Ladies and gentlemen, thank you for being here and welcome to Watts Water Technologies' First Quarter 2020 Earnings Conference Call. All participants are currently in listen-only mode. After the presentations, there will be a question-and-answer session. I would like to now introduce your speaker today, Timothy MacPhee, Treasurer and Vice President of Investor Relations for Watts Water. Thank you. Please proceed.

Thank you and good morning, everyone. Welcome to our first quarter earnings conference call. With me today are Bob Pagano, CEO and President; and Shashank Patel, our CFO. During today's call, Bob will offer insight into our response to the COVID-19 pandemic and discuss the current state of the markets, our operations and liquidity. Shashank will discuss details of our first quarter performance and provide assumptions about the outlook for the second quarter. Following the prepared remarks, we will address questions related to the information covered during the call. Today's webcast is accompanied by a presentation, which can be found in the Investor Relations section of our website. We'll reference this presentation throughout our prepared remarks. Any reference to non-GAAP financial information is reconciled in the appendix to the presentation. Before we begin, I'd like to remind everyone that during the course of this call, we will make 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 and uncertainties, see Watts' publicly available filings with the SEC. The company disclaims any intention or obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. With that I will now turn the call over to Bob.

Thank you, Tim, and good morning, everyone. Please turn to Slide 3 to begin. Before we get started, I'd like to commend the healthcare and first response workers for their amazing efforts during the COVID-19 crisis. Their unwavering commitment to help people in their time of need is truly heroic. We also would like to thank those people that are behind the scenes, the plumbers, the maintenance teams and so many others as the work they do has never been more essential and we salute their efforts. Finally, I want to thank my Watts colleagues around the world for their unwavering support in meeting our customers' critical needs during this extraordinary period. COVID-19 is impacting every aspect of our lives and throughout this ordeal, our team has been committed to ensuring that the essential water and heating products we manufacture are available for our customers. The markets have been significantly affected by the pandemic and our operations have been impacted to different degrees. I'll provide an update on both the markets and our operations in just a minute. Our response to COVID-19 has been timely and comprehensive. As the pandemic spread, we were able to incorporate many of the early learnings from our China operations to the other regions. In February, we established a COVID-19 Task Force made up of a cross-section of functional leaders. One of the key focus areas of the task force was to ensure we addressed employees' safety, which is our number one priority. The task force enacted global policies and procedures around social distancing including working from home, the use of personal protective equipment, temperature monitoring and other recommended protocols by the CDC and local country governments. There are several other important facets of our COVID-19 response that I'll speak to in more depth momentarily. As for the first quarter financials, our performance was solid given the early headwinds from COVID-19 in China and later in Europe and the Americas. We estimate the first quarter sales were negatively impacted from COVID-19 by about $10 million to $15 million, in-line with the range we had provided in February. Adjusted operating margin exceeded expectations as proactive cost actions mitigated some of the top line softness. The second quarter will be very challenging as the global effect of the pandemic is expected to have a significant impact on our worldwide businesses. Shashank will review details of our first quarter results and second quarter assumptions in a few minutes. And as you may have noted in last evening's press release, we are withdrawing the full year outlook we provided in February. We said many times it's a predominantly book and ship business that our ability to forecast beyond the next quarter is limited at best. We usually rely on leading indicators for insight beyond the next quarter. However, given uncertainty regarding the length and full impact of COVID-19, we believe those indicators are lagging at this point and that it is prudent to temporarily suspend our 2020 outlook. Now on Slide 4, I'd like to provide an update on COVID-19's impact on our end markets and our operations. Recently, we have seen the lockdown start to loosen, which hopefully is a sustainable trend. Our end markets have all been affected by government-imposed lockdowns to some degree, through April. APMEA was first to feel these effects as evidenced in their first quarter results. Europe and the Americas didn't feel the impact until the latter half of March. These lockdowns have affected new construction in the repair replacement end markets. New projects are being delayed given the uncertainties and potential financing concerns. We have not seen project cancellations to date, but we could see more challenge verticals like hotels, restaurants and retail move in this direction in the future. Where allowed, we expect the projects already started will continue, but at a slower pace due to social distancing requirements. Many channel partners have begun de-stocking efforts to preserve cash which we believe will continue into the second quarter. Most vertical end markets are slow with the exception of specific COVID-19 related healthcare and education projects. In Europe, we saw significant wholesale store closures in many key countries in March and April. Just recently, we started to see them coming back online. As mentioned, operationally through late March both Europe and the Americas were performing well. Sales and orders started to soften in the last six to seven work days of the month. Currently, all our plants in both the Americas and Europe are operational. We did see sporadic plant closures in Italy, France and Tunisia caused by a combination of supply chain concerns and government intervention. The late March sluggishness continued in the Americas and Europe as activity in April was well below the prior year. Operations are mixed in APMEA with China opening back up and the Middle East and New Zealand recently emerging from lockdowns. Our China plants came online in March as expected and the markets are improving. We have seen China orders recover during April. If you turn to Slide 5, I want to speak briefly about how we have remained engaged with customers during the pandemic. We realize that the healthcare vertical was particularly vulnerable during the pandemic. We established a mission-critical project hotline that elevated COVID-19-related requests within our company to meet our customer's immediate needs. On the slide, you'll see three examples of our efforts. And while people are isolated, we are also emphasizing virtual training for customers, reps and employees. Since January 1, 2,500 global contractors and engineers have completed over 15,000 online courses and during the quarter, our U.S. sales teams trained over 1,000 customers through virtual lunch and learn programs. Moving to Slide 6, this summarizes the cost actions we have taken and are taking to mitigate the expected impact of COVID-19 on our 2020 results. Our cost reductions include discretionary spending reduction, savings from flexing variable factory overheads and renegotiated material costs. We initiated many of the programs during the first quarter. Also due to the severity of the crisis, we have had to take several actions which directly affected our employees. The Board of Directors and I have taken voluntary and temporary base pay reductions of 25%. Direct reports are taking 15% pay reductions and lower temporary pay reductions have been cascaded throughout the company. In addition, we have initiated reductions in force, merit deferrals and furloughs. In light of the fact that the COVID-19 has had a direct impact on our employees' personal lives, the decision to take these actions was extremely difficult but necessary given the impact that the pandemic is having on our end markets and ultimately our business. We are also taking actions to preserve cash at the end of the year. We expect to reduce planned 2020 capital spending to spend the planned share repurchase program through at least the second quarter and take advantage of the CARES Act legislation by deferring employer FICA taxes into 2021 and 2022. We remain committed to maintaining our dividend at current levels. We will adjust our actions as needed to meet any unforeseen market changes. Finally on Slide 7, let me review our current liquidity position. Our balance sheet remains strong at March quarter-end. Since 2016, we have aggressively paid down debt using both repatriated cash and funds from operations. Over that time, we've also restructured our portfolio and become a more efficient organization, driving more profits and cash into the business. Our debt metrics are strong. We have plenty of room under our credit facility covenants to borrow and we have ample liquidity. In April, we renegotiated our line of credit expanding it by $300 million to $800 million and extending it a year through February 2022. We used the revolver to pay off the $225 million term loan and expect to pay off the $75 million of senior notes due in June with revolver borrowings as well. The revised credit agreement also expanded our liquidity by $75 million and the credit extension gives us time to renegotiate a longer-term agreement, once the capital markets have settled down. During the first quarter, we also drew down a portion of our line of credit as a precautionary measure to ensure that cash was available if needed into the next quarter. With that, let me turn the call over to Shashank to talk more about our first quarter results and our second quarter assumptions. Shashank?

Thanks, Bob. Please turn to Slide 8, which shows the first quarter's consolidated comparative results. Obviously, underlying markets have changed dramatically over the last two to three months and therefore I will only make some brief comments about the quarter as the results are no indication of how the remainder of 2020 could play out. Sales of $383 million were down 2% on a reported basis and down 1% organically. Organically, the estimated sales were impacted by a $10 million to $15 million headwind due to COVID-19. Foreign exchange, primarily driven by a weaker Euro, decreased year-over-year sales by roughly $4 million or 1%. As mentioned in February, both the Americas and Europe were impacted by one less workday which negatively impacted sales by approximately 1% as compared to the first quarter of last year. Acquisitions accounted for $2.6 million of incremental sales year-over-year. Despite the sales drop, adjusted operating profit was flat as compared to last year and adjusted earnings per share were up 1% to $0.95. Adjusted operating margin of 12.6% was up 20 basis points as price productivity and recent cost actions more than offset volume loss, incremental investments and inflation. As Bob mentioned, we took some timely actions to reduce our cost base, which are reflected in the results. The adjusted effective tax rate of 28.2% is 70 basis points higher than the first quarter of 2019 and relates primarily to the greater impact from non-deductible tax items in 2020. Our free cash flow for the quarter was negative $8 million as compared to negative $31 million in the first quarter of last year. The cash flow improvement was due to better working capital management. Our goal is to drive free cash flow conversion at 100% or more of net income for the year. During the quarter, we purchased approximately 175,000 shares of our common stock at a cost of $14.7 million. We expect to suspend our share repurchase program for the remainder of the second quarter and will reevaluate the program quarterly after that. On Slide 9, other regional results. Again, I would make just a few high-level comments. In total, the estimated impact of COVID-19 on our first quarter sales was in-line with our expectations. As expected, the impact to APMEA was more significant. With the combination of lower third party and intercompany volume driving less plant absorption, which in turn affected APMEA's profits. The Americas posted a reasonably strong quarter despite flat organic sales due to favorable pricing productivity and cost actions. Europe's adjusted operating margin declined slightly as gains from price and productivity were more than offset by the volume loss and investment spend. Slide 10 provides general assumptions about our second quarter operating outlook. We expect a very challenging second quarter. We anticipate that activity will recover slowly as we move through the quarter. So we see April and May as the trough with improvement starting in June, assuming mandated lockdowns end and the markets begin to open up in May. Given lower April sales and order rates and the market feedback from channel partners, Bob mentioned earlier, we're estimating sales for the second quarter to be down 25% to 30% below the second quarter of 2019. The rate at which markets return will ultimately determine our sales level for the quarter. The dramatic drop in expected volume is going to significantly impact plant absorption levels during the second quarter. Even with the quarterly savings from our cost out programs, we estimate our adjusted operating margin would be in the mid to high-single-digits for the second quarter due to the high drop-through on lower volume. As Bob mentioned, we refinanced our credit agreement and extended it through February 2022. We expect to incur about $1 million more interest expense sequentially in the second quarter versus the first quarter of 2020. Current market rates are higher than we are paying under the old agreement and we have additional debt cost and interest rate swap losses to amortize. We are planning to repatriate approximately $50 million by the end of the quarter. We intend to use the majority of those funds to pay down debt. The effective tax rate should approximate 28.5% in line with the second quarter of last year. Foreign exchange would be a headwind when compared to the second quarter of last year given the current Euro-Dollar exchange rate.

Thanks, Shashank. On Slide 11, I'd like to summarize our discussion before we address your questions. COVID-19 is certainly causing enormous disruption around the globe. The speed of which the pandemic has affected our lives and commerce has been unprecedented. Our company has reacted with decisiveness and urgency, focusing on our people's safety, our customers' needs and being fiscally responsive to changing market demand. With our experienced management team, we have recalibrated our cost structure to help navigate these turbulent times. While COVID-19 uncertainties make predicting the future more difficult, we will continue to monitor developments daily and proactively take necessary measures based on underlying market conditions. The company is well capitalized and well positioned to make it through these challenging economic conditions. We are taking actions to optimize our cash flow to further enhance our strong balance sheet. Finally, we are a market leader. We know we must address the many near-term challenges, but we won't lose focus on our long-term strategy by continuing to invest for the future, especially in our smart and connected product portfolio. We expect to come out the other end of this crisis a stronger company. With that, operator, please open the line for questions.

Thank you. Your first question comes from Jeff Hammond with KeyBanc. Your line is open.

Can you hear me?

Yes, we can.

We can now.

Okay, great. You gave a really good color in your presentation. You gave the 25% to 30% expectation. Can you just talk about what you actually saw in your April sales run rates? And if there are any big disparities between North America and Europe?

Yes. When you look at quarter-to-date, we've seen about a 30% reduction in the Americas and about 40% in Europe, and Asia Pacific about 30%. However, inside of Asia Pacific's number, actually China was up 2%, which is good. However, New Zealand and Middle East were basically closed for the month. So that's what brought down the overall APMEA numbers. You could see a little worse in Europe, and they hit the virus; it hit them harder. So I think that's why we're seeing that activity.

Okay. And then just on the decrementals, I think if you kind of run the math, it's in that 30% range. As you start to go through the year, is that kind of the right decremental to think about Q2 and beyond?

Yes. It's in that 30% to 35% range in the second quarter. It's closer to that 35% range, but as the year progresses, hopefully, the volume declines are less; it's closer to that 30% decrement range.

Okay, great. And then just finally, can you just talk about what you're seeing in terms of deferrals beyond mandatory work stoppages or any cancellations in your kind of order book on the non-res side?

Yes. We've not seen cancellations. What we've seen is deferrals pushed out. So I think a lot of uncertainty is out there just because of the social distancing requirements that are happening out there. And as you know, places like the Northeast and the West Coast were basically shut down from a new construction point of view. So that's kind of the activity we're seeing in the marketplace.

Okay. Thanks so much, guys.

Thanks, Jeff.

Thank you.

Your next question comes from Nathan Jones of Stifel. Your line is open.

Good morning, everyone.

Good morning, Nathan.

I apologize if I ask something you covered in your opening comments, Bob. I was a little bit late getting on. So you guys have a 30-odd percent decline here in the second quarter. Is there any color you can give us on what you think the split is between inventory destocking in the channel, the decline in replacement revenue, and the decline in new construction revenue?

Yes, that's really difficult to see because we saw a lot of activity. I think again, when you look at our portfolio, 65% is repair replace. When we talk to local plumbers, etc., in our channels, the discussion is emergency work is continuing, and on a repair and replacement. But a lot of the plumbers, as well as people in multifamily homes, they don't want anybody in there unless there's a material error, a big issue going on right now. So I think given the shock to the system, that's why we're seeing this uncertainty. But we can tell, especially from our smaller wholesalers, they're ordering less and less. So again, I think it's pretty much across the board at this point in time, and we think the destocking will end in May. So we're seeing it in April and May, and we'll come out of the other end of that in June, once everybody starts opening up all these construction markets.

Okay. I guess part of my point here is on the replacement market. I mean, with these kinds of levels of revenue decline, and given that two-thirds of the portfolio is replacement, that has to be a fairly significant decline in replacement revenue here. I would think that snaps back fairly quickly once we get the economy open again and things running at a more normalized rate. Is that a reasonable expectation?

Yes, I think it is. I mean, look at, you can only put off repair and maintenance. Whether a building has one occupant or a hotel is 95% full, you still need to ensure they have good plumbing and code-driven is going to be even more important right now. So again, I think your assumption is accurate.

And did you quantify what the cost out number is going forward?

So the total here is approximately $55 million. A piece of that is obviously the same reductions we talked about, which at the end of Q3. So there is a larger portion of that $55 million that happens in the second quarter.

Okay. Thanks very much. I'll pass it on.

Thank you.

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

Great, thanks for taking my question. Hope everyone's well. Wanted to kind of follow on with that prior question on repair replace and just kind of clarify and better understand the buckets here. So you talk about new construction being a third, and then sort of repair replace being the remainder. Where does sort of remodeling fit into all that, where you've got a restaurant or a hotel, or even a household; it's not new construction, but it's not an emergency repair. It's some sort of remodeling. Which bucket would that fall in and how have you seen that type of business impacted?

Yes. So again, it's early on, right, with April just being - just happening here. We saw it across the board. But just if you look strategically inside of that, that would fall under depending on if it's a brand new addition, maybe in the new construction repair replacement. If it's fixed. So it's a combination of both of those. But if you just look at some of the markets that we think are probably more apt to get hit, restaurants, some hotels in the short term, and let's call it just office buildings, I mean that's less than 10% of our business. But still, as I said earlier, they'll still need to be repaired. It doesn't codes are going to be more in force than ever before. And I think there is an opportunity for people to continue to upgrade. So when you look at our core strategic things of safety and regulation, energy efficiency, and water quality and conservation, all of those are going to be critical in this new world. So as we go forward also - I also look at our connected product strategy, how important that's going to be. Because monitoring and making sure there are less people requirements to determine whether there are issues in the system, right? So that's going to be really important going forward. So again, that's where we're looking at, and we're watching very closely.

Yes. Just on that point, Bob, you talked about the connected strategy. I guess there's been a lot of talk about reopening these buildings, offices and hotels and whatnot, and if the water's been stagnant in those systems, there has been talk about Legionella concerns and things like that. I know that is part of the connected strategy, kind of monitoring for some of those things, Legionella in particular. Is that - I mean, we could spin that as a positive, but is that just a longer-term thing? Or are you just seeing it more demand for those types of things even now?

Well, we're doing a lot of seminars exactly on that with our customers, engineers, et cetera. So you know how to start up buildings, et cetera. And we believe when buildings sit idle for a while, restaurants and everything else, once they start up, they're going to have some issues, and they need to deal with the proper way to prevent Legionella and other diseases in their pipes and systems. So again, that could be an opportunity for us. But again, we're monitoring it very closely.

Got it. And then one last one from me, if I could. You made a comment in the press release about sort of renegotiating materials contracts. Can you please elaborate on that? Or is the mechanics of that, to the extent you can?

Yes. Look, so Ryan, it's Shashank. So on as we all know, commodities have gone down, especially comp a little bit stingless. We typically go long on those. So we got contracts over the next, let's say, three months, six months, nine months. And also, the challenge we have is the volume is going down. It's harder to negotiate price decreases with volume reductions, but that's in fact we're in a unique place, so we're going back and we are having some luck in negotiating lower prices as we go forward on those material contracts, as well as even on some freight contracts as well, because at the lower prices on oil.

Got it. Okay. Thanks for your time.

Thank you.

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

Good morning, everyone. Hope you're staying safe.

Good morning.

Same to you, Bryan. Thanks.

Thank you. Following up on your second quarter mid to high-single-digit margin guide. Can you break that out by region, what we should expect across your segments?

So the margin performance we are up 20 basis points. America was the strongest of the regions, so we had good and relatively good price performance there as well. And some of the actions, we were proactive in our cost action. So that helped to the first quarter as well. So that drove the margin expansion in the Americas. In Europe, we were actually soft in the first quarter. And then obviously, the third - and then we got affected in APMEA. Now, as we think about the second quarter though, we basically said mid to high-single-digits on the operating margin. With the volume declines, we're talking about 25% to 30%. We expect to see margin declines across all regions. APMEA will be the most affected because their volume is going down, as well as they get affected with the intercompany volume piece. But the margin decline will pretty much be similar in the Americas and in Europe.

Got it. And any additional color you can offer on expected cost savings by region? I think you said $55 million for the year in total. And also the variable versus structural breakout there would be helpful.

Yes. Just to take the second piece first, the structural piece is about 15% of the total approximately $55 million we talked about. The structural piece, which is headcount, that does have annual savings related to what we realized in 2020. As far as the regional split of the cost savings, for the most part, we're about 75% of that going to be in the Americas, and then about 20% in Europe, and the other 5% in APMEA. Rough split. We do get a little bit more savings in the Americas versus Europe.

Okay. And what are the key metrics you're tracking to determine if additional action is needed? And what would come next if further action's warranted as we move through Q2 and into the back half?

Well, we certainly watch orders. We watch that daily, and we continue to look for leading indicators, talking to our channel partners, understanding permits, and all the normal things that we've all been looking at for a while. I think what's more important, as we see this country come back up and running, is to see whether there's some surge of pent-up demand, etc. But we're looking at all our costs. Every single piece, we're asking our teams to review every single thing in every single region. So it's across the board. We're continuing to look. We went aggressive right out of the gate, and we have detailed contingency plans when we start the year. We triggered those immediately, and we'll continue to watch these leading indicators. And most importantly, as the shutdowns come back online, we want to see how quickly they think in.

Got it. Appreciate the color.

Thanks, Bryan.

Thank you.

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

Thank you for taking the time to join us today. We appreciate your continued interest in Watts and look forward to speaking with you again at our second quarter earnings call in early August. Have a great day, and stay safe and healthy. Take care.