Watts Water Technologies, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Watts Water Technologies fourth quarter 2020 earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, Please press star zero. I would now like to turn the conference over to your speaker today, Timothy McPhee, Treasurer and Vice President, Investor Relations. Thank you. Please go ahead.

Thank you and good morning, everyone. Welcome to our fourth quarter and full year 2020 earnings conference call. Joining me today are Bob Pagano, President and CEO, and Shashank Patel, our CFO. Bob will provide an overview of the past year. Review our 2021 priorities, as well as update you on our market expectations for this year. Shashank will provide a detailed analysis of our fourth quarter and full-year financial results and discuss our outlook for 2021. Following our 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 our 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. With that, I will turn the call over to Bob.

Thank you, Tim, and good morning, everyone. Please turn to slide three in the earnings presentation, and I'll offer some reflections on 2020 and provide our updated thoughts on 2021. I want to start out by expressing my deepest gratitude to our employees around the world. Their dedication since the start of the pandemic has been unwavering to ensure our customers' needs were being met and our business continued to move forward. This past year has tested everyone's endurance and patience. I'm so grateful to our experienced team that was able to nimbly adapt to the dynamics of this constantly changing global environment. And I'm confident the team will continue to proactively manage our business to meet our customer expectations in 2021 and accelerate Watt's strategy. I'm also pleased to report that we continue to make progress in our environmental, social, and governance efforts and in diversity, equity, and inclusion initiatives this past year. Our sustainability performance improved following evaluations from several leading ESG rating agencies, and we supported our customers and local communities that were impacted by the pandemic. As you know, our product portfolio is aligned with three macro themes, safety and regulation, energy efficiency, and water conservation. We believe this focus dovetails well with the ESG framework. In 2020, we launched our first diversity, equity, and inclusion survey, which identified key focus areas, and we formed working groups to lead our global diversity initiatives. We've also deployed employee training and development programs relevant to this effort. As a company, we enacted a comprehensive response to COVID-19 challenges. First, employee safety was and remains our priority. Through our COVID-19 task force, we emphasized safety protocols in the workplace that met or exceeded CDC and other country-specific requirements. Secondly, given we are an essential business, we maintained a customer focus. We set up a hotline very early in the pandemic to aid healthcare customers with any urgent requirements. We expanded our library of online learning tools to offer training and to stay in touch with our customers, which has provided us with great insights into customer focus areas and usage. And we continue to invest in new product development to address our customers' needs. Regarding our 2020 performance. We proactively took very aggressive cost actions starting late in the first quarter of 2020. These addressed long-term structural as well as short-term discretionary costs. The totality of these actions was a positive impact of $55 million to our operating income in 2020. Clearly, some of the short-term actions are a headwind in 2021. The cost actions helped us maintain our operating margin at 2019 levels, despite the top-line headwinds. We also invested in strategic new product development and in our smart and connected strategy. We increased free cash flow over 2019 levels by 14%, and we strengthened our balance sheet by paying down debt, putting the company on solid footing as the pandemic subsides. We prioritized liquidity by managing working capital, extending our financing agreement, and aggressively paying down existing debt through repatriation and operating cash flows. We continued our balanced capital allocation strategy. We invested 50% more than 2019 in capital spending to fund growth and productivity. We continued to invest in new product development and we made two small bolt-on acquisitions. We acquired the Australian Valve Group in Q3 and the Detection Group, or TDG, in the fourth quarter, which I'll discuss momentarily. Finally, we sustained our dividend in share repurchase programs. Given the circumstances and challenges we faced, 2020 was a successful year for our company. Next, I'll review our key priorities for 2021. As I previously mentioned, employee safety is our number one priority. We'll continue to promote proper hygiene and safe social distancing practices. In 2020, we delivered over 100,000 training sessions, both online and through virtual lunch and learn meetings. This represented a 70% increase in training sessions over 2019. In 2021, we'll continue to enhance our training programs for customers, reps, engineers, and contractors in order to drive further customer connectivity. We'll continue to elicit customer feedback to drive new product introductions and solutions, including expanding our smart and connected portfolio. We'll look for opportunities to expand geographically into new regions either organically or through acquisition. Productivity will continue to expand through our One Watts performance initiative and is expected to help fund incremental 2021 long-term investments. Now let's briefly talk about how we see the markets shaping up in 2021. We gave some preliminary views on this year's markets during our November earnings call. Since then, We have finalized our internal operating plans and updated industry data has been published. Also, two important macro unknowns have been crystallized, namely the U.S. elections are behind us and effective vaccines have been approved and the deployment process has begun. What is still uncertain is when we can effectively reach herd immunity, which in turn depends on how quickly the vaccine can be disseminated to the broader population and how many people opt to take the vaccine. From a macro perspective, GDP forecasts in all our major regions are expected to grow from 2020's depressed levels, with most of our key countries expanding at 3% or higher. In the Americas, our market expectations for new construction in both the commercial and residential markets are still mixed and varied by sub-markets. New residential single-family construction, in general, looks to be steady with persistently low interest rates, higher housing starts, expected job and income growth in positive demographics, driving anticipated mid to high single-digit growth in single-family housing starts in 2021. And the Lyra Index is anticipating the growth rate of homeowners' spend on repair and replacement projects to continue into 2021, with spending increasing approximately 4%. However, multifamily starts are expected to decline mid-single digits in 2021. In non-residential, we anticipate that overall growth will be challenged. We still see divergent growth prospects dependent on the end market. The latest industry indicators, including the ABI, construction market data, and construction industry confidence indexes, are all portending a decline in non-residential construction in 2021. The AIA recently released its semi-annual consensus construction outlook, which expects new non-resi construction spend in the U.S. to decrease by about 6% in 2021. Also, AGC recently released survey results based on over 1,300 contractors that concluded 2021 will be a very difficult year for many construction firms and their markets. Given the various industry indicators and feedback we are getting from the channels, we are anticipating an air pocket in activity impacting us starting in the second quarter of this year due to the reduction in non-residential and multifamily new construction starts during the pandemic. Existing funded projects continue and are being finished, but we expect new construction projects starting in the second quarter and through year-end may be down significantly. In Europe, the markets are also mixed. In our drains business, the commercial marine segment is expected to continue to be challenged. Project markets are lumpy and home building is flat. Government-sponsored home energy subsidies in Germany should continue to provide support, and we see more wholesaler activity in France, at least in the near term as we enter 2021. In Italy, there are concerns with government programs protecting employment that expire in March, which could impact unemployment and recovery there. In the Asia-Pacific region, The overall economy is expected to grow, with GDP up in all regions. China is forecast to grow over 8% in 2021. Finally, Middle East GDP is expected to grow in the 3% range, so a little slower than other regions and likely being more influenced by adverse geopolitical issues and energy demand. Now, I'd like to provide an update on our smart and connected product initiatives. Please turn to slide four. When we started evaluating the potential for transforming our portfolio to be smart and connected in 2015, we realized we had deep capabilities and competencies in our WAAS Electronics and Techmar businesses, but little in the way of a development pipeline or strategic plan. Today, each of our business units has clear strategic goals to digitally transform their product portfolio where possible. Additionally, we have created and deployed a dedicated team that has a mandate for ensuring that our connections are robust, scalable with our businesses, and most importantly, secure. With these added resources, we have more than 85 people working exclusively on smart and connected products globally, a 55% increase in resources over 2019. Cumulatively, We have exceeded 70,000 connected devices shipped since we started selling smart and connected products. The primary goal of our smart and connected initiative is to enhance the value our products provide to customers. We are focusing our efforts on the following key areas. Safety and regulation, like our Intellistation digital mixing products. Water hygiene, like our HF scientific instruments. Energy efficiency in products like our airco boilers and PVI water heaters. Leak Detection Systems like the Century Plus Backflow Discharge System. These systems will ultimately provide us with the meaningful data that we can begin leveraging to further enhance our product performance, customer service levels, and our own operational activities. In addition, we see pathways towards subscription services. In 2020, our smart and connected solutions continue to represent a larger share of our sales and we're in the mid teens of total lot sales. We're still focused on achieving our goal of 25% smart and connected product sales by 2023. On slide five, let me highlight two smart and connected product solutions. As I mentioned previously, we made a small acquisition in the fourth quarter, a company called the Detection Group or TDG. TDG provides factory mutual approved wireless leak detection products and Notification Services for commercial and multifamily buildings. Sales approximate $4 million annually. We were interested in TDG as another offering to bundle into our overall smart and connected suite of products. Their products are addressing a key pain point for commercial and multifamily building owners, that being rising insurance costs due to water leaks. We welcome the TDG team to WOTS. On the right side of the slide, You will see an in-house developed solution that leverages multiple WAAS brands to provide a single connected user experience. The Dormant FlowPro MD combines our Dormant gas connector manufacturing with our Tecmar electronics expertise on a single Bluetooth enabled device and is utilized by service technicians and gas equipment installers to read and document consumption, Pressure and Flow of Gas via a proprietary mobile app. This allows installers to quickly identify and report if a problem may be related to equipment or to disturbances in the gas line. This reduces the need for return service calls and increases efficiency during initial startup or repair and maintenance procedures. FlowPro MD is another good example of how far we can combine our capabilities to create solutions that address everyday customer challenges. We remain excited about the future of smart and connected systems and what it's bringing to Watts and the industry. Now, Shashank will review our results for the fourth quarter and full year and offer our outlook for 2021. Shashank?