Watts Water Technologies, Inc.

Thank you and good morning, everyone. Welcome to our third 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 third quarter, our markets, and our operations. Shashank will discuss the details of our third quarter performance and provide our outlook for the fourth 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. 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 undertakes no 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. We were pleased with our third quarter results, which exceeded expectations. During the quarter, organic sales were down 4%. Strong growth in apnea was offset by declines in the Americas and Europe. The decline in the Americas was partly due to project timing and inventory safety stock reductions within our wholesale channel. Europe was weaker than expected as a result of continued heat pump stocking in our OEM channel. Adjusted operating margin of 17.1% exceeded our expectations, primarily driven by productivity and cost controls, which more than offset European volume deleverage. Adjusted operating margin was down 90 basis points compared to last year, primarily due to acquisition dilution and Europe volume deleverage. Year-to-date free cash flow continues to be solid, and we expect to generate seasonally strong free cash flow through year-end. The balance sheet remains healthy, and we have ample flexibility in our disciplined capital allocation strategy. Strategic M&A, high ROI capex, competitive dividends, and steady share buybacks remain our top capital allocation priorities. Moving to operations, the integrations of our Bradley, Josam, and Enware acquisitions remain ahead of schedule with solid synergy savings being realized largely due to the strong execution by our global operations and sourcing teams. We recently announced a project regarding the closure of a manufacturing plant in France. As we currently are consulting with the appropriate French Works Council and local government authorities, the timing for making a final decision to close the plant and related costs have yet to be determined or approved. If the project is approved, Our plan would be to move the production from this plant to existing plants in France and other locations. In addition, we have initiated other cost reduction actions to further optimize our cost structure. We expect to begin realizing these savings toward the end of 2024. Now, a few comments on our end markets. Global GDP remains positive and will continue to support repair and replacement activity, which represents approximately 60% of our business. Europe's residential and non-residential new construction markets continue to weaken. The reduced energy incentive programs continue to unfavorably impact OEM volume and drive destocking activity, especially in the heat pump markets. In the Americas, single-family new construction remains muted, and multifamily new construction indicators have been down double digits since the end of last year. On a positive note, America's institutional and light industrial new construction continues to be solid. Global megaprojects, including data centers, continue to provide a tailwind and are growing at a double-digit pace. We believe our strategic account teams in each region are well positioned to participate in this growing market. now an update on our outlook for the fourth quarter in the full year as a reminder due to our fiscal year calendarization in 2024 we had extra shipping days in the first quarter and will now have fewer shipping days in the fourth quarter compared to the prior year as a result we expect organic sales to be down mid to high single digits in the fourth quarter with an estimated five percent of that decrease attributable to fewer shipping days We also anticipate a sequential decline in operating margins due to normal seasonality, incremental investments, Volume D leverage, and the dilutive impact of our Bradley acquisition. While we expect Q4 to be softer, we are increasing the midpoint of our full-year adjusted operating and EBITDA margin outlook due to our solid year-to-date performance, improved acquisition profitability, and the benefit of cost actions initiated at the end of the third quarter which we expect will more than offset further weakness in Europe new construction and lower OEM volume from the reduced energy incentives in heat pump destocking. We continue to monitor the geopolitical uncertainty in the U.S., Europe, and the Middle East, and we believe we are positioned to proactively address any developments that may impact our operations. Moving on to slide four, I'd like to talk about the next phase of our smart and connected journey. Over the last five years, we have made the digitalization of our business and solutions a strategic priority. We have reached critical milestones, including achieving our goal of 25% of total sales being comprised of smart and connected enabled products by 2023. We have continuously increased usage of our digital solutions and remain focused on growing user adoption across our entire customer base. Today I'm thrilled to talk about what's next in this journey and excited to share details about Nexa, our intelligent water management solution. We've been field testing Nexa for over a year and are very excited about its unique potential to address critical trends within our industry, including skilled talent shortages in the facilities and plumbing spaces, the rise of smart building technologies, and concerned around aging water infrastructure. Additionally, NEXA's purpose is directly aligned with our long-term strategy, which focuses on water conservation, energy efficiency, and safety and regulation. NEXA uniquely integrates sensing hardware, smart and connected equipment, a legacy of plumbing and hydronic systems expertise, and cutting edge software into a powerful offering for customers in the commercial building space. This new solution provides unprecedented insight into water systems and unlock significant value in on-site operations and water risk management while supporting sustainability targets. We are able to provide this solution while continuously improving what our industry professionals care about most, the experience of the occupants in their buildings. If we turn to slide five, we can see what NEXA offers. At its core, NEXA helps protect properties against the costly impact of water damages saves teams time and effort associated with managing water assets, facilitates addressing water-related compliance needs, and provides critical insight to meet our customers' sustainability goals. It is a modular solution that can be deployed in any commercial property and is already empowering customers to address a wide spectrum of operational challenges, including water usage measurement, leak risk management, and mechanical room performance tracking. Nexa can either be used on its own to optimize building water systems or as a complement to existing building management solutions. It is easy to deploy in new builds or as a retrofit, intuitive to use, compatible with key water-related equipment, and comes with expert support that Watts is uniquely positioned to provide. It unlocks actionable value for users, managers, and owners of commercial properties and systems that have historically been complex and hard to monitor and automate. Nexa is a pivotal step in our goal to build new business models geared towards services and reoccurring revenue. It will be monetized through an ongoing subscription fee for active customers, while its adoption will increasingly create value for Watts by reinforcing our core business of equipment in solution sales. Based on feedback from customers, Nexa is an undeniably valuable tool, yielding many powerful examples of value creation in commercial properties such as multinational hotel brands, educational campuses, and franchise restaurant chains. From early detection of risk to solving complex system balancing issues, it has delivered immediate results for nearly every property deploying it. We encourage you to visit nexaplatform.com to find out more about the valuable water management solution we have created. Before I turn the call over to Shashank to discuss our financial results, I want to take a moment to comment on our CFO transition. We announced yesterday that Shashank will be retiring on March 15, 2025, although he will continue as CFO until a successor is named to ensure a smooth transition. We have begun a comprehensive search to identify a successor, which will include both internal and external candidates. The board, the executive leadership team, and I are incredibly grateful for Shashank's leadership during his more than six years as the CFO of Watts. He has been an invaluable partner and has made significant contributions to our success. With that, I'll turn the call over to Shashank, who will address your third quarter results and discuss our fourth quarter and full year outlook. Mr. Schenk.

Thanks, Bob, and good morning, everyone. Please turn to slide six, and I will review the third quarter's consolidated results. Sales of $544 million were up 8% on a reported basis and down 4% organically. Solid organic growth in apnea was offset by another challenging quarter in Europe and a decline in the Americas where we were unfavorably impacted by project timing and inventory safety stock reductions within our wholesale channel. The acquisitions of Bradley and Joe Sam contributed approximately $59 million, or 12%, and foreign exchange increased sales by approximately $1 million versus the third quarter of 2023. Compared to the prior year, adjusted operating profit of $93 million increased 2%, and adjusted operating margin of 17.1% was down 90 basis points. Adjusted EBITDA of $106 million increased 5%, and adjusted EBITDA margin of 20% was down 50 basis points. Adjusted operating and EBITDA margin benefited from price, productivity, favorable mix and cost controls, which were more than offset by inflation, volume deleverage, acquisition dilution of approximately 70 basis points, and incremental investments of $6 million. Adjusted earnings per share of $2.03 were slightly down versus last year, with benefits from acquisitions offset by decline in operational contribution and incremental interest expense. The adjusted effective tax rate was 25.2%, down 20 basis points compared to the prior year period. For gap purposes, we incurred approximately $7.4 million in restructuring and acquisition-related charges. These charges were more than offset by $7.8 million non-recurring gain on the settlement of the terminated Bradley pension plan. Our year-to-date free cash flow was $204 million, up from $182 million in the comparable period last year, primarily due to the contribution from our acquisitions. We expect the seasonally strong free cash flow to continue in the fourth quarter, and consequently, we are increasing our full-year free cash flow conversion target to 100% or more of net income from the 90% conversion previously communicated. The balance sheet remains robust and provides us with ample capital flexibility. Our net debt to capitalization ratio at quarter end was negative 6%, and our net leverage was negative 0.2. A strong cash flow, healthy balance sheet, and available credit continue to give us capital allocation optionality. Please turn to slide seven and I'll provide a few comments on the regional results. America's organic sales were down 3% and reported sales were up 14% year over year. Organic sales declined partly due to the previously communicated project timing between the second and third quarters and inventory safety stock reductions within our wholesale channel driven by our normalized lead times. The acquisitions of Bradley and Joe Sam added $59 million, or 17%, to America's sales in the quarter. Adjusted operating income increased 2%, while adjusted operating margins decreased 260 basis points. The operating margin decline was primarily driven by acquisition dilution, inflation, volume deleverage, and incremental investments which more than offset price and productivity. Europe organic sales were down 12%, and reported sales were down 11%, which included a 1% favorable impact from foreign exchange movements. Double-digit growth in our drains business was more than offset by declines in our wholesale plumbing sales in France, Benelux, and Scandinavia, as well as our OEM business in Germany and Italy, where heat pump destocking had a significant negative impact. Adjusted operating income decreased 10%, while adjusted operating margins increased 20 basis points. Price, favorable mix in productivity, offset inflation, volume deleverage, and incremental investments. APMEA organic sales were up 8% and reported sales grew 10% due to healthy demand and a 2% benefit from favorable foreign exchange movements. We saw strong growth across China, New Zealand, and the Middle East. Growth in China was driven by demand in data centers. Adjusted operating income increased 18%, and adjusted operating margin increased 130 basis points as volume and productivity more than offset inflation, incremental investments, and the dilutive effect of the annual acquisition. Slide 8 provides our assumptions about our fourth quarter and full year outlook. First, let's cover the fourth quarter outlook. On a reported basis, we expect sales to range between negative 4% to flat. We expect organic sales to decrease between 5% and 9%. As a reminder, we have fewer shipping days in the fourth quarter due to our fiscal year calendarization, which will result in approximately 5% of decline versus last year. Organic sales are expected to be down mid-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 addition to fewer shipping days, we anticipate continued softness in multifamily and non-residential new construction in the Americas and weaker European markets, partly due to continued heat pump and related product destocking. We expect incremental sales in the Americas from acquisitions to be between $20 and $25 million. Fourth quarter adjusted EBITDA margins are expected to be in the range of 18.6% to 19.2%, or up 70 basis points to 130 basis points. Fourth quarter adjusted operating margins should be in the range of 16% to 16.6%, or up 20 to 80 basis points. The increase versus the prior year is due to price, favorable mix and productivity, that are more than offsetting the reduced volume incremental investments of approximately $4 million and approximately 30 basis points of dilution from the Bradley acquisition. The sequential decline in operating margin from Q3 is driven primarily by the impact of seasonal volume deleverage and incremental investments. We are estimating a 1.08 euro-US dollar exchange rate for the fourth quarter versus the average rate of euro 1.07 in the fourth quarter of 2023. This equates to an increase of approximately $1 million in sales and less than one cent in EPS versus the prior year. Now let's cover the full year outlook. For full year 2024, we are narrowing our sales outlook range and expect reported sales to increase by nine to 10%. We expect organic sales to decline between one and 2% with the midpoint consistent with our previous guidance of minus 4% to plus 1%. Full year incremental acquired sales for Bradley and Joe Sam should be between $205 to $210 million. We are increasing our full year adjusted EBITDA margin outlook to a range of up 10 basis points to up 30 basis points. We are also increasing our full year adjusted operating margin expansion to a range of down 10 basis points to down 30 basis points. represent an increase of 20 basis points to the midpoint of our previous guidance. The solid results so far this year, along with our fourth quarter expectations, are anticipated to more than offset weakening in Europe and acquisition dilution of 60 basis points. We are also increasing our free cash flow conversion target to 100% or more of net income from the 90% conversion previously communicated. For the full year, we are assuming a 1.09 average EOSG effects 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 fourth quarter and the full year can be found in the appendix. With regards to my announced retirement, For the past six years, it has been a privilege to be a part of the WATS leadership team. While I'm looking forward to my retirement, I'm pleased to support the process to identify our next CFO and ensure a smooth transition. I am confident that our global team will continue to fulfill our mission and successfully execute our long-term strategy. Now, let me turn the call back over to Bob before we begin Q&A. Bob. Thanks, Shashank.