Q2 2021 Watts Water Technologies Inc Earnings Call
Thank you for standing by and welcome to the Watts water technologies second quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star 1 on your telephone.
If you require any further assistance please press star zero.
I would now like to hand, the conference over to your speaker today.
Timothy Macphee, Treasurer, and Vice President Investor Relations of Watts Water Technologies, Inc. Thank you. Please go ahead Sir.
Thank you and good morning, everyone welcome to our second quarter earnings Conference call.
We're glad that you could join US with me today are Bob Pagano, CEO and president interest rate for <unk> CFO.
During today's call Bob will provide an overview of the second quarter and discuss the current state of our operations and markets.
He will also update you on our smart and connected and sustainability efforts.
Sure Nick will discuss the details of our second quarter performance provided an initial outlook for the third quarter and offer a revised outlook for the full year of 2021.
Following our remarks, we will address questions related to the information covered during the call.
Today's webcast is accompanied by a presentation, which can be found in the investor Relations section of our website.
We will reference this presentation throughout our prepared remarks.
The reference to non-GAAP financial information is reconciled in the appendix to the presentation.
Before we begin I'd like to remind everyone that during the call we will be making certain comments that constitute forward looking statements.
Statements are subject to numerous risks and uncertainties that could cause actual results to differ materially.
For information concerning these risks.
What's publicly available filings with the SEC.
The company disclaims any intention or obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise.
I will now turn the call over to Bob.
Thanks, Tim and good morning, everyone.
I want to start the call by thanking our 4500 global employees for their continued dedication and hard work. During these challenging times, they've been navigating a robust demand environment and at the same time managing through persistent supply chain constraints and the emergence of COVID-19 variance.
I am proud of our team's efforts to support our customers while remaining safe in the workplace.
In general the markets continued to move in a positive direction during the second quarter GDP expectations for 2021 have trended up in many of our key global regions. Since the first quarter. So we expect that should continue to drive repair and replacement activity.
In the Americas single family residential new construction remains strong in the second quarter in both residential and nonresidential repair and replacement activity was buoyant.
These markets have more than offset weakness in multi family, new construction and certain non residential new construction and specially in verticals like lodging and office buildings for.
Looking data off for some hope that non residential new construction may gained momentum in 2022.
Europe markets were solid again in the second quarter.
Driven by repair and replacement activity.
The wholesale market remained strong in France, and Italy, while the OEM market held its own, especially in the electronics business.
Here, we saw high demand from channel anxiety caused by component shortages in the market. We also saw heating Oems continue to benefit from green initiatives driven by government stimulus.
We are introducing our third quarter outlook with sales and margin improvements expected versus the prior year.
And we have increased our full year adjusted outlook to account for the stronger second quarter than expected third quarter results.
We are more encouraged about the markets in general, but still have concerns about nonresidential new construction supply chain issues continued inflationary pressures and virus variants.
On slide 4 I'd like to update you on our smart and connected journey.
We continue to introduce new connected products in the marketplace based on customer feedback.
The Tech Maher snow melt controller has a snow ice sensor interface designed specifically to integrate into building management systems. It was developed to eliminate the need to write custom code, which is a time and cost saver for the contractor.
In addition, the challenge of commissioning testing and then maintaining the code is made easier than <unk>.
Marsano ice interface provides proven snowmelt functionality in a simple to integrate device HFF scientifics copper silver monitor or CSM is designed to monitor the level of copper and silver ions and a plumbing system down to the parts per billion range copper.
Copper silver ionization has emerged as 1 of the leading technology used in mitigation of water borne pathogen growth, specifically legionella and the plumbing systems of healthcare and hospitality facilities.
By monitoring eye on concentrations daily the CSM allows copper silver ionization systems to more accurately regulate their disinfection levels under dosing reduces the efficacy of the system, while overdosing increases operating costs and risk patient guest health.
During the second quarter, the percentage of smart and connected product sales to total sales increased sequentially as compared to the first quarter as well as to the full year of 2020.
We continue to make progress towards our goal of 25% smart and connected product sales by 2023.
Now on slide 5 I'd like to update you on our sustainability efforts.
We are focused on and committed to having a positive impact in the world. This commitment is leading us to deploy ongoing initiatives to reduce energy water and waste usage within our own organization as well as developing solutions to support our customers' sustainability goals.
We also view our role as an employer as an opportunity to effect positive change and are addressing diversity equity and inclusion in our everyday actions.
In June we issued our most comprehensive sustainability report to date, highlighting 2020 accomplishments and establishing some longer term goals to reduce our environmental impact in.
In 2020, we reduced our water usage by 33% and our greenhouse gas emissions by 13%.
Our product portfolio shift to eco friendly products and solutions continues.
This past year sales of our condensing boilers and water heaters reduce more than 110000 metric tons of cotwo for our customers more than 4 times, what what's generated as a company.
We have maintained our partnership with planet water, providing funding and resources to install water purification systems for disadvantaged areas of the world.
To date, we have positively impacted over 30000 people in 8 different countries, providing safe drinking water and education on the importance of proper Ham sandwich position in.
And later this year, we will be sponsoring additional sites as part of our global Handwashing Day initiative.
Turning diversity equity and inclusion we commenced our first internal D E and I survey to employees, we've revised our recruiting guidelines and training manuals to include new diversity based standards, we've begun partnerships with several historically black colleges and universities supporting programs that we hope will garner future Watson.
Ploys, and we've initiated multiple diversity employee resource groups to promote education awareness and inclusivity.
Let me turn the call over to Shashank, who will discuss our second quarter operating performance and provide more detail on our third quarter and revised full year outlook.
Thanks, Bob and good morning, everyone.
Please turn to slide 6 to review, our second quarter consolidated comparative results.
$467 million increased 38% on a reported basis and 32% organically driven primarily by the global economic recovery.
Sales benefited from a 5% foreign exchange tailwind and acquisitions added 1%.
Adjusted operating profit increased 85% and adjusted operating margins expanded 80 basis points to 14, 9%.
Both measures were driven by increased volume from easier compares to last year price productivity and cost actions.
This more than offset incremental investment spend inflation and the return of expenses related to business normalization.
Adjusted earnings per share increased to 100% as compared to last year from the better operating result, as well as favorable below the line items and a foreign exchange benefit.
So due to improvements in net income and lower net capital spending on.
<unk> remains to achieve free cash flow conversion at 100 per cent or more of net income for the year.
Our balance sheet remains strong.
Gross leverage was 0.7 times and net leverage was negative 0.2.
Our net debt to capitalization ratio at quarter end was also negative at 4.5% during the quarter, we repurchased approximately 31000 shares of our common stock at an investment of $4 million primarily to offset dilution.
Turning to slide 7 at our regional results.
For the region experienced organic sales growth of between 28 and 51% during the second quarter as compared to last year amid a strong economic recovery sale.
Sales also benefited from favorable foreign exchange in Europe, and apnea by 14% and 10% respectively.
Acquisitions benefited apnea sales by 14%.
The Americas had an estimated 5 per cent revenue tailwind from the continuing benefit from the February weather fees in south Central United States.
The Americas experienced strong repair and replacement activity and growth in single family residential markets.
It was across all major platforms with plumbing related products, especially strong.
Americas adjusted operating profit increased 54 per cent.
On adjusted operating margin increased 270 basis points to 17, 7%.
Driven by volume price cost actions and productivity, which was partially offset by incremental investments inflation and the return of expenses related to business normalization.
Europe delivered another solid quarter with sales growth in all major regions and platforms.
The wholesale markets in France, and Italy remains strong and we saw good growth in Germany, and Italy OEM sales.
Electronic sales increased as pre buying by customers continued from market concerns around component shortages.
Europe's adjusted operating margin increased 700 basis points to $17.1 per cent.
This was driven by volume price and cost actions, which more than offset investments inflation. The return of expenses related to business normalization and a loss of benefits from government employment subsidies.
At my second quarter sales increased double digits, both inside and outside China.
China sales continued to benefit from commercial valve demand in data centers.
Outside China, New Zealand was strong due to the residential demand in the middle East is slowly improving as the region benefits from higher oil prices.
Me as adjusted operating margin increased for the 60 basis points to 17, 9% driven by trade volume, a 61% increase year on affiliate volume productivity and cost actions, which more than offset inflation.
Moving to slide 8 and general assumptions about our third quarter operating outlook.
We are estimating consolidated organic sales growth for the third quarter to be 8% to 12% over the third quarter of 2020.
Versus last year, we should see the benefit of additional volume and price increases and now through June.
We have announced a third price increase in the Americas, which goes into effect in September, but we anticipate minimal benefit in the third quarter acquired sales should approximate $2 million.
We anticipate that on adjusted operating margin could range from 13, 7% to $14.5 per cent in the third quarter, driven by volume and price, partially offset by investments of $6 million and incremental costs of $7 million related to the return of discretionary spend.
Corporate costs should approximate $13 million in the third quarter.
Interest expense should be in line with Q2 at about $1.5 million.
The adjusted effective tax rate should approximate 27 per cent.
Foreign exchange is expected to be neutral to slightly positive to last year should current rates persist throughout the quarter.
Now please turn to slide 9 and I'll review, our revised full year 2021 outlook.
From an organic perspective, we expect Americas sales growth to be in the range of 9% to 13% for 2021.
As higher than anticipated in our may outlook and is being driven by stronger growth in non residential repair and replacement due to higher GDP expectations.
Stronger North America residential market and the third price increase recently announced.
Sales should increase by about $5 million for the full year from acquisitions.
We expect adjusted operating margins in the Americas should be up versus 2020, driven by the dropped for benefits of additional volume, including the fees impact. We also expect that price will more than offset cost inflation for the year.
For Europe, we're forecasting organic sales to increase between 10 and 14 per cent.
In France, the increase will be driven by continued residential market growth and government energy incentives will drive the growth in Germany and Italy.
Adjusted operating margin should be up from incremental drop through on volume price and cost savings initiatives.
In <unk>, we now expect organic sales to grow from 23 to 27 per cent for the year.
Sales also increased by approximately $6 million from the AVG acquisition in the first half of 2021.
We anticipate adjusted operating margin for the year to be up as compared to 2020 from third party and affiliate volume drop through.
Consolidated organic sales growth for the full year is expected to range from 10% to 14%.
This is approximately 7.5% higher at the midpoint from our previous outlook and is primarily driven by better global end market expectations and our third price increase in the Americas.
We anticipate adjusted operating margin will be up by 100 to 150 basis points year over year.
Given by the incremental volume drop through price restructuring savings of approximately $12 million, partially offset by $32 million on incremental investments and expenses related to business normalization and general inflation.
And now regarding other key inputs, we expect corporate costs will approximate $48 million for the year.
Interest expense should be roughly $7 million for the year.
Our estimated adjusted effective tax rate for 2021 should approximate 27, 5%.
Capital spending is expected to be in the $35 million range.
Presentation, and amortization should approximate $46 million for the year.
We expect to continue to drive free cash flow conversion equal to or greater than 100% of net income.
We are now assuming a 1 to 1 average euro U S dollar FX rate for the full year versus the average rate of 1.1 for in 2020.
Please recall that for every 1 cent movement up or down in the Euro dollar exchange rate our European annual sales are impacted by approximately $4 million and on.
Our annual EPS is impacted by 1 cent.
We expect our share count to approximate $34 million for the year.
So with that let me turn the call over to Bob before we begin Q&A Bob.
Thanks for shrink to summarize let me leave you with a few key themes second quarter results were better than expected as activity improved during the quarter helped by the global economic recovery, a strong repair and replacement market and the U S weather freeze tailwind.
We have announced a third price increase in the Americas as inflation and supply chain costs continue to rise.
Markets are supportive and the leading indicators for non residential new construction are positive entering 2022, we continue to invest in long term growth opportunities, especially in smart and connected solutions and in productivity enhancing technology in our manufacturing facilities to support our long term.
Strategy, we have also increased our full year investment spend.
During the second half, we expect to see increased costs on necessary investments such as in house training as business normalizes from pandemic levels.
We continue to closely monitor expenses.
We expect to see improvement in third quarter results versus last year, our full year outlook has been raised for both sales and adjusted operating profit given the stronger than anticipated second quarter results and expectations for Q3 in the second half.
With that operator, please open the lines for questions.
At this time, if you would like to ask a question. Please press star 1 on your telephone keypad.
And your first question comes from the line of Nathan Jones from Stifel.
Good morning, everyone.
Moving.
I'd like to start off.
Focusing on a comment you made during your prepared remarks, Bob about high demand from channel anxiety I think that was a specific comment about some European market, maybe you could comment more broadly on on your feeling about your customers' distributed potentially over ordering a little bit here to try to get to the for.
On the line everybody's trying to you know.
Lucky narrow and supply chain any color you have on what kind of your sell in versus sell through is.
Yeah, Nathan I think we are seeing some of that inside of the channels all over in particular in North America, and Europe Europe I commented on that because of our electronics business in Europe, and we actually were pushing our customers to give us their orders. So we could understand how much.
You really need it so we could lock in our supply chain from an electronics point of view. So again I think there are some buyers out there I think people are being price increases, but we are seeing sell through in the channel. So.
People want inventory in a week or for your inventories, it's pushing through right now. So again there is some pent up demand as.
As we saw GDP and opening up of the economy has been strong. So we're watching it very closely and but we believe based on our July results. So far that on its all in line with our forecast on for the third quarter.
Yeah. It sounds like the markets are getting much better as well.
<unk> announced another price increase for September obviously inflation continues to go up for a costs continue to go up can you talk about where you expect to be on on price cost for the full year and what maybe the price carryover into next year would be.
Yeah. So look in the first half if you think about price and material cost net of net of the 2 was slightly positive as we've talked about we're always trying to stay ahead of the curve and that's why we're looking at the third.
Third price increase in the Americas. The second 1 went into place through July 1 between Americas, Europe, and the rest of the world.
As we think about how much of that goes into 2022, I mean, it's a little early for that because we still got to get to the realization of the second and third price increase, but we will give more color on that in the next call for <unk>.
On a year over year basis, because of the timing there'll be incremental benefits in 2022.
And you said you were slightly positive on first half do you expect to be neutral to slightly positive in the second half are some lag as pricing catches up to inflation.
We always expect to be ahead to make on you know how we run this business. So we're in front of it.
Not surprising thanks for taking my questions. Thank.
Thank you thanks for everything.
Your next question comes from the line of Jeff Hammond with Keybanc capital markets.
Hey, good morning, Gosh on a jam.
Jim and Jeff.
Hey, so.
European results are very impressive, particularly on the margins on I know this has been kind of an ongoing effort, but just trying to unpack the margin improvement here over the last couple of quarters on.
How much you think is mix versus kind of structural improvements.
Well I think it's a combination of both looking at the freeze or I'm, sorry, the France and France in particular, I think there was some pent up demand where we're strong in residential there. So we're seeing some of the same patterns. We saw on North America, just delayed a little bit.
And you know people are staying home and doing DIY and various things in their local houses. So you know we are in addition, you know we talked about the energy incentives in Germany, and Italy, which has helped some of our OEM business and in the previous comment I made around the electronics that we're seeing people put in.
Orders are quickly on that and that.
Those between the France, and the electronics that was favorable mix for us for sure.
When we look at.
You know our fixed cost structure, we continue to look at that we announced the Marie France.
Closure, that's taken us awhile to do and we've been taking out cost as you know all along on this platform, but I think we're benefiting as you know with a higher volume in our see our strong fixed cost. There. So it is volume related and I think it's going to taper off a little bit as we get going but we're always focused on improving.
I'm really proud of the team's effort to hit that record operating margin and take advantage of the volume opportunities where we could.
Okay, Great and then.
Can you quantify price how much price was in the quarter on how you think.
Price plays out in the second half.
Yes, so in the second quarter on a global basis on a price was about 2%.
And then as we talked about it we got the second prices price increase that went into effect from let's say the end of May to the end of June time period.
And that will benefit us in the third quarter and then the Americas pricing piece. The third 1 will benefit us in the fourth quarter.
From a quantification of the second and third price increases the second price increases in the 5 to 10 per cent range, and obviously typically a realization rates on or about 50% and that's the closest 1 to us so 5% to 10 per cent is the price increase about half of that realization. The third 1 in the Americas, it's kind of it.
Early days on that 1.
Yeah.
Okay and then just.
Last 1 Bob you still seem a little.
Less certain on I'm kind of new commercial construction recovery can you just talk about what youre seeing from an order activity standpoint.
What does that tell you about kind of timing for an inflection there.
Yeah. So again, we have to estimate that based on you know because we sell through the wholesale channel, but certainly our.
Market intelligence, what we're hearing et cetera.
Still lodging stores office buildings.
Recreation et cetera, those those have been still slow to.
To do it but we look at the same reports on all of you were looking at the Abi the Dodge momentum et cetera, and they're all pretending you know more positive growth. So we've seen some pick up in the education markets from an institutional size from health care also so again, we're starting to see that there is still labor shortages out there we're hearing a lot of that discussion.
And its regional right every every region for a little bit different but again, we're still watching that closely we look at loan data for new construction and and that's starting to move in the right direction. We're looking at big quotes on new projects and stuff. So I think things are starting to move in the right direction and are a significant bump in repair.
On replacement.
It's been nice to offset some of that but it's nice to see the new construction indicators starting to move forward.
Okay. Thanks, guys.
Thank you.
Your next question comes from the line of Ryan Connors with Boenning and Scattergood.
Great. Thanks for taking my questions first off just a bigger picture 1.
If we assume that at least part of what's going on in the markets is the impact of just <unk>.
Increased money supply just general inflation on a monetary basis and that driving not only the raw material costs higher but.
Driving demand in the end markets as well.
What are your thoughts about.
The potential unraveling of that in the future as the fed steps back and contracts money supply what's the scenario analysis in terms of how that impacts not only the market, but the margins on the price cost as all of that maybe.
Maybe just walk back in the next 12 to 18 months, if in fact that kinda habits.
Yeah, well look it I still think we're in a low interest rate environment going forward here.
So although they might raise it a little bit I still think it.
It's still going to be lower interest rates et cetera, I think a lot of this depends on the virus how fast some of these variants are or could potentially if another lockdown happens et cetera, let's hope that's not the case, but look it overall as I said earlier labor shortages too so theres a pent up demand there are some projects that are out there.
Think we're going to see the boom that we've been seeing right now because I think some of this is you know.
Tends to be from pent up demand, but look at if you step back 10000 feet or repair replace which is 60% of our business tends to follow GDP and then the 40% tends to follow on with new construction trends.
So that very carefully and certainly GDP has gone up significantly overall I think for the world. This year, it's 5% so that makes sense, but I think that's going to taper down a little bit, but I think construction will continue to happen.
As things continue to open up and if some of these bills pass.
There might be some investments.
Especially and in health care and institutional type areas. So again, we're watching very closely but I.
I think that's how we're looking at the world right now.
And then I guess, I mean, specifically what I'm, what I'm trying to drive that there is price cost I mean, if if some of this liquidity against sucked out of the economy in general.
And that has an obvious effect on commodity prices and things like Bras do you believe you can hold a significant amount of the price you've gotten and then realize the benefit of that on the margin or do you think.
On that kind of a scenario you'd be just sort of the market with force you to give some of that most of that back.
I think we're going to have to give some of it back or it'll be our goal on our team's goal is to keep as much of that as we can and in leveraging our differentiated product that offers a solution to our customers versus the commodity product and that's why our smart and connected initiatives really focused on that right. So we look at what value are we providing to our customer.
Not necessarily a cost plus we don't do that so that's not our focus but we're watching that and again, that's why we continue to provide higher value for customers.
Got it and then 1 last 1 just to follow up on the prior question there on non resi.
How important is office.
What's the longer term I mean that does seem like the 1 market, where we maybe got a structural change I mean I'm talking to you from a fully opened office were about 5 people have elected 5% of people who have elected to actually be here. So.
It seems like maybe we are in just a new normal in terms of.
Work and so forth.
How important is that market never really does come back is that what impact does that have on your longer term.
In terms of the business.
It's not significant less from 5% so again.
We will focus on the markets that are going well our product doesn't care what end market. It goes into so we'll take advantage of the markets that are moving and offset some of that.
So in line just to quantify that that 5% less than 5% is the new construction piece of all of this stuff.
Segment.
Okay, Yeah that makes more sense, that's on a little low okay, great. Thanks for your time.
Thank you.
Your next question comes from the line of Bryan Blair with Oppenheimer <unk> company.
Thanks, Good morning, everyone.
Good morning.
Uh huh.
Call that strong momentum across the repair replace side of your portfolio.
All of that makes sense at a high level drilling down a bit more can you offer color on brake fix versus retrofit activity on what your team is expecting.
Yeah.
And in between the 2 for.
For the back half.
Yeah, I think it's a combination of both it's hard to.
Determined what is what at this point in time, because we're seeing the demand and I think we've talked about break fixed is about 40% renovation 60 per cent somewhere around there. So I look at it it's across the board and I cant distinguish between the 2 so just solid opening up people are adjusting and renovating and as we said before looking for.
There's only so long you can hold off your plumbing repairs before you really have to do it and I think we saw some of that in Q2 and some of that happening in Q3.
That's fair and good day here.
Just to level set on the revised guide Shashank you walked through some of the pricing dynamics.
But if we think of the 7% to 8 points that you've lifted the full year outlook, what's baked in for Incrementals on volume versus price.
Yes.
Approximately half an hour because some of those price increases on.
Some of them go into effect July 1 and then the Americas 1 is really effective October 1.
But if I were to break it out it's roughly about half of that is incremental price on the other app in the some of the incremental volume you've already seen in the second quarter.
Thanks again.
Thanks for thanks, Brian.
Your next question comes from the line of Joe Giordano with Cowen and company.
Yes, good morning.
Our new zone.
And when I, just think about the growth guidance for the full year.
<unk> here.
It.
It was the previous guide more just maybe a little unwillingness to.
To extrapolate what you saw a couple of months ago is for the rest of the year and now we're just like all right about 3 months later on we're still there.
Do you feel like something structurally changed for the better over the last 3 months.
Well I think look at when we gave guidance for last time.
There was still a lot of uncertainty how things were growing as you know could there be slowdowns et cetera, I think we feel more confident now and Thats why we are more aggressive with our third quarter forecast and outlook at this point in time and I remember the second quarter last year. It was an easier compare.
Globally for us because the world kind of shut down in the second quarter. So again I think you know our leading indicators what we're seeing what we're hearing from customers gives us the confidence to bring some of that forward.
For the rest of the year so.
Again, it was too early you know when we gave guidance before we're still hearing mixed signals in the market and we just wanted to clarify what was happening.
Yeah fair enough.
And then on the balance sheet.
And then just just thoughts there on capital deployment priorities I mean, I know you guys on it you know we.
We're always looking and you have a pipeline, but if things don't if prices are not where you need them to be your thoughts on other sorts of usage of balance sheet.
We'll look at our first priority is investing in ourselves and we continue to do that.
That's that's our first we believe in a balanced capital deployment strategy as we always have and.
As you said, we will look at alternatives, we're not willing to give up at this point in time, we think there's opportunities for capital deployment out there and we just have to be patient and we're gonna be disciplined like we always have so we'll be watching we're looking and but you never can predict timing of any M&A, but you know our first priority is <unk>.
<unk> and ourselves organic growth as well as in our factories from on automation point of view.
Increased our dividends and again the rest from an M&A point of view, but we continue to monitor and look at that.
Thanks, guys.
Thank you Joe.
Thank you for like can I ask a question. Please press star 1 on your telephone keypad.
Our next question comes from the line of Michael Halloran with RW Baird.
Hey, good morning, guys line.
I think so.
So could you just go through on how the uptake has come is going on on the innovation and the connected strategy.
Do you see incremental spend is happening on the R&D side, which we always like to see just curious if that receptivity is still gaining momentum.
What the clients are saying in any kind of context behind it.
Yeah, Mike, we're getting very positive comments from our customers on our innovation strategy.
Especially as it relates to smart and connected and really.
Smart and collect connected really allows us to offer solutions to our customer and we look at the various things in the pain points and as we talked about it in the past I mean, theres a shortage of plumbers and there's a shortage of maintenance personnel.
And.
For us to have more connected products to allow them to anticipate issues are see issues before they're catastrophic failures, everyone has seen the benefit of that so, especially in this labor shortage market right. Now so again very positive results as I said in my comments opening comments.
You know look at we're continuing to increase our percentage as a percentage of our total sales in and invest in.
Actually if you think about it the freeze had a lot of increases in our let's call. It traditional sales, but our overall percentage keeps on going up even though we.
Sold a lot of let's call it the non smart and connected products in the second quarter. So we continue to increase our percentage of the pipeline is very full and.
Our team is excited about that.
Thanks for that and then outside of some of the pre buy activity you talked about in Europe. How do you think channel inventories are sitting here today.
So the interest and we continue to have dialogue with our customers and it's interesting I would say believe it or not the channel inventory from a year ago was probably flattish. However, the channel wants more inventory given the current demand and volume out there right. So.
I think it's a mixed bag people want more because of the supply chain concerns and they're demanding more so overall.
They would tell you they want more.
And is that a is that a challenge from a capacity perspective for you to be at this point.
Inventory I mean, what's the.
Things are where your channel is and what the capacity looks like.
It's been a challenge only because of the supply chain issues, but our team has worked.
We're literally looking at alternative sources and we've stayed in front of this thing as best we could so they're doing a great job of I think where we're doing.
I would say the team is.
Selling in that area and I would tell you our strong supply chain is helping US continue the growth. So we will continue to push the team's watching very closely and.
But like everybody, we have labor shortages of supply chain issues right. So we're continuing to work real hard on that and building capacity, where we need it.
Great appreciate it Bob quick corner. Thanks.
Thanks, so much Mike.
Our next question comes from the line of Walter Liptak with Seaport Research.
Alright, thanks, guys.
Just on that as a follow on for the last 1.
Do you think youre, gaining market share because of supply or your competitors able to meet their channel partners' inventory needs.
I think we're holding our own or doing better.
That's the best I can say.
Okay.
Alright fair enough.
The.
I think in your commentary you talked about some costs coming back in I Wonder if you could talk a little bit more about what those costs were that are coming back maybe quantify them.
Yeah. So for the full year, we had talked about.
This normalization costs and those are things like travel Mar Com training all those things that we got back starting last March and that was about $50 million on the headwind in 2021.
To that you know obviously last year, we got benefit of you know.
Government compensation incentives, primarily in Europe, and a little bit in China, obviously those are not there this year.
And lastly, also we got the benefit you know we had some pay cuts et cetera, we got the benefit of that last year for a few months. So that all kind of goes away and that's kind of headwind and then incremental investment spend for this year, we've got about $17 million on incremental investment spend about half of that is smart and connected strategy and the rest of it is you know whether it's.
Product expansion on global.
Global market expansion et cetera, but those are the headwinds this year.
Okay Alright.
Alright.
I think you mentioned.
Some expenses from from travel and so for the new lifted.
Any kind of travel bans or are you, allowing people to travel to.
And from your locations.
So.
There's limited travel out there.
<unk> has begun.
I've been out to our sites.
Met with our sales team has gotten together et cetera International travel is still not there.
I think it's more internally so we're starting to visit customers, but again very limited and but it's starting to ramp up in these variance will be watching very closely. So again, we're balancing all of that right now.
Yeah, I guess the reason I ask is it important now or have you been able to figure out ways of selling.
To get around that travel or do you think it's important to.
You have to have your channel partners coming into your facility for training on <unk>.
New products, where are you able to get around that too.
Digital ways.
Yeah. So we've been doing digital training, but I got to tell you. The field is really pushing us to start offering our in house training, which has hands on training, where you take apart products you troubleshoot them.
Great beginner training, so we're getting a lot of pressure to open that back up and we're looking to do that and.
Right now its scheduled for the fourth quarter and were being pushed open it up even sooner. So if we did that it certainly would have to be vaccinated people before we allow external people to come inside of our facilities. So anyway. So there's a pent up demand we've been doing great digitally and zoom, but at some point with our.
Our long list of new product development and innovation.
Need to get out there and do more training and show everybody what we have so.
It can only last so long and I'm sure everybody in the industry.
Cited to see that starting to come back.
Okay, great. Okay. Thanks for the color on that.
Thanks, Paul Thanks, a lot.
And once again, if you would like to ask a question. Please press star 1 on your telephone keypad.
Yeah.
We have no further questions at this time I would like to turn the call back over to Bob Pagano for closing remarks.
Thanks, everyone for taking the time to join US today for our second quarter earnings call. We appreciate your continued interest in water and we look forward to speaking with you again on our third quarter earnings call in early November stay safe and enjoy the rest of your summer.
Thank you for participating this concludes today's conference call you may now disconnect.
Okay.
[music] expenses.