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 second quarter 2023 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 number one on your telephone keypad. If you would like to withdraw your question, again, press star 1. Thank you. I will now turn today's call over to Diane McClintock, Senior Vice President, Financial Planning Analysis 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 the 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 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 the quarter. First, I'd like to thank the entire Watts team for their hard work and dedication to diligently serving our customers worldwide. Together, we delivered another better than expected quarter, despite tough comparisons to a very strong second quarter in 2022. We finished the quarter with record sales, operating margin, and earnings per share, leading to the decision to raise our full year 2023 outlook. The Europe and APMEA regions were resilient as organic sales grew at a mid single digit pace, primarily due to price. Sales in the Americas region were down low single digits as we expected due to a tough comparison to a very strong second quarter in 2022 where organic sales were up 22%. Strong growth in our non-residential core valve products was more than offset by double digit declines in our gas connectors, radiant heating applications, and commercial marine instrumentation. Adjusted operating margin exceeded expectations supported by solid price realization, favorable mix in productivity, which more than offset inflation, lower volume, and incremental investments. Year-to-date free cash flow has been strong and has added to the strength of our balance sheet. We expect to generate strong free cash flow into the second half of 2023, which will afford us ongoing flexibility in our balanced capital allocation strategy. To that end, our Board approved a new $150 million share repurchase program. This program will follow on our existing plan as stock repurchases remain an important part of our capital allocation strategy. As a reminder, stock buybacks, along with high ROI CapEx investments, competitive dividends, and strategic M&A, such as our recent NWARE acquisition, remain our top capital allocation priorities. Moving to operations, the integration of our NWARE acquisition is going well and cost actions are ahead of schedule. By leveraging our one-watch performance system and collaborating with the NWARE team, we have been able to seamlessly integrate and align the organization and efficiently streamline operations. We are excited about the future of NWARE as we continue to scale our operations in Australia. While inflation is moderating, it is still above normal historical levels. We continue to assess our price-cost relationship and will address price increases as needed. Automation is a big focus for our capital spending and is necessary to offset labor shortages and drive productivity. We expect to continue these investments to enhance productivity in our factories. Next, I'd like to provide an update on our end markets. While GDP is down compared to 2022, it remains positive in our key markets and is contributing to continued repair and replacement activity. Europe remains solid in the quarter as growth continued in Germany, France, and Benelux. However, we do expect softening marketing additions in the second half of the year, driven by a slower residential market, declining Eurozone PMI, and the potential impact of changes to the energy incentive program in Italy. In the Americas, new residential single-family construction appears to have bottomed out and multifamily new construction is holding up. Non-residential new construction indicators are mixed, but have shown recent resilience. After multiple readings below 50 dating back to the fall of last year, the May and June ABI index readings bounced back above 50, indicating expansion. The Dodge Momentum Index is still suggesting that growth in non-residential projects will continue. the institutional industrial verticals have remained solid year-to-date, and we expect this to continue through 2023. In the Asia-Pacific region, growth in China has decelerated in recent months. We are seeing strengthening markets in the Middle East due to continued higher oil prices. Australian markets remain resilient despite continued interest rate increases, and our recent NWARE acquisition gives us confidence that we'll continue to grow in Australia. Now, an update on our outlook for the third quarter and the remainder of the year. Due to challenging comps as a result of a strong third quarter 2022, we expect our third quarter organic sales growth to be lower versus prior year. We also anticipate declining operating margins due to normal seasonality, incremental investments, and volume deleverage. While we expect difficult comps in Q3, we are increasing our full year outlook due to a strong first half performance as well as better-than-expected price and favorable mix. We expect America's non-residential business to remain solid but be offset by weak single-family residential and continued softness in certain specialty channel products. We also anticipate the second half to be softer in Europe due to weakening macros. Inflated interest rates and lending tightening may also have an impact on new construction. In addition, we are accelerating $3 million of investments into 2023 and increasing our full-year investments to $23 million from the $20 million previously communicated to fund new product development, including smart and connected enabled products. On slide four, I'd like to update you on our smart and connected offerings. Year-to-date, the percentage of smart and connected enabled product sales to total sales reached 23%. Our goal has been to achieve 25% of sales from smart and connected-enabled products by the end of 2023, and we expect to meet that goal. I would also like to share with you one of the new smart and connected products that was developed by the team at Enware. The SmartFlow Meter Risk Management System incorporates a smart thermostatic mixing valve, tapware, and other hardware to provide monitoring and flow management capability. The SmartFlow platform serves the healthcare vertical and provides visibility into water system delivery that will enhance asset performance and longevity, reduce operating costs, and help proactively manage bacterial and scalding risk while ensuring a more comfortable patient experience. We are excited about the SmartFlow and other new products as we continue to grow our smart and connected product offering. On slide five, I'd like to comment on our most recent sustainability report. In May, we published our 2022 Sustainability Report, which highlights the accomplishments and the progress we've made within our four ESG pillars, footprint, handprint, social responsibility, and corporate governance. Our focus on our sustainability triple play, safety and regulation, energy efficiency, and water conservation, has allowed us to deliver tremendous value to our customers as we continue to enhance efficiency, and transform traditional products into our smart and connected solutions. Our focus on social responsibility reflects our people-first approach and commitment to making people and communities safer, healthier, and stronger. Sustainability is a core commitment at Watts that extends into all aspects of our business. I'm proud of the progress our global team has made and invite you to read more about it in our sustainability report which can be downloaded from our investor relations website. With that, let me turn the call over to Shashank, who will address our second quarter results and our third quarter and revised full year outlook. Shashank.