Watts Water Technologies, Inc.

Good day and thank you for standing by. Welcome to the Watts Water Technologies first quarter 2021 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 the session, you'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. I'd now like to hand the conference over to your presenter today, Timothy M. McPhee, Treasurer and Vice President, Investor Relations of Watts Water Technologies, Inc. Please go ahead.

Thank you and good morning, everyone. Welcome to our first quarter earnings conference call. Joining me today are Bob Pagano, CEO and President, 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 our revised outlook for the full year 2021. 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. Before we begin, I'd like to remind everyone that during the course of this call, we will 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 WAAT's 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 now turn the call over to Bob.

Thank you, Tim, and good morning, everyone. Please turn to slide three, and I'll provide an overview of the quarter. I must first thank our global organization for executing under very trying circumstances. I'd especially like to applaud our manufacturing, supply chain, and logistics teams. During the first quarter, the teams dealt with numerous issues around component availability, transportation bottlenecks, customer fulfillment needs, and the ongoing pandemic. I'm proud of how they work together to serve our global customers' demand. We had a solid start to the year. The severe winter freeze experienced in the South Central U.S. in mid-February caused widespread plumbing infrastructure problems and was an unexpected benefit that we estimate positively affected consolidated sales by about 3%. The underlying market conditions in Europe and apnea were stronger than we had anticipated. Lastly, part of the year-over-year upside was driven by an easier comp in apnea, which was heavily impacted by COVID in Q1 of 2020. Adjusted operating margin exceeded expectations supported by continued cost actions and incremental sales. We also delivered strong cash flow in the quarter. And shortly after the quarter ended, we completed the renegotiation of our credit agreement, extending the facility through March 2026 and amending terms to mirror current market conditions. We have ample capacity, which affords us a lot of flexibility. Finally, we announced a double-digit dividend increase starting in June. Shashank will review the financials in more detail momentarily. Operationally, commodity increases, especially in copper, steel, and packaging supplies, coupled with increases in logistics costs, have driven us to announce additional price increases globally. These will go into effect later in the quarter. We won't see the real benefit of that price increase until the second half of 2021. Supply chain constraints have increased significantly as well, driving potential component and product availability issues. Entering the first quarter, we maintained higher inventory levels, which allowed us to proactively meet the heavier freeze demand. However, constraints in the local and global supply chains are now resulting in higher costs. During the quarter, we continue to invest for the future. We incrementally spent approximately $2 million, of which over half was invested in our smart and connected products. We plan to increase investment spending for the full year from $13 million to $16 million, primarily to support additional growth and productivity projects. We announced a proposal to close or sell a small plant in Marie, France. We are currently consulting with the Works Councils and local government authorities so timing for making a final decision to close or sell the plant and related costs have yet to be determined or approved. Our goal is to move the MERIA operation to other existing plants in France. Our proposal impacts approximately 85 employees. On a net basis, we anticipate downsizing by approximately 50 people. Now, I'd like to provide an update on our end markets. From a macro perspective, since we last spoke in February, GDP forecasts have been revised upwards in the U.S., Canada, and parts of Asia Pacific, while other key areas in Europe, including France, Germany, and Italy, have seen GDP expectations reduced. Market expectations in the Americas for new construction in both the commercial and residential markets continue to be mixed and vary by submarkets. New residential single-family constructions continue to look steady for the year, with recent March and year-to-date housing starts positive. And multifamily residential starts, although lumpy, showed some buoyancy recently, with March starts up over 30% sequentially. We anticipate non-residential new construction growth will remain challenged at least through 2021. We still see a divergent growth prospects dependent on the end market. A recent AGC survey of about 1,500 contractors noted that 77% saw new projects either postponed or canceled in 2020, and 40% are seeing further project cancellations or postponements for the January to June 2021 period. Our drain product lines that are installed early during commercial construction projects saw continued negative sales growth in the quarter. The latest industry indicators have been more positive which may indicate new commercial construction growth as we head into 2022. For now, non-residential repair and replacement market is holding up very well, and with the positive impact of the freeze in the south central region, has offset the air pocket in new construction. As mentioned, GDP expectations for the U.S. and Canada have increased, so we expect that to continue to drive repair and replacement activity. Certainly, the south central U.S. freeze helped during Q1, and we anticipate that tailwind will continue into the second quarter. That sudden freeze demand has also caused reduced channel inventory levels, so we expect there will be channel restocking in the second quarter as well. Feedback from many contractors in the Americas that business has picked up and looked solid in Q2. In Europe, except for drains, the underlying markets look better. In our drains business, the commercial marine market is expected to continue to be challenged for the foreseeable future. Government-sponsored home energy subsidies in Germany and Italy should continue to provide support, and we see stronger wholesaler activity in France, at least in the near term. However, the second half of the year is still unclear. Strength in Italy has been driven by government-sponsored programs protecting employment that are in place through June. and successful vaccine implementation across Europe is still a concern as many countries are lagging the progress in the U.S. and the U.K. In the Asia Pacific region, our China markets have come back strong, especially in commercial valve sales. And we see growth in both the Australian and New Zealand markets where the governments have done a good job controlling the pandemic. The Middle East is still being challenged by COVID, and we expect minimal market expansion there for the balance of 2021. Regarding our outlooks for Q2 and the remainder of the year, we expect a strong year-over-year performance in the second quarter given the negative impact COVID had last year and the expected positive impact from the freeze and channel restocking. We're increasing our full-year outlook given the stronger-than-expected first half. We still have some concerns about the second half, with the main issues being supply chain and logistics disruptions, the final impact of the commercial new construction air pocket, inflation, and vaccine rollouts outside the U.S. Finally, I want to mention a few points as we continue along our ESG journey. First, we remain vigilant towards the health and safety of our employees, which remains a priority. Masks, social distancing, and sanitation protocols remain embedded in our operations. Second, We recently took part in Project 24 in partnership with the Planet Water Foundation. We sponsored the installation of an integrated water system and funded a water health and hygiene education program for more than 600 students in a small Vietnamese town. Since the beginning of our partnership with Planet Water in 2016, we've provided approximately 30,000 people in nine countries with safe, clean drinking water. Finally, we'll be issuing our annual sustainability report in June. The enhanced report will discuss our latest accomplishments and some important near-term ESG goals. With that, let me turn the call over to Shashank, who will address our first quarter results and our second quarter and advise full-year outlooks. Shashank?