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Interview
conducted by: Lynn Fosse, Senior Editor, CEOCFO Magazine, Published –
February 17, 2012
CEOCFO: Mr.
Coghlan, you have been CEO for about a year; how has Watts Water
Technologies changed in the last year under your leadership?
Mr. Coghlan: We started to develop and implement a new
strategy a couple of years ago during my time as COO as we responded to one
of the toughest recessions ever seen in our industry. For a company with
sales at approximately $1.5 billion, we have seen about $200 million of
volume disappear. So our focus this past year has been on implementing our
strategy and continuing to work our operating parameters to deal with the
recession. We’ve made progress in that we are delivering what are
effectively peak earnings at the lowest point in the trough. Also, last year
we closed on the largest acquisition we’ve ever made – the acquisition of
Danfoss’ water assets based in Europe.
CEOCFO: Would you tell us about the new
Watts Water strategy?
Mr. Coghlan: Our new strategy focuses on growth, operational
excellence and something we call One Watts Water. We are working to drive
growth through acquisitions and a series of organic growth strategies, which
we call depth, breadth, and reach. Depth means looking for share gain
opportunities within our existing customer base. With this in mind, in North
America, we’ve reorganized our sales forces to better enable us to bring all
of our products to all of our customers. For example, we are pretty heavily
represented throughout the wholesale plumbing channel. However, our water
quality business did not sell through these plumbing channels. So, we
identified a significant sales opportunity to take our water quality
products, which are sold primarily through water quality dealers, and bring
them into that wholesale channel. A second example is that we found ways to
bundle products from a number of our different businesses for our OEM
customers. Instead of selling just plumbing products to a boiler
manufacturer, we can sell scale prevention and gas installation kits to that
OEM, so it is a larger sale. Breadth is really an innovation play where we
sell products into a number of key systems in residential and commercial
buildings, and we have identified many opportunities for growth. We are
pursuing those through acquisitions, technology plays or product
development. The third part of the organic growth strategy is reach and that
is our all-around geographic expansion. We have focused on expansion in
three geographic areas: China, the Middle East, and Eastern Europe, and we
are seeing some reasonable growth come out of those initiatives.
CEOCFO: Did Watts Water Technologies
have a presence in China, the Middle East, and Eastern Europe before?
Mr. Coghlan: We had a presence in China for
low-cost manufacturing and sourcing, but we were not bringing our North
American and European technologies to bear on the Chinese building market,
and now we are starting to. We did not have a presence on the ground in the
Middle East – rather, a number of our businesses sold through local
distributors. We have now opened an office, we have boots on the ground, and
we are much more focused. It was the same thing in Eastern Europe. In
addition to growth, the second part of our strategy is operational
excellence, and there we have focused on footprint optimization and on
driving continuous improvement. We have taken out 13 rooftops since 2008 and
expanded our presence in low-cost countries. Our continuous improvement
efforts are focused on driving improvements in key metrics such as safety,
quality, productivity and working capital, using tools such as Lean and Six
Sigma. We have been able to reduce our days working capital by approximately
25 in the last three years and to increase our gross margins by about 300
basis points.
CEOCFO: With a wide global reach, how
does Watts Water maintain the excellence and corporate culture throughout
the organization?
Mr. Coghlan: It’s largely by focusing on continuous
improvement. The first thing you do is identify key metrics, so we have a
consistent set of key metrics that we measure our operations against on a
global basis. We are working for improvements to benefit our employees,
customers, and shareholders. Internally, everybody measures their
performance against those metrics in a consistent way, and we set goals for
improvement. Second, we put in place some consistent tool kits and some
standard ways of doing things that can be deployed across the organization.
Third, we provide expertise and training to enable our teams to use the
tools, the standardized approaches and to go after metric improvement. For
example, an important metric we talk about when we go through our
performance reviews every month is employee safety. If our employees cannot
come to work and be safe, they are not going to do a good job. That’s going
to affect their ability to delight the customer, and that’s going to affect
our ability to create shareholder value.
When we started this continuous improvement process in 2008, our Lost Day
Work Rate was 48. We are going to end 2011 with about 6.5 and room for
further improvement. You do not see that improvement showing up directly on
the P&L, although indirectly you do through Worker’s Comp. But, it is an
example of about 10 or 12 key metrics that we have driven throughout the
company. Having established that metric and identified that we were not at
best practice, we then developed a series of safety tools that would allow
us to train our employees and to put problem-solving processes in place so
we could improve our safety performance. Then we put in place safety
resources in our key plant clusters, and through the combination of the
metric, the tool kits, and the resources, we established a continuous
improvement process that got us that level of improvement. We are taking the
same approach with our other key metrics, such as quality, productivity, and
working capital.
CEOCFO: Was it easy to get people on
board with the new corporate philosophy?
Mr. Coghlan: Initially, a lot of people scratched their heads
and said, “What is this all about?” In reality, in continuous improvement
what you are doing is inverting the pyramid. You move from command and
control to a much more enabled environment. For example, if you are trying
to take waste out of a process, the folks who can do the most to accomplish
that are the folks who are working in that process. And, as they are trained
on our continuous improvement tools and gain experience by participating in
Kaizens, they begin to understand the logic of the metrics. They also start
to understand that this is empowering them and that we are serious about it,
and they begin to get excited. Then they start to take ownership, and we
begin to see improvement.
CEOCFO: What about the third leg of your
strategy, One Watts Water?
Mr. Coghlan: The third part of our strategy is something we
call One Watts Water and there are several aspects to that. For example, we
had over 40 ERP systems throughout our company, and we are currently engaged
in a quest to winnow that down to a single global ERP system for greater
efficiency. We are also implementing shared service centers. Why should each
of our businesses and locations process payroll, accounts payable checks,
and pursue accounts receivables, when we can consolidate that into shared
service centers? Lastly, under One Watts Water, we are implementing a
mindset change, which is our version of GE’s “boundary-less” thinking. What
that really means is that we are building a culture to make one plus one
equal three. For example, one of our account management teams started a
process about a year ago with one of our large OEM accounts, an American
company, to whom we were selling plumbing products. As we built
relationships, we found opportunities in their US business for a lot more of
our business platforms. This customer was investing a lot in growing a
business in Asia, so our account team helped our Asian business build
relationships with that customer on the other side of the Pacific. In Asia,
the needs could best be met with products and technologies from our business
in Germany. In all, we had a wonderful trifecta of an account team in the US
broadening relationships with their customer, identifying an opportunity for
another region and helping to open the door. Then you have our German team
stepping up and helping by sending a product manager to China for two weeks
to help develop a solution with the customer’s product managers. We now have
a much broader and deeper relationship with that customer because instead of
each person thinking about their individual objectives, we looked for ways
to improve the overall business.
CEOCFO: Watts Water Technologies has
been around for a very long time; how important is the history to your
customers and potential customers?
Mr. Coghlan: The history is tremendously important, both to
our employees, who can take pride in working for a company that has been
around for as long as we have, and to our customers. At the end of the day,
most of our products are installed and serviced by plumbing contractors.
Product availability and product quality is incredibly important to the
plumbing contractor. If they trust the brand and the product, they will keep
using it, even if you are a bit more expensive than the other guy. In our
case, our customers say, “Look, Watts has been in the business for over 100
years. I have used the product for 10 years or 25 years, I know the quality
is good, I know your reputation for standing behind your product is good,
and I know your product is always available in the plumbing wholesale supply
house when I need it. That makes me more confident that the profit I have
earned on the job I can put in my pocket.” Because if they have to go back
to repair a poor quality part, they have just lost the profit at the job. If
they are scheduled to do a job and go to the wholesale supply house and
can’t get the part they need, then they have lost the revenue for that time
and they never get it back. Therefore, the history and the brand name are
incredibly important, because it gives us this longstanding relationship
with our customers and they trust us.
CEOCFO: What is the market like in the
water industry, and what are the biggest changes you have seen recently?
Mr. Coghlan: We see that energy efficiency, water
conservation, and water quality are becoming more and more important. For
example, in North America, most buildings are heated and cooled through air,
but if you go to Asia, Europe, and other parts of the world, most heating is
actually done by moving hot and cold water around. That plays exactly into
our business. Also, markets around the world are becoming much more focused
on energy efficiency, which we can support.
Water conservation is also becoming more important as demand exceeds supply
in a number of places around the world. We are starting to see codes and
regulations that require people to capture and reuse rainwater, and we think
this is going to become more of an issue. Then there is water quality. If
you read some of the environmental surveys, you see that people rate the
quality of drinking water as a key concern. We help improve the quality of
water coming into homes. So these are all trends that are positives for our
business.
CEOCFO: What is the financial picture
like today for Watts Water Technologies?
Mr. Coghlan: I briefly mentioned it earlier, but in terms of
our financial picture, we have done a good job during the downturn to the
point where we are close to our peak earnings in the economic trough. What
do I mean by that? For example, in 2007, our gross margins were 33.5%, in
2010 they were 36.5%. In 2007, our days working capital were about 126 and
in 2010 they were just about 100. So we have been fortunate in that we have
been able to take advantage of the downturn and to really become a lot
fitter, leaner and meaner. So, when the recession ends and that $200 million
of volume comes back, we expect it should really give us some positive tail
winds. We will be able to leverage that volume very strongly given the
improvements that we have made in the business.
CEOCFO: Why should potential investors
consider Watts Water Technologies?
Mr. Coghlan: First, I would say that the water industry is an
attractive space for many of the reasons that I mentioned earlier, such as
the need for energy efficiency, water conservation, water quality, and water
safety. We are one of a handful of pure play companies in the water space.
Second, we have delivered very solid results through the downturn and we
believe we are positioned for some very positive results as we come out of
the downturn. Third, we have a long-term record of growth. We have grown
this business at a 9.7% compound annual growth rate since 1999. About half
of that was organic, and the other half a series of close to 30
acquisitions. We have about $250 million in cash on our balance sheet, and
while we have done some substantial acquisitions the last couple of years,
between the cash and our relatively low debt-to-cap ratios, we have the
ability to do some significant acquisitions going forward. So, putting all
of that together, Watts Water is a pure play company in an attractive space,
a company that is yielding peak results in the trough, which has a long-term
record for growth through a mix of organic and acquisitions and that has a
lot of resources ready to deploy as it sees attractive opportunities going
forward.
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