Watts Water Technologies, Inc.

Senior Vice President of Investor Relations. Please go ahead.

Thank you and good morning, everyone. Welcome to our first quarter 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 first quarter, an operational update, and an update on our outlook for 2025. Shashank will discuss the details of our first quarter performance and provide our outlook for the second 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'll 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 first quarter. We began 2025 with better than expected first quarter results, including record adjusted operating income, adjusted operating margin, and adjusted earnings per share. I'd like to thank the entire Watts team for their significant contributions during the quarter. Organic sales declined 2% in the quarter due to fewer shipping days, which we noted on our last earnings call, and continuing weakness in Europe. We benefited from incremental sales from our ICON acquisition. However, the benefit was more than offset by unfavorable foreign exchange. Adjusted operating margin of 19% exceeded expectations due to better than expected volume, productivity, and cost controls. As a result of our solid start to 2025 and expected cash flows for the remainder of the year, we announced a 21% dividend increase beginning in June. Our balance sheet remains strong and provides ample capacity to support flexibility in our capital allocation strategy. From an operations perspective, we are proactively working to mitigate the impact of tariffs. We expect that our vertical integration strategy with the manufacturing close to our customers here in the US will benefit us. We have a proven track record of successfully navigating inflation and supply chain challenges and are competent in our ability to execute through the current environment. I'll talk more about tariffs in a minute. We continue to drive productivity savings through automation, lean initiatives both inside and outside the factory walls, leveraging our one watts performance system and selective restructuring actions including the previously announced exit from a manufacturing facility in france the exit is progressing as expected and will be complete by year end we're pleased with the progress of the integration efforts with our recent icon acquisition and our teams are working together to capitalize on synergies we expect icon to be accreted to adjusted ebitda margins and adjusted EPS in 2025. Now, an update on our outlook for the remainder of the year. Despite the uncertainty around the trade environment and resulting demand impacts, we're maintaining our full-year organic sales and adjusted operating margin outlook. We anticipate that price increases, our global sourcing actions, and accelerated onshoring of production should offset incremental tariff costs and any potential demand reduction in the second half of 2025. There are a few positives to note. Our solid first quarter and outlook for the second quarter are supportive of our full year outlook. Mega project activity, including data centers, remains strong. We also expect to see a benefit from foreign exchange movements relative to the outlook we provided in February. Recently, global GDP forecasts have been revised downward including a first quarter contraction in the U.S. Given the uncertain impact of tariffs on inflation, we expect interest rates to remain higher for longer. This may unfavorably impact residential and non-residential new construction in the second half of the year. We expect continued weakness in Europe due to a slowdown in new construction amid continued economic weakness. We saw ongoing heat pump destocking in the first quarter and anticipate this to continue in the second quarter. But current market feedback suggests potential recovery in the second half of the year. Please turn to slide four and I'll provide an overview of the cost impact of the current tariffs and the actions we're taking. The table on the left illustrates the estimated impact of currently enacted tariffs on our 2025 call space. We source globally and expect there will be some impact on most countries we import from with the biggest impact on raw material and components sourced from China. We've been proactively working on a number of actions to offset the cost impact, including implementing price increases, relocating our supply chain by leveraging our dual source supply base, and increasing capacity across our U.S. manufacturing footprint. We've invested in our North American footprint and supply chain diversification over many years and believe we're well positioned to mitigate the impact of tariffs on our cost base and stakeholders. One last item I'd like to mention is that our search for a new CFO is ongoing, and we're making good progress. We'll inform you as soon as we have identified a candidate. In the meantime, Shashank will stay on as CFO to ensure a smooth transition. With that, let me turn the call over to Shashank, who will address our first quarter results and our second quarter and full year outlook. Shashank?