Ladies and gentlemen, welcome to the Watts Water Technologies Incorporated First Quarter 2024 Earnings Call hosted by Bob Pagano, President and CEO; Shashank Patel, CFO; and Diane McClintock, Senior Vice President, FP&A and Investor Relations. At the end, we will open the line for questions. And I will now turn the call over to Diane McClintock.

Thank you, and good morning, everyone. Welcome to our first quarter earnings conference call. Joining me today are Bob Pagano, President and CEO; and Shashank Patel, our CFO. During today's call, Bob will provide an overview of the first quarter and discuss the current state of the markets and our operations. Shashank will discuss the details of our first quarter performance and provide our outlook for the second quarter and the full year. Following our 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 will reference this presentation throughout our prepared remarks. Any reference to non-GAAP financial information is reconciled in the appendix to the presentation. I'd like to remind everyone that during 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 undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. With that, I will turn the call over to Bob.

Thank you, Diane, and good morning, everyone. Please turn to Slide 3, and I'll provide an overview for the first quarter. We began 2024 with better-than-expected first quarter results, including record sales, adjusted operating margin, and earnings per share. I'd like to express my appreciation to the entire Watts team for their hard work that made this outperformance possible. Organic sales growth of 6% in the quarter was largely driven by extra shipping days as discussed on our last earnings call. We also benefited from incremental sales due to our acquisitions of Enware, Bradley, and Josam. We are very pleased with the performance of these new acquisitions and expect them to continue contributing to our long-term success. Adjusted operating margin exceeded expectations primarily due to incremental volume from the extra shipping days, solid price realization, and productivity, which more than offset inflation, lower European volume, and incremental investments. As a result of our strong earnings and expected cash flows for the remainder of 2024, we announced a 19% dividend increase with payments beginning in June. Our balance sheet remains strong and provides ample capacity to support flexibility in our capital allocation strategy. From an operations perspective, we are pleased with the progress of the Bradley, Josam, and Enware integration efforts. Our teams are working together to capitalize on synergies and capture additional growth opportunities. We expect both acquisitions to be accretive to adjusted EPS in 2024. Regarding inflation, we continue to see cost increases across labor and overhead, and we're seeing renewed escalation of raw material costs. While the inflation rate has moderated, it is still above normal historical levels. Our teams have done a great job driving productivity, not only in our operations but outside the factory walls, which has helped offset some inflationary pressure. We continue to invest in our digital strategy as we believe providing smart and connected solutions is vital to improving water safety and regulation, water conservation, and energy efficiency. We will provide you with an update on our smart water initiative later this year. In addition, enabling our customers to achieve their sustainability goals and meeting our own remains a top priority. We'll be issuing our annual sustainability report by the end of June. Additionally, we'll be establishing new long-term goals, including an absolute carbon emissions reduction commitment. Our team has made tremendous progress advancing our sustainability strategy and initiatives, and we are looking forward to sharing this with you. So stay tuned. As I discussed during our last call, 2024 is the 150-year anniversary of Watts. We are proud of this milestone and are hosting customer and employee events across the globe to celebrate this tremendous accomplishment. Our new customer training programs introduced in connection with our 150th anniversary have been well received. Next, I'd like to provide an update on our end markets. Global GDP, which is a proxy for our repair and replacement business, is lower than last year but remains positive in our key markets. Europe's residential and non-residential and new construction markets remain soft and continue to be impacted by the conflicts in Ukraine and the Middle East. The reductions of the energy incentive programs in Germany and Italy are unfavorably impacting OEM volume, particularly in the heat pump market. In the Americas, single-family new construction is expected to remain flat, at least until interest rates begin to ease. Multifamily new construction indicators, including starts and permits, have been down double digits in recent months and indicate a decline in multifamily new construction as 2024 progresses. Non-residential new construction indicators in the Americas are mixed. The ABI has been below 50 since July 2023, and the Dodge Momentum Index turned negative in March. However, the most recent ENR Construction Industry Confidence Index rose above 50 for the first time in 2 years. Industrial mega projects remain resilient and are expected to be supportive in 2024, but will be tempered by challenging sub-verticals, including retail, office, and recreation. In the Asia Pacific region, China end markets are moderating but are still expected to grow. We are seeing improving markets in the Middle East due to continued higher oil prices. Elevated interest rates have impacted new construction in Australia and New Zealand, but GDP is still expected to be positive. We continue to monitor the geopolitical uncertainty in the Middle East and expect to proactively address any direct or indirect impact to our customers and supply chain as they arise. Now an update on our outlook for the remainder of the year. We are increasing our full-year sales and operating margin outlook due to our strong first quarter performance. We expect continued weakening in Europe as new construction slows, including a decline in OEM volume from the reductions in energy incentives. As I mentioned before, the decline in volume will have a more significant impact on earnings for the rest of 2024 due to our higher fixed cost base in Europe. Interest rates are now expected to remain higher for longer. This may unfavorably impact residential and non-residential new construction in the second half of the year. With that, let me turn the call over to Shashank, who will address our first quarter results and our second quarter and revised full year outlook.

Thanks, Bob, and good morning, everyone. Please turn to Slide 4, and I will review the first quarter's consolidated results. Sales of $571 million were up 21% on a reported basis and up 6% organically. As Bob mentioned, we benefited from extra shipping days in the quarter. We estimate the extra days contributed approximately 7% of sales growth in the quarter. The acquisitions of Bradley, Josam, and Enware contributed approximately $68 million or 15% in foreign exchange, primarily driven by a stronger euro, increased sales by approximately $1 million versus 2023. Compared to last year, adjusted operating profit of $104 million increased 23% and adjusted operating margin of 18.2% was up 30 basis points. Adjusted EBITDA of $118 million increased 25% and adjusted EBITDA margin of 20.6% was up 60 basis points. Benefits from price, productivity, and volume from extra shipping days more than offset acquisition dilution of approximately 60 basis points inflation and incremental investments of $6 million. Adjusted earnings per share of $2.33 increased 21% versus last year. Earnings per share growth was driven primarily by solid operational performance, including the benefit of the extra shipping days and the strong performance of our acquisitions. The adjusted effective tax rate was 23.8%, up 130 basis points compared to the first quarter of 2023, primarily due to a lower tax benefit from the vesting of stock compensation awards that occurred in the first quarter of 2024. For GAAP purposes, we incurred $7 million of nonrecurring acquisition-related charges. We also recorded a restructuring charge of $1.2 million related to several cost actions. These charges were partially offset by the nonrecurring gain on the sale of an office building in Europe. Our free cash flow for the quarter was $37 million compared to $28 million in the first quarter of last year. The cash flow increase was primarily due to higher net income and lower working capital investment. We expect sequential improvement in our free cash flow and are on track to achieve our full year goal of free cash flow conversion greater than or equal to 90% of net income as previously communicated. During the quarter, we repurchased approximately 20,000 shares of our Class A common stock for $4 million. Additionally, as Bob mentioned, we announced a 19% increase in our dividends that will begin in June. The balance sheet remains strong and provides us with ample flexibility. Our net debt to capitalization ratio at quarter end was 3% and our net leverage is 0.1. Our solid cash flow and healthy balance sheet continue to give us capital allocation optionality. Please turn to Slide 5, and let me provide a few comments on the regional results. Americas organic sales were up 11% and reported sales were up 30%. Both were ahead of expectations due to slightly better price. Reported sales benefited from better-than-anticipated acquisition performance. The additional shipping days increased sales by high single digits. Solid growth in our core valve products was partly offset by declines in water quality and radiant heating products. The acquisitions of Bradley and Josam added $60 million or 19% to Americas sales in the quarter. Adjusted operating profit increased by 28%, while adjusted operating margins decreased by 40 basis points. The operating margin decline was primarily driven by acquisition dilution, inflation, and incremental investments, which more than offset price, productivity, and leverage from the extra shipping days. Europe organic sales were down 5% as we expected. The reported sales were down 4% and included a 1% favorable impact of foreign exchange movements. Additional shipping days increased sales by mid-single digits. Growth in our Drains business was more than offset by declines in wholesale plumbing in France and Benelux as well as our OEM business in Germany and Italy with the reduction of government subsidies and heat pump destocking had an unfavorable impact. Despite the challenge, top line operating profit increased 3%, and operating margins increased by 110 basis points as price-favorable mix, productivity, and the extra shipping days more than offset inflation investments and volume deleverage. APMEA organic sales were up 6%. The reported sales growth of 43% was negatively impacted by 3% from unfavorable foreign exchange movements and favorably impacted by 40% or approximately $8 million of acquired Enware sales. The extra shipping days increased sales by mid-single digits. Growth in Australia and the Middle East were partially offset by declines in China due to weak residential under floor heating sales and project timing in data centers. Adjusted operating margin decreased 150 basis points as a result of inflation investments and the diluted effect of the Enware acquisition, which more than offset price volume and productivity. Slide 6 provides our assumptions about our second quarter and full year operating outlook. First, let's cover the second quarter outlook. On a reported basis, we expect sales to increase between 7% and 11%. Organically, we expect sales to decrease between 1% and 5%. Organic sales in the Americas are expected to be flat, while APMEA is expected to be up low single digits, offset by a low double-digit decline in Europe. In addition, we expect approximately $64 million of incremental sales in the Americas from acquisitions. Second quarter adjusted EBITDA margins are expected to be in the range of 20% to 20.6% or down 100 to 160 basis points. Second quarter adjusted operating margin should be in the range of 17.6% to 18.2% or down 130 basis points to down 190 basis points. This is partially due to a very difficult comparison to the second quarter of 2023 when margins exceeded 19%. Additionally, acquisition dilution of 110 basis points incremental investments and volume deleverage, particularly in Europe, will all have an unfavorable impact. We expect incremental investments of approximately $5 million. Corporate costs should be approximately $15 million. Net interest expense should be approximately $3 million. The adjusted effective tax rate should be approximately 25%. We are estimating a $1.08 euro-U.S. dollar exchange rate versus the average rate of $1.09 in the second quarter of 2023. This would imply a decrease of 1% year-over-year or approximately $1 million in sales, which is less than $0.01 per share in EPS versus the prior year. Now let's cover the updated full year outlook. For the full year 2024, we are increasing our reported sales growth outlook to a new range of plus 7% to plus 12%. Our previous guidance was plus 6% to plus 12%. Additionally, we are increasing our organic sales growth outlook to a range of minus 4% to plus 1%. Our previous guidance was a range of minus 5% to plus 1%. In effect, this raises the midpoint of our reported and organic growth range by 50 basis points based on our stronger-than-expected start in the first quarter. We are increasing our full-year adjusted EBITDA margin outlook to a range of 19.6% to 20.2% compared to our previous guidance of 19.4% to 20%. Additionally, we are raising our full-year adjusted operating margin outlook. We now expect our 2024 adjusted operating margins to be between 17.1% and 17.7% compared to our previous guidance of 16.9% to 17.5%. The updated outlook for adjusted EBITDA margin and operating margins represents an increase of 20 basis points from our previous guidance and reflects the flow-through of our better-than-expected first quarter, including acquisition performance. Our free cash flow expectation remains in line with our previous outlook from February as we expect to deliver free cash flow conversion of greater than or equal to 90% of net income in 2024. For the full year, we are now assuming a $1.08 euro-U.S. dollar FX rate, which is flat versus 2023 and down versus our previous assumption of a $1.09 euro-U.S. dollar FX rate. This change reduces our sales guidance by $5 million in sales and our EPS guidance by $0.02 a share for the full year versus the prior year. Regarding other key inputs for the full year, which can be found in the appendix, we expect corporate costs to be about $55 million for the year. Net interest expense should be approximately $12 million. Our estimated adjusted effective tax rate is expected to be approximately 25%. We expect our share count to be approximately 33.5 million. CapEx spending is anticipated to be approximately $50 million. Finally, depreciation and amortization should be approximately $55 million for the year.

Now let me turn the call back over to Bob before we begin Q&A.

And your first question comes from the line of Nathan Jones with Stifel.

This is Adam Farley on for Nathan. I wanted to start on Europe. Really strong margin performance despite the organic revenue decline. Plus, given the relatively high fixed cost base there. So what was the main tail end of margins from mix in Europe?

Yes. It was a combination of favorable mix. So we had higher sales in Drains where we have higher margins. And then we had lower sales in the OEM channel, primarily out of Germany, which have lower margin. So there's a double benefit on mix. And then also, we benefited, as you know, we lock in certain commodities, for example, brass in Europe, and we had locked that in, in Q4. We benefited from that in Q1. Certainly, copper brass has been escalating, but we benefited from some of the locks we had. And then productivity came in really strong as well in Q1.

Okay. And then how should we think about margins in Europe for the remainder of the year? Should mix continue to be positive? Productivity improvements continue? Maybe narrowing in the price cost spread?

Yes, I would say that productivity and mix should continue positive. However, on the commodity side, as I said, we lock in for a period of time. So those locks do come undone, so to speak. And we have seen escalating commodities, especially on the brass side. So there could be some headwind down there. So we'll see how it plays out for the rest of the year.

And your next question comes from the line of Mike Halloran with Baird.

So, can you just talk about guidance front half, back half and just run through the moving pieces? I know last call you talked about uncertainty as you move to the back half of the year, and you reflected that in the guidance. I imagine that's still the case today, but we'd love some context on that. And then shipping days are probably going to impact front half, back half, but it's certainly weighted front half from a guide perspective relative to what you would see historically. So I just want to understand the moving pieces and the thought process behind it.

Yes, Mike, not much has changed significantly. We believe that Europe will continue to soften. We are also being cautious in the second half of the year, as we anticipate that multifamily will start to impact us during that period. So we're monitoring that closely. Additionally, you are right about the shipping days. The favorable days we have in the first quarter will be offset in the fourth quarter, making Q4 weaker as we lose those days. We need to maintain that balance. Overall, things are unfolding as we expected, although Europe appears to be a bit softer than we initially anticipated based on current order rates even through April. So we are keeping a close eye on that.

And also, Mike, we had baked in also on the non-commercial new construction site softness in the second half because the ABI has been down for roughly 9 months.

Let's follow up on that train of thought. Obviously, you sell into a lot of different non-res markets, numerous commercial and institutional subsets. When you think about the moving pieces there, how does that play out as we get into next year to the back half of the year, however you want to think about it? In other words, there's a lot of puts and takes. It's a really large market. You're talking about some of these leading indicators where there's concern, but we also feel optimistic about some of these other areas. How much of a balancing mechanism is it? Maybe just talk about the moving pieces there and anything interesting from a subset perspective?

I always start by noting that 60% of our business involves repair and replacement due to our significant installed base, which tends to follow GDP, helping to stabilize many fluctuations. You're correct that in some markets we can offset challenges, like with data centers and larger projects being a bit more variable, helping to balance any softness we might see in multifamily housing or Europe. Our diversified portfolio allows us to adapt to where the work is, as our products are applicable across various markets. We're focused on shipping, monitoring where construction activity is ongoing, which is still strong. Although we can overlook some leading indicators that traditionally have been reliable for us, our large installed base is definitely beneficial for the repair and replacement aspect of our business.

And your next question comes from the line of Jeffrey Hammond with KeyBanc Capital Markets.

This is David Tarantino on for Jeff. Maybe to start on the acquisition dilution. Could you give some context on the expectation for the deals to be more dilutive in 2Q versus the first quarter? And then maybe for the full year, it looks like you're expecting modestly less dilution. Could you give some color around what's kind of the change in assumption there?

I'll begin by saying that we are very pleased with the performance of the acquisition. The integrations are progressing exceptionally well. Much of the initial work, particularly the closing of some sites, is going positively. Additionally, favorable days in the first quarter benefited us as we implemented our 4-4-5 calendarization. Overall, we are quite satisfied. Shashank, would you like to discuss the dilution?

Yes. As we mentioned, the acquisitions exceeded expectations in the first quarter, which is why we adjusted our overall guidance. The dilution from the acquisitions is currently 70 basis points, down from 80 basis points, and it was even lower in the first quarter. We have taken that into account. However, for the entire year, we anticipate a dilution of 70 basis points from the Bradley and Josam acquisitions.

Okay. Great. And then could you maybe give some more color on what you're seeing in terms of underlying demand in Europe, kind of with cracks becoming a little bit more evident? And maybe the line of sight you guys have on the destocking trends maybe on that. Could you give some color on the forward view, just given the extra days dynamic in the first quarter?

There is a lot of uncertainty in Europe right now due to ongoing conflicts, which has led to a slowdown in new construction. We're seeing a decline in that area by double digits. In terms of repair and replacement, aside from retrofitting related to heat pump initiatives, we're observing destocking in the supply channels. There was significant ordering last year, particularly in the strong Q1 and Q2 periods for Europe, which exceeded our expectations. Now, we are facing tough comparisons in those same quarters. We anticipate that destocking will continue at least through Q2, at which point we will reassess the situation. Overall, inventories need to decrease, especially in the heat pump segment. We remain cautious about Europe and are taking appropriate cost actions as we evaluate the direction of that business.

And your next question comes from the line of Joe Giordano with TD Cowen.

This is Michael on for Joe. You had mentioned in the slide that price realization was a bit higher than expected in the quarter. What was the price component specifically? And also just for the remaining part of the year, I believe the logic before was about low single-digit increase of inflation on the commodity front and also the same on the wage front. Is the calculus for the remainder of the year still the same?

We had anticipated around a 1% price realization, but we actually achieved approximately 1.5%. This is about 50 basis points better than our expectations, primarily due to lower inflation. Regarding inflation, compensation inflation is running between 3.5% and 4%, while commodity inflation is generally in the range of 2% to 3%, despite the rise in prices for certain commodities like copper.

Great. That's helpful. And just a follow-up, if I may. But so last quarter you mentioned like OEM destocking in Europe was about 1/3 of the business there. Can you just run through perhaps like the channel and inventory at OEMs from the different regions and just kind of expectations for the remainder of the year?

Yes. Let's begin with the Americas. I believe the channel inventory is aligned with our expectations, so I think the destocking phase for North America is mostly complete. Inventory levels are reasonable. In Europe, as I mentioned in the previous discussion, there is still ongoing destocking in the OEM channels, which, as you noted, accounts for about a third of our business there. The situation in the APMEA region seems similar to that of the Americas. Thus, the primary concern is in Europe.

And your next question comes from the line of Walt Liptak with Seaport Research.

I'll try 1 on the M&A, with the revenue maybe a little bit better than expected in the first quarter. Can you help us with second quarter revenue so we can get that number closer to right? I mean, there should be some seasonal uptick, I would think. Do you have a view on where revenue could be for M&A in the second quarter?

Yes. So well, for the full year, between Bradley and Josam, we're talking about $210 million. And you're right, in the second quarter it tends to be a little higher. So in that approximately $55 million, $57 million range approximately.

Okay. And then also wanted to ask about just the Americas region. And you sell a lot through distribution, but can you differentiate as products go out to single-family versus multifamily? Or do you have a view on what the percentages are? And if there are any differences that you're seeing in the trends for those markets?

Look, when you look at our business, 35% of our business is residential. Half of that single family, half of that is multifamily; we've seen basically flatness in the first quarter. We're expecting flatness in the second quarter, and then we're expecting multifamily to go down in the second half of the year, low single digits, maybe to mid-single digits. That's kind of how we're looking at it. And single family holding up flat for the rest of the year.

Hey, Walt, just a correction on the acquired sales second quarter, $64 million.

$64 million. Okay.

Yes.

Yes, I do believe they've adjusted.

And with no further questions at this time, I would now like to turn the conference back to Mr. Bob Pagano for any additional or closing remarks.

Well, thank you for taking the time to join us today. We appreciate your continued interest in Watts, and we look forward to speaking with you again during our second quarter earnings call in early August. Have a good day, and stay safe.

And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.