Watts Water Technologies, Inc.

ladies and gentlemen thank you for standing by my name is brent and i will be your conference operator today at this time i would like to welcome everyone to the second quarter 2022 watts water technologies inc earnings call all lines have been placed on mute to prevent any background noise after the speaker's remarks there will be a question and answer session if you'd like to ask a question at that time simply press star followed by the number one on your telephone keypad If you would like to withdraw your question, again, press star one. Thank you. It's now my pleasure to turn today's call over to Diane McClintock, Senior Vice President, FP&A, and Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to our second 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 second quarter and discuss the current state of the markets and our operations. He will also update you on our smart and connected product initiatives and our sustainability efforts. Shashank will discuss the details of our second quarter performance and provide our outlook for the third quarter and for 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 this presentation. Before we begin, 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 Watt'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, Diane, and good morning, everyone. Please turn to slide three, and I'll provide an overview of our Q2 performance. Firstly, I want to thank our employees around the world who have executed through the challenges of record inflation, the effects of the Ukraine war on Europe's economy, COVID lockdowns in China, and the continuing supply chain disruptions. Our success is a result of the dedication of our team to serving our customers. We continued our strong start to the year with our second quarter results significantly better than we expected. During the quarter, we benefited from incremental sales due to our decision to invest in inventory, which allowed us to better serve our customers. Our Americas team delivered another quarter of double-digit growth despite the difficult prior year comparisons due to the impact of the freeze in the South Central U.S. in the first half of last year. We were able to deliver mid-single-digit organic growth in Europe despite the impact of the Ukraine war the exit of Russia business, and escalating inflation. And in apnea, while lockdowns impacted several of our key markets, the team still delivered top-line growth in the quarter. Adjusted operating margin exceeded expectations supported by price, volume, and productivity, which more than offset inflation, incremental investments, and cost normalization. We benefited in the quarter from our proactive investment in inventory at lower cost in parallel with increased price. This favorable dynamic subsides in the second half of the year when the price and cost become more balanced. Year-to-date free cash flow has been seasonally slow due to additional working capital needed to meet the current demand and our investment in inventory. We anticipate sequential improvement through the second half due to normal seasonality. Our supply chain and sourcing teams have done a great job securing components and managing cost increases. We're beginning to see some easing in our supply chain. However, electronic component availability is still challenging. We are committed to investing an incremental $20 million during 2022 to benefit our future and our smart and connected strategy. Now, I'd like to provide an update on our end markets. In the Americas, non-residential new construction indicators are mixed. The ABI and Dodge Momentum Index continue to be positive. However, they have shown recent moderation. Institutional and industrial remain positive, but there is slowing in retail, hotels, and office building sub-verticals. The North America repair and replacement market is currently holding up well, despite downward revisions of GDP. New residential single-family construction is beginning to slow, as rising interest rates and material inflation are starting to take effect. However, multifamily starts continue to be solid as declining single-family home affordability has bolstered rental demand. In Europe, the war on rising energy costs have triggered both a reduction in GDP forecasts and concern of a potential recession. As previously communicated, we have stopped our direct shipments to Russia. The impact is estimated to be approximately $12 million annualized and approximately $3 million in the second quarter. We anticipate that the second half of 2022 will be sequentially slower than the first half for our European business. In the Asia Pacific region, our China markets were negatively impacted by the COVID lockdowns, particularly our heating business. As the lockdowns have lifted, business activity is resuming. However, there could be some continuing impact in the third quarter as job sites are slow to reopen. Now, an update on our outlook for the third quarter and the remainder of the year. We expect organic sales growth and margin improvements versus the prior year in the third quarter. Price and productivity should more than offset any impacts from the war in Ukraine, inflation, and incremental investments. As a result of our solid start, and our third quarter expectation, we are increasing our full year outlook. We expect solid demand in the Americas could buffer against the anticipated slowing European economy driven by the impact of the war in Ukraine. On slide four, I'd like to update you on our smart and connected initiative. As part of our strategic focus to grow organically, we're investing in innovative, new smart and connected products, and I'd like to share a couple of them with you today. During the second quarter, the percentage of smart and connected enabled product sales to total sales increased sequentially as compared to the first quarter as well as the full year, 2021. We continue to make progress towards our goal of 25% smart and connected enabled product sales by 2024. Our Sentinel leak defense system detects water leaks in pipes and prevents significant water damage in a home or business. reducing insurance costs and providing peace of mind to property owners. The system employs a smart valve and thermodynamic sensing probes to monitor flow. The valve will close preventing additional flow and a notification alert is sent via the proprietary app if the preset flow parameters are exceeded. The Blucher connected roof drain provides early detection of blockages in rooftop drainage and helps prevent potential damage resulting from flooding. The system detects water levels and temperatures and will trigger a notification to the building management system or app if readings exceed certain levels. The temperature capabilities are also designed to detect snow or ice and send notifications to enable ice or snow melt controls. As you can see, our investments in smart and connected solutions are providing real-time problem solving and great value to our customers. Now, on slide five, I'd like to update you on our sustainability efforts. In June, we issued our 2021 sustainability report, highlighting our accomplishments and establishing some longer-term goals to reduce our environmental impact. During 2021, we worked to further distinguish ourselves as a responsible and committed corporate citizen, finding strategic opportunities to advance each aspect of our ESG strategy. In early 2022, we proudly joined the United Nations Global Compact, reaffirming our commitment to incorporate the UNGC's principles and standards on human rights, labor, and environment, and anti-corruption into our strategy, culture, and operations. During the year, we improved water use intensity by 28%, greenhouse gas intensity by 30%, and hazardous waste intensity by 23%. We are also solving sustainability challenges for our customers by designing and commercializing sustainable products and solutions based on our triple play theme of safety and regulation, water conservation, and energy efficiency. We continue to focus on social responsibility. In 2021, we achieved zero recordable injuries at 13 sites, established diverse hiring targets at 12 US sites, and collaborated with Planet Water to provide clean, safer drinking water to families in disadvantaged areas. In addition, we encourage and supported the formation of six different employee resource groups as part of our overall work to attract, retain, and inspire talent at Watts. Sustainability is core to what we do at Watts. It is a key component of our strategy and is ingrained in our culture. We look forward to continuing our sustainability journey and furthering our commitment to improving our communities. With that, let me turn the call over to Shashank, who will address our second quarter results and our third quarter and revise full year outlooks. Shashank.