Q3 2021 Watts Water Technologies Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to a what's water technology third quarter of 2021 earnings Conference call. All lines are in a listen only mode to prevent any background noise.
After the speaker's remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press dark send the number one on your telephone keypad to withdraw yourself from the queue simply press star one again.
Thank you I would now like to turn the call over to Tim Mcveigh, Treasurer, and Vice President Investor Relations of what border technologies incorporated. Please go ahead Sir.
Thank you and good morning, everyone. Welcome to one third quarter earnings Conference call. Joining me today, Barbara Donald C E O and president and Shake would tell our CFO.
During today's call Bob will provide an overview of the third quarter results and discuss the current state of our operations in market share.
We'll discuss the details about third quarter performance provide our initial I'll look for the fourth quarter and also revised I'll look for the full year of 2021.
Bowling Ah remarks will address questions related to the information covered during the call.
Today's webcast is accompanied by a presentation, which can be found at an investor relations section of our website.
We will references presentation throughout our prepared remarks.
Any 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.
These statements are subject numerous risks and uncertainties that could cause the actual results to differ materially.
For information concerning these risks see what's publicly available filings with the SEC.
The company disclaims any intention or obligation to what day to revise any forward looking statements, whether because of new information future events or otherwise.
Ah request a question to be limited to one plus follow up to ensure everyone has an opportunity to participate.
If you have additional questions. Please rejoined the queue.
Let me now turn the call over to Bob.
Thanks, Tim and good morning, everyone.
First I must recognize the efforts of all our employees for their sustained commitment while dealing with continued supply chain and logistics challenges and the Delta variant.
Our team has maintained a customer focus and it worked diligently to deliver on her promises to them my sincere thanks to the entire team for their hard work.
Now please turn to slide three in the presentation and I'll provide an overview of the quarter.
The team produced another strong quarter, despite supply chain or logistics challenges, we delivered record third quarter sales adjusted operating margin and adjusted earnings per share.
All regions sales grew organically by double digits are results benefited from the continued economic recovery as well as price and volume Tailwinds.
Cash generation remains a focal point year today, we have increased our free cash flow by 26% as compared to last year.
Shank will review the financial results in more detail momentarily.
In late September we purchased Sentinel Hydro solutions in an all cash transaction.
Fentanyl Ah 6 million dollar sales business provides leak detection solutions, mostly to the high end residential market.
No systems are designed to detect leaks in water pipes, plumbing fixtures and appliances and will automatically shut off the water when a leak is detected.
This acquisition further expands are developing focus and leak detection technology I'd like to welcome our Sentinel colleagues to watch.
Like many companies, we're dealing with supply chain and logistics challenges. We previously mentioned concerns involving components used in our electronics products. Since then supply chain and logistics issues have gotten more dynamic we're seeing disruptions across the board in all regions impacting many of our core raw materials and components.
[noise] lead times on average have more than doubled and suppliers are dealing with labor constraints. We're addressing these and other problems daily to maximize customer order fulfillment.
Our expectation is that supply chain and logistics disruptions will continue into 2022.
We are monitoring this issue closely.
Now, let me talk about the markets.
In general markets have continued to be positive.
D P expectations in most regions pretend to solid finished of 2021 for repair and replacement in both commercial and residential and markets and.
In the Americas single family residential new construction remain strong and we've seen some pickup in multifamily starts as well.
Repair and replacement business and both nonresidential in residential and markets remained strong.
We still see pent up demand an older projects, while new project starts are still lagging contractors are also dealing with materials and skilled labor shortages that job sites. In addition to substantial inflation on project costs.
In Europe, German and Italian Oems continue to benefit from government energy efficiency subsidies.
Repair and replacement was against wrong in France, we are beginning to hear customer feedback that there is more uncertainty heading into queue for his projects are being delayed due to material and labor shortages as well as an across the board inflationary impact on project costs. The team is watching this trend closely.
And at Mia underlying market demand has improved but as being impacted by the pandemic New Zealand and Australia have both had recent lockdowns affect their economies China market demand has been steady but has been impacted by a potential correction in the housing market and COVID-19 the outbreaks that caused lockdowns, which impacts both so.
Pliers and customers.
China is also experiencing power outages, which is further exasperating the supply chain.
Finally, given our performance in the third quarter and our expectations for Q4, we're raising our full year sales outlook.
Let me turn the call over to Shashank, we will discuss the third quarter operating performance and provide more detail on our fourth quarter expectations and revise full year outlook shenk.
Thanks bother, please turn to slide four and let's review the third quarter consolidated results.
[noise] sales of $455 million or up 18% on a reported basis and up 17% organically driven primarily by the global economic recovery.
Foreign exchange and acquisitions combined had a favorable yearly or impact of $5 million.
Operating profit of $66 million increased 24% and adjusted operating margin of 14.4% increased 60 basis points and volume price and productivity more than offset the impact of supply chain challenges logistics inflation incremental investments incentives and business normalization.
<unk> costs.
Just did earnings per share increased by 32% for the reasons. You cited in addition to lower interest expense and reduced foreign currency transaction losses.
They adjusted effective tax rate of $26, 9%.
40 basis points lower year over year.
Forget purposes recorded a charge of zero point $9 million is related to the previously announced restructuring of ordinary facility in France.
We expect approximately $1 million more will be incurred in the fourth quarter.
We anticipate another $5 million to $6 million and restructuring costs in 2022 with respect to this plant closure upon completion.
As Bob noted here to date free cashflow is up 26% to $120 million.
As compared to the same period last year.
This was driven by higher net income and lower capital to spend.
We expect to maintain free cash flow conversion at 100% more of net income for the full year.
A balance sheet to remain strong and provides ample flexibility.
The gross and net leverage ratios at the end of September was 0.6 times and negative 0.3 times respectively.
Net debt to capitalization ratio at quarter end was negative 8%.
During the quarter, we probably just approximately 25000 shares of common stock at an investment of $4 million primarily to offset dilution.
Cutting dislike five in a retail results.
Organic sales in all regions increased by double digits during the quarter primary from the continued strong economic recovery.
Reported regional sales also benefited from favorable foreign exchange movements.
In addition, the Americans at approximately $1 million and acquired sales.
Ah Mac is organic sales increased 17% during the quarter with broad growth across all of our major product categories, driven by strong repair and replacement and single family residential markets and price.
We had minimum benefit in the corner from the U S South central freeze.
America's adjusted operating margin declined by 30 basis points during the quarter as gross margin expansion from price volume and productivity was more than offset by inflation incremental investments incentives and business normalization costs.
Europe sales increased over 14% organically delivering another solid quarter with the expansion in both the fluids solutions and drains platforms.
Sales were up in all key regions driven by the wholesale activity in France, and Italy continued strong OEM demand in Germany, and Italy, driven by local government energy subsidies and.
And an uptick in Scandinavian sales due to a gradual recovery of the commercial marine market.
You have suggested operating margin expanded by 420 basis points benefiting from volume price and productivity, which more than offset inflation incrementally investments and business normalization costs.
Apnea continued its strong performance with sales up 33% organically.
The region saw double digit growth in most locations.
For New Zealand, where sales were down due to COVID-19 related shutdowns.
Adjusted operating margin expected by 400 basis points and that being the quarter as trade in intercompany volume and productivity more than offset inflation and business normalization costs.
Moving to slide six and general assumptions about our fourth quarter and full year 2021 outlook.
Our expectation for the fourth quarter as sales should expand by 10% to 14% over the fourth quarter of 2020.
We anticipate that fourth quarter adjusted operating margin should range from $13 four to 13, 8%.
Margins, maybe challenge due to the impact of inflation, especially from supply chain and logistics costs as well as continued growth in business normalization costs and incremental investments.
Corporate caution approximate $11 million to $12 million for the fourth quarter.
We expect interest expense sequentially will be flat to the third quarter.
Hey, adjusted effective tax rate should approximate 26%.
Foreign exchange it would be a headwind to last year should current rates persists throughout the fourth quarter has.
As a reference the average euro dollar foreign exchange rate for the fourth quarter of 2020 was 119.
Please recall that for every one said movement up or down in the Euro dollar exchange rate Ah.
European annual sales are impacted by approximately $4 million in our annual EPS impacted by one cent.
We expect seasonally strong cash flow to end the year.
For the full year 2021, we anticipate organic growth to be 14% to 17% or about 350 basis points higher at the midpoint than our previous outlook in August.
Full year adjusted operating margin.
Dusted margin expansion and free casually expectations are anticipated to be in line with our previous outlook in August.
Other full year inputs are noted on the right with some minor changes since August.
So with that let me turn the call over to Bob before we begin Q&A Bob.
Thanks to a shrink to summarize I'd like to leave you with a few key points third quarter results were better than we anticipated and was aided by continued global demand and a strong repair and replacement market. We continue to drive price and proactively manage the money supply chain issues to support our customers.
We continue to invest for the long term, including Smarten connected solutions, we have raised our full year 2021 revenue outlook adjusted margin expansion remains in line with previous expectations.
Finally, given our strong results today and are already healthy balance sheet, we are well positioned to drive our strategy, including expanding our smarten connected offerings and executing on strategic M&A opportunities as they arise with that operator. Please open the lines for questions.
Thank you that's all I have been for your question in order to ask a question. Please press star.
One on your telephone keypad again to that question. Please.
One.
Your first question comes from Ryan Connell, Anthony and scanner.
Yeah, I just had a couple of a big picture questions actually just to start off but I'm just I'm curious how you are you posting some really great numbers, obviously, it's a good demand backdrop I'm curious just philosophically how you are looking at this environment in terms of.
Committing capital to things like capacity expansion, we had some peer companies out today, saying they are going to commit capital expanding capacity.
But in your case you know.
Is the idea that this is gonna be sustained long enough that you you get behind it and invest and increased capacity and do the other things you need to do or do you think this is going to be normalized at some point you don't want a strand those types of investments.
Oh, Ryan good morning, and yes, when we look at capacity I think we have plenty of capacity, we've been spending a lot of time and effort in automating our factories and we have ample capacity.
Complete network here, so I'm not going to add additional capacity, but I'll invest in automation inside of our factories.
Okay. Okay, I guess, I guess I'll have to what I say capacity I guess I mean, the capacity along the supply chain.
Things like altering your supply chain too.
Make it less complex shorten that you're here, you're reading a lot about sort of the reverse of globalization to bring things back home.
I guess I'm talking about all of the above in terms of capital investment versus buybacks and and.
So just you know is this going to last long enough, where you're going to reconfigure everything you do or do you. Just think this is kind of the fence going to.
Normalized monetary policy things will settle down and you just kind of go back to the old lots I mean, what's your philosophy there.
Well in general our philosophies, you know Ryan as we usually produce where we ship where more vertically integrated than most people and we do outsource stuff and we've looked at alternative.
Capabilities and like everyone else during the supply chain Crunch, but look at I think it will come back to normal at some point in time here. It's you got some shock and demand based on we started with the fries you've had some hurricanes you've got add dorm abnormal demand you've got increasing pricing so that will settle down and.
Eventually I think it will come back to normal, but we've always believed in the philosophy of manufacturer where you ship your product. So it's right in line with Ah.
Then our strategy all along.
Okay I'll hop back in queue. Thanks, so much.
Thanks.
Your next question comes from Joe G R Domino at Cowen and company.
Hey, Good morning. This is Robert on for Joe Nice.
Nice quarter of it and Robert Hey, Good morning.
Hey, just a quick one.
<unk> sales pushed out during the quarter due to these logistics are supply chain issues. It doesn't seem like there would've been a ton and then I guess just also another question on pricing specifically.
And what does that look like.
Backlog.
Yeah, I mean look at certainly we probably could have shipped a little bit more but it's not a huge number I think our teams executed and we have a great flexible workforces that flex where the volume is and if there were supply chain issues, we moved to another area to allow us to do that but yeah, a little bit more but it's.
Not a big huge number so thank you want to take the price on the pricing the price realization in the third quarter was approximately 5% and then you asked about queue for any any obviously, we announced the extent of price increases between September one in October one our expectation on price realization in queue for us in December.
10% range.
Okay. That's great. Thank you very much again back in queue.
Thanks.
Your next question comes from what I can see for research.
Hi, Thanks.
I wanted to ask about the.
Your operating leverage the profitability in Europe.
Segment.
Pretty good about 40% even with the inflation.
Inflationary environment and tough logistics I Wonder if you could talk a little bit about just how the euro businesses.
Yeah, operating I guess from a production and shipment.
A view.
And how pricing is going.
Are they on the same cadence and price increases that you just mentioned thanks.
Yeah, So so long kind of good morning.
As you know we have a fixed cost base in Europe and as the volume goes up significantly like in the third quarter, we get significant leverage of those all of those things cost.
Secondly, we did get price in Europe, as well right as we all know Europe, it a little harder to get in price, but we did get good price in Europe, and then lastly over the last several years that teams I've been doing a good job on the commercial side of it on the commercial magnet side of it as far as.
A margin expansion with for example, the OEM channels. So we continue to work that so it's a combination of all of those see that we got that nice operating leverage.
Okay great.
Okay. Thank you.
Thank you.
Your next question comes from J, John again, a bird.
Yeah flooring guys mccowen.
More than one and just follow up on the price costs comments appreciate the detail on what was achieved in the quarter and then <unk>. So I guess what is that.
For that kind of price carry carryover into next year I'll be talking low single digits type type number as a buffer and then.
Is there potentially plans to do another one at some point did you buy the next year and kind of what are you looking at to to determine that.
Yes, I think so Jacob will that will depend on as we said we would that we had some price increases announced between September one in October one depending on the region and it'll depend on the realization of those but clearly as we've had three sets of price increases the carryover into next year.
Goal is always to be slightly positive on the price cost piece. So we will continue to watch that and over the next few months will decide what the the January price increases looked like right. Now we are slated for January price increases.
Great that's helpful and then.
High level here.
You talked about the demand environment being mostly.
In depth related outside of new housing starts on the residential side, leading indicators and an Android besides they'll look pretty good.
How are you kind of reconciling back at a high level you know how do you see this playing out in this isn't necessarily a 2022 specific question but.
You would like to get your thoughts on the potential for.
What type of construction cycle that could be ahead, and what are the variables that could.
Detail and are what are the impediments to that Olympics laboratory about Sir thanks.
When you look at it I mean residential both new construction and repair or replace has been really strong.
What we've also seen as repair and replacement on the commercial side has been very strong.
In addition, when you look at the new construction on the commercial side.
We've seen a lot of let's call. It the projects that started before the pandemic. They were all delayed and now they're coming online they are taking longer than expected, but there was a stronger backlog probably quite honestly higher than we thought.
From that point of view, so when we look at.
Construction certainly in the difficult markets of office buildings stores malls lodging et cetera, they're still significantly below ninth 2019 levels from a new construction point of view. So again when you look at some of these leading indicators overall commercial new construction still is is down.
<unk>.
But some of the air pocket that we thought has just been absorbed by this strong repair and replacement and some of the new construction related to those previously started construction project. So.
As we look into next year certainly.
You know the background looks strong GDP coming into next year. However, we got some.
Headwinds in there with the fries, we're not expecting to freeze to happen and we've also got to look at a lot of people are building star.
Stock and supply chain capabilities, beating price increases et cetera, So there'll be some channel Destocking I believe as we had in the next year. So we're reconciling all of that right now and.
We will provide more input to you guys.
When we do our next earnings call.
Great. Thank you jump back in queue.
Thank you.
Your next question comes from Jack Hammond Ah Keybanc.
Hey, this is David Tarantino on for Jeff.
Hi, David.
So you kind of touch on it just then but could you just give like a little bit more of an overview on the channel dynamics, just given all the supply chain on logistics constraints and.
How much Destocking has happened if if so.
I'm not sure we're seeing Destocking I think a lot of what we're seeing in the channels as the channels are stocking right now for two different reasons number one they're trying to be price increases from an inflationary point of view and number two they're trying to grab inventory before future jobs happen. So we're actually seen a dynamic.
Nick where.
Where even seen contractors starting to have warehouses to put inventory and just wait for upcoming projects. So.
What's happening here is theirs inventory, but not the right necessarily mix of inventory. So you may have three quarters of everything you need for a job, but you are missing that other quarter. So there.
They are stocking up what they can and waiting for for the additional components as it come as we talked earlier my prepared remarks lead times in general have doubled out there right now because of this demand and some of this so again, we're watching that very closely and we will take advantage of the opportunity with our.
Our supply chain.
Great and then just on M&A just following the acquisition of sending all kind of what are your thoughts on.
And a more incremental M&A going forward.
Well look at you never can time M&A.
We can.
We continue to be.
Very disciplined and our M&A it has to make strategic and financial sense and certainly we've got some.
Hi, multiples out there right now, but we're going to be disciplined we're going to look at the opportunities as they arise and we will continue to watch it the pipeline continues to be full and.
But it takes two to tango and.
We've got to make sure it makes financial sense. So.
With our healthy balance sheet.
We'll leverage that as.
[noise] brigit.
Great. Thank you.
Thank you.
Again as a reminder, in order to ask a question. Please.
One on your telephone keypad.
Your next question comes from Ryan contact of bending and Scattergood.
Okay, great. Thanks for taking the follow up I wanted to.
Ask a couple a couple more one was on.
These lead times extend and we're starting to hear more about sort of double ordering in bullwhip effects and things like that not necessarily specific to your product lines, but just in the economy as a whole.
Seen any evidence of that that that any part of your backlog could could be a double order.
But by a customer that could be subject to cancellation or any any.
Any thoughts there.
Ryan we're seeing some of that.
It's not material, but we're seeing some of that with people, placing orders and then.
Not delivered though potentially cancel it but I think we've been.
We've been hitting more than we've been losing from that regard so.
Again or vertically integrated supply chain strategy is actually helping out in this environment. Okay.
And then my last one was just.
On the connected strategy you know you go back a couple of years ago pre.
Pre COVID-19 you sort of rule that out it was it was a very significant initiative for you I know you're mentioning how you're still investing in that but presumably given the technology content. There those would be some of the product lines, where you are having more issues in terms of components and things like that so how how is all this kind of impact the.
The rollout and the penetration of that connected strategy or is it is it kind of push that out to the right and if so how do you.
How do you go about kind of reaccelerating that if and when things normalized.
Yeah, Ryan Good point here listen we've had to take some of our key engineers and allocate them back on existing products because of the chip shortages and when you changed chips. You also have to change the circuit boards right. So we've had to reengineer some existing products and taking some people off of some of our new product development, but.
I am not letting the team off the hook right, we have a goal to get 25% connected by 2023 and we're.
We're still focus on that will watch how this chip shortage.
Impacts that but right now it's two.
<unk> 2023 is a coupla years away, so I am not giving up yet on that target, but certainly it is having an impact one that we never planned on when we certainly put that target out but.
I'm still proud of the team that we're in the mid teens still on our Smarten connected products as a percentage of sales. So we've come a long way over the last several years.
Yeah, that's great.
Thanks again for your time.
Thank you.
At this time and further questions I will now turn the floor back as we get off the tongue.
For any additional Scotland, I think remark.
Thank you for taking the time to join US today for our third quarter earnings call. We appreciate your continued interest in Watson, we look forward to speaking with you again in February to discuss our fourth quarter and full year 2021 results enjoyed the upcoming holidays and please stay safe take care.
Ladies and gentlemen, thank you bring over here.
Patient and today's the dance since does conclude today's call you may now disconnect.
[music].