Q2 2020 Watts Water Technologies Inc Earnings Call
Our water leaks from your hot water heater.
The value of the in vitro system was re have asked this old house.
Our HF scientific business has been a water treatment market.
Plus waters through filtration any remaining invasive organism.
HF scientist these oxidants during treat.
Formants.
Once the ships returned to port can begin to deep.
And monitor the oxidant levels to ensure that the treated ballast water.
The age of scientific theme recently launched the excess power JAKKS system, which makes it easier to connect into local can.
Troll systems service more easily and increase the safety levels of this instrument.
Alice water treatment systems.
Finally, as a number of our accomplishments in 2000.
19 around sustainability very important to us ours.
In June of this year and the quality.
In content has been significantly 19, we continued to reduce our consumption of natural resources, including a 13% reduction in water usage by taking measures to conserve water in manage.
It's slow and discharge responsibly.
Our product portfolio solutions continues.
This past year sales of our can 10 seen boilers in water heaters from tons of Seo two for our customers.
More than three times, what watch generated as the company.
We've maintained our partnership with planet water.
The install water purification systems for disadvantage areas of the.
Positively impacted over 15000 people in eight different countries, providing safe drinking water.
In terms of proper hands sanitation.
And we were recognized by Newsweek as one of America's most responsible companies with regard.
Parts to our SG efforts.
Now, let me turn the call over to Shashank, who will discuss our SEC provide more details on our third.
Thanks, Bob.
Please turn to slide six to review second quarter consolidated comparative results.
Sales of $339 million on both a reported and organic basis.
The primary driven by the impact from clove at 19.
Foreign exchange.
Impact goes minimal and acquisitions accounted for approximately $2 million on incremental sales year over year.
Adjusted operating profit and adjusted earnings per share were both down 32% as compared to last year.
Adjusted operating margin of 11.1% was down 220 basis points as price productivity and recent cost actions well more than offset by volume loss inflation.
They're not.
Being present detriment to the adjusted operating margin, which.
35% document.
The improvement was driven by higher than anticipated sales volume production incorporates longtime incented effective tax rate of 26.
3% is to bring 10 basis points lower year over year.
The reduction.
Turning to screen to the quarter and relates primarily to the foreign exchange impact of Repatriations.
Our year to date freak as compared to $5 million for the same period last year.
The increase was due to improvements in accounts receivable more than offsetting lower income and inventory increase and higher capital spending.
Our goal remains to achieve free cash flow conversion at 100% off.
Well, you tied $75 million, our private placement notes using both existing.
Well the borrowings.
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Well, it's approximately twice the rate, we now pay on revolver debt.
Wrong.
Our gross and net leverage ratios at the end of June were 1.2 times and zero <unk> 0.5 times respectively.
Evasion ratio at June quarter end was 10.4%.
During the quarter, we purchased approximately 79000 shares of our common stock.
Okay at a cost of $6.4 million before temporarily suspending the share repurchase program to repurchase is starting again in the third quarter probably focused.
Turning to slide seven in our regional results.
The regions experienced organic sales declines on between 18 and 21%.
During the second quarter as Europe lagged almost as some of the key countries that we participate in had more strictly enforced locked down and therefore markets where is loaded return.
Americans in Europe Sabra.
And all key regions within Europe were soft.
China sales within apnea went down only mid single digits as Chinas economy was ahead of us.
The regions in recovering from covered 19.
However, the middle East and usually into a book.
The middle East.
Oh markets on major project.
Funding.
I mean, the Americas was 270 basis points below last year.
Price cost Act.
Then offset by the volume loss and incremental investments.
The Americas documents of 30% on lower sales volume was inline with our expectations.
Operating margin of 10.1% was 230 basis points lower than last year for similar reasons as the Americas.
Europe's 22% Dacra depends on lower sales volume, what was better than anticipated due to government subsidies and cost actions.
At me is adjusted operating margin increased 590 basis points to 13.3% driven by a 16% increase in affiliate volume productivity and cost actions, which more than offset a reduction in third party volumes.
Moving to slide eight and general assumptions about our third quarter operating outlook.
As Bob mentioned, we expect better operating results compared to the second quarter and anticipate that activity will continue to gradually improve month to month.
We are estimating organic sales for the third quarter to be at 8% to 12% below the third quarter of 2019.
This assumption could be impacted by changing global federal and individual state responses to cover 19.
We anticipate that operating margin for the third quarter will approximate 11% to 13%.
The volume drop is expected to drive margin decrements inline with the second quarter.
As mentioned the second quarter did benefit from European government subsidies and a onetime true up of long term incentive plans that don't repeat.
We expect interest expense sequentially, a little dropped by about $500000 into third quarter versus the second quarter.
Additional debt costs related to the second quarter refinancing that won't repeat and as I noted before we paid off higher interest cost dead in the second quarter as well.
The adjusted effective tax rate should be approximately 28.5%.
Foreign exchange wouldn't be slightly positive to last year should current grades persist throughout the quarter.
Consistent with last quarter, we're refraining from giving full year guidance as they continue to be many uncertainties concerning covered 19 that.
Inhibit our ability to reasonably forecast beyond this coming quarter.
So with that let me turn the call over to Bob before we begin queuing Hey, Bob.
Thanks for sharing.
To summarize your a few key themes from today's call.
We continue to take employee safety very seriously and expanded our protocols is more employees returned to the office.
Second quarter results were better than expected as activity improved during the quarter markets are returning slowly.
We aggressively implemented the cost actions discussed last quarter and we're continuing to review our cost base for other opportunities.
We continue to invest in long term growth opportunities, especially in smart and connected solutions productivity enhancing technology in our manufacturing facilities and bolt on acquisitions that support our long term strategy.
Our balance sheet remains strong, which is providing us flexibility, while we navigate through the pandemic.
We expect to see sequential improvement in the third quarter. The path of Coburn 19 remains a concern and could impact our results. So we're watching developments closely.
With that operator, please open the line for questions.
Ladies and gentlemen, who asked the question. Please press Star then the number one on your telephone keypad, a pause for just a moment how the company roster.
Your first question comes from Nathan Jones with Stifel. Your line is open.
Good morning, everyone [laughter] slightly more than anything.
Hi, just starting on the top line here I mean, you started the Twoq you got it you know down 25 to 30 took that up to down 20 to 25 as the U.S. construction industry got back I think they're coming in better than you know that the down 20 and that sounds like it was primarily Europe opening up.
Hi that you had thing in my you've got eight to 12 for the third quarter out can you talk about you know what are the kinds of things that could surprise you waited to the upside to you know the top end or better although the lower Endo was a as you use a markets at the moment.
And at the quarter, we changed the if you recall, we weren't sure when particularly the northeast New York, Massachusetts, Pennsylvania, and even the West coast.
And it up starting mid May and things started to progress. So that was in May we were surprised with retail retail was very strong up double digits for us in the quarter. So we don't expect that to continue because some of our contractors were going to the big box stores to get products while.
Do you know still be club.
So the high end of your discussion I guess would be if retail continue.
And the construction markets than they were before we also got to surprise in the second quarter, where our German OEM partners were ordered more business.
Some energy efficiency subsidies or were happening in Germany. So we had some strong performance out of our German each frac Oems so that was positive in the second quarter.
Act continued that would be at the higher end, but we think a we're more balanced we have a little bit more clarity than we had you know at the age.
So.
You know things are opening up and as long as they stay open what concerns US is things go back to you.
You know workover outbreaks or even more concerning and that begins to you know have more locked bounce in various countries and.
Tough time to guide a in April.
[laughter] I think a the connected solutions business.
You are starting to hear a lot of people a lot of focusing a lot of industries one.
Remote monitoring capabilities those kinds of things I'm sure. It's.
Been too early into page, the probably say concrete orders you know coming out of that.
Increased interest from cost him as a maybe Rick that that would you know lead you to think that the penetration of does connected solutions might accelerate for me.
Hey relative to what you're thinking previously.
I I think that to happen and we did see.
Yes, Ron around that is like you said.
So as we look at what's decrease.
I mean, you know our decrease in our connected products is this the running as a percentage of sales in them.
Mid teens on some of our business. So you know a lot higher as a percentage of sales and you know more towards our goal by 2023, so clearly.
The remote monitoring is really going to be important for the future.
[noise] do you have any kind of idea when you.
You think that you might be out occurring but some of that interest into orders into revenue.
I think we already are I mean, you know when you see some of the our new products that we've introduced some of the ones I just talked about we're seeing you know a growth and those some of those key markets. So yeah I I think as we continue to expand our portfolio in connected systems continue to go forward I think what you're seeing is every.
But do you went through a shocking Q2 and some of this just takes time to materialize retrofit cycle I think people will be will be pushing more of it out.
Basically because of this.
Okay. Thanks, I'll pass it on.
Thank you.
[laughter].
Your next question comes from Ryan Connors with Boenning and Scattergood. Your line is the morning.
Right.
So, but my question actually had to do with what the operating margins. You know you did talk about it a little bit but there.
The resiliency there does seem pretty remarkable given the magnitude of the topline hits you took in the quarter. So I know you kind of laid out a few of the drivers book can you just just drill down on that a little bit what exactly where are you able to cut without getting into bone its it to sustain margins I'm pretty well and.
Maybe discuss kind of the variable for versus fixed cost structure going forward.
I'll, let shashank answer that in detail, but I just want to commend our team for a great job of controlling costs. I mean, the teams took a very seriously and Ah you know, we're really cost conscious. So just thank you can get into some of the detail and Ryan look I mean, as we talk to even in Q1 earnings call right. We should we took actions earlier.
So we implemented actions early in the March time period, I think we saw a results because of that so when you think about the 55 million of cost out we targeted about half of that was people cost and then about you know the down 33%, 100% is discretionary in things like T. Any mark calm additional spend and then about 17, but.
Sand was variable you know manufacturing supplies things like now that's kind of the breakdown of the 55 million as to what is long term short term. We had said about 15% of that is long term structural I head count restructuring. So annualize, it's about a 30 million dollar benefit as we go forward. This year, we'll see eight of the 13 million.
And that 8 million is included in the people cost reduction off to another 55.
<unk> million.
And now some of that.
As John said, Sandra which ended the into September.
Okay.
So if we if we if we take a.
A relatively bullish you know a view and we think things are going to continue to go to rebound sequentially I mean, with some of that start to creep back in or or or or do you get some some cost leverage on that going forward.
Yeah, so someone that does creep back in mostly in the fourth quarter, but then obviously, where our hope is that the volume to do come back and continue progressing in a positive trajectory, although you know negative but less negative.
Got it Okay and then just one last one on more on the balance you know I appreciate the rationale for paying down debt early on in the crisis. I mean things were obviously very uncertain there for a time, but no. If we look at where interest rates are we looking when the fed is doing in terms of you know actually buying corporate that it seems like the government is practically a go to encompass.
He isn't into levering up would you think about going the opposite direction at some point actually taking up.
On the some debt on the balance sheet now in this environment now that things have kind of states. It's funny, you said that I've been challenging shashank on that but obviously look at ER our balance sheets healthy. We believe interest rates are gonna stay you know a low for a while but yeah. It's certainly an option will continue to look at.
Got it okay. Thanks for your time.
Thank you.
Your next question comes from Brian Blair with Oppenheimer. Your line is open.
Good morning Americans and well.
Morning, Murray Ryan.
That's something we'll get drill down a little more on the Q3 sales guide specifically, how we should think about your outlook by region, it's actually a little tighter band of organic decline than we expected last quarter, Although you mentioned.
Europe in terms of order rates trailed the debt. So should we expect a little more disparity in Q3 declined by Reid.
You know you know I'll give you are planning assumptions right now, we're looking at Americas down, 6% to 10% Europe, 14% to 18% and ATMI, a down 10% to 14% in those ranges.
Okay. That's helpful.
And how than expected margin by region and corporate expense netting to the 11% to 13% so.
I just missed on sounds like consolidated Decrementals to remain in a pretty attractive range for the quarter, just curious how that shakes out by region. Yeah. So as you noted the consolidated Decrementals are similar to what we experienced in the second quarter roughly 23%.
Ah America's will be better from a margin performance. Then for example, Europe and apnea for a couple of reasons Europe, We did get government subsidies into second quarter, which helped a the margins there.
And then in apnea, we had higher intercompany volume in the second quarter, but the margins in ACMI a won't be as good as they were in the second quarter still you know low double digits, but not as good so Americas will be the well will be better margins are now versus the other regions as far as performance versus Q2.
Got it.
And any additional color you can offer on the AG deal and we know run rate revenue 10 million range.
You any any detail on multiple page current margin profile of that business expected accretion would be helpful.
Yeah. So look we because we you know made the acquisition in middle of coal that we actually put 30% of the purchase price.
Subject to hitting certain performance milestones over the next couple of years. So that 10 million is on that number there could be additional money based on how they perform over the next couple of years.
So there's about $3 million of additional yeah money at risk there as far as multiples. It's a seven to nine times EBITDA since I'm pretty decent multiple that we paid for the business.
EPS accretion you know one is gonna be you know almost zero I, it's well close to zero and then we'll get <unk> situation here to alone.
Okay appreciate the color.
Thank you.
Your next question comes from Brian Lee with Goldman Sachs. Your line is open.
Hi has gone this is Alex on for Brian.
Okay. I wondering if you could just provide a bit more detail on on the recent order trends and you bifurcated by segment, there and that and how has its Greg a trend in incremental even pesky months.
Well every month, we got better in every one of the regions or every single month and continued into July. So you know <unk>. That's what gave us the confidence to give you. Our Q3 guidance you know so overall April was by far the by far the worse as I said in my prepared comments Europe.
Slower to rebound weird steeper declines in April and May but started rebounding in June ended in July so yeah sequential improvement in pretty much in every one of the regions.
Right now, obviously, you're not providing full year guidance, but how much of this how much of this recent backlog creeps into the fourth quarter no.
Yeah, we're pretty much a book and ship business. So we don't have a lot of detail, especially into the fourth quarter. Craig. So we don't have any visibility into the fourth quarter as of right. Now. So we in the third quarter, we have July behind Us and Ah you know and what we're seeing in the book and ship them from what we're hearing from the sales team.
Gives us the confidence to give you the range we gave in our Q3 guidance.
Perfect. Thanks, a lot [noise]. Your next question comes from.
Joe Giordano with Cowen and company your line is open.
Hey, Good morning, this is Robert and a couple more.
Good morning, just pick up on the end markets.
Just with what we've been seeing with Cowen magazine, and some of the urban actually this has been driving.
You know housing performance recently I, just wonder how sustainable you think this tailwind is.
Kind of Additionally, what's your view on multifamily you can that's more challenged and that's usually just as well as we move forward.
Well you know I'm not you mentioned tailwind I'm not sure where there's any tailwind right now in the market because every markets down. Unfortunately, so I I think there's some tailwind and and residential single family, but there's also a shortage right now so as I look at multi.
My family look at you know in in a a movement. They said that 911 right in New York City that everybody's going to move out of the city and guess what everybody came back. So I think it takes multi generations and right now as we all know the single family homes availability, there's just not enough inventory out there to do that so I think it's a long.
Her transition here.
Well were seen in the marketplace right now is it any new construction that is started is continuing and if anything they're behind schedule because of the lockdowns and some of the key market areas in the northeast in the West coast. So they're trying to get them going in moving as fast as we can so you know I take a as we look at multifamily for the future.
You know like I said, we have visibility to Q3, we don't have visibility for the rest of year and we're watching it very closely.
Okay. Thank you.
Then you can you talk a little bit about on impacts are unlikely to clients like the office marketing universities and things like that your business.
Office buildings, Oh as retail and.
Lodging.
Well that represents in our new construction about you know in total for the whole.
Company, 10% of our overall business for overall watch so those are the key areas were walk.
Okay, and just like you and making sure in watching the trend is being finished it's just a quick broken ground, what's going to happen and that's where we all have a lot less visibility at this time, but we're watching and you know keeping close with our customers and in watching what's going to transpire for there.
Fourth quarter and the rest of a into next year.
That's great. Thank you very much.
Thank you.
[noise] again to ask a question. Please press star one in your telephone Keypad. Your next question comes from Nathan Jones with Stifel. Your line is open.
Hi, guys I just want a follow up with a question on growth investments.
HM you certainly cut those this year, but can you talk about how you're thinking about the balance between investing for long time protecting short time margins I know some of the growth investments you decide brain met.
And so maybe you can just talk.
Just a and why it makes sense to reduce them at the moment.
[noise], Yeah. So you know move forward longer term.
And continue especially in the smart and connected we've needed voice of customer, it's been very difficult to get voice of customer and install new products and new locations, because they're very paranoid about doing that so we're being very you know we want to spend efficiently and in moving forward.
I'd like you.
In a sales force in Latin America Middle East you know we've cut back on that that just doesn't make sense and that was in our original plan.
Same with some I T investments again, given everybody working remotely weve focused our our investments on that in the security around that and versus new ERP implementations, which would allow would require us to be onsite through a lotta in person training et cetera, So weve core.
Yes that outs, we continue invest in our manufacturing capability and leveraging new top technology recently, we have automate a core boxes in our our Franklin facility in our foundry, we're pretty excited about that they're just getting that up and running right. Now so again, we're investing in technology too.
Improve efficiency, where we can but being prudent to make sure it's cost effective and not wasting money.
Fair to say that you have it and are not planning and you got any of the growth investments into connected solutions.
That's correct, we have not done that at all and we continue to focus on that where it makes sense now there's been some delays on some of those investments just could we couldn't get products installed from a test point of view as soon as well as.
Fast as we wanted to so again the general spending the focus on that continues.
Great. Thank you.
Thank you. Thank you.
Hi, there were no further questions get up it depends on the call back over to Bob <unk> for closing remarks.
Well. Thank you everyone for taking the time to join US today for our second quarter earnings call. We appreciate your continued interest in watts and we look forward speaking with you again at our third quarter earnings call in early November enjoy the rest of your summer and stay safe. Thank you.
This concludes today's conference call you may now disconnect.
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[music].