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 watts water technologies inc fourth quarter 2022 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 would 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 is now my pleasure to turn today's call over to Diane McClintock, Senior Vice President of Investor Relations. Ma'am, please go ahead.

Thank you and good morning, everyone. Welcome to our fourth quarter and full year 2022 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 2022 as well as an update on our expectations for the markets in 2023. Shashank will discuss the details of our fourth quarter and full year financial results and provide our outlook for Q1 and the full year 2023. 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. 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 turn the call over to Bob.

Thank you, Diane, and good morning, everyone. Please turn to slide three in the earnings presentation, and I'll provide a recap of 2022 and some initial thoughts regarding 2023. I'd like to start by thanking the entire Watts Water team We've continued to execute and provide outstanding service to our customers despite escalating inflation, supply chain challenges, and labor shortages. The team's collective efforts delivered another strong quarter and record full-year sales, operating margin, earnings per share, and free cash flow. Organically, full-year 2022 sales increased by 13%, adjusted operating margin increased by 210 basis points, and adjusted EPS increased by 29%. We delivered record operating margin while still investing in incremental $23 million for the future, including spending on our smart and connected initiatives. We generated record free cash flow in the fourth quarter to end the year at 201 million, which represents an 80% conversion rate. Our balance sheet remains strong and provides us with the flexibility to continue to invest for the future through our strategic investments in R&D, smart and connected projects, factory automation, and M&A. From an M&A perspective, we have signed a definitive agreement to acquire the assets of Enware Australia, a leading supplier of specialty plumbing and safety equipment. This acquisition will expand our presence and scale in the Australian market and further provide channel access. We expect to close the acquisition later in Q1 and we'll discuss our expectations in our Q1 earnings call. Operationally, our team did an outstanding job executing through numerous challenges. We were able to deliver meaningful margin expansion in 2022 despite unprecedented inflation and material, labor, overhead, and energy costs. Our teams overcame material availability challenges, drove cost savings, and realized price increases to keep in front of our cost base. We maintained our focus on the customer and invested in inventory early to ensure we had stock on the shelves during supply chain disruptions throughout the year. We've been reducing our inventories as supply chains have begun to normalize. However, there are still some challenging areas, including electronic component availability. We successfully completed the closure and sale of our plant in Marie, France, and transferred all production to sister facilities in France, reducing our footprint in Europe. Our focus on ESG is evident at all levels of our organization. Our employees, customers, and suppliers are all engaged in expanding the positive impact we can have on our environment and communities. I'll talk a bit more on our sustainability progress in a moment. Now, I'd like to talk about our view of the markets in 2023. From a macro perspective, global GDP has slowed but remains positive in our key markets. The North America repair and replacement market is currently solid despite lower GDP. Rising interest rates have significantly slowed single-family new construction, and this is expected to decline double digits in 2023. While multifamily new construction remains resilient today, some leading indicators suggest a slowing in multifamily as 2023 progresses. In the Americas, non-residential new construction indicators are mixed. The ABI dipped below 50 for the last few months, suggesting a slowing toward the end of 2023. However, the Dodge Momentum Index continues to be in expansionary territory, suggesting growth in non-residential projects will continue into 2023. Other forecasts, including the AIA consensus construction forecast, are slightly more optimistic with expectations of mid-single-digit growth in 2023. Certain sectors have been resilient. including healthcare, education, data center projects, and food and beverage. In Europe, energy costs, inflation, and the war in Ukraine continue to have an impact on economic activity. Eurozone GDP has trended downward, although it is expected to remain slightly positive in 2023. We expect government sponsored energy subsidies to continue to provide support in Germany and Italy. As a reminder, Europe represents approximately 25% of our business. In the Asia Pacific region, China's economy is now forecasted to grow in the low single digits in 2023. China markets have been significantly impacted by the reopening after the elimination of the zero COVID policy. We expect the aftermath to last at least through Q1. In addition, both Australia and New Zealand are seeing the impact of interest rate increases on residential markets. The economy in the Middle East region is expected to grow low to mid single digits in 2023, and we expect the strength in the oil industry to support new construction. Now, a preview of the drivers for our outlook for 2023. We expect challenging comps for the year after a record 2022. Rollover price, repair and replacement activity, and non-residential new construction will be supportive, at least through the first half of the year. Weakness in Europe will continue. The slowing volume will have a more significant impact on our earnings due to our higher fixed cost base in Europe. We did take additional restructuring actions at the end of the fourth quarter, which will help to reduce the impact of the volume deleveraging. In addition, we expect higher interest rates and inflation to unfavorably impact single-family residential new construction. As a reminder, this is less than 10% of our total business. Despite the tougher 2023 macro backdrop, We're continuing to invest in strategic initiatives, including our smart and connected enabled products, and expect full year incremental investments of approximately $20 million. Now, I'd like to update you on our smart and connected initiative. Please turn to slide four. As part of our strategic focus to grow organically, we're investing in innovative new smart and connected enabled products. We invested an incremental $15 million in support of our smart and connected initiatives in 2022 with more than half of our total R&D spend linked to smart and connected products. We have a team of over 100 engineers supporting this important initiative. We ended 2022 with approximately 19% of total sales generated from the sale of smart and connected enabled products. The percentage increased 300 basis points over 2021 and sequentially increased each quarter as we introduced 20 new products. These new products are contributing towards our goal of generating 25% of our sales from smart and connected enabled product sales by the end of 2023. Let me now highlight one of our new smart and connected product solutions. Our Aegis system by Link provides building owners with a cost-effective hot water system that limits greenhouse gas emissions by combining an innovative carbon dioxide heat pump with key ancillary equipment, such as domestic water heater exchange skids, electric hot water tanks, and mixing valves. The technology provides flexibility to build systems customized to unique applications. Integrated into a building automation system, the Aegis system can monitor unit status in real time, record operational data, check for faults with alarms and warnings, and change set points and operating modes. We're excited about the progress we have made in the future of our smart and connected systems. Our goal is to lead our industry in connecting our products and providing superior benefits to our customers. Please turn to slide five, and I'll update you on our sustainability progress. Our mission at Watts is to improve comfort, safety, and quality of life for people around the world through our expertise in solving water-related challenges. Sustainability is inherently part of how we fulfill our mission. We focus daily on improving sustainability outcomes for ourselves, our customers, and our communities by aligning to long-term secular growth trends including safety and regulation, energy efficiency, and water conservation. We work to reduce the water, carbon, and waste footprint across our operations and create innovative products and solutions for our customers to help them protect, control, and conserve critical resources. Social responsibility is critical at Watts, where safety at our sites is always our first priority. We encourage a diverse, equitable, inclusive environment to ensure all employees are heard, and we strive to make a positive economic and social impact on our communities. Recently, we issued a human rights policy aligned with the UN Global Compact. We also endorsed the CEO Water Mandate expanding our commitment to water stewardship. Our Sustainalytics ESG score improved by 24%, promoting Watts to a low-risk category. And finally, Watts was again recognized as among America's most responsible companies for the fourth consecutive year. With that, let me turn the call over to Shashank, who will address our results for the fourth quarter and full year and offer our outlook for Q1 in the full year 2023. Shashank?