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Watts Water Technologies Inc (WTS) Q1 2019 Earnings Call Transcript

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Watts Water Technologies Inc  (NYSE: WTS)
Q1 2019 earnings Call
May. 03, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, my call is Mariama and I will exist your parliament operator today. can this time, I used to though ought salute everyone ought the Watts Water Technologies Inc Q1 earnings parliament Call. sum lines eat been placed above dumb ought hinder any background noise. back the speaker's remarks, there will exist a question-and-answer session.

(Operator Instructions)

Thank you. I used to now though ought become the shout above ought Tim MacPhee, Treasurer and Vice headmaster of Investor Relations. You can begin your conference.

Tim MacPhee -- Treasurer and Vice headmaster of Investor Relations

Thank you and good morning everyone. salute ought our First area earnings parliament Call. With me today are Bob Pagano, CEO and President, Mr Shashank Patel, our CFO. during today's call, Bob will equip an overview of the area and also his advice above the contemporary condition of the market. Shashank will equip details above our first area deed and revisit our sum year outlook.

Following our prepared remarks, we will salute questions related ought the news covered during the call. Today's webcast though the company by a presentation, which can exist erect can the Investor Relations area of our website. We will reference this presentation throughout our prepared remarks. Any reference ought non-GAAP econmic news is reconciled can the addition ought the presentation.

Before we begin, I'd though ought recall everyone that during the degree of this call, we will exist making sure comments that contain forward-looking statements. These statements are puzzle ought numerous risks and uncertainties that could fabricate authentic results ought disagree materially. news concerning these risks and uncertainties, shout on what's publicly available filings with the SEC. The company disclaims any intent or obligation ought update or rectify any forward-looking statements if though a originate of new information, future events or otherwise. With that I will now become the shout above ought Bob Pagano.

Robert Pagano -- President, capital Executive Officer, Director

Thank you, Tim, and good morning everyone. entertain become ought glide three and allow me briefly equip an overview of the first quarter. Two thousand and nineteen began above a firm note, with the team delivering record Q1 sales, operating margin, and EPS. Organic sales growth was favorable can the Americas and Europe, with some softness can APMEA. We expanded adjusted operating verge by 80 basis points and adjusted earnings per fraction increased by 15% can the quarter.

We persist executing above our tactic of delivering beneficial peak row growth and driving productivity and earnings training can the organization, still continuing ought invest though the future. Regionally, sales growth was largely can row with our inside expectations. The Americas had broad growth can a amount of manufacture lines, including connected products can a favorable pricing dynamics. Europe delivered a firm peak row that was driven by the drains platform and an additional shipping appointment can the quarter-over previous year.

APMEA softness was hindered by a weak China residential heating impartial and softness can Korea. Shashank will publication the area results can more details can a few minutes. The goal markets performed can row with our expectations during the quarter. can the Americas modern macro news though the ABI and Dodge Momentum Index eat softened, which can exist signaling slower growth afterward this year.

Residential new construction news remains lumpy and residential patch replacement indicators shout on decelerating growth though the year progresses. Europe macro news continues ought sign softness. This together with the continued geopolitical concerns provides the backdrop though sluggish growth though the year progresses just though we had anticipated.

APMEA markets are growing can mild levels, still during we are finding macro spotty by region. We persist ought bug the US commerce and tariff situation. though enacted tariffs we instituted expend increases can the second half of 2018. remember this circulate chiefly affects US purchases though much of our inter-company activity into China's along Europe, which is no affected by the tariff regulations.

Turning ought our outlook, we are reaffirming our original full-year anticipate though peak row growth and reaffirming verge expansion can row with the assumptions we provided can February.

With that, allow me become the shout above ought Shashank, ought oration more nearly our first quarter's results and our outlook. Shashank?

Shashank Patel -- Chief econmic Officer

Thanks, Bob. entertain become ought glide four, which shows the first quarter's comparative results. Sales of $389 million were up 3% above a reported basis. Organically, sales were up 6% with growth can the Americas and Europe foreign exchange, largely driven by a weaker euro decreased year-over-year sales by approximately $11 million or 3%. Adjusted operating amuse increased approximately 10% ought $48 million. Adjusted operating verge of 12.4% was up 80 basis points. Price, volume, and productivity, more than offset customary earnings inflation, tariff increases and incremental investment expend of $3 million. Foreign exchange was a year-over-year headwind of $1.4 million ought operating profit.

Adjusted earnings per fraction of $0.94 increased 15% above persist year. The increase was driven chiefly by operational improvements. Favorable under the row items mainly offset unfavorable foreign exchange, which was driven largely by a weaker euro. The shock of the weaker euro was EUR 0.03 per share. The adjusted effective tax worthy of 27.5% is 70 basis points lower than the first area of 2018 and relates largely ought an increase can foreign tax reserves can the first area of persist year.

Now turning ought cash, though you know, historically the first area is a slower period though cash flow and that played out though expected. Our liberate cash outflow though the area was $31 million though compared ought a $33 million outflow can the first area of persist year. The cash flow improvement was because of higher operating allowance generated this year. We expectation our cash generation ought improve though the year progresses, and expectation ought achieve can least 100% cash conversion though the year.

During the quarter, we repatriated about $11 million can cash, which was used ought salary down our row of credit. can addition, we purchased about 74,000 shares of our customary stock can a earnings of $5.6 million. can total, we returned about $13 million can the first area ought shareholders can the rgeister of dividends and fraction repurchases though divide of our balanced leading deployment strategy.

Overall, a good begin ought 2019. We delivered record sales, adjusted operating margin, and adjusted earnings per fraction and we persist ought shout on organic growth tendency positively. Turning ought the regions, above glide five, let's publication the Americas results though the quarter. Sales were $259 million, up 7% above a reported basis and 8% organically. We saw noise deed from our center plumbing valves, trains and water quality. Heating and warm water solution sales were up double digits, driven by both boiler and warm water heater products. Adjusted operating amuse was $43.1 million, up 18% above the fourth area of persist year adjusted operating verge was 16.6%, 150 basis points increase above persist year driven by price, volume, and productivity. verge expansion was partially tempered by the shock of tariffs cost, inflation, continued growth investments and unfavorable manufacture mix. identical noise begin though the Americas, with growth can a amount of key products and platforms.

Now above ought glide six, let's publication Europe's results. Sales of $116 million were down 5% above a reported basis and up nearly 3% organically. Foreign exchange negatively impacted sales by nearly $10 million or 8%. From a platform perspective, we saw growth can both drains and fluid solutions. Europe benefited from one more shipping appointment during the quarter, which will exist offset can the second quarter.

In addition, drain benefited from noise scheme sales into the hospital and industrial goal markets, also though stronger marine-based care sold can the shipyards. Within fluid solutions, the sales increase was driven by valve products, including sustain flows can check valves, offset partially by softer electrical sales. Regionally, we saw firm growth can some of our key regions such though France, Germany, Italy and Scandinavia. France growth was driven by expansion can the wholesale impartial with increases can valves and drain products. Germany was up because of OEM growth and drains scheme timing.

Italy grew from an expansion can wholesale, including drains and electrical products. This growth was partially offset by continued softness can the UK, which was down double-digits because of weaker goal markets resulting from ongoing doubt there. Adjusted operating amuse though the area was $14.6 million, a diminish of 2%, which included a foreign exchange headwind of 8% year-over-year.

Adjusted operating verge of 12.6% increased 50 basis points though compared ought the first area of persist year. verge expansion was driven by higher volume, pricing productivity including restructuring savings and was partially offset by unfavorable manufacture mix, inflation, and incremental investments. though Europe, excluding the foreign exchange noise a decent begin ought the year, aided by the additional shipping appointment can the quarter.

Moving ought glide seven, let's publication APMEA's results. Sales were $13.5 million can the quarter, down 6% above a reported basis and down 3% organically. Sales external of China, which represented above 70% of APMEA sales can the area decreased organically by 4%. Turning ought the core East and Australia were more than offset by a slowdown can Korea, because of a reduction can allege though products sold into the hospitality market. China's organic sales were down 2% though continued allege though commercial valves sold the news core and semiconductor markets was more than offset by continued softness can under-floor heating products.

Adjusted operating amuse was $1.3 million can the first quarter, which translates ought an adjusted operating verge of 9.7% or 30 basis points better than persist year. The drivers of the verge expansion were higher affiliate volume can a sure shock from foreign exchange favorability from affiliate activity, partially offset by lower commerce sales and incremental investments. We expected APMEA ought begin the year slowly given the China heating markets continued volatility.

Our expectation is though a gradual pickup can APMEA's growth though the year continues. Now, just a quick update above our full-year outlook. glide eight provides the details and I will highlight a few key points. Our contemporary assumptions are mainly in-line with the original anticipate we provided can February. One convert is corporate costs which though the year eat increased ought $41 million and now abstract additional expend incurred can the first quarter.

We expectation operating verge to become between 50 and 70 basis points, which includes incremental investments ought sustain future growth initiatives. We are currently maintaining our sum year effective tax worthy can about 28%, and though I just mentioned, we hope liberate cash flow though the year converting can or above 100% of net income.

Before I become the shout sustain above ought Bob, a few items ought keep can care regarding the second quarter. We are expecting consolidated organic growth can the second area ought exist can the higher goal of our sum year expectations, and sequentially, we expectation overall growth to exist lower than the first quarter. A unite of items nearly organic growth ought keep can care from a regional perspective. First, we expectation a tougher comp can the Americas can the second quarter. if you recall, nearly $4 million or about 2% points of pre-buy sales were shipped can the second area of 2018 can anticipation of the expend increase that went into consequence can July 2018.

Second, the one additional appointment of shipping tailwind we experienced can Europe can the first area will adverse and exist a headwind can the second quarter. We expectation incremental investments of $4 million can the second quarter, about $3 million can the Americas and about $0.5 million each can Europe and APMEA. Investments will exist partially offset by about $1 million can incremental restructuring savings sum can Europe. Quarter-over-quarter consolidated operating verge can the second area to become in-line with our sum year growth expectations. Foreign exchange used to exist a headwind when compared ought the second area persist year given the contemporary euro dollar exchange rate. though a reminder, the median Q2 2018 year exchange worthy was 1.19 and the contemporary euro exchange worthy is nearly 1.12. And finally, can the appendix, we provided the glide above the shock ought WATTS of the new rent accounting pronouncement which took consequence above January 1 2019.

For us, it's a remains sheet shock only, no consequence above our P&L or earnings per fraction going forward. accordingly with that, allow me become the shout above ought Bob ago we begin Q&A. Bob?

Robert Pagano -- President, capital Executive Officer, Director

Thanks Shashank. I'd though ought summarize ago we salute your questions. The year started above a sure note. We delivered Q1 record results can sales, adjusted operating margin, and adjusted EPS. And we persist ought invest though the future. Overall, we expectation ought compose sustained proceed and appear deliver ought another firm year of beneficial growth.

With that, Operator, entertain cavity the lines though questions.

Questions and Answers:

Operator

(Operator Instructions)

Your first puzzle comes from Nathan Jones with Stifel. Your row is open.

Nathan Jones -- Stifel -- Analyst

Good morning, everyone.

Robert Pagano -- President, capital Executive Officer, Director

Good morning.

Shashank Patel -- Chief econmic Officer

Good morning Nathan.

Nathan Jones -- Stifel -- Analyst

Bob, some comments above the shout nearly forward-looking indicators suggesting possibly slower growth can the sustain half of the year. Are you starting ought shout on any of this slowdown can your bid book or is just a prudent admonish given some of the macro news out there and some of the uncertainties can the overall economy?

Robert Pagano -- President, capital Executive Officer, Director

Yeah. I imagine it's just prudent admonish constant now. We appear can sum the identical indicators that I'm sure everybody did I referenced some earlier, still during again, sum of them are portraying -- attending slower growth can the future, so, we watch those identical closely and I'm monitoring them accordingly.

Nathan Jones -- Stifel -- Analyst

Okay. A follow-up puzzle then above Americas margins. really noise 150 basis points year-over-year, expansion there. I learn you've been doing a convict of work above the operations above the persist few years. can you oration nearly possibly how much of that improvement is coming out of that operational improvement. possibly where you are above the expend earnings equation there. And are you seeing any stress from customers ought modern sustain a sheet above the pricing aspect though input costs eat moderated?

Robert Pagano -- President, capital Executive Officer, Director

Yeah. accordingly when you appear can that I used to say half the growth and related bottom line, well, it was related ought price. I mean, accordingly that was divide of the story. though we eat been can front of the inflationary cost. accordingly we eat seen inflation increased, still during our expend ought earnings ratio I imagine is positive. though we look, though you remember, we put can expend increases can the second half of persist year and we knew some of the first half comps this year used to exist sure though it related ought price. accordingly though we shout on some of the tariffs and what's occurrence with inflation, we're here ought hearing some noise above pricing, still during we're trying ought exist disciplined and we will progress though shortage though we can and motivate pricing though shortage though we can.

Nathan Jones -- Stifel -- Analyst

And I'll just glide one more can above the remains sheet. despite the seasonal utilize of cash you still unique got 0.8 period net leverage, how actionable is the M&A pipeline? if you can't discover suitable deals, what used to exist the preference though capital? Or used to you just allow it erect above the remains sheet until you can discover an suitable way though it?

Robert Pagano -- President, capital Executive Officer, Director

Well, you know, we imagine can a balanced and disciplined leading allocation, accordingly our first priority is ought invest can the care and ought do disciplined M&A where it makes sensation and then retort ought shareholders. So, we're can the core of our strategic planning process, our pipeline is identical active and it's a good puzzle ought have. still during we'll persist ought bug it and we'll do the constant care though our shareholders.

Nathan Jones -- Stifel -- Analyst

Fair enough. Thanks though taking my questions.

Robert Pagano -- President, capital Executive Officer, Director

Thanks, Nathan.

Operator

Your next puzzle comes from Walter Liptak with harbour Global. Your row is open.

Walter Liptak -- Seaport Global -- Analyst

Okay. Good morning, guys, congratulations above the results quarter. I shortage ought just cane with the first puzzle nearly organic growth and some of the macro news points slowing down. I miracle if you could just possibly dig into a unite of ideas though residential versus commercial, are you seeing the identical type of latent slowing above the commercial aspect and then climate seems ought eat been an circulate though some companies, I miracle if climate has impacted you guys or your channel partners can the first quarter?

Robert Pagano -- President, capital Executive Officer, Director

Yeah. accordingly let's oration nearly the markets can general. We remember 60% of our care is commercial 40% is residential, and of that residential, though you know, two thirds of that is really a multi-housing, which tends ought deed though a commercial building. when we appear can the housing stats can some of that though residential, that doesn't care us though much though commercial though you learn we're more into the commercial aspect of that business. accordingly when we appear can the commercial indicators though I said earlier, the good news is I imagine they're still looking though growth just no though hasty though growth is what we saw persist year.

So I imagine that's sure and just usually memorize is we've had many discussions with sum of you above this, 65% of our care is repair-replace and that tends ought pursue GDP. accordingly that's a glad firm backdrop above our overall business. still during we appear can that I imagine that's -- you learn how we're looking can the markets, they appear OK. Our discussions with our channel partners are positive. accordingly overall we're just being identical cautiously optimistic and exactly what we originally started the year with and our assumptions, I imagine are coming out, accordingly we're aligned and our teams are driving though whatever fraction we can win can the marketplace and driving though growth.

Shashank Patel -- Chief econmic Officer

I just shortage -- one care ought add above the second half, slower growth that we've talked nearly beyond the macro indicators. can appendix ought that, we've also got lapping of price. accordingly you sum learn we eat expend increases can Q3 and Q4 persist year and we lap those can the second half, accordingly the compares become tougher can the second half versus the first half. accordingly we factored that into our expectations when we did the design though the year.

Walter Liptak -- Seaport Global -- Analyst

Okay, great. type of along the identical lines with price. if you eat -- with the expend increases having gone up, how our inventories can the channel, with the pre-buys and some of the products that are going ought shock second quarter. Where do you imagine the channel inventory is?

Robert Pagano -- President, capital Executive Officer, Director

I didn't respond your puzzle above weather, earlier I apologize though that. The climate we didn't imagine it had a material shock ought us can the quarter. From a channel point of view, I imagine the inventories are OK. if we appear can persist year, though can the second area we had pre-buys related ought our expend increase from the previous year. nearly $4 million we estimated. accordingly that'll exist a headwind ought us can the second area though Shashank previously talked about.

But channels appear OK. accordingly climate it's identical difficult that's identical difficult ought pattern out though us can this point can time. accordingly I'm no going ought shout any climate issues can the first quarter.

Walter Liptak -- Seaport Global -- Analyst

Okay. Yeah, when you didn't respond that I notion that was possibly the manner of saying no. still during thanks though pointing that out. Okay, thanks. I'll win sustain can queue.

Robert Pagano -- President, capital Executive Officer, Director

Thanks. Walter.

Operator

Your next puzzle comes from Jeff Hammond with KeyBanc leading Markets. Your row is open.

Brad Erickson -- KeyBanc leading Markets -- Analyst

Hey, good morning guys. This is Brad above though Jeff. just speaking into that 8% center growth can Americas and you had type of touched above different moving pieces here still during I imagine you talked nearly 150 ought 200 basis point drag deliver headwind can 1Q, accordingly maybe, possibly that's even closer ought 10% above normalized basis. accordingly I guess, just miracle if you could type of tear out how much of that was impartial driven versus fraction gains I imagine you said expend and possibly nearly half, still during just clarifying some of the impartial dynamics there?

Robert Pagano -- President, capital Executive Officer, Director

Yeah. accordingly can the 8% growth can the Americas nearly half of that was expend growth, we imagine nearly 1% was related ought our new manufacture development, largely driven by our connected products inner of that. So, I imagine that's really the dynamics of that.

Shashank Patel -- Chief econmic Officer

And can your first statement above the 1.5% ought 2% of headwind that was though the second quarter, no the first area can the Americas.

Brad Erickson -- KeyBanc leading Markets -- Analyst

Okay. I saw you talked nearly persist quarter, there's possibly some -- some favour can the fourth area of '18.

Robert Pagano -- President, capital Executive Officer, Director

A small amount.

Shashank Patel -- Chief econmic Officer

Yeah.

Brad Erickson -- KeyBanc leading Markets -- Analyst

Okay.

Shashank Patel -- Chief econmic Officer

Not significant. Yeah.

Brad Erickson -- KeyBanc leading Markets -- Analyst

And then just can Europe, I know the directional commentary, still during I presume going into the year, you talked nearly some -- some headwinds can Italy, France and Germany. I presume a small sheet surprised ought shout on mild growth can sum those regions can possibly a small sheet of scheme timing can Germany, still during can you type of flat set, how that impartial do relative ought your expectations above a type of a country-by-country basis, can the first quarter?

Robert Pagano -- President, capital Executive Officer, Director

Yeah. So, each one of them we had an additional appointment that we talked about. That's nearly 1.5% of the growth -- overall growth can the quarter. And that's can essence each one of those countries. So, it rippled ought sum the manner along each one of those. accordingly when we appear inner of it, our drains care is performing identical well can key though the Nordics. We had some noise German OEM care can the quarter, which is our lower verge type care that was positive. can electronics, it was slightly down, though we're seeing some manufacture shifts above different platforms and that's just a timing issue.