Ladies and gentlemen, welcome to the Watts Water Technologies Incorporated First Quarter 2024 Earnings Call hosted by Bob Pagano, President and CEO; Shashank Patel, CFO; and Diane McClintock, Senior Vice President, FP&A and Investor Relations. At the end, we will open the line for questions. And I will now turn the call over to Diane McClintock.

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 the second quarter and 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 Watts' 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 3, and I'll provide an overview for the first quarter. We began 2024 with better-than-expected first quarter results, including record sales, adjusted operating margin and earnings per share. I'd like to express my appreciation to the entire Watts team for their hard work that made this outperformance possible. Organic sales growth of 6% in the quarter was largely driven by extra shipping days as discussed on our last earnings call. We also benefited from incremental sales due to our acquisitions of Enware, Bradley and Josam. We are very pleased with the performance of these new acquisitions and expect them to continue contributing to our long-term success. Adjusted operating margin exceeded expectations primarily due to incremental volume from the extra shipping days, solid price realization and productivity, which more than offset inflation, lower European volume and incremental investments. As a result of our strong earnings and expected cash flows for the remainder of 2024, we announced a 19% dividend increase with payments 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 pleased with the progress of the Bradley, Josam and Enware integration efforts. Our teams are working together to capitalize on synergies and capture additional growth opportunities. We expect both acquisitions to be accretive to adjusted EPS in 2024. Regarding inflation, we continue to see cost increases across labor and overhead, and we're seeing renewed escalation of raw material costs. While the inflation rate has moderated, it is still above normal historical levels. Our teams have done a great job driving productivity, not only in our operations but outside the factory walls, which has helped offset some inflationary pressure. We continue to invest…

Thanks, Bob, and good morning, everyone. Please turn to Slide 4, and I will review the first quarter's consolidated results. Sales of $571 million were up 21% on a reported basis and up 6% organically. As Bob mentioned, we benefited from extra shipping days in the quarter. We estimate the extra days contributed approximately 7% of sales growth in the quarter. The acquisitions of Bradley, Josam and Enware contributed approximately $68 million or 15% in foreign exchange, primarily driven by a stronger euro, increased sales by approximately $1 million versus 2023. Compared to last year, adjusted operating profit of $104 million increased 23% and adjusted operating margin of 18.2% was up 30 basis points. Adjusted EBITDA of $118 million increased 25% and adjusted EBITDA margin of 20.6% was up 60 basis points. Benefits from price, productivity and volume from extra shipping days more than offset acquisition dilution of approximately 60 basis points inflation and incremental investments of $6 million. Adjusted earnings per share of $2.33 increased 21% versus last year. Earnings per share growth was driven primarily by solid operational performance, including the benefit of the extra shipping days and the strong performance of our acquisitions. The adjusted effective tax rate was 23.8%, up 130 basis points compared to the first quarter of 2023, primarily due to a lower tax benefit from the vesting of stock compensation awards that occurred in the first quarter of 2024. For GAAP purposes, we incurred $7 million of nonrecurring acquisition-related charges. We also recorded a restructuring charge of $1.2 million related to several cost actions. These charges were partially offset by the nonrecurring gain on the sale of an office building in Europe. Our free cash flow for the quarter was $37 million compared to $28 million in the first quarter of last year.…

Thanks, Shashank. On Slide 7 I'd like to summarize our discussion before we address your questions. First quarter performance was better than we anticipated with record first quarter sales, adjusted operating margin and earnings per share due to better-than-expected price and acquisition performance. As a result of our solid first quarter, we are increasing our full year sales, operating margin and EBITDA margin outlook. Our 2024 outlook reflects our expectation of softer market conditions as the year progresses, especially in Europe. As we have said, our portfolio is agnostic to end markets, and we expect our teams 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. Despite the challenging markets, we plan to maintain our incremental investments to support long-term profitable growth, notably in our digital strategy. We continue to focus on the integrations of Bradley, Josam and Enware to ensure a seamless transition and are pleased with the progress to date. Our balance sheet remains strong post acquisitions and provides ample flexibility to support our capital allocation priorities, including the 19% increase in dividends that we recently announced. 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 and to continue creating value for our shareholders. With that, operator, please open the lines for questions.

[Operator Instructions] And your first question comes from the line of Nathan Jones Jones with Stifel.

This is Adam Farley on for Nathan. I wanted to start on Europe. Really strong margin performance despite the organic revenue decline. Plus, given the relatively high fixed cost base there. So what was the main tail end of margins from mix in Europe?

Yes. It was a combination of favorable mix. So we had higher sales in Drains where we have higher margins. And then we had lower sales in the OEM channel, primarily out of Germany, which have lower margin. So there's a double benefit on mix. And then also, we benefited, as you know, we lock in certain commodities, for example, brass in Europe, and we had locked that in, in Q4. We benefited that -- we benefited from that in Q1. Certainly copper brass has been escalating, but we benefited from some of the locks we had. And then productivity came in really strong as well in Q1.

Okay. And then how should we think about margins in Europe for the remainder of the year? Should mix continue to be positive? Productivity improvements continue? Maybe narrowing in the price cost spread?

Yes, I would say that productivity and mix should continue positive. However, on the commodity side, as I said, we lock in for a period of time. So those locks do come undone, so to speak. And we have seen escalating commodities, especially in -- on the brass side. So there could be some headwind down there. So we'll see how it plays out for the rest of the year.

And your next question comes from the line of Mike Halloran with Baird.

So, can you just talk about guidance front half, back half and just run through the moving pieces? I know last call you talked about uncertainty as you move to the back half of the year, and you reflected that in the guidance. I imagine that's still the case today, but we'd love some context on that. And then shipping days are probably going to impact front half, back half, but it's certainly weighted front half from a guide perspective relative to what you would see historically. So I just want to understand the moving pieces and the thought process behind it.

Yes, Mike, lots -- nothing has significantly changed. We believe Europe is going to continue to get soft. We also are being conservative in the second half of the year, cautious, I should say, given that we believe multifamily is going to start impacting us in the second half of the year. So we're watching that very carefully. And finally, you are correct regarding the days. The favorable days we have in Q1 get offset in Q4. So you'll see the fourth quarter be softer where we'll give up those days. So we just got to keep that in balance. But for the most part, it's playing out as we expected. Europe is probably a little softer than we expected based on current order rates even through April. So we're watching that very carefully.

And also, Mike, we had baked in also on the noncommercial new construction site softness in the second half because the ABI has been down for roughly 9 months.

Let's follow up on that train of thought. Obviously you sell into a lot of different nonres markets, numerous commercial and institutional subsets. When you think about the moving pieces there, how does that play out as we get into next year to the back half of the year, however you want to think about it? In other words, there's a lot of puts and takes. It's a really large market. You're talking about some of these leading indicators where there's concern, but we also feel optimistic about some of these other areas. How much of a balancing mechanism is it? Maybe just talk about the moving pieces there and anything interesting from a subset perspective?

Yes. I always start, Mike, with 60% of our business is repair and replace given our large installed base. So that tends to follow GDP. So that stabilizes a lot of these ups and downs. So you're right on the -- some of these markets, we do offset them, for example, data centers, mega projects a little more lumpy, but that offset some of the softness you see potentially in multifamily and/or Europe that we're trying to balance. So we have a diversified portfolio. We move to where the work is. As I said earlier, our products are agnostic to the markets. We're just trying to ship. So we look where construction is going, and it's still happening right now, but we can ignore some of the leading indicators, which in the past have always held through for us. But again, our large installed base certainly helps on the repair replacement side.

And your next question comes from the line of Jeffrey Hammond with KeyBanc Capital Markets.

This is David Tarantino on for Jeff. Maybe to start on the acquisition dilution. Could you give some context on the expectation for the deals to be more dilutive in 2Q versus the first quarter? And then maybe for the full year, it looks like you're expecting modestly less dilution. Could you give some color around what's kind of the change in assumption there?

So I'll start on the -- look at -- we're very pleased with the acquisition performance. Integrations are going extremely well. A lot of the heavy lifting, especially on the front end, closing of some sites is going positive. And some of the days favorability helped us in the first quarter because we've got them on now our 4-4-5 calendarization. But I think overall, we're very pleased. So Shashank, do you want to talk about the dilution?

Yes. So you know as we noted that the acquisitions outperformed in Q1, and that's why we took down -- the overall guide, the dilution from the acquisitions is now 70 basis points versus 80 basis points, and it was less than that in Q1, right? So we factored that into the equation. But overall, for the full year, we expect 70 basis points dilution from the Bradley, Josam acquisitions.

Okay. Great. And then could you maybe give some more color on what you're seeing in terms of underlying demand in Europe, kind of with cracks becoming a little bit more evident? And maybe the line of sight you guys have on the destocking trends maybe on that. Could you give some color on the forward view, just given the extra days dynamic in the first quarter?

I think there's just a lot of uncertainty in Europe right now with the wars going on right now. So I think new construction is halting a little bit or slowing significantly. We're seeing that down double digits. Repair and replacement other than, let's call it, the retrofit related to some of the heat pump initiatives there is where we're seeing destocking in the channels. They were ordering a lot last year. And if you recall, Q1 and Q2 were very strong quarters for Europe, exceeding our expectations. And now we have some really tough comparison, in particular in Europe in Q1 and Q2. So destocking, we think is going to take at least through Q2. And then let's see at that point in time. But in general, I would say inventories have some -- need to go down, especially in that heat pump area. So we're cautious on Europe as we always are and are taking appropriately cost actions as we analyze where that business is going.

[Operator Instructions] And your next question comes from the line of Joe Giordano with TD Cowen.

This is Michael on for Joe. You had mentioned in the slide that price realization was a bit higher than expected in the quarter. What was the price component specifically? And also just for the remaining part of the year, I believe the logic before was about low single-digit increase of inflation on the commodity front and also the same on the wage front. Is the calculus for the remainder of the year still the same?

So on the price front, we had assumed about a 1% price realization. We actually achieved about 1.5%, so about 50 basis points better than we thought, obviously on the back of lower inflation. And on the inflation side, on the people inflation, compensation inflation running at 3.5% to 4%, on the commodity inflation all up, all in, including the -- I talked about commodities -- commodity, especially copper price escalating. But overall commodity inflation is in the 2% to 3% range.

Great. That's helpful. And just a follow-up, if I may. But so last quarter you mentioned like OEM destocking in Europe was about 1/3 of the business there. Can you just run through perhaps like the channel and inventory at OEMs from the different regions and just kind of expectations for the remainder of the year?

Yes. I would think, let's start with the Americas. I think the channel inventory is in line with expectations. So I don't -- I think destocking is done pretty much for North America. So inventory levels are reasonable levels. Europe, as I said on the previous question that we just had, I think there's continued destocking in the OEM channels, which exactly what you said is about 1/3 of our business there. ATMEA, I think it's reasonable, very similar to the Americas. So really the issue is in Europe.

[Operator Instructions] And your next question comes from the line of Walt Liptak with Seaport Research.

I'll try 1 on the M&A, with the revenue maybe a little bit better than expected in the first quarter. Can you help us with second quarter revenue so we can get that number closer to right? I mean, there should be some seasonal uptick, I would think. Do you have a view on where revenue could be for M&A in the second quarter?

Yes. So well, for the full year, between Radley and Josam, we're talking about $210 million. And you're right, in the second quarter it tends to be a little higher. So in that approximately $55 million, $57 million range approximately.

Okay. And then also wanted to ask about just the Americas region. And you sell lot through distribution, but can you differentiate as products go out to single-family versus multifamily? Or do you have a view on what the percentages are? And if there are any differences that you're seeing in the trends for those markets?

Look, when you look at our business, 35% of our business is residential. Half of that single family, half of that is multifamily, we've seen basically flatness in the first quarter. We're expecting flatness in the second quarter, and then we're expecting multifamily to go down in the second half of the year, low single digits, maybe to mid-single digits. That's kind of how we're looking at it. And single family holding up flat for the rest of the year.

Hey, Walt, just a correction on the acquired sales second quarter, $64 million.

$64 million. Okay.

Yes.

Okay. And do you think that the -- that your distribution channels already adjusted in the Americas for the multifamily outlook? I think it's been kind of pretty well pronounced.

Yes, yes, I do believe they've adjusted.

[Operator Instructions] And with no further questions at this time, I would now like to turn the conference back to Mr. Bob Pagano for any additional or closing remarks.

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

And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.