Watts Water Technologies - Q2 2020

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by, and welcome to the Watts Water Technologies Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star one on your telephone. If you require any further assistance, please press star zero. I would now like to turn the call over to Timothy McPhee, Vice President of Investor Relations. Please go ahead.

Timothy MacPhee (VP of Investor Relations)

Thank you, and good morning, everyone. Welcome to our second quarter 2020 earnings conference call. With me today are Bob Pagano, President and CEO, and Shashank Patel, our CFO. Bob will provide an overview concerning various aspects of our business before turning the call over to Shashank, who will address the financial results in more detail and offer our outlook for the third quarter. Following the prepared remarks, we will address questions related to the information covered during the call. Today's webcast is accompanied by a slide presentation, which can be found in the Investors section of our website. We will reference these slides throughout our prepared remarks. Any reference to non-GAAP financial information is reconciled to the relevant GAAP measure in the appendix to the presentation.

Before we begin, I'd like to remind everyone that during the course of this call, we may be making certain comments that constitute forward-looking statements. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially. For information concerning these risks, see Watts' publicly available Filings with the SEC. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Now, I will turn the call over to Bob.

Robert Pagano (CEO)

Thanks, Tim, and good morning, everyone. Please turn to slide 3 in the presentation, and I'll provide an overview of the quarter. I'd like to start with a COVID-19 update. Our highest priority continues to be the health and safety of our employees. Fortunately, confirmed COVID-19 cases within our workforce has been very low. Since early April, all our manufacturing locations have remained open. The safety protocols we established during the first quarter have continued, and we've actually enhanced measures as government requirements have started easing. We have recently implemented new travel and back to the office policies as we move into the next phase of the pandemic recovery. We will remain diligent in ensuring workplace safety is a top priority.

I again want to acknowledge the efforts of our employees, who continue to maintain a customer focus as we transition into the new normal, ensuring our essential products are manufactured and delivered in a timely fashion. Thanks to our dedicated team, we delivered results in the second quarter that exceeded our internal expectations. The second quarter sales reduction was less than we had anticipated, and decrements in operating profits came in lower than expected as well. Overall, we maintained our focus on productivity and cost management, preserving cash and controlling what we can. Shashank will provide more financial details in a few minutes. Orders trended positively during the second quarter and into July. Monthly orders were down as compared to the prior year from April through June, but sequentially, order rate declines improved as the quarter progressed.

Order rates on average for the quarter declined more in Europe as compared to the Americas, with Europe substantially softer in April and May, but recovering in June. Now let me provide a view on the markets. During the second quarter, the end markets performed as we had anticipated for the most part, with gradual sequential improvements as lockdowns in the U.S. and Europe began to ease. We continued to see delays across most verticals. Restrictions on social distancing at job sites is also causing a slowdown as construction companies adapt to the new normal. There does appear to be a push to get jobs already in process completed. The U.S. repair and replacement market performed better than other markets, especially in retail, as DIY demand was strong.

The marine market is slow and expected to remain tempered, at least in the near term, due to softness from the COVID-19 impact. Destocking by channel partners in the Americas has mostly subsided, while channels in Europe, which are taking a little longer to return, will likely see destocking into the third quarter. Some of the important indices we follow, such as the ABI and Dodge Momentum Index, have stabilized, albeit at much lower levels than before the pandemic. June PMI indices in both the U.S. and Europe improved as restrictions eased. The July AIA Consensus Construction Outlook is predicting total non-residential new construction spending will decrease in the high single digits for 2020 and mid-single digits in 2021. In APMEA, China's markets have made steady progress, with Middle East continuing to languish. Operationally, we have instituted a majority of the cost out programs we discussed last quarter.

During the second quarter, we estimate total savings approximated $21 million. In the second quarter, we recorded a special charge of $6.7 million, primarily for costs related to the cost out and restructuring initiatives, most of the total being severance. We expect to book additional costs for asset relocation, asset write-offs, and other exit costs in the third and fourth quarters that also relate to these programs. They will be classified as special items when incurred. Further, we continue to review additional cost actions to support operational efficiency. Next, let me comment on some changes in our operating portfolio in APMEA. First, I'm happy to announce the acquisition of Australian Valve Group, or AVG, in an all-cash transaction that was consummated in early July.

AVG is a $10 million sales company that designs and distributes heating control valves for the Australian marketplace, that are sold into both the residential and commercial end markets. This acquisition broadens our product offering and channel access in a region with well-established and tightly enforced plumbing codes. We welcome our new AVG colleagues to Watts. Secondly, we have changed how we go to market in Korea, moving from a direct sales organization to a distribution model. We effected this change by selling our interest in our Watts Korea subsidiary to a local management in July. The future addressable market is limited, and government regulations and certifications favor locally owned enterprises, which is why we made the change. The new entity will have exclusive distribution rights to sell our heating and hot water products, as well as some complementary products in the Korean marketplace.

We expect a better margin on product sales due to reduced SG&A costs. The proceeds and loss on sale were minimal and will be recorded in the second half of 2020. A few words now on our third quarter outlook. We expect both sales and operating margins to improve relative to the second quarter, in line with the order trends we saw through July. Obviously, we continue to be concerned about the spread of COVID-19, especially in the U.S. Our results may be impacted depending on its ultimate course. Now, I'd like to update you on our smart and connected product offerings. Please turn to slide four. Our tekmar Control Systems business has been a market leader in hydronic and snow melting control systems. The tekmar team recognized that many homeowners were having difficulty upgrading their HVAC systems because they were wired for older two-wire control systems.

The Invita thermostat system enables homeowners to upgrade their system without having to rewire their home. The Invita system is also Wi-Fi connected and includes connections to monitor water leaks from your hot water heater. The value of the Invita system was recently highlighted in an episode of Ask This Old House. Our HF Scientific business has been a key technology supplier into the ballast water treatment market. One of the most common ways to treat ballast water is through filtration and then injection of oxidants to kill any remaining invasive organisms. HF Scientific instruments help monitor the level of these oxidants during treatment to ensure proper system performance. Once the ships return to port and begin to de-ballast, our instruments again monitor the oxidant levels to ensure that the treated ballast water will not harm the local environment.

The HF Scientific team recently launched the SSR-Ex system, which makes it easier to connect into local control systems, service more easily, and increase the safety levels of this instrument, which is essential to the performance of ballast water treatment systems. Finally, on slide 5, I'd like to discuss a number of our accomplishments in 2019 around sustainability. Sustainability is very important to us. Our sustainability report was issued at the end of June of this year, and the quality and content has been significantly improved. During 2019, we continued to reduce our consumption of natural resources, including a 13% reduction in water usage by taking measures to conserve water and manage its flow and discharge responsibly. Our product portfolio shift to eco-friendly products and solutions continues.

This past year, sales of our condensing boilers and water heaters reduced more than 110,000 tons of CO2 for our customers, more than three times what Watts generated as a company. We have maintained our partnership with Planet Water, providing funding and resources to install water purification systems for disadvantaged areas of the world. To date, we have positively impacted over 15,000 people in eight different countries, providing safe drinking water and education on the importance of proper hand sanitation. We were recognized by Newsweek as one of America's most responsible companies with regards to our ESG efforts. Now, let me turn the call over to Shashank, who will discuss our second quarter operating performance and provide more details on our third quarter outlook. Shashank?

Shashank Patel (CFO)

Thanks, Bob. Please turn to slide 6 to review second quarter consolidated comparative results. Sales of $339 million were down by 19% on both a reported and organic basis, and were primarily driven by the impact from COVID-19. Foreign exchange impact was minimal, and acquisitions accounted for approximately $2 million of incremental sales year-over-year. Adjusted operating profit and adjusted earnings per share were both down 32% as compared to last year. Adjusted operating margin of 11.1% was down 220 basis points, as price, productivity, and recent cost actions were more than offset by volume loss, incremental investments, and inflation. The reduction in revenue resulted in a 23% decrement to the adjusted operating margin, which was better than our expected 30%-35% decrement.

The improvement was driven by higher than anticipated sales volume, and we booked a one-time reduction in corporate long-term incentives. The adjusted effective tax rate of 26.3% is 210 basis points lower year-over-year. The reduction is discrete to the quarter and relates primarily to the foreign exchange impact of repatriations made during the second quarter. Our year-to-date free cash flow was $25 million as compared to $5 million for the same period last year. The increase was due to improvements in accounts receivable, more than offsetting lower income and inventory increase and higher capital spending. Our goal remains to achieve free cash flow conversion at 100% or more of net income for the year. We retired $75 million of private placement notes using both existing cash and additional revolver borrowings.

The interest rate on the retired notes was approximately twice the rate we now pay on revolver debt. The balance sheet remains strong. Our gross and net leverage ratios at the end of June were 1.2 times and 0.5 times, respectively. Our net debt to capitalization ratio at June quarter end was 10.4%. During the quarter, we purchased approximately 79,000 shares of our common stock at a cost of $6.4 million before temporarily suspending the share repurchase program. We have resumed repurchases starting again in the third quarter, primarily focused on offsetting dilution. Turning to slide 7 and our regional results. The regions experienced organic sales declines of between 18% and 21% during the second quarter as compared to last year.

Europe lagged the most, as some of the key countries that we participate in had more strictly enforced lockdowns, and therefore, markets were slower to return. Americas and Europe saw broad declines in most product lines, and all key regions within Europe were soft. China sales within APMEA were down only mid-single digits, as China's economy was ahead of other regions in recovering from COVID-19. However, the Middle East and New Zealand were both down double digits due to lockdown. The Middle East is also suffering from the impact of weak oil markets on major project funding. Adjusted operating margin of 15% in the Americas was 270 basis points below last year. Price, cost actions, and productivity were more than offset by the volume loss and incremental investments. Americas' decrements of 30% on lower sales volume was in line with our expectations.

Europe's adjusted operating margin of 10.1% was 230 basis points lower than last year for similar reasons as the Americas. Europe's 22% decrements on lower sales volume was better than anticipated due to government subsidies and cost actions. APMEA's adjusted operating margin increased 590 basis points to 13.3%, driven by a 16% increase in affiliate volume, productivity, and cost actions, which more than offset a reduction in third-party volume. Moving to Slide 8 and general assumptions about our third quarter operating outlook. As Bob mentioned, we expect better operating results compared to the second quarter and anticipate that activity will continue to gradually improve month-to-month. We are estimating organic sales for the third quarter to be at 8%-12% below the third quarter of 2019.

This assumption could be impacted by a change in global, federal, and individual state responses to COVID-19. We anticipate that operating margin for the third quarter will approximate 11%-13%. The volume drop is expected to drive margin decrements in line with the second quarter. As mentioned, the second quarter did benefit from European government subsidies and a one-time true-up of long-term incentive plans that don't repeat. We expect interest expense sequentially will drop by about $500,000 in the third quarter versus the second quarter. We had additional debt costs related to the second quarter refinancing that won't repeat, and as I noted before, we paid off higher interest cost debt in the second quarter as well. The adjusted effective tax rate should be approximately 28.5%. Foreign exchange would be slightly positive to last year should current rates persist throughout the quarter.

Consistent with last quarter, we are refraining from giving full year guidance as there continue to be many uncertainties concerning COVID-19 that inhibit our ability to reasonably forecast beyond this coming quarter. So with that, let me turn the call over to Bob before we begin Q&A. Bob?

Robert Pagano (CEO)

Thanks, Shashank. To summarize, here are a few key themes from today's call. We continue to take employee safety very seriously and have expanded our protocols as more employees return to the office. Second quarter results were better than expected as activity improved during the quarter. Markets are returning slowly. We aggressively implemented the cost actions discussed last quarter, and we're continuing to review our cost base for other opportunities. We continue to invest in long-term growth opportunities, especially in smart and connected solutions, productivity-enhancing technology in our manufacturing facilities, and bolt-on acquisitions that support our long-term strategy....Our balance sheet remains strong, which is providing us flexibility while we navigate through the pandemic. We expect to see sequential improvement in the third quarter. The path of COVID-19 remains a concern and could impact our results, so we're watching developments closely. With that, operator, please open the line for questions.

Operator (participant)

Ladies and gentlemen, to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Nathan Jones with Stifel. Your line is open.

Nathan Jones (Analyst)

Good morning, everyone.

Robert Pagano (CEO)

Morning, Nathan.

Ryan Connors (MD and Research Analyst)

Morning, Nathan.

Nathan Jones (Analyst)

Just starting on the top line here. I mean, you started the 2Q guide at, you know, down 25-30, took that up to down 20-25 as the U.S. construction industry got back. I think they're coming in better than, you know, the down 20, and sounds like it was primarily Europe opening up, that you hadn't seen in May. You've got 8-12 for the third quarter. Can you talk about, you know, what are the kinds of things that could surprise you, either to the upside or the downside, that could get you to, you know, the top end or better, or the lower end or worse, as you view the markets at the moment?

Robert Pagano (CEO)

Sure, Nathan. When you look at it, the quarter we changed, as you recall, we weren't sure when, particularly the Northeast, New York, Massachusetts, Pennsylvania, and even the West Coast, when they were gonna start up. So they ended up starting mid-May, and things started to progress. So that was in May. We were surprised with retail. Retail was very strong, up double digits for us in the quarter. So, we don't expect that to continue because some of our contractors were going to the big box stores to get products while the wholesalers were beginning to, you know, still be closed and opening up. So, you know, so the high end of your discussion, I guess, would be if retail continued and the construction markets kept on moving faster than they were before.

We also got a surprise in the second quarter, where our German OEM partners ordered more business, ordered more products because of some energy efficiency subsidies that were happening in Germany. So we had some strong performance out of our German HVAC OEM, so that was positive in the second quarter. So again, we're not expecting that to be as high as it was, but if that continued, that would be at the higher end. But we think, we're more balanced. We have a little bit more clarity than we had, you know, at the April timeframe when we originally gave guidance. So, you know, things are opening up, and as long as they stay open.

What concerns us is really if there's a shutdown, you know, things go back to, you know, where COVID outbreaks are even more concerning, and that begins to, you know, have more lockdowns in various countries and/or states. So that's kind of how we're looking at it.

Nathan Jones (Analyst)

It was a tough time to guide in April. I think the connected solutions business is interesting at the moment. You're starting to hear a lot of people, a lot of folks in a lot of industries want remote monitoring capabilities, those kinds of things. I'm sure it's been too early in the piece for you to probably see concrete orders, you know, coming out of that. But have you seen, you know, increased interest from customers, maybe requests for quotes or anything like that, that would, you know, lead you to think that the penetration of those connected solutions might accelerate from here relative to what you were thinking previously?

Robert Pagano (CEO)

I think early in April, we expected that to happen, and we did see there is a lot of inquiries around around that. Like you said, I think it's too early. But I would tell you, as we look at what's decreased, I mean, you know, our decrease in our connected products is substantially lower, and we're actually running as a percentage of sales in the mid-teens on some of our business. So, you know, a lot higher as a percentage of sales and, you know, more towards our goal towards 25%, as you know, by 2023. So clearly, remote monitoring is really gonna be important for the future.

Nathan Jones (Analyst)

Do you have any kind of idea when you think that you might be able to convert some of that interest into orders, into revenue?

Robert Pagano (CEO)

I think we already are. I mean, you know, when you see some of the our new products that we've introduced, some of the ones I just talked about, we're seeing, you know, growth in those, some of those key markets. So, you know, I think as we continue to expand our portfolio and connect the systems, I think that will only continue to go forward. I think what you're seeing is everybody, you went through a shock in Q2, and some of this just takes time to materialize as we go, you know, into the retrofit cycle. I think people will be thinking more of it, and our sales team will be pushing more of it, obviously, because of this.

Nathan Jones (Analyst)

Okay, thanks. I'll pass it on.

Robert Pagano (CEO)

Thank you.

Operator (participant)

Your next question comes from Ryan Connors with Boenning & Scattergood. Your line is open.

Ryan Connors (MD and Research Analyst)

Great, thanks. Good morning.

Robert Pagano (CEO)

Good morning.

Ryan Connors (MD and Research Analyst)

So, my question actually had to do with the operating margins. You know, you did talk about it a little bit, but the resiliency there does seem pretty remarkable given the magnitude of the top-line hits you took in the quarter. So I know you kind of laid out a few of the drivers, but can you just drill down on that a little bit? What exactly were you able to cut without getting into bone, to sustain margins pretty well, and maybe discuss kind of the variable versus fixed cost structure, going forward?

Robert Pagano (CEO)

... I'll let Shashank answer that in detail, but I just want to commend our team for a great job of controlling costs. I mean, the teams took it very seriously, and you know, we're really cost conscious. So Shashank, you could get into some of the details.

Shashank Patel (CFO)

Yeah, and Ryan, look, I mean, as we talked even in Q1 earnings call, right, we, we took actions early. So we implemented actions early in the March time period, and I think we saw results because of that. So when you think about the $55 million of cost out we targeted, about half of that was people cost, and then about, you know, of the balance, 33% of the 100% is discretionary, things like T&E, MarCom, additional spend. And then about 17% was variable, you know, manufacturing supplies, things like that. That's kind of the breakdown of the $55 million. As to what is long term, short term, we have said about 15% of that is long-term structural, i.e., headcount restructuring. So annualized, it's about a $13 million benefit as we go forward.

This year, we'll see $8 million of the $13 million, and that $8 million is included in the people cost reduction of $27 million, which is 50% of the $55 million. Now, some of that does, you know, some of that was, temporary pay cuts, et cetera, which ended the end of September.

Ryan Connors (MD and Research Analyst)

Okay. So if we take a relatively bullish, you know, view, and we think things are gonna continue to rebound sequentially, I mean, will some of that start to creep back in, or do you get some cost leverage on that going forward?

Shashank Patel (CFO)

Yeah, so some of that does creep back in, mostly in the fourth quarter. But then, obviously, we're, our hope is that the volumes do come back and continue progressing in a positive trajectory, although, you know, negative, but less negative.

Ryan Connors (MD and Research Analyst)

Got it. Okay. And then just one last one on, on more on the balance sheet. I, I appreciate the rationale for paying down debt early on in the crisis. I mean, things were obviously very uncertain there for a time. But, but now, if we look at where interest rates are, we look at what the Fed is doing in terms of, you know, actually buying corporate debt, it seems like the government is practically goading companies in, into levering up. Would you think about going the opposite direction at some point and actually taking on some debt on the balance sheet now in this environment, now that things have kind of stabilized a bit?

Robert Pagano (CEO)

It's, it's funny you said that. I've been challenging Shashank on that, but obviously, look at, our balance sheet's healthy. We believe interest rates are gonna stay, you know, low for a while. But, you know, it's certainly an option we'll continue to look at.

Ryan Connors (MD and Research Analyst)

Got it. Okay. Thanks for your time.

Shashank Patel (CFO)

Thank you.

Robert Pagano (CEO)

Thank you.

Operator (participant)

Your next question comes from Brian Blair with Oppenheimer. Your line is open.

Brian Blair (MD and Senior Analyst)

Good morning. Hope everyone's doing well.

Shashank Patel (CFO)

Good morning.

Robert Pagano (CEO)

Good morning, Brian.

Brian Blair (MD and Senior Analyst)

So I was hoping we could drill down a little more on the Q3 sales guide, specifically how we should think about your outlook by region. It's actually a little tighter band of organic decline than we expected last quarter, although you mentioned, you know, Europe, in terms of order rates, trailed a bit. So should we expect a little more disparity in Q3 decline by region?

Robert Pagano (CEO)

You know, you know, I'll give you our planning assumptions. Right now, we're looking at Americas down 6%-10%, Europe 14%-18%, and APMEA down 10%-14%, in those ranges.

Brian Blair (MD and Senior Analyst)

Okay, that's helpful. And how that expected margin by region and corporate expense netting to the 11%-13% guide? I mean, sounds like consolidated decrementals will remain in a pretty attractive range for the quarter. Just curious how that shakes out by region.

Shashank Patel (CFO)

Yeah. So as you noted, the consolidated decrementals are similar to what we experienced in the second quarter, roughly 23%. Americas will be better from a margin performance than, for example, Europe and APMEA, for a couple of reasons. Europe, we did get government subsidies in the second quarter, which helped the margins there. And then in APMEA, we had higher intercompany volume in the second quarter, so the margins in APMEA won't be as good as they were in the second quarter. Still, you know, low double digits, but not as good. So Americas will be better margins versus the other regions as far as performance versus Q2.

Brian Blair (MD and Senior Analyst)

Got it. Any additional color you can offer on the AVG deal? You know, we know run rate revenue, $10 million range. You know, any detail on, you know, the multiple paid, current margin profile of that business, expected accretion would be helpful.

Shashank Patel (CFO)

Yeah. So look, we, because we, you know, made the acquisition in the middle of COVID, we actually put 30% of the purchase price subject to hitting certain performance milestones over the next couple of years. So that $10 million is a net number. There could be additional money based on how they perform over the next couple of years. So there's about $3 million of additional money at risk there. As far as multiples, it's a 7-9x EBITDA, so it's a pretty decent multiple that we paid for the business. EPS accretion year one is gonna be, you know, almost zero. It's, well, close to zero, and then we'll get EPS accretion year two and on.

Brian Blair (MD and Senior Analyst)

Okay. Appreciate the color.

Robert Pagano (CEO)

Thank you.

Operator (participant)

Your next question comes from Brian Lee with Goldman Sachs. Your line is open.

Alex Meisel (Analyst)

Hey, how's it going? This is Alex on for Brian.

Shashank Patel (CFO)

Alex, hi.

Alex Meisel (Analyst)

Wondering if you could just provide a bit more detail on the recent order trends. Can you bifurcate by segment there, and how has it trended incrementally over the past few months?

Robert Pagano (CEO)

Well, every month got better in every one of the regions, every single month, and continued into July. So, you know, that's what gave us the confidence to give you our Q3 guidance, you know. So overall, April was by far the worst. As I said in my prepared comments, Europe was slower to rebound. We had steeper declines in April and May, but started rebounding in June and in July. So, you know, sequential improvement in pretty much every one of the regions.

Alex Meisel (Analyst)

Great. Now, obviously, you're, you're not providing full year guidance, but how much of this, how much of this recent backlog creeps into the fourth quarter as of now?

Robert Pagano (CEO)

Yeah, we're pretty much a book and ship business, so we don't have a lot of detail, especially into the fourth quarter, right? So, we don't have any visibility into the fourth quarter as of right now. So we--in the third quarter, we have July behind us, and, you know, and what we're seeing in the book and ship, and from what we're hearing from the sales team, gives us the confidence to give you the range we gave in our quarter guidance.

Alex Meisel (Analyst)

Perfect. Thanks a lot.

Robert Pagano (CEO)

Thank you.

Nathan Jones (Analyst)

Thank you.

Operator (participant)

Your next question comes from Joe Giordanowith Cowen and Company. Your line is open.

Robert Jamieson (Analyst)

Hey, good morning. This is Robert in for Joe.

Nathan Jones (Analyst)

Hello.

Robert Jamieson (Analyst)

Good morning. Just a couple on the end markets. Just with what we've been seeing with COVID-19 and some of the urban exodus that's been driving, you know, housing performance recently, I just wondered how sustainable you think this tailwind is? And kind of additionally, what's your view on multifamily? Do you think that's more challenged in a socially distanced world as we move forward?

Robert Pagano (CEO)

Well, you know, I'm not-- You mentioned tailwind. I'm not sure where there's any tailwind right now in the market, 'cause every market's down, unfortunately. So, I think there's some tailwind in residential single family, but there's also a shortage right now. So, as I look at multifamily, look at, you know, in a movement... They said that in 9/11, right, in New York City, that everybody's gonna move out of the city, and guess what? Everybody came back. So I think it takes multi-generations, and right now, as we all know, the single-family homes availability, there's just not enough inventory out there to do that. So I think it's a longer transition here.

What we're seeing in the marketplace right now is any new construction that is started, is continuing, and if anything, they're behind schedule because of the lockdowns in some of the key market areas in the Northeast and the West Coast, so they're trying to get them going and moving as fast as we can. So, you know, I think, as we look at multifamily for the future, you know, like I said, we have visibility to quater three. We don't have visibility for the rest of the year, and we're watching it very closely.

Robert Jamieson (Analyst)

Okay. Thank you. And then can you talk a little bit about the impact from likely the clients like the office market, universities, things like that, to your commercial business?

Robert Pagano (CEO)

Yeah. So office buildings, you know, stores, malls, retail, and lodging, you know, that represents in our new construction about, you know, in total for the whole company, 10% of our overall business for overall Watts. So those are the key areas we're watching, just like you, and making sure and watching the trends. Like I said, what started is being finished. It's just a question of where they haven't broken ground, what's gonna happen? And that's where we all have a lot less visibility at this time. But we're watching and, you know, keeping close with our customers and watching what's gonna transpire for the fourth quarter and the rest of into next year.

Robert Jamieson (Analyst)

That's great. Thank you very much.

Robert Pagano (CEO)

Thank you.

Operator (participant)

Again, to ask a question, please press star one on your telephone keypad. Your next question comes from Nathan Jones with Stifel. Your line is open.

Nathan Jones (Analyst)

Hey, guys. I just want to follow up with a question on growth investments. You've certainly cut those this year. Bob, can you talk about how you're thinking about the balance between investing for long term, protecting short-term margins? I know some of the growth investments you deferred were in Middle East, where there's no demand, which makes sense. So maybe you can just talk about, you know, where they've been reduced, and why it makes sense to reduce them at the moment.

Robert Pagano (CEO)

Yeah. So you know my feeling on long-term investments. I wanna move forward longer term and continue especially in the smart and connected. But where we've been prudent is where we've needed voice of customer. It's been very difficult to get voice of customer and install new products in new locations, because they're very paranoid about doing that. So we're being very, you know, we wanna spend efficiently, and moving forward, and like you said, areas like expanding sales force in Latin America, Middle East, you know, we've cut back on that. That just doesn't make sense, and that was in our original plan. Same with some IT investments.

Again, given everybody working remotely, we've focused our investments on that and the security around that, versus new ERP implementations, which would require us to be on site, do a lot of in-person training, et cetera. So we've pushed that out. We continue to invest in our manufacturing capability and leveraging new technology. Recently, we have automated core boxes in our Franklin facility, in our foundry. We're pretty excited about that. They're just getting that up and running right now. So again, we're investing in technology to improve efficiency where we can, but being prudent to make sure it's cost effective and not wasting money.

Nathan Jones (Analyst)

Fair to say that you haven't and are not planning to cut any of the growth investments into connected solutions?

Robert Pagano (CEO)

That's correct. We have not done that at all, and we continue to focus on that where it makes sense. Now, there's been some delays on some of those investments, just so we couldn't get products installed from a test point of view as soon as, you know, as fast as we wanted to. So again, the general spending, the focus on that continues.

Nathan Jones (Analyst)

Great. Thank you.

Robert Pagano (CEO)

Thank you.

Nathan Jones (Analyst)

Thank you.

Operator (participant)

Okay, there are no further questions queued up at the time. I'll turn the call back over to you, Bob, again, for closing remarks.

Robert Pagano (CEO)

Well, thank you everyone for taking the time to join us today for our second quarter earnings call. We appreciate your continued interest in Watts, and we look forward to speaking with you again at our third quarter earnings call in early November. Enjoy the rest of your summer and stay safe. Thank you.

Operator (participant)

This concludes today's conference call. You may now disconnect.