Watts Water(US:WTS)2022-08-06 22:04Financial Data and Key Metrics Changes - Sales for Q2 2022 were $527 million, up 13% on a reported basis and up 16% organically compared to the previous year [22][23] - Adjusted operating profit increased by 40% to $98 million, and adjusted EPS rose by 43% to $2.11 [23] - Adjusted operating margin improved by 360 basis points to 18.5%, driven by price, volume, and productivity [23][24] Business Line Data and Key Metrics Changes - The Americas experienced organic sales growth of approximately 22%, with strong price realization and underlying market demand [26] - Europe saw organic sales growth of about 5%, but reported sales were negatively impacted by 12% due to unfavorable foreign exchange movements [29] - APMEA (Asia Pacific, Middle East, and Africa) grew organically by 3%, with China experiencing high single-digit growth in commercial valves despite lockdown impacts [31] Market Data and Key Metrics Changes - In the Americas, nonresidential new construction indicators are mixed, with positive ABI and Dodge Momentum Index but recent moderation [12] - Europe faces potential recession concerns due to the war and rising energy costs, with an estimated impact of $12 million annualized from exiting the Russian market [13] - APMEA's growth was hindered by COVID lockdowns in China, but business activity is resuming as restrictions lift [14] Company Strategy and Development Direction - The company is focusing on Smart and Connected product initiatives, aiming for 25% of total sales to come from these products by 2024 [16] - Sustainability efforts are emphasized, with significant improvements in water use intensity, greenhouse gas intensity, and hazardous waste intensity [20][21] - The company is committed to investing an additional $20 million in 2022 to support future growth and Smart and Connected strategies [11] Management's Comments on Operating Environment and Future Outlook - Management noted that the second quarter results exceeded expectations despite challenges from inflation, the Ukraine war, and supply chain disruptions [7][10] - The outlook for the third quarter anticipates organic sales growth and margin improvements, with solid demand in the Americas expected to buffer against European economic slowdowns [15] - Management expressed caution regarding the visibility of the European market due to the ongoing geopolitical situation and energy costs [46][80] Other Important Information - Year-to-date free cash flow was $33 million, down from $65 million in the previous year due to increased working capital and inventory investments [24] - The balance sheet remains strong, with gross leverage at 0.6x and net leverage at negative 0.1x [25] - The company repurchased approximately 434,000 shares for $61 million year-to-date [25] Q&A Session Summary Question: Insights on price-cost dynamics for the second half - Management indicated that the benefits from lower-cost inventory in Q2 would not be repeated in the second half, with a net benefit of $6 million to $8 million in Q2 [45] Question: Differentiation in outlook for EMEA and Asia - Management expects North America to see double-digit growth, while Europe may decline low single digits, with APMEA expected to grow mid-single digits [46] Question: Visibility into channel inventories and destocking - Management noted limited visibility into channel inventories but indicated that destocking is occurring, particularly in Europe [77] Question: Commentary on margin sustainability in the Americas - Management acknowledged that volume leverage in the Americas would be less in the second half, impacting margins, along with higher incremental investments [53] Question: Future capital allocation strategy - Management emphasized a balanced allocation strategy, remaining disciplined in M&A while also considering dividends and capital expenditures [59] Question: Selling prices and commodity costs - Management conducts evaluations every 90 days on cost inflation and adjusts prices accordingly, with ongoing monitoring of commodity costs [83][84]