Watts Water Technologies, Inc.

Joining me today are Bob Pagano, President and CEO, and Shashank Patel, our CFO. During today's call, Bob will provide an overview of 2024 as well as an update on our expectations for 2025. Shashank will discuss the details of our fourth quarter and full year financial results and provide our outlook for the first quarter and full year 2025. 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, please 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'll turn the call over to Bob.

Thank you, Diane, and good morning, everyone. Please turn to slide three, and I'll provide a recap of 2024 and an overview of the key drivers for our 2025 outlook. 2024 was a momentous year for us. marking the 150th anniversary of the company and another year of record performance. I'd like to start by thanking the entire Watts Water team for their tremendous contributions to these results. We finished the year with a solid quarter that exceeded our expectations, including record fourth quarter adjusted operating margin and adjusted EPS. We drove record full-year sales, operating income, earnings per share, and free cash flow. Organic sales decreased by 1%, largely driven by weakness in Europe, and adjusted EPS increased by 7%. Adjusted operating margin decreased only 10 basis points versus the prior year, despite 60 basis points of acquisition dilution, significant volume deleverage from weakness in Europe, and incremental investments in our long-term strategy. We generated record-free cash flow of $332 million, an increase of 18%, with a conversion rate of 114%, well above our expectations. Our balance sheet remains strong and provides us with the flexibility to continue investing for the future. Strategic M&A, high return investments, competitive dividends, and stable share buybacks remain our top capital allocation priorities. Moving to operations. Over the course of 2024, we were able to drive significant productivity savings through investments in automation, our focus on lean initiatives both inside and outside the factory walls, leveraging the one watts performance system, and selective restructuring actions. These savings enabled us to mitigate the dilutive impact of acquisitions and the impact of European Volume D leverage on our operating margins. We expect to continue investing to enhance productivity in our factories and drive margin expansion. As previously announced, we closed on our acquisition of Icon Systems on January 2, 2025. Icon is a leading provider of innovative plumbing and water management solutions. This strategic acquisition will expand our digital offerings and provide growth opportunities in the correctional facilities niche of the institutional market. Integration is underway and progressing well. We expect ICOM to be modestly accretive to adjusted EPS in 2025 after factoring in incremental interest expense and normal purchase accounting adjustments. Last week, our board authorized a restructuring program involving the exit from a manufacturing facility in France. We'll be moving the production from this plant to existing plants in France and other locations. This action will help to simplify our manufacturing structure and provide incremental productivity. The majority of the expected costs for this program will be recorded in the first quarter. Full year run rate savings should be realized in 2026. Shashank will provide more financial details on this in a moment. As discussed in our last earnings call, we introduced our new intelligent water management solution, NEXA. We continue to work multiple go-to-market strategies, and the pipeline is growing nicely. Feedback from customers has been positive with concrete results of value creation from risk mitigation, reduced water consumption, and improved occupant comfort. We look forward to continued scaling of our ecosystem of digital solutions in 2025. As part of our OneWATS performance system, We regularly assess our portfolio and phase out low performing products under our 80-20 model. As part of this process, we have identified approximately 10 million to 15 million of sales we expect to eliminate over the course of 2025, a significant portion coming from our integration of Bradley. We expect these actions will be margin accretive in 2025. Now, an overview of the drivers for our outlook for 2025. We believe that price as well as repair and replacement activity will continue to drive growth in 2025. Global GDP, a proxy for our repair and replacement business, has slowed but remains positive in our key end markets. In the Americas, non-residential new construction indicators are mixed. The ABI remains below 50, implying a slower 2025. The Dodge Momentum Index is slightly more positive suggesting growth in non-residential products will continue into 2025, primarily supported by strength in institutional and megaprojects, including data centers. However, we believe growth in institutional and megaprojects will be partly offset by more challenged subverticals, including offices, retail, warehouses, and recreation. For residential new construction, we expect single-family will be flat to slightly up. multifamily permits were in decline for most of 2024. With interest rates remaining elevated, we expect multifamily starts to decline double digits throughout 2025. As a reminder, multifamily new construction accounts for less than 10% of our total sales. With the uncertainty surrounding the direction of inflation and policy under the new U.S. administration, we expect interest rates to remain higher for longer, which may delay construction projects. We expect Europe residential and non-residential new construction to remain weak. In addition, we expect the heat pump destocking that has unfavorably impacted our OEM partners in Germany and Italy to continue in the first half of 2025. The reduced volume will have a more significant impact on earnings due to our higher fixed cost base in Europe. In addition to the planned closure of the manufacturing site in France, we implemented headcount restructuring actions in the fourth quarter that will help reduce the impact of volume deleveraging. Europe sales represent approximately 20% of our business. We expect growth in the Asia-Pacific region with stronger growth in China data centers and in the Middle East with modest growth in Australia and New Zealand. We continue to monitor U.S. policy uncertainty, including potential tariffs and geopolitical uncertainty in the Middle East and Europe. We expect to proactively address any direct or indirect impacts to our customers and supply chain. 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 of 2025. Shashank?

Thank you, Bob, and good morning, everyone. Please now turn to slide four, which highlights our fourth quarter results. Sales of $540 million were down 1% on a reported basis and down 5% organically. As previously discussed, we had fewer shipping days in the fourth quarter, which unfavorably impacted our sales by approximately 5% across all regions. America's organic sales were down 3% and reported sales were up 3%. This was better than expected, particularly with the reduced shipping days. Some of this favorability was a result of several large projects shipping earlier than expected. Sales from our Joe Salmon Bradley acquisitions added $23 million. Europe organic and reported sales were down 15% with declines across all geographies due to fear shipping days, heat pump destocking at our OEM partners in Germany and Italy, and weakness in new construction markets triggering some destocking in the wholesale channel. APMEA delivered 3% organic growth, while reported sales growth of 4% was favorably impacted by 1% from foreign exchange movements. Double-digit growth in China and the Middle East was partly offset by declines in Australia and New Zealand, primarily driven by fewer shipping days. Compared to the prior year, adjusted EBITDA of $104 million increased 6%, and adjusted EBITDA margins of 19.3% increased 140 basis points. Adjusted operating profit of $91 million increased 5%, and adjusted operating margins of 16.8% was up 100 basis points. Adjusted EBITDA and operating income benefited from price, productivity, favorable mix and cost controls, which more than offset inflation, volume deleverage, investments, and acquisition dilutions. America's segment margins increased 160 basis points to 21.8%. Europe's segment margins decreased by 480 basis points to 10.2%. And APMEA's segment margins increased 480 basis points to 17.5%. Adjusted earnings per share of $2.05 increased 4% versus last year, with benefits from acquisition, operational contribution, and reduced interest expense more than offsetting incremental tax expense. The adjusted effective tax rate in the quarter was 24.6%, up 230 basis points compared to the fourth quarter of 2023, primarily due to the recognition of additional R&D credits in the fourth quarter of 2023. Moving to the full year results, please turn to slide five. As Bob mentioned, we delivered record operating results for 2024. Sales were $2.25 billion, up 10% on a reported basis and down 1% organically. The organic decline was primarily driven by the challenging year in Europe. Acquisitions accounted for 11% or $215 million of incremental sales. Globally, foreign exchange had an immaterial impact. Adjusted EBITDA of $454 million increased 11% An adjusted EBITDA margin of 20.1% increased 20 basis points. Adjusted operating income of $400 million increased 9%, and adjusted operating margins of 17.7% decreased 10 basis points. As Bob noted, adjusted operating margin decreased only 10 basis points versus the prior year, despite 60 basis points of acquisition dilution and significant volume deleverage from weakness in Europe. Similarly, the Americas segment margin was unfavorably impacted by 140 basis points of acquisition dilution. Excluding acquisitions, the Americas core business operating margin was up 100 basis points and APMEA was up 170 basis points, a very strong performance by both teams. Adjusted EPS of $8.86 increased by 59 cents or 7% versus the prior year. benefits from acquisition, operational contribution, and reduced interest expense more than offset incremental tax expense. For GAAP purposes, we incurred after-tax charges of $16.1 million in restructuring and acquisition-related costs. These charges were partly offset by $10.3 million of non-recurring gains on the sale of assets, the settlement of the terminated Bradley pension plan, and other investment gains. Free cash flow for the full year was $332 million, an 18% increase compared to 2023, and was a company record. The increase was driven by higher net income, improved working capital, and cash flow generated by acquisitions. Our 2024 free cash flow conversion was 114%. We returned $73 million to shareholders in the form of dividends and share repurchases in 2024, and increased our annual dividend return by 20%. Our net debt to capitalization ratio at year end was negative 13% compared to negative 4% at year end 2023. Our net leverage ratio at year end is negative 0.4. Our balance sheet continues to be in excellent shape and provides substantial flexibility to fund our capital allocation priorities. Now on slide six, Let's review our outlook for the full year 2025 and our expectations for the first quarter of 2025. Our 2025 outlook reflects the market factors previously discussed by Bob. Starting with the full year assumptions on both a reported basis and organic basis, we expect sales to range between down 3% to up 2%. Regional expectations are as follows. Americas from down 3% to up 3%, Europe from down 8% to down 2%, and APMIA from flat to up 5%. In addition, we expect approximately $25 million of incremental sales in the Americas from acquisitions to be offset by the impact of 80-20 product rationalization of between $10 million and $15 million, and the unfavorable impact of foreign exchange across all regions, which equates to a decrease of $28 million in sales and 11 cents per share in EPS versus the prior year. Adjusted EBITDA margin is expected to be in the range of 20.4% to 21% or up 30 to 90 basis points. Adjusted operating margin should be in the range of 17.7% to 18.3% or flat to up 60 basis points. From a regional perspective, the America's segment margin is expected to be flat to up 60 basis points. We anticipate the segment margin in Europe will be down 30 basis points to up 30 basis points, and apnea will be flat to up 60 basis points. We expect the margin improvement to be driven by price, productivity, and restructuring savings, which will more than offset inflation and volume deleverage. As Bob mentioned, we have completed negotiations to exit a facility in France. Total pre-tax exit costs are estimated to be approximately $22 million. We will record a majority of the costs in the first quarter and provide more detail during our first quarter earnings call. Most of the costs are severance related and are expected to be incurred in 2025. Full year pre-tax run rate savings are estimated to be $3 million which should be fully realized in 2026. We expect about $1.5 million in savings this year, largely in the second half. We expect to deliver free cash flow conversion of greater than or equal to 100% of net income in 2025. Finally, a few items to consider for Q1. On a reported and organic basis, we expect sales to decrease between 3% and 7%. Reasonably, we expect a low to mid single digit decline in the Americas and a high single to low double digit decline in Europe, partly offset by apnea, which is expected to be flat. Based on the calendarization in 2025, we'll have fewer shipping days in the first quarter versus last year, which will unfavorably impact sales by approximately 3%. We also expect Europe to remain weak as heat pump destocking is expected to continue at least through the first quarter. We expect approximately $5 million of incremental sales in the Americas from acquisitions to be offset by the unfavorable impact of foreign exchange across all regions, which equates to a decrease of $7 million in sales and 3 cents per share in EPS versus the prior year. We do not expect a significant impact from our 80-20 actions in the first quarter. First quarter EBITDA margin is expected to be in the range of 19.4 to 20% or down 60 to 120 basis points. Operating margins should be in the range of 16.9% to 17.5% or down 70 to 130 basis points. This is primarily due to the volume deleverage impact of fear shipping days and continuing European weakness. Other key inputs for the first quarter and the full year can be found in the appendix. With that, I'll turn the call back over to Bob before moving to Q&A. Bob.