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Text: Bob will provide an overview of the past year, review our 2021 priorities as well as update you on our market expectations for this year.
Shashank will provide a detailed analysis of our fourth quarter and full year financial results and discuss our outlook for 2021.
For information concerning these risks, see our publicly available filings with the SEC.
I want to start out by expressing my deepest gratitude to our employees around the world.
Their dedication since the start of the pandemic has been unwavering to ensure our customers' needs were being met and our business continued to move forward.
This past year has tested everyone's endurance and patience.
I'm so grateful to our experienced team that was able to nimbly adapt to the dynamics of this constantly changing global environment, and I'm confident the team will continue to proactively manage our business to meet our customer expectations in 2021 and accelerate Watts' strategy.
I'm also pleased to report that we continue to make progress in our environmental, social and governance efforts and in diversity, equity and inclusion initiatives this past year.
Our sustainability performance improved following evaluations from several leading ESG rating agencies, and we supported our customers and local communities that were impacted by the pandemic.
As you know, our product portfolio is aligned with three macro themes.
Safety & Regulation, Energy Efficiency and Water Conservation.
We believe this focus dovetails well with the ESG framework.
In 2020, we launched our first diversity, equity and inclusion survey, which identified key focus areas, and we formed working groups to lead our global diversity initiatives.
We've also deployed employee training and development programs relevant to this effort.
As a company, we enacted a comprehensive response to COVID-19 challenges.
First, employee safety was and remains our priority.
Through our COVID-19 taskforce, we emphasized safety protocols in the workplace that met or exceeded CDC and other country-specific requirements.
Secondly, given we are an essential business, we maintained a customer focus.
We set up a hotline very early in the pandemic to aid healthcare customers with any urgent requirements.
We expanded our library of online learning tools to offer training and to stay in touch with our customers, which has provided us with great insights into customer focus areas and usage.
And we continue to invest in new product development to address our customers' needs.
Regarding our 2020 performance, we proactively took very aggressive cost actions starting late in the first quarter of 2020.
These address long-term structural as well as short-term discretionary costs.
The totality of these actions was a positive impact of $55 million to our operating income in 2020.
Clearly, some of the short-term actions are a headwind in 2021.
The cost actions helped us maintain our operating margin at 2019 levels despite the top line headwinds.
We also invested in strategic new product development and in our Smart & Connected strategy.
We increased free cash flow over 2019 levels by 14%, and we strengthened our balance sheet by paying down debt, putting the company on solid footing as the pandemic subsides.
We prioritized liquidity by managing working capital, extending our financing agreements, and aggressively paying down existing debt through repatriation and operating cash flow.
We continued our balanced capital allocation strategy.
We invested 50% more than 2019 in capital spending to fund growth and productivity.
We continue to invest in new product development, and we made two small bolt-on acquisitions.
We acquired the Australian Valve Group in Q3 and The Detection Group, or TDG in the fourth quarter, which I'll discuss momentarily.
Finally, we sustained our dividends and share repurchase programs.
Given the circumstances and challenges we faced, 2020 was a successful year for our company.
Next, I'll review our key priorities for 2021.
As I previously mentioned, employee safety is our #1 priority.
We'll continue to promote proper hygiene and safe social distancing practices.
In 2020, we delivered over 100,000 training sessions, both online and through virtual Lunch & Learn meetings.
This represented a 70% increase in training sessions over 2019.
In 2021, we'll continue to enhance our training programs for customers, reps, engineers and contractors in order to drive further customer connectivity.
We'll continue to elicit customer feedback to drive new product introductions and solutions, including expanding our Smart & Connected portfolio.
We'll look for opportunities to expand geographically into new regions, either organically or through acquisition.
Productivity will continue to expand through our One Watts performance initiative and is expected to help fund incremental 2021 long-term investments.
Now let's briefly talk about how we see the market-shaping up in 2021.
We gave some preliminary views on this year's markets during our November earnings call.
Since then, we have finalized our internal operating plans and updated industry data has been published.
Also, two important macro unknowns have been crystallized, namely the US elections are behind us, and effective vaccines have been approved and the deployment process has begun.
What is still uncertain is when we can effectively reach herd immunity, which in turn depends on how quickly the vaccine can be disseminated to the broader population and how many people opt to take the vaccine.
From a macro perspective, GDP forecasts in all our major regions are expected to grow from 2020's depressed levels, with most of our key countries expanding at 3% or higher.
In the Americas, our market expectations for new construction in both the commercial and residential markets are still mixed and vary by submarkets.
New residential single-family construction in general looks to be steady with persistently low interest rates, higher housing starts, expected job and income growth and positive demographics, driving anticipated mid to high-single-digit growth in single-family housing starts in 2021.
And the LIRA index is anticipating the growth rate of homeowner spend on repair and replacement projects to continue into 2021, with spending increasing approximately 4%.
However, multifamily starts are expected to decline mid-single digits in 2021.
In nonresidential, we anticipate that overall growth will be challenged.
We still see divergent growth prospects dependent on the end market.
The latest industry indicators, including the ABI, construction market data and construction industry confidence indexes are all portending a decline in nonresidential construction in 2021.
The AIA recently released its semiannual Consensus Construction Outlook, which expects new non-resi construction spend in the US to decrease by about 6% in 2021.
Also, AGC recently released survey results based on over 1,300 contractors that concluded 2021 will be a very difficult year for many construction firms in their markets.
Given the various industry indicators and feedback we are getting from the channels, we are anticipating air pocket in activity impacting us starting in the second quarter of this year due to the reduction in non-residential and multifamily new construction starts during the pandemic.
Existing funded projects continue and are being finished, but we expect new construction projects starting in the second quarter and through yearend may be down significantly.
In Europe, the markets are also mixed.
In our Drains business, the Commercial Marine segment is expected to continue to be challenged.
Project markets are lumpy and homebuilding is flat.
Government-sponsored home energy subsidies in Germany should continue to provide support, and we see more wholesaler activity in France, at least in the near-term as we enter 2021.
In Italy, there are concerns with government programs protecting employment that expire in March, which could impact unemployment and recovery there.
In the Asia Pacific region, the overall economy is expected to grow with GDP up in all regions.
China is forecasted to grow over 8% in 2021.
Finally, Middle East GDP is expected to grow in the 3% range, so a little slower than other regions and likely being more influenced by adverse geopolitical issues and energy demand.
Now I'd like to provide an update on our Smart & Connected product initiatives.
When we started evaluating the potential for transforming our portfolio to be Smart & Connected in 2015, we realized we had deep capabilities and competencies in our Watts Electronics and Tekmar businesses, but little in the way of a development pipeline or strategic plan.
Today, each of our business units has clear strategic goals to digitally transform their product portfolio where possible.
Additionally, we have created and deployed a dedicated team that has a mandate for ensuring that our connections are robust, scalable with our businesses, and most importantly, secure.
With these added resources, we have more than 85 people working exclusively on Smart & Connected products globally, a 55% increase in resources over 2019.
Cumulatively, we have exceeded 70,000 connected devices shipped since we started selling Smart & Connected products.
The primary goal of our Smart & Connected initiative is to enhance the value our products provide to customers.
We are focusing our efforts on the following key areas.
Safety and regulation, like our IntelliStation digital mixing products.
Water hygiene, like our HF Scientific instruments.
Energy efficiency in products like our AERCO boilers and PVI water heaters.
Leak detection systems like the Century Plus backflow discharge system.
These systems will ultimately provide us with the meaningful data that we can begin leveraging to further enhance our product performance, customer service levels and our own operational activities.
In addition, we see pathways toward subscription services.
In 2020, our Smart & Connected solutions continued to represent a larger share of our sales and were in the mid-teens of total Watts sales.
We're still focused on achieving our goal of 25% Smart & Connected product sales by 2023.
On slide five, let me highlight two Smart & Connected product solutions.
As I mentioned previously, we made a small acquisition in the fourth quarter, a company called The Detection Group, or TDG.
TDG provides factory mutual approved wireless leak detection products and notification services for commercial and multifamily buildings.
Sales approximate $4 million annually.
We were interested in TDG as another offering to bundle into our overall Smart & Connected suite of products.
Their products are addressing a key pain point for commercial and multifamily building owners, that being rising insurance costs due to water leaks.
On the right side of the slide, you will see an in-house developed solution that leverages multiple Watts brands to provide a single connected user experience.
The Dormont FloPro-MD combines our Dormont gas connector manufacturing with our Tekmar Electronics expertise on a single Bluetooth-enabled device and is utilized by service technicians and gas equipment installers to read and document consumption, pressure and flow of gas via a proprietary mobile app.
This allows installers to quickly identify and report if a problem may be related to equipment or to disturbances in the gas line.
This reduces the need for return service calls and increases efficiency during initial start-up or repair and maintenance procedures.
FloPro-MD is another good example of how far we can combine our capabilities to create solutions that address everyday customer challenges.
We remain excited about the future of Smart & Connected systems and what it's bringing to Watts and the industry.
Now, Shashank will review our results for the fourth quarter and full year and offer our outlook for 2021.
Reported sales of $403 million were up 1% year-over-year.
Organic sales were down 2%, but were more than offset by net acquired sales and a foreign exchange tailwind.
While each region experienced lower organic sales, America and Europe sales were better than anticipated.
Acquired sales, net of divestiture, approximated $1 million in the quarter.
I will review regional performances momentarily.
Adjusted operating profit of $55 million, a 10% increase, translated into an adjusted operating margin of 13.6%, up 110 basis points versus last year.
Benefits from cost actions, including restructuring and productivity savings, more than offset lower volume and incremental growth and productivity investments.
Investments totaled $3 million in the quarter.
Adjusted earnings per share of $1.15 increased 15% versus last year.
EPS growth was driven by $0.08 from operations and $0.07 primarily from a lower adjusted effective tax rate and positive foreign currency translation.
The adjusted effective tax rate in the quarter was 24.6%.
The rate declined as compared to last year as new regulations provided an opportunity to benefit from a favorable tax election, and we received tax benefits related to foreign exchange on cash repatriation.
GAAP reporting included a net tax charge of $9.7 million or $0.29 a share, primarily driven by increased income tax expense resulting from recently issued final tax regulations which reduced the realizability of foreign tax credits.
In summary, aggressive cost controls and a higher American and European topline drove the better-than-anticipated operating results.
In the Americas, reported sales decreased by approximately 1% to $264 million.
Organically, sales were down by approximately 2%, with growth in certain plumbing and electronic products being more than offset by reductions in heating and hot water, water quality, drains, and HVAC product sales.
Together, positive foreign exchange movements in the Canadian dollar and the TDG acquisition added 1% to sales year-over-year.
Americas adjusted operating profit for the quarter increased 1% to $46 million.
Adjusted operating margin expanded 40 basis points to 17.4%.
The margin increase was driven by cost savings and productivity, which more than offset the volume reduction and incremental investments.
We made approximately $2 million more in investments than the previous year.
Overall, Americas sales were slightly better than anticipated, with cost actions driving the positive bottom line.
Turning to Europe, sales of $120 million were up 6% on a reported basis, driven mainly by a stronger euro as foreign exchange increased sales by 8% year-over-year.
Organically, sales were down 2%, which was better than we had expected.
From a platform perspective, we saw growth in fluid solutions from higher plumbing and HVAC sales being more than offset by continued drain softness, especially sales into the commercial marine market.
By region, we saw growth in Italy with France flat and Germany and Scandinavia both down.
Italy saw strength in the plumbing, wholesale, electronics and OEM markets.
France saw growth in the wholesale and OEM markets being offset by drains.
In Germany, the sales decline was driven by reduced drain sales into commercial marine applications and in electronics, partially offset by continued strong sales into OEMs that are supporting government subsidized energy savings programs.
Scandinavia was down with softness in drains and the wholesale market.
Adjusted operating profit in Europe was approximately $17 million, a 25% increase over last year.
Adjusted operating margin of 14% increased 220 basis points, primarily due to cost actions and productivity, including restructuring savings which more than offset lower volume and investments.
In summary, Europe's top line performed better-than-expected and along with restructuring benefits delivered a solid operating performance in the quarter.
Now let's review APMEA's fourth quarter results.
Sales approximated $19 million, up 1% on a reported basis, with favorable foreign exchange movements of 5% probably in China and net acquired sales growth of 4%, more than offsetting an organic decline of 8%.
We saw double-digit organic growth within China, where commercial valve sales into datacenters continued to be strong.
Outside China, double-digit organic sales declines in the Middle East and Australia offset nominal growth in New Zealand.
Adjusted operating profit of $3.4 million was up 13% versus last year with adjusted operating margin up 170 basis points driven by cost controls, productivity and high intercompany volume, partially offset by lower third-party volume and investments.
So APMEA saw continued China growth, while other regions are still dealing with the impacts of COVID.
On slide eight, let me speak to the full year results.
For 2020, reported sales were $1.5 billion, down 6% on a reported basis.
The decrease was primarily driven by an organic sales decline of 7%, attributable to the effect of COVID-19.
Foreign exchange and acquisitions had a 1% positive effect on sales year-over-year.
Adjusted operating margin was 12.9% in 2020, flat with 2019 and a good result factoring in lower volume.
A decremental decline in adjusted operating profit was 13% for the year.
We were able to mitigate the impact of the volume decline through aggressive cost actions which totaled $55 million in 2020.
It is important to note that we maintained our adjusted operating margin while still funding incremental investments of roughly $9 million during the year.
Adjusted full year earnings per share of $3.88 declined 5% versus the prior year.
There was a decrease from operations due to the pandemic related sales decline, but this was partially offset by lower adjusted effective tax rate and favorable foreign currency translation.
Free cash flow for the full year was $187 million, an increase of 14% over 2019 driven by better working capital management, especially in accounts receivable.
Free cash flow conversion was 164%.
We increased free cash flow while still investing 50% more in key projects over 2019.
These investments were specifically in new product development, capacity expansion and factory productivity.
In total, we invested $44 million in 2020, which equates to 140% reinvestment ratio.
In 2020, we returned $60 million to shareholders in the form of dividends and share repurchases, an 18% increase over 2019.
During 2020, we also paid down debt by $110 million.
Our net debt to capitalization ratio is now negative at 2% at yearend as compared to a positive 8.4% in the prior year.
We used cash from repatriations and operations to pay down debt.
Our balance sheet continues to be in excellent shape and provides substantial flexibility to address our capital allocation priorities.
Given the many operating and personal challenges we faced with COVID in 2020, our ability to proactively manage costs, maintain margins in a down environment and strengthen our balance sheet was noteworthy.
Bob characterized the year as successful, and I would agree.
Now on slide nine, let's discuss the general framework we considered in preparing our 2021 outlook.
First, let's look at expected headwinds.
COVID-19 will continue to be a focal point and the evolution of the pandemic could provide potential headwind until we reach herd immunity.
We mentioned the non-residential and multifamily air pocket that could affect new construction and discretionary repair/replace.
Its timing and length will determine the impact on our business.
We presently believe that this air pocket will impact us starting in the second quarter of 2021.
Consistent with our ongoing strategy, we are going to incrementally reinvest for the long-term growth of the business, especially in investments to drive our Smart & Connected strategy.
Of the $55 million of cost actions we took in 2020, we expect that approximately $15 million of these costs will return in 2021.
These costs include pay reductions, government incentives, travel and MARCOM.
In the middle column are themes that we'll continue to monitor.
There are several geopolitical concerns that could impact Asia Pacific and the Middle East as well as Europe.
With the US election results behind us and a new administration in place, the transition and new policy proposals will take time to sort out, especially regarding further fiscal stimulus and future potential tax increases.
Commodity inflation, especially in copper and steel, have been significant.
We have also experienced substantial cost increases in logistics, packaging and insurance.
We have announced price increases to help mitigate the current cost increases.
Now looking at anticipated tailwinds, residential single-family construction should continue to grow in 2021.
We expect to benefit from new product introductions, including additional Smart & Connected products.
We intend to drive continuous improvement through our One Watts performance efforts with additional productivity initiatives within our factory walls as well as in the SGA function.
And we should benefit from incremental savings on cost actions taken last year.
As discussed, our balance sheet is exceptionally strong coming into 2021.
We have the flexibility to pursue inorganic growth opportunities to augment the business, assuming a transaction meets our strategic and financial criteria.
Lastly, global economies are expected to continue to recover in 2021 from the lows of the COVID induced recession of 2020.
With that backdrop, let's review our outlook for the full year 2021.
On slide 10, we have provided our major assumptions.
We estimate that organically, Americas sales may range from down 5% to flat in 2021.
We expect adjusted operating margin in the Americas may be down compared to 2020, with incremental cost savings and productivity initiatives offsetting increased costs that were suspended last year.
Sales should increase by about $4 million with the addition of the TDG acquisition.
For Europe, we are also forecasting organic sales to be down 5% to flat.
Adjusted operating margin may decline for similar reasons as the Americas.
In APMEA, we expect organic sales may grow from 2% to 6% for the year.
Sales should also increase by approximately $6 million from the AVG acquisition.
We anticipate adjusted operating margin may decline against 2020 as some level of expenses get reintroduced and intercompany volume is expected to decline year-over-year.
Overall, on a consolidated basis, we anticipate Watts organic sales to range from down 5% to flat in 2021.
Organically, we expect that first half sales may be better than the second half from a year-over-year perspective.
We have an easier second quarter comp due to the major COVID impact last year.
Also, the second half will be challenged as we anticipate nonresidential and multifamily new construction markets will slow due to the air pocket we've mentioned.
We estimate our adjusted operating margins may be down 50 to 90 basis points.
This is primarily driven by the 2021 time/cost headwinds of $15 million, decremental lower volume, incremental investments of $13 million, and general cost inflation, which are being partially offset by $14 million of incremental restructuring savings, along with price and productivity actions.
Now a few other key inputs to consider for 2021.
We expect corporate costs to be about $40 million for the year.
Interest expense should be roughly $10 million.
Our adjusted effective tax rate for 2021 should approximate 27%.
Capital spending is expected to be in the $40 million range as we will continue to reinvest in our manufacturing facilities, systems and new product development, which will support future growth and productivity.
Depreciation and amortization should be approximately $46 million for the year.
We expect to continue to drive free cash flow conversion equal to or greater than 100% of net income.
We are assuming a 1.22 euro-US dollar foreign exchange rate for the full year versus the average rate of 1.12 in 2020.
Please recall that for every $0.01 movement up or down in the euro-dollar exchange rate, our European annual sales are impacted by approximately $4 million, and our annual earnings per share is impacted by $0.01.
We expect our share count should approximate $34 million for the year.
Finally, a few items to consider for Q1.
For Q1 organically, we see sales down 3% to up 1%, with Americas and Europe sales slightly negative and APMEA likely experiencing organic growth in line with the full year range due to easier comps from Q1 COVID impact last year.
We estimate our Q1 operating margin will be flattish in the first quarter as compared to Q1 last year.
Acquired sales should approximate $2.5 million in Q1, $1 million in the Americas and $1.5 million in APMEA.
We expect incremental investments of $2 million to $3 million in Q1.
The investments will be offset by about $5 million of incremental restructuring savings.
The adjusted effective tax rate should approximate 26%.
We anticipate foreign exchange would be a tailwind in Q1, given current rates as compared to the first quarter of 2020.
So overall, we see 2021 as a transition year for the company.
During this time, we expect many of our end markets may be adversely affected, putting pressure on our organic growth and margin expansion opportunities, but we are taking this opportunity to continue to invest for the future, deepen our customer relationships, and empower our people to drive us forward.
The team successfully navigated through a very trying year.
We were able to adapt to the many challenges caused by the COVOD pandemic, delivering strong results by controlling what we could, given the economic environment.
Our market outlook for 2021 remains guarded.
Timing for broad dissemination of the vaccine is critical to reduce uncertainty and restore some normalcy to the markets.
We see a challenging year starting in the second quarter, given current industry indicators and the lack of new nonresidential and multifamily construction starts in 2020.
Smart & Connected products continue to gain momentum, and we expect they should continue to grow in 2021.
Productivity and efficiencies gained through the One Watch performance system will continue and help fund investments.
We plan to deliver strong free cash flow.
As always, we'll remain disciplined in our capital deployment, prioritizing reinvestment in bolt-on acquisitions that strengthen our core, further expand our geographic reach and add technology to build scale.
We'll be closely monitoring how the COVID vaccination process develops and how that affects customer sentiment and the construction markets.
Given our 2020 performance, I'm very confident in our experienced team will work through the near-term COVID issues and execute on what we can control in 2021, while still focusing on our long-term growth strategy.

user
q4 adjusted earnings per share $1.15.
q4 sales $403 million versus refinitiv ibes estimate of $385.9 million.
covid-19 will continue to affect our business in 2021.

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