Watts Water(US:WTS)2020-11-08 08:54Financial Data and Key Metrics Changes - Sales for Q3 2020 were $384 million, down 3% on a reported basis and down 5% organically, primarily due to the impact of Covid-19 [16] - Adjusted operating profit and adjusted earnings per share both increased by 1% compared to last year despite lower sales [16] - Adjusted operating margin improved to 13.8%, an increase of 50 basis points year-over-year, driven by cost actions and productivity [16][17] - Year-to-date free cash flow increased by 25% to $95 million compared to the same period last year [19] Business Line Data and Key Metrics Changes - In the Americas, organic sales declined by 4%, better than the expected reduction of 6% to 10%, with strong performance in traditional plumbing and water quality products [20] - Europe saw a 6% organic sales decline, better than the anticipated 14% to 18%, driven by resilient fluid solution product sales [20] - APMEA experienced a 22% organic sales decline, with China down only by low single digits, indicating a recovery trend [21] Market Data and Key Metrics Changes - Residential repair and replacement demand remained strong, supported by record existing home sales in September [11] - The construction industry in the Americas is adjusting to new norms, with job sites that were under construction returning to completion [10] - Concerns remain regarding the commercial markets, particularly in hospitality, office, and retail sectors, which are expected to face challenges [12][14] Company Strategy and Development Direction - The company is focusing on its smart and connected strategy to drive growth and operational efficiency [9][14] - There is a commitment to continue investing in productivity-enhancing capital expenditures and smart technology solutions [25][61] - The company is prepared to adapt to market changes and capture opportunities as markets recover [26] Management's Comments on Operating Environment and Future Outlook - Management expressed caution regarding the market outlook for 2021, citing uncertainty due to the ongoing Covid-19 pandemic [14][26] - The company anticipates soft sales in Q4 compared to last year, with operating margins expected to improve relative to last year but below Q3 levels [15][23] - The management highlighted the importance of employee safety and customer service during the pandemic [25] Other Important Information - The company has instituted cost-saving measures resulting in total run-rate savings of approximately $20 million for the quarter and $42 million year-to-date [9][19] - The adjusted effective tax rate for the quarter was 27.3%, a decrease of 120 basis points year-over-year due to new regulations [17] Q&A Session Summary Question: Can you provide more details on the restocking event in the Americas? - Management noted that restocking occurred in July due to construction restarting, with steady sales observed through October, but uncertainty remains regarding future restocking [29][30] Question: Are there favorable trends in the water quality segment? - Positive trends were noted in the residential water quality market, with double-digit growth in the residential segment [32] Question: Can you quantify temporary cost savings versus structural changes? - Approximately $55 million in cost savings were identified for 2020, with $8 million to $9 million being permanent due to restructuring [35][36] Question: What are the October order rates and their implications for Q4? - October order rates were flat, with expectations for a softer market in November and December due to Covid-19 concerns [51] Question: How is the company adapting to changes in distribution channels? - Management indicated that while smaller wholesalers are consolidating, larger wholesalers are enhancing their online capabilities, and the company is integrating its acquisitions into both traditional and online sales channels [44][48]