Operator: Welcome to Watts Water Technologies, Inc. First Quarter 2026 Earnings Call. [Operator Instructions] I will now turn the call over to Diane McClintock, Chief Financial Officer. Please go ahead.

Diane McClintock: Thank you, and good morning, everyone. Welcome to our first quarter earnings conference call. 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 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. 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. With that, I will turn the call over to Bob.

Robert Pagano: Thank you, Diane, and good morning, everyone. Please turn to Slide 3, and I'll provide an overview of the first quarter. We began 2026 with better-than-expected results, including record sales, operating income, operating margin and earnings per share. I'd like to thank the entire Watts team for their impactful contributions to our results. Organic sales rose 12% in the quarter as we benefited from price and incremental volume. Adjusted operating margin of 20.1% increased 110 basis points due to better-than-expected price, volume and productivity, which more than offset tariff costs, inflation and acquisition dilution of 80 basis points. Our balance sheet remains strong and provides ample capacity to support our disciplined capital allocation strategy. This includes evaluating strategic M&A opportunities while continuing to invest in product innovation and advancing our digital strategy. As a result of our solid start to 2026 and expected cash flows for the remainder of the year, we announced a 21% increase to our dividend beginning in June. We continue to see strong momentum in data center cooling applications with sales more than doubling in the quarter as we deepen customer relationships and leverage our broad portfolio. To support this growth and meet our customers' needs, we are investing in our team and accelerating innovation across our product portfolio. Additionally, we're expanding capacity, including adding inventory to meet shorter lead time expectations. We're also gaining traction with our digital solutions, including the Nexa platform, our intelligent water management solution. Together, these strategic initiatives are driving growth and helping to offset softer end markets. In 2025, we completed 5 acquisitions, enhancing our technology capabilities and expanding our product range, geographic reach and exposure to high-growth nonresidential end markets. These businesses are performing well, and we are successfully integrating them through our One Watts performance system. We're on track to achieve or exceed the targeted synergies. We are proactively working to mitigate the impact of the Middle East conflict. Our direct sales exposure to the Middle East is limited to approximately 2% of global sales with the majority being in our APMEA region. We are implementing targeted pricing strategies as well as sourcing and productivity initiatives to mitigate both the direct and indirect impacts, including freight and energy cost increases. Our direct Middle East exposure includes our recent acquisition, Saudi Cast, and I wanted to highlight that the Saudi Cast business is largely an in-country for-country business model, which should help insulate it from the full impact of the conflict. The tariff environment also remains fluid with IEEPA tariffs being eliminated, but generally being offset by new tariffs under Section 122 and changes in the Section 232 rules. Additionally, the administration is considering new tariffs under Section 301. Based on the tariff structure in place as of today, we believe we are well positioned from a price/cost perspective. Our strong first quarter performance and outlook for the second quarter give us a solid start towards achieving our outlook for the full year. We continue to face an uncertain macroeconomic and geopolitical environment, including the Middle East conflict, downward revisions of global GDP forecasts and elevated interest rates. In light of these factors, we believe it's prudent to maintain our full year outlook and we'll revisit in our next earnings call. With that, let me turn the call over to Diane, who will address our first quarter results and our second quarter and full year outlook. Diane?

Diane McClintock: Thank you, Bob, and good morning, everyone. Please turn to Slide 4, which highlights our first quarter results. Sales reached $677 million, reflecting a 21% increase on a reported basis and a 12% increase organically. This performance was supported by favorable price and volume, including the benefit of growth in data center sales. The Americas region delivered strong organic growth of 16% and reported growth of 23%, exceeding our expectations. Acquisitions accounted for an additional $31 million in sales, contributing 7 points to the Americas reported growth. In Europe, organic sales rose 1%, while reported sales increased 12%. Organic growth stemmed from favorable pricing, while reported sales also benefited from positive foreign exchange. In APMEA, organic sales grew 3%, with acquisitions adding 19% and favorable foreign exchange contributing 7% for a total reported sales growth of 29%. Adjusted EBITDA totaled $151 million, an increase of 27% with an adjusted EBITDA margin of 22.3%, up 90 basis points year-over-year. Adjusted operating income of $136 million increased 28% and adjusted operating margin improved 110 basis points to 20.1%. These improvements were primarily driven by favorable pricing, volume leverage and productivity gains, more than offsetting inflationary pressure, tariffs and acquisition dilution of 80 basis points. Segment margins were as follows: Americas increased 80 basis points to 24.2% and APMEA increased 120 basis points to 18.7%, while Europe decreased 20 basis points to 13.7%. Adjusted earnings per share equaled $3.04, representing a 28% year-over-year increase with operational performance, acquisitions, tax and foreign exchange gains outweighing higher net interest expense. The adjusted effective tax rate in the quarter was 24.2%, down 30 basis points compared to the first quarter of 2025, primarily due to a higher tax benefit from the vesting of stock compensation awards that occur in the first quarter of each year. Our free cash flow for the quarter was $7 million compared to $46 million in the first quarter of last year. The cash flow decrease was primarily due to the increase in accounts receivable due to higher sales volume, increases in and timing of our annual customer rebate payments and an increase in inventory related to incremental tariffs and our strategic investment in inventory. We expect sequential improvement in our free cash flow and are on track to achieve our full year goal of free cash flow conversion greater than or equal to 90% of net income as previously communicated. We have a strong balance sheet and solid cash flow, giving us flexibility in executing our capital allocation strategy, including the announced 21% increase in our dividends that will begin in June. On Slide 5, we will review our outlook for the second quarter and full year 2026. We are reaffirming the full year 2026 outlook we presented in February, which reflects the market factors Bob discussed. It assumes the Middle East conflict is short term in nature, the current tariff structure remains in place for the remainder of the year, and there are no IEEPA tariff refunds. For the full year 2026, we are maintaining both our consolidated and regional sales outlooks. Consolidated organic sales growth is expected to be between plus 2% and plus 6%, and our reported sales growth is expected to be between plus 8% and plus 12%. We are also maintaining our full year adjusted EBITDA and adjusted operating margin outlook. Next, a few items to consider for the second quarter. Reported sales are expected to increase by 10% to 14% with organic sales up 4% to 8%. We anticipate mid- to high single-digit growth in the Americas despite the tough compare to the second quarter last year, which included an estimated $20 million of pull-forward sales into the second quarter from the third quarter due to the timing of price increases. We expect a low single-digit decline in Europe and low to mid-single-digit growth in APMEA with our expected data center sales offsetting the direct impact of the Middle East conflict. These estimates incorporate the negative impact from product rationalization under our 80/20 initiative of approximately $2 million in Europe and $6 million in the Americas. Incremental sales from acquisitions are projected at $25 million to $30 million for the Americas and around $5 million for APMEA. We also estimate a foreign exchange benefit of approximately $5 million. Second quarter EBITDA margin is expected to be between 22.3% and 22.9%. Operating margin is expected to be between 20% and 20.6%. Price and volume leverage in the Americas and APMEA are anticipated to be offset by acquisition dilution of approximately 70 basis points. In addition, last year, we had a nonrecurring price/cost benefit of approximately $6 million in the second quarter, in addition to the volume leverage on the estimated $20 million of sales pull forward that together are a 120 basis point headwind to margins in the second quarter. Additional key assumptions for the second quarter and full year are available in the appendix of the earnings presentation. With that, I'll turn the call back over to Bob before moving to Q&A. Bob?

Robert Pagano: Thanks, Diane. To wrap up, we had a strong start to the year with record first quarter sales and earnings. Our portfolio spans diverse end markets, and we are actively reallocating resources towards areas of strong demand, including institutional and data centers. Importantly, approximately 60% of our sales are driven by repair and replacement activity, which provides a consistent foundation for revenue and cash flow generation over time. We remain nimble and are confident in our ability to execute through dynamic market conditions. We're maintaining our full year outlook despite the macro and geopolitical uncertainty. Our balance sheet remains strong and provides ample flexibility to support our capital allocation priorities. We believe we are well positioned to deliver on our financial commitments, create value and drive profitable growth over the long term. With that, operator, please open the lines for questions.

Operator: [Operator Instructions] We'll go to our first question from Nathan Jones at Stifel.

Nathan Jones: I guess I'll ask a dumb question about the full year guidance. I know you said, Bob, it's only 1 quarter in. There's a lot going on, but you did beat the first quarter by a long way, and the second quarter guidance is a fair way ahead of consensus as well. Is there any kind of assumption in here that you're making? I guess, maybe the MRO business slows down a little bit with global GDP. You've always said it's pretty well correlated with that? Or is there any reason to think that the second half is likely to be any weaker than you thought it was going to be 3 months ago? Or this is just purely being conservative given the macro environment that we're in?

Robert Pagano: Thanks, Nathan, for the question. Look, I think it's being prudent right now. I think we've dialed in and we feel really confident about that. And it just depends on how long the war goes on at this point in time and does it impact future demand in the future. But if it's over with quickly and everything else, I think we have opportunities in the second half. But let's talk about that in 3 months, and we'll have a better answer for you at that point in time.

Nathan Jones: Fair enough. My second question is on the topic du jour of data centers and Watts' exposure there. I think you said it doubled in the first quarter. Can you maybe talk about any details you can give us on how big this is, what the contribution to the overall Watts growth is, how big the addressable market is, how much you think you can grow it over the next few years? Any more details you can give us around that kind of thing?

Robert Pagano: Yes. Regarding data centers, look, it's an over $1 billion addressable market that we have in front of us. We ramped up last year. So the first half of this year is going to have better, easier comps than the first -- last year, we ramped up and the second half was stronger than the first half of last year. So our goal is to do high double-digit increases in data center for the year, and we believe we're well on our way to do that at this point in time. Teams are doing a great job. We're innovating new products and the customers are happy with our performance. So we're excited about this opportunity, and we're doubling down on it.

Nathan Jones: Is it accretive to the company margins?

Robert Pagano: It is. Overall operating income, very much so. Some movements on the gross profit margin with lesser SG&A costs, but overall accretive for overall Watts.

Operator: We'll move next to Mike Halloran at Baird.

Michael Halloran: So certainly acknowledged the answer to the first question Nate asked there on the conservatism in the back half of the year. So just keeping that as a backdrop, maybe just help understand how you're talking about margin cadencing, price cost, et cetera. Guidance in the back half of the year implies lower margins front half, but it feels like if this trajectory continues, there's room there. But maybe just talk to how you're thinking about price cost, particularly in the context of recent inflation and then what you're doing on the pricing side?

Robert Pagano: Yes. So we've been -- as you know, we always stay in front of the price cost. And we believe with all the movements in tariffs and everything else, we're still ahead of that. Regarding, let's call it, the cost of inflation as an impact of the war, our international units have put in additional price increases because they're more impacted than we are in the U.S. And right now, we're evaluating in the U.S., we're watching very closely how long this war will continue and fuel costs, et cetera, going up. And we're prepared to put an additional price increase if that -- if required. Now regarding your discussion regarding margins, certainly, with the second half volume assumptions, which is flattish in the second half, if there's opportunities there, that we certainly should have opportunities from a margin point of view if we increase our outlook in the second half. Again, it all depends on the war and the longer-term impacts of it. As we said earlier on the call, about 2% of overall Watts sales is in the Middle East. We have addressed that in the second quarter, about an $8 million headwind in Q2. We're just watching to see the bigger impact in the second half if this war continues.

Michael Halloran: And then maybe just an update on the 80/20 side of things, both in terms of the progress with the initiatives, expectations for drag on the sales side and how that plays out for the year and then where you're starting to see the benefit so far?

Diane McClintock: Yes. From an 80/20 perspective, we'll expect to see that ramp up in the back half of the year. So that's another piece of our decline in the second half. I think we had about $15 million of that total in the first half, and you'll see that significantly increase in the back half. Things are going well. I think we've started, in terms of price increases, that's always the first piece of it, getting a good response around that. But we do expect that to ramp up in the second half and then clearly wrap into the front half of 2027.

Operator: We'll go to our next question from Jeff Hammond at KeyBanc Capital Markets.

Jeffrey Hammond: Can you give us price mix versus volume in North America in the quarter and just how you think that's going to pace through? And then I think you said on price, you're pushing some internationally. What do you need to see on North America to kind of move forward with any incremental pricing, whether it be moving pieces in tariffs or copper inflation or some of this fuel transportation inflation?

Robert Pagano: Well, you hit all the categories we're looking at, Jeff. I mean we're watching that very closely. Certainly, our international units have impacted more. They're seeing higher charges. So we immediately went out with that. Likely, the impact of that won't be seen probably until the third quarter by the time that all the way goes through. But overall, price cost, approximately just a little shy of 8% of price was in the first quarter, which was strong overall to cover our costs in that, during the quarter and stuff. So we're on top of this. As you know, we watch it. We stay in front of it. And certainly, we're preparing if need be over the next few weeks to be ready to put in additional price increases if this continues.

Diane McClintock: And Jeff, on your question of sequentials, we'll see that price realization come down sequentially across the year as we start to lap over the 2025 price increases.

Jeffrey Hammond: Okay. Great. And then just back on kind of the uncertainty. If you look at kind of your order book through the quarter and into April, May, like are you seeing any pockets of slowing? Or is this just, hey, we're going to assume this thing continues and it's going to start to get more disruptive?

Robert Pagano: Right now, we're not seeing it. At this point in time, we've seen some drain business that's been lumpy that was waiting for some BABA funding, not material. I mean we're off some very difficult compares on an order rate in Q2 of last year because of the pull-in with the price increases. But overall, the order book is in line with our Q2 forecast at this point in time, with certainly data centers offsetting a lot of the softness, in particular, in the resi market.

Jeffrey Hammond: Okay. And then just last one. This inventory investment, can you kind of quantify what it was and kind of how you think working capital use is going to look like for the year? It doesn't seem like you're really changing your free cash flow guidance, but it seems like a change in tone a little bit on inventory.

Robert Pagano: Yes. It's really around the strategic investment from the data center point of view, right? Our customers are asking for quicker lead times and adjustments, and we want to make sure the inventory is on hand to support that. But overall, net-net, by the end of the year, we believe it worked its way through.

Operator: We'll take our next question from Andrew Krill at Deutsche Bank.

Andrew Krill: I wanted to see if there was any meaningful impact from weather this quarter. I think one of your main public peers called this out as a point benefit for the first quarter, and I think that continues into 2Q. Just historically, I think losses even over-indexed on this versus then. So anything you can provide there?

Robert Pagano: Yes. It was not a huge impact, a little under 1% in the first quarter. We're not expecting it to be meaningful in the second quarter, but the freeze that happened in the first quarter created some incremental demand, but we don't expect that to carry over into the second quarter.

Andrew Krill: Okay. Makes sense. And then following back up on the 2Q margin guide, again, it implies just a little bit of sequential expansion, and you went through some of the year-over-year headwinds. But -- any reason we're not seeing a bigger sequential expansion? I think you said $8 million of Middle East costs. Was that a cost number or sales there? Any help why that's not a bigger jump into 2Q?

Diane McClintock: Yes. Sequentially, first quarter to second quarter on the margin side, we're going to have that decline in price. So that's going to be a little bit of a margin headwind. And then if you remember, we had a pull forward last year in Q4. So that's a margin headwind for us as well. And the Middle East conflict, that will be about $5 million to $6 million on the margin side. So that's also going to be a headwind. It's a challenging compare as well.

Robert Pagano: Yes. The $8 million I referred to was the $8 million of sales we're negatively impacting in the Middle East. And certainly, we're keeping our team fully aligned inside the Middle East. So it's -- we'll have some net negative absorption costs as a result of this. We believe it's timing, and we're going to ride it out with the team because we've got a great team and a growing opportunity in the Middle East.

Andrew Krill: Okay. Great. And just one last quick one. You said you said $5 million to $6 million cost, $8 million of sales. Was there anything meaningful in the first quarter on both of those metrics?

Robert Pagano: Not on the cost side. On the sales side, a small number, a few million dollars of sales at that point because most of the conflict didn't really happen until March. So we were able to get most of our shipments out that we were expecting.

Operator: We'll take our next question from James Ko at Jefferies.

Jae Hyun Ko: I wanted to touch on the guidance here a little bit again. So are you assuming the Middle East conflict continues for the remainder of the year and it potentially impact other regions like Europe? Or like are you assuming that it ends by like first half? Because most of the companies, I think, are guiding like that Middle East should be over by first half, but it sounds like it's going to be more elongated for you guys. So just wanted to get like clarification here.

Robert Pagano: Yes. So we really are not assuming a long impact in Q2 right now. We've not made a full assumption for the rest of this year at this point in time, given we don't know the duration, et cetera. As I said earlier, certainly, if this conflict gets over and the strait opens up and things get moving, I think there's opportunities in the second half at this point in time. But we didn't want to -- there's too many geopolitical uncertainties at this point in time. So raising at this time just didn't make sense. But we'll look at it in the next 3 months because I think we'll have greater clarity at that point in time.

Jae Hyun Ko: Great. And I guess I wanted to touch on the Europe margin here. It was down a bit in the first quarter and -- but the last quarter, we had like nearly 500 basis point improvement. So can you kind of parse out kind of what changed sequentially, why aren't we seeing a strong margin expansion like we did like the last quarter?

Diane McClintock: Are you looking at Q1 to Q2, James?

Jae Hyun Ko: No, I'm comparing Q1, what is the margin performance versus last quarter, 4Q on a year-over-year basis.

Diane McClintock: Yes. There's typically a seasonality in Europe in Q4. It tends to be our higher margin quarter, in fact. So really some volume leverage there. Volume is down in the quarter. So that's a piece of it. 80/20, piece of it. And so those are all sort of contributing factors to that margin decline.

Robert Pagano: There was also a small mix issue in the first quarter also. So again, nothing to really read into that. The team is doing a good job. We're relatively stabilized in Europe at this point in time. So 2 decent quarters in a row where it's more flat. We're not seeing the decrease. And it just depends on how long this war continues and the knock-on effects inside of Europe at this point in time.

Operator: We'll move next to Jeff Reive at RBC Capital Markets.

Jeffrey Reive: Last quarter, you characterized North American and European residential construction markets as remaining soft in 2026. As you sit here today, are you seeing any meaningful change in demand trends or customer behavior relative to those expectations?

Robert Pagano: No, I would just say there's probably -- it's a little softer than we probably anticipated only because of the uncertainty in the fuel costs. I think just people are holding back on that, and you can see it in the starts, et cetera, on the resi side. So I would say resi is a little bit softer, but all the other markets are kind of in line with what we expected.

Jeffrey Reive: Got it. And maybe within that resi, is it single-family, multifamily, repair/remodel? What's tracking worse?

Robert Pagano: I think it's all of the above. I mean it's -- in general, I would say repair and replacement is holding up, in resi. Big remodeling is probably a little softer because people are deferring that. But the new construction markets are still soft, and we're carefully watching that, but we are more than offsetting that with our data center growth.

Operator: We'll go next to Joseph Giordano at TD Cowen.

Christopher Grenga: This is Chris on for Joe. You had mentioned institutional alongside data center as showing growth. I'm just wondering if you could elaborate on which particular areas within that market that you're seeing? And if you could also discuss what you're seeing in terms of the Nexa attach rate broadly in both data center and institutional, if it's applicable.

Robert Pagano: Yes. So schools and hospitals are primarily inside of the institutional market that've been holding up on that as well as data centers are really strong at this point in time. Your second question was that on Nexa, did you say? You broke up a little bit.

Christopher Grenga: Yes. If you could just elaborate on the -- what you're seeing in terms of Nexa uptake. You touched on it briefly. Just...

Robert Pagano: Yes. Yes. So Nexa continues to be a favorable story for us. We continue to grow that slow but surely. Team is making great progress. And I want to remind everybody, Nexa is going to be being put on all of our products, right? So all of our main products are going to be Nexa-enabled. So it's also something to protect our core business and allows people to hook that up on a proactive basis when they're ready to do so. So again, Nexa is also a play to protect our core business and help that to grow and command higher pricing based on the value it's doing to our customers.

Christopher Grenga: Great. And have you seen any evolution or change to the M&A environment incrementally over the last 90 days? Any change in terms of the attractiveness of the targets or what's taking place in M&A?

Robert Pagano: Yes. So M&A, the pipeline, there's still a strong pipeline out there. As you know, we're disciplined, and we always say we have to make -- it has to make strategic and financial sense based on our criteria, and we'll be watching that. As you know, you can never predict timing of acquisitions, but we'll continue to cultivate and we'll keep you posted as we make progress there.

Operator: [Operator Instructions] And that concludes our Q&A session. I will now turn the conference back over to Bob Pagano for closing remarks.

Robert Pagano: Thank you for joining us today. We appreciate your continued interest in Watts and look forward to speaking with you again during our second quarter earnings call in early August. Have a great day and stay safe.

Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.