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Watts Water Technologies Inc (NYSE:WTS)
Q3 2020 Earnings Call
Nov 5, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and Gentlemen, thank you for standing by and welcome to the Watts Water Technologies 3rd Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, Operator Instructions. Please be advised that today's conference is being recorded. If you require any further assistance, Operator Instructions. I would now like to hand the conference over to your speaker today Timothy MacPhee-Treasurer and Vice President, Investor Relations of Watts Water Technologies Inc. Thank you. Please go ahead.

Tim MacPhee -- Treasurer, Vice President Investor Relations

Thank you and Good Morning everyone. Welcome to our 3rd quarter 2020 Earnings Conference Call. Joining me today are Bob Pagano, President and CEO and Shashank Patel, our CFO. While, I will provide a business overview for the quarter and offers preliminary views of the 2021 markets, Shashank will address the 3rd quarter financial results and discuss our outlook for the 4th 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 refer to 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. Let me now turn the call over to Bob.

Robert J. Pagano -- Chief Executive Officer and President

Thanks, Tim, and Good Morning everyone. Please turn to Slide three in the presentation, and I'll provide an overview of the quarter. First, I must again applaud the efforts of all our employees for adjusting to the challenges of the pandemic. Our employees have remained deeply engaged with our customers whether working on-site or remotely, delivering our products on time and with the quality they have come to expect in Watts' solutions. The teams have worked diligently, while adhering to safety protocols to ensure we maintain close customer contact through order fulfillment, training, and responding to inquiries. And while travel is restricted, we've expanded virtual plant tours which allows local leaders a chance to update senior management on their most recent customer and operating initiatives. These virtual tours are also promoting greater employee engagement and helping to drive productivity during these difficult times. Our 3rd quarter operating performance was solid, as we again delivered results that exceeded our internal expectations. Our seasoned management team has played a critical role in taking proactive actions that have optimized the performance of the business, despite challenging underlying market conditions. The sales decline in the quarter was less pronounced than we had anticipated, both in the Americas and Europe. Despite the tough macro environment, we maintained our focus on driving our smart and connected strategy.

We also increased adjusted operating profit and expanded adjusted operating margin versus Q3 last year despite the lower sales volume. This was driven primarily by the aggressive cost actions we've undertaken in response to the pandemic. Cash also remains a focal point. In year-to-date we've increased free cash flow by 25% as compared to the same period last year. Operationally, we've now instituted all cost out programs we discussed earlier this year. During the 3rd quarter, we estimate total run-rate savings of approximated at $20 million. Year-to-date savings have totaled $42 million. We continue to review additional cost actions to support operational efficiency. Shashank will review the financial results in more detail momentarily. Now I'd like to provide our current views of the market. In the Americas, the construction industry is adjusting to the new normal, while job sites that were already under construction are back online and being driven to completion. Residential repair and replacement demand was encouraging through the 3rd quarter as we saw continued strength in our DIY channel and September's record existing home sales support continued growth there. Our products that go into hydronic and electric heating applications and residential irrigation should continue to perform well.

The new single-family home construction market is performing well mid-low-interest rates and demand is strengthening as people migrate to the suburbs. Year-over-year housing starts have been positive since June and permits are also up. We'll continue to focus and capitalize on residential opportunities especially in the higher-end, single-family homes. In Europe, we saw many companies working through the traditional August vacation holiday to catch up on project backlogs and support customer restocking efforts. German OEMs benefited from ongoing government energy efficiency subsidies and China continued to lead in rebounding from the pandemic. Conversely, there are a number of developments that are concerning. Many of the current Covid-19 trends we are seeing around the world are worrisome and impact all our markets. I realize we are nine months into this pandemic and the markets have stabilized to some degree but Covid-19 is still driving a lot of end-market uncertainty. So with that as a backdrop our worldwide markets are currently mixed.

Traditional macro data like ABI and the construction industry competence index and other information we've recently assessed our portending a slowdown in our commercial markets into 2021. As a result, we expect that new construction in the commercial building sub verticals of hospitality, office, retail, multifamily and commercial marine will continue to be a challenge; however, we do expect that there will be continued growth in the healthcare, data centers and food and beverage markets. Our teams are leveraging our expansive product breadth and channel reach to focus in on these growth sub verticals. In non-residential repair and replacement whose growth traditionally follows GDP, we see repair replacement being impacted by the differing of discretionary replacement in renovation and given the magnitude of the pandemic. Break-fix activity should grow especially given our large installed base renovation in retrofit activity may be softer, especially in the challenged hospitality and commercial submarket. Regardless of how the markets unfold next year, we are confident that our diversified product portfolio and unmatched distribution capabilities should provide us the flexibility to shift our focus to meet the demand in those products, markets and regions that offer us the best growth prospects during this difficult time.

And we'll continue to driving our smart and connected solutions that we believe will be critical as we transition into the new normal. So overall we are currently cautious about our initial market outlook for next year. We see pockets of growth opportunities, but uncertainty, driven by the continuation of the Covid-19 pandemic is causing the markets to pause. As I've said before, commercial construction activity slows during periods of uncertainty and we're clearly at this point in the North American, European and Middle East markets. Our view on 2021 is evolving as the markets remain in flux as our team continues to formulate their operating plans for next year. We'll provide further growth expectations during our February 2021 Earnings Call. As for our 4th quarter outlook, we expect sales will be soft compared to last year and we anticipate operating margins to improve relative to last year but at levels below the 3rd quarter as temporary cost reductions are partially phases back into the business. Let me now turn the call over to Shashank who will discuss our 3rd quarter operating performance and provide more detail on our 4th quarter outlook. Shashank?

Shashank Patel -- Chief Financial Officer

Thanks, Bob. Please turn to Slide four to review the 3rd quarter consolidated results. Sales of $384 million were down 3% on a reported basis and down 5% organically, driven primarily by the continued impact of Covid-19. Foreign exchange had a favorable year-over-year impact of $5 million and acquisitions and that of divestitures accounted for $4 million of incremental sales year-over-year. Adjusted operating profit and adjusted earnings per share both increased by 1% as compared to last year despite lower sales. Adjusted operating margin of 13.8% increased 50 basis points as cost actions and productivity more than offset the impact of volume loss and incremental investments. Incremental cost action savings of $20 million in the quarter were the main driver of the adjusted operating profit and adjusted margin improvements. The adjusted effective tax rate of 27.3% is 120 basis points lower year-over-year. The reduction is due to final regulations being issued in the US allowing for higher tax exceptions on foreign-sourced income. For GAAP purposes, we recorded a charge of $3.4 million primarily related to the previously announced and expanded restructuring initiatives, most of that being severance. Savings from these expanded programs should approximate $3 million annually. We expect to book $1 to $2 million of additional cost per asset relocation and asset write-offs in the 4th quarter that also relate to these programs. These costs will be classified as special items when incurred.

As Bob noted, year-to-date free cash flow is up 25% to $95 million as compared to the same period last year. We have been laser-focused on working capital optimization including improvement in accounts receivable and the teams efforts have resulted in strong results as our DSO declined by 9% year-over-year. Year-to-date, we've invested an incremental $15 million or 77% in capital expenditures versus last year. The capex spend includes manufacturing expansion and upgrades in key product categories and incremental spending on productivity enhancements. We expect to maintain free cash flow conversion at 100% or more of net income for the full year. Our balance sheet remains strong and provides ample flexibility in these uncertain times. The gross and net leverage ratios at the end of September was 1.1 and 0.3 times respectively. Our net debt to capitalization ratio at quarter-end was 5.5%. During the quarter, we purchased approximately 41,000 shares of common stock at a cost of $3.7 million. We received repurchases at the beginning of the 3rd quarter and aligned with our long-standing approach are focused on offsetting share dilution. Turning to slide five in our regional results. Organic sales decline in all regions, but less than we had anticipated in the Americas and Europe. America's organic sales declined by 4% during the quarter, slightly better than our expected reduction of 6% to 10%. We saw better performance in traditional plumbing, electronics and water quality products, which more than offset an expected softness in heating and hot water products.

We also fulfilled restocking orders as customers were buying to replenish depleted second quarter inventory levels. Europe sales were down 6% organically, much better than the 14% to 18% decline we had anticipated driven by resiliency and fluid solution product sales especially within the electronics. As expected, sales remained soft within Europe's drains platform with commercial marine sales impacted by cruise ship builders temporarily closing clients to level load production. Sales in many of our key regions in Europe were down versus the third quarter last year with the exception of France, which grew in the low single digits. France sales were driven by an unexpectedly busy summer as companies work through the traditional holiday period on fears of a second COVID wave. APMEA sales were down 22% organically with China down only by low single digits, an improvement over the second quarter as China's economy continues to recover. However, the Middle East East and Southeast Asia including Australia were down double-digits due to the continued impact of COVID. New Zealand sales were positive in the quarter from domestic plumbing demand, while the ADG acquisition in Australia contributed $3.5 million in sales during the third quarter performing moderately above expectations.

Adjusted operating margin of 18.4% in the Americas was 30 basis points higher than last year. Cost actions and productivity, more than offset the volume loss and incremental investment. Americas decrements of 8% on lower sales volume were better than expected due to aggressive cost actions. Europe's adjusted operating margin of 11.3% was 10 basis points higher than last year for similar reasons as the Americas. Europe's adjusted operating profit was flat on reduced sales volume and better than anticipated due to aggressive cost actions. APMEA is adjusted operating margin increased 640 basis points to 15.1% driven by cost actions productivity and a 7% increase in affiliate volume, which more than offset a reduction in third-party volume. Moving to Slide six and general assumptions about our fourth quarter operating outlook. As Bob mentioned, our expectation is operating margin should depend on reduced sales volume as compared to the fourth quarter of last year. We are estimating organic sales for the fourth quarter to be at 4% to 8% below the fourth quarter of 2019. This range includes some caution regarding uncertainty around Covid-19. We anticipate that fourth quarter adjusted operating margin should range from 12.5% to 13%. Corporate cost should approximate $9 to $10 million for the fourth quarter. We expect interest expense sequentially will be flat to the third quarter. The adjusted effective tax rate should approximate 27.5%. Foreign exchange would be positive to last year should current rates persist throughout the fourth quarter. As a reference, the average euro-dollar foreign exchange rate for the fourth quarter of 2019 was 1.11. We expect seasonally strong cash flow to end the year. Total capital spend is estimated at $45 million for the full year. So with that, let me turn the call over to Bob before we begin Q&A. Bob?

Questions and Answers:

Robert J. Pagano -- Chief Executive Officer and President

Thanks Shashank. To summarize, I'd like to leave you with a few key themes. Employee safety, engagement in customer service remain top priorities. We continue to expand our protocols to maximize employee safety while simultaneously meeting our customer needs. Third quarter results were better than expected as activity improved when compared to the second quarter cost actions provided significant benefits in our third quarter and year-to-date results. We continue to review our cost base for further opportunities. Our balance sheet remains solid and provide flexibility to execute our balanced capital allocation strategy. Our ability to generate cash during these turbulent times has been critical. We continue to invest for the long term in both smart and connected solutions and in productivity enhancing capital spending. We expect year-over-year margin improvement in the fourth quarter on reduced volume our outlook is mixed and cautionary especially in certain commercial markets given leading indicators and continued market uncertainty due to covid-19. We will continue to keep a close pulse on our markets. And finally, we are prepared to react quickly to market changes with mitigating actions and remain focused on positioning Watts to capture opportunity as our markets recover with our diversified portfolio and by executing our smart and connected strategy. With that operator, please open the lines for questions.

Operator

Thank you. As a reminder to ask a question, you will need to press one on your telephone. To withdraw your question press the pound or hash key. Please standby while we compile the Q&A roster. Your first question comes from Nathan Jones of Stifel. Your line is open.

Nathan Hardie Jones -- Stifel -- Analyst

Hi, good morning. This is Adam Farley on for Nathan.

Robert J. Pagano -- Chief Executive Officer and President

Hi, Adam. Good morning, Adam.

Nathan Hardie Jones -- Stifel -- Analyst

First on the restocking event that took place in the Americas, could you write a lot more color on that. And then going into the 4th quarter, do you expect to see any further restocking and could that possibly go into 2021 as well. Thank you.

Robert J. Pagano -- Chief Executive Officer and President

Yes.So we saw a restocking in North American in July and most of that was a result of construction restarted up in late May, middle to late May and some of their inventory, we saw a big restocking in July, we saw that bleed down and as of now through October, we saw steady sales with that channel versus that big stock up in July. So that's what we're seeing in the market and heading into 2021, I think -- it's what we see in the 4th quarter, I think the wholesalers will look what's on their shelves. So I think restocking from that point of view, it's too soon to tell us this point in time, with the COVID-19 still continuing here, I think there's continued uncertainty in the market as we've previously discussed.

Nathan Hardie Jones -- Stifel -- Analyst

Okay, and then turning to water quality, I know it's a smaller piece of portfolio, you did highlight in the presentation but are you seeing any favorable trends there. We've heard from other companies water quality Improvement, home improvement as a favorable trend.

Robert J. Pagano -- Chief Executive Officer and President

Yeah, we're seeing very positive related to our residential piece in that marketplace as well as some of our commercial piece of that, but water quality has been favorable so has most of our residential market. We actually saw our residential market up double-digit in the quarter. So we believe that will continue with the focus on renovation and the single-family homes growing. As I said, we're more cautionary about the commercial markets at this point in time. That's the one we're watching very closely.

Nathan Hardie Jones -- Stifel -- Analyst

Thank you for taking my questions.

Robert J. Pagano -- Chief Executive Officer and President

Thanks.

Operator

Your next question comes from Jeff Hammond of KeyBanc. Your line is open.

Jeffrey David Hammond -- KeyBanc Capital -- Analyst

Hey, good morning guys.

Robert J. Pagano -- Chief Executive Officer and President

Good Morning Jeff.

Jeffrey David Hammond -- KeyBanc Capital -- Analyst

So, 3rd quarter second half decrementals look really impressive. I'm just trying to unpack. I don't know if you can quantify for the year how much temporary cost savings are going to be, how much of this is kind of mix and structural versus temp costs and then just, as you think about that into '21, how should we think about incrementals versus normal as some of that, I think you mentioned Bob, some of the temp cost creep back in.

Shashank Patel -- Chief Financial Officer

Yes, so, Jeff, as you're saying. So as we had talked three months ago and we're pretty much on the same basis. We had about $55 million of cost out in 2020. Year-to-date through the third quarter, we are at $42 million as Bob noted and 20 million of that was in the third quarter, we get another $12 million to $13 million in the fourth quarter. Out of that $55 million, roughly $8 million to $9 million was permanent in nature, which was restructuring activities and that was $8 to $9 million and as we look into next year with the additional actions we took, it is going to be approximately $10 million of permanent cost out. And when you look at the rest of the rest of the $55 million beyond restructuring, things like travel and mark-on and things like that, right now we're in the planning stages of 2021 clearly with the fact that the vaccine might not be available for a period of time, some of those costs will not be coming back, especially in the first six months, but we're in the early planning phases so by February we'll know exactly what that cost savings number is for 2021.

Jeffrey David Hammond -- KeyBanc Capital -- Analyst

Would you think incrementals look a little bit lower than normal just as temp costs come back in or not necessarily?

Shashank Patel -- Chief Financial Officer

I think overall obviously we still got the long-range target, once we get beyond COVID of expanding the op margins, right. So when you look at the incremental drops, we're still looking at 25-30% on volume. Our decrementals with the cost actions, we've done a nice job of managing the decrementals.

Jeffrey David Hammond -- KeyBanc Capital -- Analyst

Okay, great. And then, just as we look to 2021, I mean if you look here, I mean outside of 2Q your business has been pretty resilient, you speak to the replacement and certainly RAAS. So I'm just trying to, as we look into '21 kind of balance like snapback from easy comp versus kind of this lingering commercial uncertainty and how much you think you snap back in some of these businesses into '21.

Robert J. Pagano -- Chief Executive Officer and President

Yeah, Jeff. That is something we've been analyzing a lot and we just completed our strategic planning process where we engaged an external support that a lot of voice of customer, analyze the activity and what we're seeing here is this March we're actually seeing an air pocket right? We look at our Drains business which has steadily gone down as an early indicator, so what has been happening is people who have been completing existing construction and in commercial buildings; however, they are not doing any new build and we're seeing that continue to push out including October we saw Drains down double-digit. So that's the area of, we're getting most concerned and as we're looking into next year because of the COVID continuing to extend longer than I think everybody thought and going into next year. Overall North America honestly we believe will be overall flat at best for next year. We believe Europe is going to be down and APMEA is going to be up. So we're not seeing that rebound in commercial construction, you know residential is doing fine, that is offsetting multifamily which is also projected to be down and focused on that from a residential those kind of that, but the basic commercial building is soft and it is going to continue to be soft into next year.

Jeffrey David Hammond -- KeyBanc Capital -- Analyst

And so, and those are, those are market commentary for each of the markets versus like your business, right. So I mean if you balance that with the replacement side of the business and maybe outgrowth, how much better can you do in those kind of market projections?

Robert J. Pagano -- Chief Executive Officer and President

Yeah, well, I think it's both, our market and our projection. I think the other thing is repair and replacement right now in traditionally overall that has followed GDP. What we're seeing is when we dug down deeper recently here, we're seeing that of our repair replacement, about 40% is break-fix where they repair it right away. The other 60% is preventative maintenance and renovation and what we're seeing is because COVID-19 hit some of these troubled markets very hard, they are delaying that and pushing that up. At some point that's going to catch up with them and again long term we still hold the case that our repair-replace should hold GDP. But right now with COVID, no stimulus, no health and all of and that is pushing that out and we're now seeing a bifurcation of that as we had for the rest of this year and into next year. So again, we think that will be difficult to compare us to.

Jeffrey David Hammond -- KeyBanc Capital -- Analyst

Okay, thanks for the color, guys.

Robert J. Pagano -- Chief Executive Officer and President

Thank you.

Shashank Patel -- Chief Financial Officer

Thank you.

Operator

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

Ryan Michael Connors -- Boenning and Scattergood -- Analyst

Great. Good morning.

Robert J. Pagano -- Chief Executive Officer and President

Good morning, Ryan.

Ryan Michael Connors -- Boenning and Scattergood -- Analyst

I wanted to actually drill down a little bigger picture topic on just the channel situation and I realize you have a destocking, which is encouraging, but just from a bigger picture perspective, can you talk about how the channels to market are evolving to the sort of new normal. Is there any evidence of wholesalers or at least a marginal ones being disintermediated, more of a virtual selling model direct to customer. I mean how does all this impacting your channel to market, if at all.

Robert J. Pagano -- Chief Executive Officer and President

I mean, we're not seeing any of our smaller wholesalers go under in any regard. I think that market, the smaller ones have been consolidating into the larger ones, I think that continues, I think the larger ones do have a lot more online capabilities that are capitalizing on that, but we have not seen any bankruptcies within our smaller wholesalers. At this point in time, but again I think that will be a longer-term opportunities that the larger ones to consolidate with the smaller ones.

Ryan Michael Connors -- Boenning and Scattergood -- Analyst

Okay and I guess the restocking kind of supports that right because if they were balance sheet issues and so forth, there would be a limited capability to take in inventory and they'd be on more of adjusted models. Is that a good way to read that?

Robert J. Pagano -- Chief Executive Officer and President

Yes. Yeah I agree.

Ryan Michael Connors -- Boenning and Scattergood -- Analyst

Okay. And then I guess my other just as a follow on to that, I mean I know it was a smaller deal but Backflow Direct, they obviously as their name suggests had more of a direct online more of a virtual distribution model, which would seem to be pretty timely, on the one hand the deal maybe not timely more commercial driven into all this but timely in that sense. So can you give us an update on, on how that has gone, how that's product lines integrated and then how the distribution side of that, has that just been folded into your regular distribution or are you still maintaining that online selling model there?

Robert J. Pagano -- Chief Executive Officer and President

The answer to your question is, all the above. So first of all Backflow Direct is performing very well, fully integrated into our business and we are offering that product line to our traditional build business as well as we're offering it through online capability given the various channels. So the answer is we are capitalizing that. We continue to add products to that website and capabilities and we'll continue to leverage that for the parts of the market that want to go direct like that. But overall we're very pleased with that acquisition.

Ryan Michael Connors -- Boenning and Scattergood -- Analyst

Super. Well, thanks for your time. Good luck.

Robert J. Pagano -- Chief Executive Officer and President

Thank you.

Operator

Your next question comes from Bryan Blair of Oppenheimer. Your line is open.

Bryan Francis Blair -- Oppenheimer -- Analyst

Thanks, good morning guys.

Robert J. Pagano -- Chief Executive Officer and President

Good morning.

Bryan Francis Blair -- Oppenheimer -- Analyst

So could you provide a little more color on October order rates, I'm trying to gauge how much caution you're baking into the Q4 outlook 48% organically.

Robert J. Pagano -- Chief Executive Officer and President

Yes. So October order rates were basically flat, which traditionally what we're seeing is people restock at the beginning of the quarters. So, and then it gets softer after that and with the Covid-19 spike up, we're concerned, in particular in Europe and then what usually happens is Americas follows three to four weeks later and when you have the upcoming holiday season I think there's concern in the marketplace. So right now it is aligned with where we expected it to be. We expect November and December to get a little softer as we come out of this.

Bryan Francis Blair -- Oppenheimer -- Analyst

Okay. That all makes sense. And if you're willing to drill down a little bit more on the regional planning assumptions, how are you thinking about topline trends across, Americas, Europe, and APMEA for the fourth quarter. And then any color on margin expectations and the sources of the year-on-year expansion you're guiding that would also be helpful.

Robert J. Pagano -- Chief Executive Officer and President

Yeah, so for the 4th quarter, what breaks up the top line as we're looking at it, we're expecting overall to be down 4-8, Americas will be down three to 6, Europe six to 10 and APMEA down 5%. So that is our internal planning assumption and again it all depends on what's going on with COVID and continued market uncertainty.

Bryan Francis Blair -- Oppenheimer -- Analyst

Okay, very helpful detail, and then Shashank APMEA margins were quite a bit better than we expected in the third quarter, so I was wondering if you could parse out the impact of ABG contribution and how much of a lift, if any, you've seen so far from the transition through distribution model versus direct sale in Korea.

Shashank Patel -- Chief Financial Officer

Yes, Korea sales a year ago were pretty immaterial, so nothing significant there quite frankly, but it will be margin accretive as we go forward. The rest of the margin improvement the APMEA story part of it is the intercompany volume and intercompany volume obviously drives absorption as well as productivity. So we've got a lot of favorability from the intercompany volume that went through our factory in Ningbo and then the rest of it was really margin expansion on 3rd-party sales. So we did see margin expansion as you know, in China, we target data centers which tend to be typically higher margin overall, so we had margin favorability there and then lastly, our business in Middle East-Africa was down year-over-year as well and that was margin accretive as well. So it's a combination of those that really helped. ABG is our higher margin business as well so that contributes a little bit. As we noted there were about $3.5 million inorganic sales in the 3rd quarter from ABG and those came in at higher margins as well.

Bryan Francis Blair -- Oppenheimer -- Analyst

Okay. Thanks again.

Robert J. Pagano -- Chief Executive Officer and President

Thank you.

Operator

Your next question comes from Walt Liptak with Seaport Global. Your line is open.

Walter Scott Liptak -- Seaport Global -- Analyst

Hey, good morning guys.

Robert J. Pagano -- Chief Executive Officer and President

Morning.

Walter Scott Liptak -- Seaport Global -- Analyst

I wondered to ask a follow-on question with that geographic look that was helpful. You know it sounded in your prepared remarks that some of the government subsidies were helping you guys a little bit and I think Europe has been a little bit, because maybe the political situation able to come up with government programs to support businesses. So I'm wondering if you could talk a little bit about that and the outlook for the Americans for the 4th quarter looks a little bit more stable than Europe. I wonder why that is and do you think there may be more government support in the US?

Robert J. Pagano -- Chief Executive Officer and President

Yes also, to answer your first question. In German -- in Germany, they have some energy efficiency subsidies going on and as you know, a lot of our business in Germany is related to OEMs, boiler residential boiler manufacturer so that's been helping those German manufacturers and we've been supporting that. So that has helped. The biggest overall why things were better in Europe than we expected is they worked through the summer months and we didn't expect them to do that. Right. So they worked through that, that will subside and right now we're a little concerned with the breakout, the shutdowns, the current shutdowns are not shutting down manufacturing at this point in time, it is mainly restaurants, bars etcetera but we are seeing -- obviously they're seeing wider spread and uncertainty in that marketplace and we think that's going to slow that down. So I think there has been some more government stimulus in that area. However, I guess the Covid outbreaks is what leads us to be cautious in the 4th quarter. In the Americas, certainly residential as I said before it's been doing well. And I think some of the subsidies that were happening on into the, let's call it the hospitality market et cetera, may have helped on some of the repair replacement type stuff but now that that's not been in there and we're not seeing that, we're starting to see a slowdown in people pushing out normal repair renovations, as I said earlier and we're watching that very closely, but again uncertainty in the market as I said in my prepared remarks, when there's uncertainty people aren't building and our Drains which is a leading indicator was down double-digits in October and steadily got worse of Q3. So that means they're not building new buildings at this point in time, finishing what they complete and then we got that air pocket and the question is how long will that air pocket continue and we believe it's going to go at least into the second half of next year.

Walter Scott Liptak -- Seaport Global -- Analyst

Okay. Alright. Understood on that. With the smart technology, it sounds like you're continuing to make investments there or what is the voice of the customer saying about smart technology and is there Is there a digital trend we're building where your customers are looking for digital solutions to reduce employment or just have better control over their water systems?

Robert J. Pagano -- Chief Executive Officer and President

Yeah, I think there is a clear trend in the industry. As we said before, there is a shortage of plumbers, there's a shortage of maintenance people and anything we can do to monitor and identify issues before they become big issues is going to help building owners in this environment. So, we're getting more and more focus on that. So, I think that strategy is right on and more important than ever in the current environment.

Walter Scott Liptak -- Seaport Global -- Analyst

Okay, great. Thank you.

Robert J. Pagano -- Chief Executive Officer and President

Thank you.

Operator

There are no further questions at this time, I will now turn the call back to Bob Pagano. Bob Pagano for closing remarks.

Robert J. Pagano -- Chief Executive Officer and President

Okay, thank you everyone and for taking the time to join us today for our third quarter earnings call. We appreciate your continued interest in Watts and we look forward to speaking with you again in February to discuss our fourth quarter and full year 2020 results. so enjoy the upcoming holidays and please stay safe. Thank you.

Operator

[Operator Closing Remarks]

Duration: 37 minutes

Call participants:

Tim MacPhee -- Treasurer, Vice President Investor Relations

Robert J. Pagano -- Chief Executive Officer and President

Shashank Patel -- Chief Financial Officer

Nathan Hardie Jones -- Stifel -- Analyst

Jeffrey David Hammond -- KeyBanc Capital -- Analyst

Ryan Michael Connors -- Boenning and Scattergood -- Analyst

Bryan Francis Blair -- Oppenheimer -- Analyst

Walter Scott Liptak -- Seaport Global -- Analyst

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