our expect end growing to markets, to pivot to subverticals our

a large includes support we repair strategy. in that our incremental the Despite steady component and cash notably profitable revenue and model a drives growth, to investments business base flow. replacement markets, digital maintain durable Our challenging and to our long-term plan provides

to Josam with We and continue on to transition integrations focus a and pleased progress of seamless to the date. Bradley, Enware the are ensure

priorities, support including increase XX% acquisitions recently sheet balance announced. dividends ample allocation the our to and Our capital post we strong in that provides flexibility remains

environment take are to for well-positioned I'm of to continue creating and market please uncertain advantage We lines and team's they arise, in our for operationally and opportunities to ability commercially financially, in open shareholders.With the as value that, confident questions. execute our operator, this

Operator

question comes Jones your the [Operator Instructions] of first Stifel. line Jones Nathan And from with

Adam Farley

the Europe. Nathan. cost for wanted fixed Plus, to on revenue there. base Farley I start relatively Adam organic strong decline. is performance given This the margin on Really despite high

was Europe? tail what from in main the So of end mix margins

Shashank Patel

Yes. mix. It was a combination favorable of

Drains which have out margin. OEM in sales sales we the higher of lower higher had channel, have had where we And lower primarily So we then margins. in Germany,

QX. we mix. then also, brass So know, we certain benefited, We benefited benefit there's for And locked in double a Europe, on we in, in example, as in and lock commodities, had you that of in that benefited came we that been productivity copper had. really -- as we the And Certainly but we QX. locks brass well from strong in then has benefited QX. escalating, from some in

Adam Farley

the think Okay. improvements cost And remainder be margins about price the Should Europe year? Productivity then in of Maybe how in the continue positive? should spread? narrowing we mix to for continue?

Shashank Patel

productivity should I Yes, mix that would say positive. continue and

of I period the commodity on lock for as time. we side, a said, However, in

seen So especially those -- speak. have brass undone, come commodities, in locks to do on And so we the side. escalating

down there. So there headwind could be some

year. So we'll see rest for how of it the the plays out

Operator

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

Michael Halloran

some just run half move back about last talked you So, the and year, the you of reflected about half call in you case can we'd uncertainty through guide to imagine but that's And probably half, would half impact the certainly front still what historically. back days on context half, to today, then relative a but see from shipping are weighted you it's that. perspective and that to pieces? half, I know I guidance the back guidance. as talk front front just going love the you moving

and just the thought So the process to I moving want it. understand pieces behind

Robert Pagano

-- changed. nothing to to believe significantly is lots get Mike, continue soft. Yes, We going Europe has

should we to being second going in year, impacting We the of multifamily believe say, in of the cautious, also the that us the start half given year. half are I conservative second is

regarding you favorable are The have correct we that very days. the in get carefully. watching we're QX in days And offset QX. finally, So

softer So the days. you'll where fourth see give quarter be we'll up those

April. part, got that order little even in we than probably just most a But to on through expected. we rates keep playing expected as Europe current balance. So the for softer is we out it's based

we're So very watching that carefully.

Shashank Patel

had Mike, roughly also, because new ABI site noncommercial in softness construction the has we half months. on for also been baked the And X second down in the

Michael Halloran

get thought. there, you the that into how lot out play When train that Let's follow Obviously subsets. sell on nonres think and does there's you however the a numerous we think of different of as up next words, about large half want the institutional commercial pieces puts markets, In a market. back lot about takes. of moving year, to and to year into other you it? of really a It's

feel Maybe it? pieces anything concern, a we moving these these some some balancing there's about interesting where of perspective? also about subset is mechanism of about You're other of and the just but How talking leading areas. there much talk optimistic from a indicators

Robert Pagano

start, given base. of our business our XX% I large replace with Yes. and Mike, is always repair installed

to tends that GDP. So follow

a that of lot ups So stabilizes downs. these and

do you more -- trying projects markets, them, we're we offset So data mega you're lumpy, that in centers, and/or Europe potentially for softness balance. some example, that see on right to of these some the little the multifamily of offset a but

We So a the we where to portfolio. move diversified is. have work

are As our We're products I said earlier, just ship. to to trying the agnostic markets.

for and replacement where helps base indicators, look we the on still our always right some we leading certainly us. construction ignore So installed through which the it's side. of going, have repair held large happening now, the But past is in again, can but

Operator

Hammond with question And your KeyBanc the of comes next from Capital line Jeffrey Markets.

David Tarantino

the And what's you This more less on the dilution. the full there? around give of change you you're Could in quarter? like modestly year, some then expecting kind color for first assumption maybe the versus to looks it on context Maybe in Tarantino acquisition the some on is XQ deals for expectation David Could dilution. be Jeff. the start give to for dilutive

Robert Pagano

lifting, end, some -- the with lot well. acquisition especially -- heavy So front on going the very closing of of A Integrations sites performance. are I'll extremely pleased start going at positive. on is we're the look the

And overall, But the first got think very favorability some we've on the calendarization. them helped we're days pleased. now us X-X-X because of in quarter I our

Shashank, you to do want So the talk dilution? about

Shashank Patel

Yes.

So But noted acquisitions XX it expect points -- that know down the the acquisitions dilution as points, the XX the we acquisitions. year, into we took the points from overall the that's QX, basis outperformed than factored is we and you and that in right? for the that basis basis versus Bradley, why Josam in equation. we dilution from guide, full now QX, XX less was So overall,

David Tarantino

Okay. line Great. underlying you sight some evident? seeing on on Europe, trends the demand of just maybe color dynamic of on given more a color some you terms guys the little have more destocking cracks maybe that. bit the in first view, And kind the what give of you in you're then Could days could with forward the extra And becoming on give quarter? in maybe

Robert Pagano

just uncertainty lot on I a wars think right in Europe there's now. with now of going right the

And in ordering have year. a halting So bit where initiatives and think seeing channels. And of it, construction lot you double particular the is recall, heat strong there the than, were the tough I seeing They QX quarters Europe little exceeding related if Repair expectations. in replacement we're comparison, a pump and QX we in slowing retrofit our some some QX. in digits. very really to or last We're new is destocking QX were that Europe, other significantly. call down for and now let's

in I then area. down, general, through we at say in So least to see in that time. to would go But going have let's QX. especially some pump inventories -- take destocking, that at heat is And point need think

taking cost that are analyze on going. appropriately we Europe we is So we're as always where cautious business actions and are as

Operator

the [Operator with of Giordano from Instructions] TD line comes Cowen. And Joe your next question

Michael Anastasiou

Joe. for on Michael is This

higher expected the And logic the for commodity front. on before on was the was the of You realization bit calculus had same? than part price in single-digit quarter. the specifically? about remaining wage year that I remainder same component the year, low also the was in the for the of believe also just the the and a still the Is the increase price inflation mentioned front What slide of

Shashank Patel

achieved front, points than basis lower about better on we X.X%, price price -- inflation But to so compensation side, about commodity, the assumed XX the at And the on realization. obviously up, So X%, had inflation, inflation a all the about inflation X% on commodity We of on the X% commodity thought, overall we the back actually including to X% X.X% people -- inflation especially running all I in talked in, escalating. commodities range. is the copper about on price inflation.

Michael Anastasiou

if follow-up, like last Great. channel different through business I you just the the so mentioned run Europe expectations regions quarter for like of of and inventory the from just That's helpful. year? was there. OEMs And just perhaps destocking kind Can the at But about you of OEM X/X and a in remainder the may.

Robert Pagano

Americas. I Yes. start would let's think, the with

channel in inventory line think the with I is expectations.

don't -- pretty is So America. I North done think for I much destocking

think that inventory exactly there. I Americas. had, levels in similar I our the X/X the levels. are we I think just reasonable it's is business as said what channels, the very of you on So OEM said Europe, ATMEA, question destocking to reasonable, continued previous which there's about

So is in issue really Europe. the

Operator

your from line And of Liptak Research. Instructions] the comes with [Operator Walt question next Seaport

Walter Liptak

should we bit where help quarter? quarter can that view with could I'll so little on second Can the think. get there than the revenue second maybe I Do you mean, a try in on the the us number better quarter. M&A first X to I with right? have some would be for closer in be seasonal you revenue a uptick, expected revenue M&A,

Shashank Patel

Yes.

year, for second $XXX the little higher. we're right, tends So quarter well, talking the And Radley it and be you're to Josam, million. full between about in a

approximately. $XX approximately $XX million, million that in range So

Walter Liptak

in you as differences go can markets? And view what multifamily? seeing region. are? you're a sell Okay. the any And those through do are versus distribution, Or the differentiate products there about also you to have single-family you then out percentages to wanted ask if just lot trends that Americas And on the but for

Robert Pagano

we're quarter. that digits, expecting year. the half maybe then mid-single And flatness of half of expecting is seen and down how looking up that the to quarter, basically low flatness at look multifamily we're of business is for business, year, family, our you We're of the at multifamily, first to the second rest go the single residential. flat kind in That's second when single single of the in of Half XX% family holding digits. in it. Look, we've our

Shashank Patel

a Hey, sales acquired on $XX the correction second quarter, Walt, just million.

Walter Liptak

million. $XX

Okay.

Shashank Patel

Yes.

Walter Liptak

Okay. that think -- the And channels do of you been think the distribution pronounced. in for Americas multifamily adjusted I already pretty that the outlook? well it's your kind

Robert Pagano

believe do they've I yes, adjusted. Yes,

Operator

no questions conference [Operator at like to Pagano any Instructions] And the with further this for time, I turn Mr. or would remarks. to additional Bob closing now back

Robert Pagano

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

Operator

and and we participation. ladies call, you And concludes for gentlemen, thank this your today's

now may disconnect. You

Watts Water (WTS) 9 May 242024 Q1 Earnings call transcript