Watts Water(WTS) - 2020 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Sales for Q2 2020 were $339 million, down 19% on both a reported and organic basis, primarily due to COVID-19 impacts [30] - Adjusted operating profit and adjusted earnings per share decreased by 32% compared to the previous year, with an adjusted operating margin of 11.1%, down 220 basis points [31] - Year-to-date free cash flow was $25 million, compared to $5 million for the same period last year, driven by improvements in accounts receivable [33] Business Line Data and Key Metrics Changes - The US repair and replacement market performed better than other markets, particularly in retail, which saw strong DIY demand [13] - The marine market remained slow, expected to be tempered due to COVID-19 impacts [13] - APMEA's adjusted operating margin increased by 590 basis points to 13.3%, driven by a 16% increase in affiliate volume [39] Market Data and Key Metrics Changes - Orders trended positively during Q2, with a decline in order rates improving as the quarter progressed [11] - The ABI and Dodge Momentum Index stabilized at lower levels than pre-pandemic, with June PMI indices in both the US and Europe improving as restrictions eased [14] - In APMEA, China's markets showed steady progress, while the Middle East continued to struggle [15] Company Strategy and Development Direction - The company continues to focus on employee safety and has expanded safety protocols as employees return to the office [45] - Cost management and productivity remain priorities, with total savings approximated at $21 million during Q2 [15] - The company is investing in long-term growth opportunities, particularly in smart and connected solutions and productivity-enhancing technology [46] Management's Comments on Operating Environment and Future Outlook - Management expects both sales and operating margins to improve in Q3 relative to Q2, in line with order trends observed through July [21] - Concerns remain regarding the spread of COVID-19 and its potential impact on results [21] - The company refrains from providing full-year guidance due to uncertainties surrounding COVID-19 [44] Other Important Information - The company acquired Australian Valve Group in an all-cash transaction, broadening its product offering in the Australian market [17][18] - A shift in the go-to-market strategy in Korea was implemented, moving from a direct sales organization to a distribution model [19][20] - The company recorded a special charge of $6.7 million in Q2, primarily for costs related to restructuring initiatives [15] Q&A Session Summary Question: What factors could influence the Q3 sales guidance? - Management noted that the reopening of construction markets and strong retail performance could positively impact sales, while potential COVID-19 lockdowns could have a negative effect [52][54] Question: Is there increased interest in connected solutions? - Management observed increased inquiries about remote monitoring capabilities, with a higher percentage of sales coming from connected products [56][57] Question: How did the company manage to sustain margins despite revenue declines? - Cost control measures were implemented early, with significant reductions in discretionary spending and variable costs contributing to margin resilience [63] Question: What is the outlook for sales by region in Q3? - Management provided guidance indicating expected declines of 6% to 10% in the Americas, 14% to 18% in Europe, and 10% to 14% in APMEA [69] Question: Can you provide details on the AVG acquisition? - The acquisition was made at a multiple of 7 to 9 times EBITDA, with some of the purchase price contingent on performance milestones [74][75]