Watts Water Technologies, Inc.

The trading margin is also partially due to a very difficult comparison the second quarter of 2023 when margins exceeded 19%. Adjusted earnings per share of $2.46 increased 5% versus last year with growth driven by operational performance and solid contribution from our acquisitions. The adjusted effective tax rate was 25.2% of 50 basis points compared to the prior year period. primarily due to the reduction of foreign taxes associated with the repatriation of funds that occurred in the second quarter of 2023. For gap purposes, we incurred approximately $4 million of restructuring and acquisition-related charges. These charges were partially offset by a $3 million non-recurring gain on the sale of a building in the Americas. Our free cash flow year-to-date was $120 million compared to $89 million in the comparable period last year. The cash flow increase was primarily due to higher net income, lower working capital investment, and the contribution from our acquisitions. We expect sequential improvement in our free cash flow and are on track to achieve a full year free cash flow conversion goal of greater than or equal to 90% of net income as previously communicated. The balance sheet remains robust and provides us with ample flexibility. Our net debt to capitalization ratio at quarter end was negative 1%, and our net leverage was negative 0.1. A strong cash flow, healthy balance sheet, and the recent extension of our credit facility through July 2029 continue to give us capital allocation optionality. Please turn to slide six, and I'll provide a few comments on the regional results. America's organic sales were up 5%, and reported sales were up 22% year over year. Organic sales were ahead of our expectations as a result of higher volume, partly due to project shipping earlier than expected. We saw solid growth in our core valve products and our heating and hot water solutions. The acquisitions of Bradley and Josem added $65 million, or 17%, to America's sales in the quarter. Adjusted operating income increased 19%, while adjusted operating margin decreased 60 basis points. The operating margin decline was primarily driven by acquisition dilution, inflation, and incremental investments, which more than offset price, volume leverage, favorable mix, and productivity. Europe organic sales were down 15%, which was slightly worse than we expected. Reported sales were down 16% and included a 1% unfavorable impact of foreign exchange movements. Growth in Audrey's business was more than offset by declines in wholesale plumbing in France, Benelux in Scandinavia, as well as our OEM businesses in Germany and Italy, where heat pump destocking had a significant impact. Operating income decreased 48%, and operating margins decreased 620 basis points. Price, favorable mix, and productivity did not offset inflation and the significant impact of volume deleverage due to our high fixed cost base in Europe. Apnea organic sales were up 18%, And reported sales growth of 16% was negatively impacted by 2% from unfavorable foreign exchange movements. We saw growth across China, Australia, New Zealand, and the Middle East. Project timing contributed to the growth in China and the Middle East. Adjusted operating margins increased 70 basis points as volume and productivity more than offset inflation, incremental investments, and the dilutive effect of the acquisition. Slide seven provides our assumptions about our third quarter and full year outlook. First, let's cover the third quarter outlook. On a reported basis, we expect sales to increase between five and eight percent. Organically, we expect sales to decrease between four and seven percent. Organic sales are expected to be down low single digits in the Americas and down low double digits in Europe, partially offset by apnea which is expected to be up low single digits. In the Americas, we anticipate weakening in multifamily and non-residential new construction. In addition, our third quarter guidance includes the unfavorable impact of project timing in the Americas at NAPMEA, where we saw projects deliver in the second quarter, which was earlier than anticipated. It also includes a soft start to the quarter resulting from a reduction in safety stocks at some of our channel partners in the Americas, due to our normalized lead times. Gear markets are expected to remain soft, partly due to continued heat pump and related product destocking. We expect incremental sales in the Americas from acquisitions to be between $60 and $62 million. Third quarter adjusted EBITDA margins are expected to be in the range of 18.7 to 19.3%, or down 70 to down 130 basis points. Third quarter adjusted operating margins should be in the range of 16.2 to 16.8% or down 120 basis points to down 180 basis points. Acquisition dilution of 90 basis points, incremental investments of $6 million, and volume deal average, particularly in Europe, will all have an unfavorable impact. A few other items related to the third quarter. Corporate costs should be approximately $14 million and net interest expense should be approximately $2 million. The adjusted effective tax rate should be approximately 25%. We are estimating a 1.09 euro-US dollar exchange rate, which is flat compared to the third quarter of 2023. Now let's cover the full-year outlook. For full-year 2024, we are maintaining our outlook consistent with our previous guidance. Reported sales are expected to increase 70% to 12%, and organic sales are expected to range from down 4% to up 1%. Full-year incremental acquired sales from Bradley and Joe Sam should be between $210 million and $215 million. Our full-year adjusted EBITDA margin should be between 19.6% and 20.2%, or down 30 basis points to up 30 basis points. Our full-year adjusted operating margin should be between 17.1% to 17.7%, or down 70 basis points to down 10 basis points. Our better than expected second quarter, including acquisition performance, is expected to offset second half weakening in Europe, as previously mentioned. As a reminder, the operating and EBITDA margin guidance includes an increase in incremental investments of $2 million and acquisition dilution of 60 basis points. Our free cash flow expectation remains in line with our previous outlook as we expect to deliver free cash flow conversion of greater than or equal to 90% of net income in 2024. For the full year, we are assuming a 1.09 average Euro-US dollar FX rate versus the average rate of 1.08 in 2023. This would imply an increase of 1% year-over-year and would equate to an increase of $5 million in sales and 2 cents per share in EPS for the full year versus the prior year. Other key inputs for the full year can be found in the appendix. Now, let me turn the call back over to Bob before we begin Q&A.

Bob. Thanks, Shashank. On slide 8, I'd like to summarize our discussion before we address your questions. Our second quarter performance was better than we anticipated with record sales, adjusted operating income, and earnings per share due to better than expected performance in our Americas and AFIA regions. We are maintaining our full-year outlook with a solid first-half performance expected to offset second-half weakness, especially in Europe. Our portfolio is agnostic to end markets, and we are well-positioned to pivot to growing subverticals as needed. Our business model includes a large repair and replacement component that provides a durable base and drives steady revenue and cash flow. The integration efforts at Bradley, Josam, and Enware are going well. We are pleased with the progress today and excited about their growth potential. Our balance sheet remains robust and with a proactive extension of our credit facility provides ample flexibility to support our discipline capital allocation priorities. We are well positioned financially, operationally, and commercially, but I'm confident in our team's ability to execute despite the uncertain environment, which will enable us to continue creating value for our shareholders. With that, operator, please open the line for questions.

In order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Ryan Connors with North Coast Research. Your line is open.