Ladies and gentlemen, thank you standing by. My name is Brent, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Watts Water Technologies First Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise, and after the speakers' remarks, there’ll be a question-and-answer session. Thank you. It is now my pleasure to turn today's call over to Diane McClintock, Senior Vice President of Investor Relations. Please go ahead.

Thank you and good morning, everyone. Welcome to our first 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 first quarter and discuss the current state of the markets and our operations. Shashank will discuss the details of our first quarter performance and provide our outlook for 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 this 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 what'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 now turn the call over to Bob.

Thank you, Diane and good morning, everyone. As many of you know, Tim MacPhee retired last month and Diane McClintock has assumed his responsibilities within Investor Relations. Diane has been with Watts for over 10 years, has been an integral part of our finance team and a key contributor to earnings and investor communications. We are confident the transition will be seamless. Please turn to slide three and I'll provide an overview of the quarter. We have a strong start to the year, with our first quarter results better-than-expected with record operating margins. I want to thank the entire team for their contributions as they manage through supply chain disruptions, labor shortages and unprecedented inflation. Demand remained strong, and our Americas teams delivered double-digit growth despite the difficult prior year comparisons due to the freeze in the South Central U.S. in the first half of last year. The underlying markets in Europe held up during the quarter despite the impact of the war in Ukraine. In APMEA, lockdowns impacted several of our key markets, including New Zealand and China. However, the teams still delivered double-digit top line growth in the quarter. Adjusted operating margin exceeded expectations, supported by price, volume and productivity, which more than offset inflation, incremental investments and cost normalization. As a result of our strong earnings and expected cash flows, we announced a 15% dividend increase starting in June. Our balance sheet remained strong. We have ample capacity, which affords us flexibility in our capital allocation strategy. Operationally, commodity costs increases, especially in copper, steel and energy, together with increases in logistic costs, have driven us to announce additional price increases globally. Those will go into effect during the second quarter, and we should start to see the benefit of those price increases at the end of…

Thanks Bob and good morning, everyone. Please turn to slide four and I will review the first quarter's consolidated results. Sales of $463 million were up 12% on a reported basis and up 14% organically. We saw strong demand in all regions and we're able to drive solid price realization. We saw double-digit growth despite the tough first quarter 2021 comps that included a 3% benefit from the fees in the South Central United States. Foreign exchange primarily driven by a weaker euro, reduced year-over-year sales by roughly $10 million or 2%. Acquisitions accounted for $2 million of incremental sales year-over-year. Adjusted operating profit was $73 million, up 21% compared to last year, and adjusted EPS was up 31% to $1.63. Adjusted operating margin of 15.7% was up 120 basis points as volume, price and productivity more than offset inflation and incremental investments. The adjusted effective tax rate was 22%, 590 basis points lower than the first quarter of 2021. The decrease relates primarily to a higher tax benefit resulting from the vesting of stock compensation awards, geographical earnings mix resulting from the restructuring of our Mexican manufacturing supply chain operations, and the favorable impact of tax contingencies. Our free cash for the quarter was negative $8 million as compared to positive cash flow of $32 million in the first quarter of last year. The cash flow decrease was due to our proactive decision to invest in inventory, higher employee and customer incentives and restructuring payments, and higher capital spend, which more than offset higher net income. We expect sequential improvement in our free cash flow and our full year goal is to drive free cash flow conversion at 90% or more of net income as previously communicated. During the quarter, we repurchased approximately 293,000 shares of our common stock…

Thanks Shashank. On slide seven, I'd like to summarize our discussion before we address your questions. The first quarter was stronger than we anticipated, with double-digit organic growth in all regions that was supported by price and stronger underlying demand. Inflation continues to accelerate, and we've announced additional price increases to offset cost increases. We are working hard to stay on top of the price/cost dynamic and monitor the situation daily. Strong North America repair replacement demand in both residential and non-residential should support a good first half. As a result, we expect a solid second quarter with strong demand in favorable price. We are increasing our full year operating margin expansion outlook, and are maintaining our full year organic growth expectations with our strong start and incremental price increases able to offset second half headwinds from the war in Ukraine. We plan to continue to make incremental investments in new product development to drive our smart and connected strategy and in automation to drive productivity. We are well-positioned financially, operationally and commercially to take advantage of market opportunities as they arise. And I'm confident in our team's ability to execute in this uncertain environment. With that operator, please open the lines for questions.

Your first question from Jake Jarnigo with Baird. Your line is open.

Hey, good morning, everyone. Jake Jarnigo again today for Mike Halloran. So, first question, will just, -- I'll touch on Europe here. Not try to see the expectations lowered there, but I guess kind of twofold question. Are you seeing any of that weakness materialized yet? And then secondarily, I know we've thought about this business as kind of following your GDP, but any specifics I guess, and how you could see it rolling into impacting demand to your products? Is it primarily the non-discretionary side? Is that where you're thinking potential weakness to come in?

Yeah. Good morning, Jake. What we're seeing is -- right now, the only change we're seeing is the lack of orders and shipments to Russia that we've exited. So, at this point in time, we're cautiously optimistic, but we're hearing feedback from our teams on the ground that things are going to begin to slow right now. So that's where we're being cautious right now. I think it just depends on the extent of the war and what's going to happen. If Russia shuts off gas, I think that would have a dramatic impact. So, we're just being cautious at this point in time until we have a better visibility to what's happening in Russia. It's still early.

Yeah. Totally understand. And then, somewhat related to that. Looking at the implied guidance here, it looks like in the back half of the year, margins are expected to sequentially decline relative the first half. Is this primarily isolated to Europe? I think typically, Americas, as we see margins expand in the back half of the year, just making sure that that logic thinks with how you guys are thinking about it.

Yeah. That's probably a function of -- we have -- obviously, in the first half, we have incremental volume leverage that kind of goes away a little bit in the second half. And then, we have incremental investment spend and incremental normalized costs in the second half versus the first half. And that's why you see that margin profile you talked about.

Got it. All right. Great. I'll jump back in the queue for now.

Thank you.

Your next question is from the line of Nathan Jones with Stifel. Your line is open.

Yeah. Good morning. This is Adam Farley on for Nathan. Following up on the revenue guide, understand the potential impacts from the war in Ukraine on European growth. Are you expecting any slow down in APAC, given COVID lockdowns in China?

Yeah. That's the second piece. We're watching very closely. Certainly, the China lockdowns has created uncertainty. I know our China, Shanghai team has been locked in their homes for five weeks now. So, we're -- that'll impact our heating business in particular, because construction is shut down in that area. So, we're watching that very closely. That's another one of these large uncertainties that are out there and that -- we're being cautious in our outlook in China.

Okay. And then, Watts is more -- much larger and more sophisticated than the majority of its competitors. Do you believe that you have better product availability that's leading some market share gains in this environment and which products and markets do you think that's occurring in?

Well, certainly, we've invested a lot of money into inventory to make sure we have available products. We have a vertically integrated strategy, as you know, where we manufacture and where we sell, both in North America and Europe. So, we believe that in this environment with the uncertainty and spikes in demand has certainly helped. So, I think we're certainly holding our own and in various places taking market share. So, we don't believe we're losing any market share, for sure.

Thanks for taking my questions.

Thank you.

Your next question is from the line of Joe Giordano with Cowan. Your line is open.

Good morning. This is Michael in for Joe.

Good morning, Michael.

Good morning.

Yeah. As we look towards the housing market, specifically multifamily, how should we be thinking about that on go forward? What's your outlook there?

Multifamily has been very positive. And we like multifamily homes, because they're more code driven and have more larger products than single-family homes. So, although, we might be peeking in single-family home market, that being more than offset by multifamily, so watching that closely, but we're very cautiously optimistic in that market.

Great. Thank you.

Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Your line is open.

Hey, guys. It's Jeff live and in-person.

Hey, Jeff. How are you?

Hey, Jeff.

Good. Good. Just wanted to get a better sense of what price was in the quarter. It looks like it was most of North America growth. And just kind of what you've been seen or what you've been putting out in terms of follow on pricing.

Yeah. So, in the first quarter, just globally, our -- approximately of our growth about 10% was in price realization, a little bit more in the Americas, a little bit less in APMEA, and then Europe kind of in the middle there. And the expectation as we go forward -- as you know, price increases, we announced sequentially through 2021. So, the comps get harder in the second half of this year. So, that's what we anticipate. Now, as far as forecasting the future, we wait till the quarter-end, because it's one thing announcing the prices, the another thing actually realizing them. The teams have done a great job so far, but in Q1 it was approximately 10% of realization.

Okay. Great. And then, I noticed you guys stepped up your buyback in the quarter. I didn't know if that's a function of being opportunistic as the stock has pulled back, or any indication of kind of what you are -- aren't seeing the M&A pipeline.

Yeah. So, I'll take that. I'll let Bob talk about the M&A. On the stock purchases, yes, it was an opportunistic buyback. And historically, we've always said that we buy stock back -- stock buybacks for offsetting dilution. We've issued equity, but also if there's an opportunity in the market and there certainly was one in the first quarter, we did go in and buy stock back in Q1.

And Jeff, on the M&A front, look at, as you know, we're very disciplined from that regard. So, we're watching. We have a solid pipeline. And -- but we're going to be disciplined. So, we've not done any major acquisitions. We've done some small bolt-ons. And right now, we felt that was the best allocation of cash in the quarter.

Okay. Great. And then, seems like commercial HVAC, or I'm sorry, commercial construction in North America, still seems quite robust. And I think most people are saying, Hey, we're still building backlog. And we're kind of being held back more by labor. But just give us a sense of what you're seeing in the commercial landscape.

Yeah. We would agree with that. We're seeing similar things. We had across the board growth in all segments, in all -- everywhere, except for retail, which we expected given that that was highly impacted by the freeze. But commercial construction, there was a large backlog of projects and the spending continues. And then, as we look at some of the leading indicators, like I talked about in my prepared comments, that would indicate even further expansion. But I think you hit it right on the head. They need the labor right now. And I think that's the constraint. Our discussion with our contractors is -- there's a lot of work out there. They just need more labor and they're having material shortages, which are delaying projects and causing cost overruns.

Okay. And then, just last one. Maybe just talk about inventory in the channel. I think you've said maybe over the past couple quarters, inventory's gotten better for your product, but there's still maybe competitive or other items that are light.

Yeah. I would say same -- the same. We're seeing inventory growing in the channels. I think it's spotty where I don't think wholesalers in particular have all the inventory they need from all the suppliers. They need to help the builders complete the jobs. But we believe we continue to give them the products they need when they need them. And we have a solid backlog in regards to that and have visibility to what their needs are. So, we'll continue to monitor that and watch it very closely.

Okay. Thanks so much guys.

Thanks Jeff.

Your next question comes from Brian Lee with Goldman Sachs. Your line is open.

Hi, team. Thanks for taking the question. This is Grace on for Brian. I guess, first question is on margins, just to follow-up on the previous questions. Like your second half -- you're implied margin for the full year suggests that second half of the year will be lower. I guess, should we expect 3Q to be the low-point of the year then, taking back up in the 4Q or do you expect 4Q to be the low-point of the year? And also, can you talk about margin by segments? Like, I think last quarter you indicate America than Europe flat to up on margins and down in APMEA. Are those still -- do you still expect those trends, given the Russia/Ukraine conflict and potential lockdown in APMEA? Thanks.

Yes. On your first question, right, so right now, basically it's the second half, which has the lower margins for the reasons I stated. Breaking that down between Q3 and Q4, it's -- at this point, it's kind of -- we'll update that as we get through the end of the second quarter and we look at what the third quarter looks like. But I would say that that margin decline is probably -- roughly equal between Q3 and Q4 at this point. But we'll take another look at it. Back to your first question as to the margin profile by region. Certainly, as Bob noted, the impact of the Ukraine war is more heavily felt in Europe. And as that volume goes down and with our fixed cost structure there, the margin decline will be greater in Europe, a little bit less so in APMEA, and then with North America, with the strength of the markets, like we talked about in commercial and multifamily, the margin accretion should be -- should still be good there.

Okay. Understood. And the margin decline in Europe, are you talking about like sequential declines or year-over-year decline? Thanks.

Well, it'd be first half, second half, right? That's what we're talking about. So, it'll be from first half to second half.

Okay. Got it. And then, one last question for me. And then on revenue growth, I think, last quarter you talked about, like the organic growth by segments. Just given the Russia/Ukraine conflict and the lockdowns in Asia, can you give us an updated views on organic growth by segments? Thanks.

So, clearly, you got the Q1 numbers and the second quarter guidance. I think your question is regarding the second half. And as we look at the second half where we -- we expect the impact of the Ukraine war, the impact to Europe. Look at the second, Americas would be like in the low mid single digit growth. Europe would probably be in the mid high single digit decline and APMEA would be relatively flattish in the second half from a growth standpoint.

Thank you. I will pass it on.

Thanks.

There are no further questions at this time. I will now turn the call back over to Mr. Bob Pagano.

Thank you for taking the time to join us today. We appreciate your continued interest in Watts. And look forward to speaking with you again in our second quarter earnings call in early August. Have a good day and stay safe.

Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.