Q4 2023 Watts Water Technologies Inc Earnings Call

Hello, and welcome to the Watts Water Technologies, Inc. Fourth quarter 2023 earnings call. All lines have been placed on mute to reduce background noise. After the presentation. There will be a question and answer session. If you would like to ask a question. During this time simply press star one.

Operator: Hello, and welcome to the Watts Water Technologies Inc. fourth quarter 2023 earnings call. All lines have been placed on mute to reduce background noise.

Operator: After the presentation, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1. I will now turn the call over to Diane McClintock, Senior Vice President of Investor Relations.

I'll now turn the call over to Diane Mclintock Senior Vice President of Investor Relations. Please go ahead.

Diane McClintock: Thank you and good morning everyone. Welcome to our fourth quarter and full year 2023 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 2023, as well as an update on our expectations for the markets in 2024. Shashank will discuss the details of our fourth quarter and full year financial results and provide our outlook for the first quarter and the full year 2021. 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.

Thank you and good morning, everyone.

Welcome to our fourth quarter and full year 2023 earnings Conference call. Joining me today are Bob Pagano, President and CEO and Shashank Patel, our CFO during.

During today's call Bob will provide an overview of 2023 as well as an update on our expectations for the markets in 2024.

<unk> will discuss the details of our fourth quarter and full year financial results and provide our outlook for the first quarter and the full year 2024.

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.

Diane McClintock: 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 SBA. However, the company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or other factors. With that, I'll turn the call over to Bob. Thank you, Diane, and good morning, everyone.

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.

What'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.

Robert J. Pagano: Please turn to slide three in the earnings presentation, and I'll provide a recap of 2023 and an overview of our outlook for 2024. But I'd like to start by thanking the entire Watts Water team for their tremendous contributions that resulted in another record year. We close out the year with a strong quarter resulting in an adjusted operating margin expansion of 150 basis points. The strength of our fourth quarter drove record full-year sales, operating margin, earnings per share, and free cash flow. Organically, full year 2023 sales increased by 1%, adjusted operating margin increased by 140 basis points, and adjusted EPS increased by 16% compared to the prior year. We delivered record operating margin while continuing to invest an incremental $24 million in strategic projects, including spending on our Smart and Connected initiative. We generated a record free cash flow of $281 million, which represents 107% conversion.

Please turn to slide three in the earnings presentation, and I'll provide a recap of 2023 and an overview of our outlook for 2024.

I'd like to start by thanking the entire watts water team for their tremendous contributions that resulted in another record year.

We closed out the year with a strong quarter, resulting in an adjusted operating margin expansion of 150 basis points. The strength of our fourth quarter drove record full year sales operating margin earnings per share and free cash flow.

Organically full year 2023 sales increased by 1% adjusted operating margin increased by 140 basis points and adjusted EPS increased by 16% compared to the prior year we.

We delivered record operating margin, while continuing to invest an incremental $24 million on strategic projects, including spending on our smart and connected initiatives.

We generated record free cash flow of 281 million, which represents a 107% conversion rate or.

Robert J. Pagano: Our balance sheet remains strong and provides us with the flexibility to continue to invest for the future. High ROI CapEx, Competitive Dividends, and Strategic M&A remain our top capital allocation priorities. Moving to operations, as previously announced, we closed on our acquisition of JOSAM Company, effective January 1st, 2024. Joe Sam is a leading provider of commercial drainage and plumbing products.

Our balance sheet remains strong and provides us with the flexibility to continue to invest for the future.

High ROI capex competitive dividends and strategic M&A remain our top capital allocation priorities.

Moving to operations as previously announced we closed on our acquisition of Joseph Company effective January one 2024.

Joe Sam is a leading provider of commercial drainage and plumbing products. This complementary acquisition broadens, our existing portfolio and expands our exposure to profitable commercial institutional and light industrial end markets integration is underway and the teams are working collaboratively to capture synergies and drive growth.

Robert J. Pagano: This complementary acquisition broadens our existing portfolio and expands our exposure to profitable commercial, institutional, and light industrial end markets. Integration is underway, and the teams are working collaboratively to capture synergies and drive growth through cross-selling opportunities. The integration of our Bradley acquisition is also going very well, as our cross-functional teams work together to capture cost synergies and additional growth opportunities. We expect both acquisitions to be modestly accretive to adjusted EPS in 2024 after factoring in incremental interest expense and normal purchase accounting adjustments. Finally, I'd like to provide an update on our Smart and Connected initiative.

Through cross selling opportunities.

The integration of our Bradley acquisition is also going very well as our cross functional teams work together to capture cost synergies and additional growth opportunities.

We expect both acquisitions to be modestly accretive to adjusted EPS in 2024 after factoring in incremental interest expense and normal purchase accounting adjustments.

I'd like to provide an update on our smart and connected initiatives and.

Robert J. Pagano: In early 2019, we committed to an aggressive goal of having 25% of our revenues generated from smart and connected enabled products by year-end 2023, compared to a baseline of low single digits in 2018. I'm proud to announce that we met this goal as we exited 2023. This translated to a 600 basis point improvement over 2022, which was driven by new product introductions and expanded adoption rates. We are excited about the progress we have made and the future of our smart and connected systems and digital solutions. We are well on our way to achieving our goal of being an industry leader and connecting our products to provide superior benefits to our customers. As part of our goal to solve complex water challenges around the world, we focus daily on improving sustainability outcomes for ourselves, our customers, and our communities.

In early 2019, we committed to an aggressive goal of having 25% of our revenues generated from smart and connected and enabled products by year end 2023, compared to a baseline of low single digits in 2018.

I'm proud to announce that we met this goal as we exited 2023.

This translated to a 600 basis point improvement over 2022, which was driven by new product introductions and expanded adoption rates.

We are excited about the progress we've made and the future of our smart and connected systems and digital solutions, we are well on our way to achieving our goal of being an industry leader in connecting our products to provide superior benefits to our customers.

As part of our goal to solve complex water challenges around the world, We focus daily on improving sustainability outcomes for ourselves our customers and our communities. We continue our work to reduce the water carbon and waste footprint across our operations and create innovative products and solutions for our customers to help them.

Robert J. Pagano: We continue our work to reduce the water, carbon, and waste footprints across our operations and create innovative products and solutions for our customers to help them protect, control, and conserve critical resources. We continue to be recognized for our efforts. Watts was selected by Newsweek as one of America's most responsible companies for the fifth consecutive year and as one of America's greenest companies for our work on environmental sustainability. And for the first time in 2023, Watts was named one of the top places to work in Massachusetts, a recognition based on employee surveys that validates the work we are doing to foster an engaged, people-first organization.

Protect control and can serve critical resources.

We continue to be recognized for our efforts what's was selected by Newsweek as one of America's most responsible companies for the fifth consecutive year and as one of America's Greenest companies for our work on environmental sustainability and for the first time in 2023 Watts was named one of the top places to work in Massachusetts.

That's a recognition based on employee surveys that validates the work, we're doing to foster and engage people first organization.

Robert J. Pagano: Last but not least, we are proud to share that 2024 is the 150th anniversary of Watts. We want to thank all of our customers, employees, suppliers, investors, and other stakeholders who have been by our side along this journey. It is only through your unwavering trust, support, and partnership that we have reached this remarkable milestone in Watts' history.

Last but not least we are proud to share that 2024 is the 150 year anniversary for what we want to thank all of our customers employees suppliers investors and other stakeholders who've been by our side along this journey.

It is only through your unwavering trust support and partnership that we have reached this remarkable milestone and what's history.

Robert J. Pagano: Now, I'd like to talk about our market expectations in 2024. From a macro perspective, global GDP has slowed but remains positive in our key end markets. In Europe, we do see softening driven by slowing residential and non-residential new construction markets, as well as the impact of changes to the energy incentive programs in Germany and Italy. The Scandinavian countries remain in a recessionary environment.

Now I'd like to talk about our market expectations in 2024.

From a macro perspective global GDP has slowed but remains positive and our key end markets.

In Europe, we do see softening driven by slowing residential and nonresidential, new construction markets as well as the impact of changes to the energy incentive programs in Germany, and Italy the.

The Scandinavian countries remained in a recessionary environment as a reminder, Europe represents approximately 22% of our business on a pro forma basis.

Robert J. Pagano: As a reminder, Europe represents approximately 22% of our business on a pro forma basis. After a challenging year in 2023, single-family new construction in the Americas is expected to return to very modest growth, while multifamily new construction has been resilient. However, leading indicators, including starts and permits, portend a decline in multifamily new construction in 2024. In the Americas, non-residential new construction indicators are mixed.

After a challenging year in 2023 single family New construction in the Americas is expected to return to very modest growth, while multifamily new construction has been resilient.

Leading indicators, including starts and permits portended decline in multifamily new construction in 2024.

In the Americas nonresidential, new construction indicators are mixed the Abi has been below 50 for several months, suggesting a slowing as the year progresses.

Robert J. Pagano: The ABI has been below 50 for several months, suggesting a slowdown as the year progresses. The DODGE Momentum Index is slightly more positive, suggesting growth in non-residential projects will continue into 2024, primarily supported by institutional and data center projects. Institutional and light industrial verticals, including megaprojects, are expected to remain resilient in 2023 and are expected to be supportive in 2024, but will be tempered by challenging sub- In the Asia-Pacific region, China's economy is forecasted to grow in the low single digits in 2024. However, markets in China have been significantly impacted by the real estate crisis.

The Dodge momentum index is slightly more positive suggesting growth in nonresidential projects will continue into 2024, primarily supported by institutional and data center projects.

Institutional and light industrial verticals, including Mega projects to remain resilient in 2023 and are expected to be supportive in 2024, but will be tempered by challenging sub verticals, including retail office and recreation.

In the Asia Pacific region, China's economy is forecasted to grow in the low single digits in 2024 markets in China had been significantly impacted by the real estate crisis.

Robert J. Pagano: We expect Australia, New Zealand, and the Middle East to show modest growth in 2024. We continue to monitor the geopolitical uncertainty in Europe and the Middle East and expect to proactively address any direct or indirect impacts on our customers and supply chains. Now, a preview of the drivers for our outlook for 2024. Price, Institutional, and Light Industrial, America's Single-Family New Construction, and Repair and Replacement activity are expected to be supportive at least through the first half of the year. We expect elevated interest rates and supply to unfavorably impact multifamily new construction. As a reminder, multifamily new construction accounts for less than 10% of our total business. With the exception of institutional and light industrial, we are also anticipating a slowdown in non-residential new construction.

We expect Australia, New Zealand and the Middle East to show modest growth in 2024.

We continue to monitor the geopolitical uncertainty in Europe, and the middle East and expect to proactively address any direct or indirect impacts to our customers and supply chain.

Now a preview of the drivers for our outlook for 2024.

Price institutional and light Industrial America single family, New construction and repair and replacement activity are expected to be supportive at least through the first half of the year.

We expect elevated interest rates and supply to unfavorably impact multifamily new construction as a reminder, multifamily new construction accounts for less than 10% of our total business.

With the exception of the institutional light industrial we are also anticipating slowing in nonresidential new construction.

We expect weakening in Europe as new construction slows. In addition, the reduction in energy efficiency incentives in Germany, and Italy may unfavorably impact our OEM partners. The slowing volume will have a more significant impact on earnings due to our higher fixed cost base in Europe.

Robert J. Pagano: We expect weakening in Europe as new construction slows. In addition, the reduction in energy efficiency incentives in Germany and Italy may unfavorably impact our OEM partners. This slowing volume will have a more significant impact on earnings due to our higher fixed cost base in Europe. We took additional restructuring actions at the end of the fourth quarter that will help reduce the impact of volume deleveraging. We do anticipate a decline in operating margins due to incremental investments, Volume D leverage, and the diluted impact of our Bradley and JOSAM acquisitions as a result of customary transaction-related costs, including amortization. Despite the expected 2024 macro backdrop, we believe we are well positioned to manage these headwinds due to our resilient business model and end market diversification. We continue to invest in strategic initiatives, including our digital strategy and new product development to fuel our growth and expand our leading market position. We are also investing in a multi-year new SAP ERP system for our Americas region to consolidate our business systems, drive productivity, and support our smart and connected journey.

We took additional restructuring actions at the end of the fourth quarter that will help reduce the impact of volume deleveraging.

We do anticipate a decline in operating margins due to incremental investments volume deleverage and the dilutive impact of our Bradley and Joe Sam acquisitions, as a result of customary transaction related costs, including amortization despite.

Despite the expected 2024 macro backdrop, we believe we are well positioned to manage these headwinds due to our resilient business model and end market diversification.

We continue to invest in strategic initiatives, including our digital strategy and new product development to fuel our growth and expand our leading market positions.

We are also investing in a multi year, new SAP ERP system for our Americas region to consolidate our business systems drive productivity and support our smart and connected journey, we expect full year incremental investments of approximately $20 million.

Shashank Patel: We expect full-year incremental investments of approximately $20 million. With that, let me turn the call over to Shashank, who will address our results for the fourth quarter of full year 2023 and offer our outlook for Q1 of full year 2024. Thank you, Bob, and good morning, everyone.

With that let me turn the call over to Shashank, who will address our results for the fourth quarter and full year 2023 and offer our outlook for Q1 and the full year 2020 for zinc.

Thank you Bob and good morning, everyone. Please now turn to slide four which highlights our fourth quarter results.

Shashank Patel: Please now turn to slide four, which highlights our fourth quarter results, sales of $548 million, or up 9% on a reported basis and down 1% organically. Organic growth of 1% in America and 4% in Africa were offset by a 5% organic decline in Europe; foreign exchange, primarily driven by a stronger Euro, increased year-over-year sales by roughly $6 million or 1%. Sales from our Enware and Bradley acquisitions added $42 million, or nine points, and are reported within the APMEA and Americas regions, respectively. I will review the regional performance momentarily. Compared to last year, adjusted operating profit of $86 million increased 21%, and adjusted operating margin of 15.8% was up 150 basis points. Benefits from price, productivity, and mix more than offset inflation, reduced volume, and incremental investments of $9 million.

Sales of $548 million or up 9% on a reported basis and down 1% organically.

Organic growth of 1% in Americas, and 4% in that beer were offset by a 5% organic decline in Europe.

Foreign exchange finally, driven by a stronger euro increased year over year sales by roughly $6 million or 1%.

Sales from our <unk> Bradley acquisitions added $42 million or nine points in our reported within the apnea and Americas regions respectively.

We will review the regional performance momentarily.

Compared to last year, adjusted operating profit of $86 million.

Increased 21% and adjusted operating margin of 15, 8% was up 150 basis points.

Fitz from price productivity and mix more than offset inflation reduced volume and incremental investments of $9 million.

Shashank Patel: The acquisitions diluted operating margins by approximately 100 basis points. Adjusted earnings per share of $1.97 increased 23% versus last year. Unexpected growth was driven primarily by strong operational performance and reduced interest expense, which was partially offset by the net impact of acquisitions and foreign exchange movements. The adjusted effective tax rate in the quarter was 22.3%, up 10 basis points compared to the fourth quarter of 2022.

The acquisitions were dilutive to operating margins by approximately 100 basis points.

Adjusted earnings per share of $1 97 increased 23% versus last year.

Growth was driven primarily by strong operational performance and reduced interest expense, which is partially offset by the net impact of acquisitions and foreign exchange movements.

The adjusted effective tax rate in the quarter was 22, 3% up 10 basis points compared to the fourth quarter of 2022.

Shashank Patel: For GAP purposes, we took a $3.8 million restructuring charge in the quarter related to the continued rightsizing of our European cost structure, along with additional America cost actions and facility exit. We also incurred $6.3 million of non-recurring acquisition charges. These charges are partially offset by the reversal of an earn-out accrual from a prior acquisition. We also recorded a tax charge of $5.3 million primarily related to foreign withholding taxes associated with the repatriation of cash in 2023.

For GAAP purposes, we took a $3 8 million restructuring charge in the quarter related to the continued right sizing of our European cost structure, along with additional Americas cost actions and facility exit costs.

We also incurred $6 3 million of nonrecurring acquisition charges.

These charges were partially offset by the reversal of an earn out accrual from a prior acquisition.

We also recorded a tax charge of $5 3 million, primarily related to foreign withholding taxes associated with the repatriation of cash in 2023.

Shashank Patel: Moving to regional results, please turn to slide five. America's organic sales are up 1%, and reported sales were up 10%. This was slightly better than we expected, especially against a tough prior year comparison.

Moving to regional results, please turn to slide five.

Americas organic sales were up 1% and reported sales were up 10%. This was slightly better than we expected, especially against a tough prior year comparison.

Shashank Patel: As a reminder, America's grew 11% organically in the fourth quarter of 2022. However, solid growth in our non-residential core valve products was largely offset by declines in gas connectors and commercial marine instrumentation. America's reported sales were favorably impacted by 9% from the acquisition of Bradley, which added $33 million of sales in the quarter. Adjusted operating profit increased by 19% and adjusted operating margins increased by 150 basis points. The margin expansion was driven by price, favorable mix, and productivity, which more than offset volume declines, inflation, incremental investments, and dilution from the Bradley acquisition. Europe's organic sales were down 5%, as we expected, but reported sales were flat as they are positively impacted by 5% from favorable foreign exchange rules.

As a reminder, Americas grew 11% organically in the fourth quarter of 2022.

Solid growth in our non residential core valve products was largely offset by declines in gas connectors and commercial marine instrumentation.

Americas reported sales were favorably impacted by 9% from the acquisition of Bradley Woods.

At $33 million of sales in the quarter adjust.

Adjusted operating profit increased by 19% and adjusted operating margins increased by 150 basis points. The margin expansion was driven by price favorable mix and productivity, which more than offset volume declines inflation incremental investments and dilution from the <unk> acquisition.

Organic sales were down 5% as we expected.

Reported sales were flat as they were positively impacted by 5% from favorable foreign exchange movements.

Shashank Patel: Growth in our wholesale business in France was more than offset by declines in Germany and Italy, where the reduction of government subsidies had an unfavorable impact. However, operating margin increased by 220 basis points as price, favorable mix, and productivity more than offset inflation, investments, and volume de-leveraged. Apnea delivered 4% organic growth. Reported sales growth of 40% was negatively impacted by 1% from unfavorable foreign exchange movements and favorably impacted by 37%, or $9 million, of acquired NWARE sales. Strong growth in Australia and New Zealand was tempered by flat sales in China due to weak residential underfloor heating sales and project timing in data centers.

Growth in our wholesale business in France was more than offset by declines in Germany, and Italy with a reduction of government subsidies had an unfavorable impact.

Operating margin increased by 220 basis points as price favorable mix and productivity more than offset inflation investments and volume deleverage.

Apnea delivered 4% organic growth.

Reported sales growth of 40% was negatively impacted by 1% from unfavorable foreign exchange movements and favorably impacted by 37% or $9 million of acquired and where sales.

Strong growth in Australia, and New Zealand was tempered by flat sales in China due to weak residential underfloor heating sales and project timing in data centers.

Shashank Patel: Adjusted operating margin decreased 180 basis points due to affiliate charges, inflation, investments, and the dilutive effect of the NREA acquisition, which more than offset price, volume, and productivity. On slide six, I will speak to the full year results. As Bob mentioned, we delivered record operating results for 2023; reported sales were $2.1 billion, up 4% primarily driven by price. Again, this was against a tough prior comparison when we grew 13% organically in 2022 on a consolidated basis, acquisitions accounted for 3% or $59 million of incremental sales year over year, and foreign exchange globally had an immaterial impact across the year. Compared to last year, adjusted operating profit of $365 million increased 13%, and adjusted operating margins of 17.8% were up 140 basis points. Benefits from price, productivity, and mix more than offset inflation, reduced volume, and incremental investments of $24 million.

Adjusted operating margin decreased 180 basis points due to affiliate charges inflation investments and the dilutive effect of the <unk> acquisition, which more than offset price volume and productivity.

On slide six I will speak to the full year results.

As Bob mentioned, we delivered record operating results for 2023.

Reported sales were $2 1 billion up 4%, primarily driven by price again.

Again this was against a tough prior year comparison, when we grew 13% organically in 2022 on a consolidated basis acquisitions.

Acquisitions accounted for 3% or $59 million of incremental sales year over year.

Foreign exchange globally had an immaterial impact across the year.

Compared to last year, adjusted operating profit of $365 million increased 13% and adjusted operating margins of 17, 8% was up 140 basis points.

Benefits from price productivity and mix more than offset inflation reduced volume and incremental investments of $24 million a.

Shashank Patel: The dilutive impact of acquisitions was approximately 40 days. Adjusted full-year earnings per share of $8.27 increased by $1.14, or 16%, versus the prior year. Operating results drove approximately $0.91 of the increase, while acquisitions, lower interest expense, and a lower adjusted effective tax rate combined for an additional $0.23. Pre-cash flow for the full year was $281 million, a 40% increase compared to last year and is a company record.

The dilutive impact of acquisitions was approximately 40 basis points.

Adjusted full year earnings per share of $8 27.

Increased by $1 14, or 16% versus the prior year.

Operating results drove approximately 91 of the increase while the acquisitions lower interest expense and a lower adjusted effective tax rate combined for an additional 20 <unk>.

Free cash flow for the full year was $281 million, a 40% increase compared to last year and as a company record.

Shashank Patel: The increase was driven by higher net income and reduced working capital investment. We invested approximately $30 million in capital spending, including investments in new product development, lean initiatives, and automation. Our 2023 free cash flow conversion was 107%, and our reinvestment ratio was 99%. We repatriated approximately $64 million in cash during the fourth quarter of 2023 and approximately $118 million for the full year of 2023. The proceeds were used to pay down revolving debt and to fund acquisitions. We returned $63 billion to shareholders in the form of dividends and share repurchases in 2023 and increased our annual dividend return by 20%. We repurchased approximately 92,000 shares of our Class A common stock at a cost of $16 million during the year.

The increase was driven by higher net income and reduced working capital investment.

We invested approximately $30 million in capital spending including investments in new product development lean initiatives and automation.

23 of free cash flow conversion was 107% and our reinvestment ratio was 99%.

We repatriated approximately $64 million in cash during the fourth quarter of 2023, and approximately $118 million for the full year of 2023.

The proceeds were used to pay down revolving debt and to fund acquisitions.

We've done $63 billion to shareholders in the form of dividends and share repurchases in 2023 and increased our annual dividend returned by 20%.

We repurchased approximately 92000 shares of our class a common stock at a cost of $16 million during the year.

Shashank Patel: There is approximately $12 million remaining under the current stock repurchase program that was authorized in 2019, with another $150 million remaining available under the stock repurchase program authorized in July 2023. Our net debt-to-capitalization ratio at year-end was negative 3.5%, compared to negative 14.3% at year-end 2022. Our net leverage ratio at year-end was negative 0.1.

There is approximately $12 million remaining under the current stock repurchase program that was authorized in 2019 with another $150 million remaining available under the stock repurchase program authorized in July 2023.

Our net debt to capitalization ratio at year end was negative three 5% compared to a negative 14, 3% at year end 2022.

Our net leverage ratio at year end is negative one.

Shashank Patel: Our balance sheet continues to be in excellent shape and provides substantial flexibility to fund our capital allocation priorities. Our team did an excellent job proactively managing the price-cost dynamic, expanding margins, further strengthening our balance sheet while continuing to invest for future growth and delivering record financial results in 2023. Now, on slide 7, let's discuss the general framework we considered in preparing our 2024 outlook. First, we look at the expected unfavorable conditions. Elevated interest rates could further impact multifamily and non-residential construction projects, as the European economy continues to slow.

Balance sheet continues to be in excellent shape and provides substantial flexibility to fund our capital allocation priorities.

Our team did an excellent job proactively managing the price cost dynamic expanding margins further strengthening our balance sheet, while continuing to invest for future growth and delivering record financial results in 2023.

Now on slide seven let's discuss the general framework, we considered in preparing our 2020 for outlook.

First let's look at the expected unfavorable conditions.

Elevated interest rates could further impact multifamily and nonresidential construction projects.

Europe economy continues to slow.

Shashank Patel: Higher interest rates and general uncertainty may negatively impact purchasing decisions, especially for new construction and energy incentive projects in Germany and Italy. We expect America's multifamily new construction to weaken over the course of 2024. Available data suggests a continued decline in new permits for multifamily projects and an excess of capacity currently on the market. As Bob discussed, America's non-residential new construction indicators are mixed.

Higher interest rates and general uncertainty may negatively impact purchasing decisions, especially in new construction and energy incentive projects in Germany and Italy.

We expect Americas multifamily new construction to weaken over the course of 2024.

Available data suggests a continued decline in new permits for multifamily projects and an excess of capacity currently on the market.

As Bob discussed Americas, nonresidential, new construction indicators are mixed.

Shashank Patel: Some sub-verticals will be more challenging, including office, retail, and recreation. Additionally, some leading indicators, including the ABI index, have dipped in recent quarters, portending a slowdown in 2024. We expect incremental investments to be a headwind in 2024. As Bob previously mentioned, we have commenced a multi-year implementation of a new SAP cloud-based ERP system in the Americas. This is the continuation of our efforts to reduce our global ERP instances, which grew through our many acquisitions. Over the last 10 years, we have gone from 30 ERP systems down to 12.

Some sub verticals will be more challenged including office retail and recreation.

Some leading indicators, including the Abi index have dipped in recent quarters portending a slowdown in 2024.

We expect incremental investments to be a headwind in 2024.

As Bob previously mentioned, we have commenced a multiyear implementation of a new cloud based ERP system in the Americas. This is the continuation of our efforts to reduce our global ERP instances, which grew through our many acquisitions.

Over the last 10 years, we have reduced from 30 ERP systems down to 12.

Shashank Patel: We'll be continuing this effort in the Americas by migrating to one SAP system, which will further reduce our ERP instances. We have established a roadmap for the next several years to enable us to make a smooth transition to the new platform, and we expect this investment to lead to significant efficiencies for our team and customers. In the middle column are themes that we'll continue to monitor. Geopolitical uncertainty both in Europe and in the Middle East may impact global markets during 2024. We have been able to maintain a positive price-cost dynamic during 2023. We'll continue to monitor the cost environment and respond appropriately. Global GDP has slowed but is currently expected to be positive in the U.S. and Europe. As a reminder, GDP acts as a proxy for our repair and replacement business. America's single-family new construction bottomed in 2023 and is expected to see slight growth in 2024.

We'll be continuing this effort in the Americas by migrating to one SAP system, which will further reduce our ERP instances.

We have established a roadmap for the next several years to enable us to make a smooth transition to the new platform and we expect this investment to lead to significant efficiencies for our team and customers.

In the middle column are themes that we'll continue to monitor.

Geopolitical uncertainty both in Europe, and in the Middle East May impact global markets during 2024.

We have been able to maintain a positive price cost dynamic during 2023, we'll continue to monitor the cost environment and respond appropriately.

Global GDP has slowed but is currently expected to be positive in the U S and Europe as a reminder, GDP acts as a proxy for our repair and replacement business.

Erica single family, New construction bottomed in 2023 and is expected to see slight growth in 2024.

Shashank Patel: Now looking at potential favorable conditions. Our recent acquisitions of Bradley, Johnson, and Endwear are expected to contribute over 10 points of revenue growth and increase our exposure to attractive institutional and market conditions. America's institutional and light industrial new construction is expected to remain favorable. We believe that the healthcare, education, data centers, megaprojects, and food and beverage sub-verticals should continue to grow. We expect incremental revenue driven by our digital product offerings and other new product introductions. Productivity and automation investments are expected to provide cost savings by 2024.

Now looking at potential favorable conditions are.

Our recent acquisitions of Bradley Johnson, and <unk> are expected to contribute over 10 points of revenue growth and increased our exposure to attractive institutional end markets.

America's institutional and light industrial new construction are expected to remain favorable.

We believe that the health care education, Datacenters Mega projects, and food and beverage sub verticals should continue to grow.

We expect incremental revenue driven by our digital product offerings and other new product introductions.

Activity in automation investments are expected to provide cost savings in 2024. In addition, our Europe and America segments are expected to have incremental cost savings from the restructuring activities. We initiated in late 2023.

Shashank Patel: In addition, our Europe and America segments are expected to have incremental cost savings from the restructuring activities we initiated in late 2023. As discussed, our balance sheet remains strong as we head into 2024. With that as a background, let's review our outlook for the full year 2024 and our expectations for the first quarter of 2024. On slide 8, we have provided our major assumptions.

Discussed our balance sheet remains strong as we head into 2024.

With that as background, let's review our outlook for the full year 2024, and our expectations for the first quarter of 2024.

On slide eight we have provided our major assumptions.

Shashank Patel: Starting with the full year assumptions, on a reported basis, we expect sales to increase between 6 and 12 percent. Consolidated organic revenue is estimated to range from negative 5% to positive 1%, with regional expectations as follows. Americans from negative 3 to positive 2 percent, Europe from negative 9 to negative 4 percent, and APMEA from flat to positive 6 percent. In addition, we expect approximately $210 million of incremental sales in the Americas and $9 million in APMEA for acquisition. Compared to 2023, we expect the following. EBITDA margin to be in the range of 19.4% to 20%, or down 50 basis points to up 10 basis points. Operating margins should be in the range of 16.9% to 17.5%, or down 90 basis points to down 30 basis points.

Starting with our full year assumptions on a reported basis, we expect sales to increase between six and 12% Consol.

Consolidated organic revenue is estimated to range from negative 5% to positive 1% with regional expectations as follows ameri.

Americas from negative 3% to positive, 2% Europe from negative nine to negative, 4% and FBA from flat to positive 6%.

In addition, we expect approximately $210 million of incremental sales in the Americas and $9 million in <unk> acquisitions.

Compared to 2023, we expect the following.

EBITDA margin to be in the range of 19, 4% to 20% or down 50 basis points to up 10 basis points.

Operating margins should be in the range of $16 nine to 17, 5% or down 90 basis points down 30 basis points.

Shashank Patel: This is largely due to the expected acquisition dilution of approximately 80 basis points, mostly driven by Bradley. From a regional perspective, the Americas operating margin is expected to be down 90 basis points to 140 basis points, primarily driven by the diluted impact of the acquisition. We anticipate Europe's adjusted operating margin will decrease 100 basis points to 160 basis points due to the impact from volume de-leverage.

This is largely due to the expected acquisition dilution of approximately 80 basis points, mostly driven by Bradley.

From a regional perspective, the Americas operating margin is expected to be down 90 basis points to 140 basis points, primarily driven by the dilutive impact of acquisitions.

We anticipate Europes adjusted operating margin decreased 100 basis points to 160 basis points due to the impact from volume deleverage.

Shashank Patel: APMEA's adjusted operating margin is expected to increase 40 basis points to 100. It is important to note that the margin guidance includes approximately $20 million in incremental investment. As for the other 2024 key inputs... They expect corporate costs to be about $55 million for the year.

<unk> as adjusted operating margin is expected to increase 40 basis points to 100 basis points.

It is important to note that the margin guidance includes approximately $20 million and incremental investments.

As for the other 2024 key inputs.

We expect corporate cost to be about $55 million for the year.

Shashank Patel: Net interest expense should be approximately $12 million. Our estimated adjusted effective tax rate for 2024 should be approximately 25 percent. CapEx spending is expected to be approximately $50 million. Depreciation and amortization should be approximately $55 million for the year.

Net interest expense should be approximately $12 million.

Our estimated adjusted effective tax rate for 2024 should be approximately 25%.

Capex spending is expected to be approximately $50 million depreciation and amortization should be approximately $55 million for the year.

Shashank Patel: We expect to deliver a free cash flow conversion of greater than or equal to 90% of net income in 2024. However, we expect free cash flow to be below 100% due to the previously mentioned incremental investments related to our new ERP system. For the full year, we are assuming a 1.09 average EURUSD FX rate versus an average rate of 1.08 in 2023. This would imply an increase of 1% year over year and would equate to an increase of $5 million in sales and two cents a share in EPS for the full year versus the prior year. We expect our share count to be approximately 33.5 million for the year. Finally!

We expect to deliver free cash flow conversion of greater than or equal to 90% of net income in 2024.

We expect free cash flow to be below 100% due to the previously mentioned incremental investments related to our new ERP system for.

For the full year, we are assuming a 1.0 line average Euro U S dollar FX rate versus the average rate of 1.08 in 2023.

This would imply an increase of 1% year over year and would equate to an increase of $5 million in sales and two cents a share in EPS for the full year versus the prior year.

We expect our share count to be approximately $33 5 million for the year.

Finally, a few items to consider for Q1.

Shashank Patel: A few items to consider for Q1. On a reported basis, we expect sales to increase between 15 and 19 percent. Organically, we expect sales to increase 1% to 5% with mid-single-digit growth in the Americas and APMEA, offset by a mid-single-digit decline in Europe. Based on the calendarization in 2024, we will benefit from four extra shipping days in the first quarter, which will be offset in the fourth quarter. In addition, we expect approximately $57 million of incremental sales in the Americas and $9 million in APMEA from acquisitions. Compared to the first quarter of 2023, we expect the following. First quarter EBITDA margin should be in the range of 19.5 to 20.1%, or down 50 basis points to up 10 basis points. First quarter operating margin should be in the range of 17 to 17.6 percent, or down 80 basis points to down 20 basis points.

On a reported basis, we expect sales to increase between 15% and 19%.

Organically, we expect sales to increase 1% to 5% with mid single digit growth in the Americas, and EMEA offset by a mid single digit decline in Europe.

Based on the calendar as Asian in 2024, we will benefit from four extra shipping days in the first quarter, which will be offset in the fourth quarter.

In addition, we expect approximately $57 million of incremental sales in the Americas and $9 million in apnea from acquisitions.

To the first quarter of 2023, we expect the following.

First quarter EBITDA margin to be in the range of 19, 5% to 21% or down 50 basis points to up 10 basis points.

First quarter operating margin should be in the range of 17 to 17, 6% or down 80 basis points to down 20 basis points. This is due to the impact of acquisition dilution as well as higher investments.

Shashank Patel: This is due to the impact of acquisition dilution as well as higher investment. We expect incremental investments of approximately $6 million in Q1. Corporate costs should be approximately $13 million, and net interest expense should be approximately $3 million.

We expect incremental investments of approximately $6 million in Q1.

Corporate costs should be approximately $13 million.

Net interest expense should be approximately $3 million.

Shashank Patel: The adjusted effective tax rate should be between 23% and 24%. We are estimating a 1.07 euro dollar exchange rate, which is flat to the first quarter of 2023. With that, I'll turn the call back over to Bob to summarize our discussion before moving to Q and A.

The adjusted effective tax rate should be between 23 and 24%.

<unk>, a 1.07 Euro dollar exchange rate, which is flat to the first quarter of 2023.

With that I'll turn the call back over to Bob to summarize our discussion before moving to Q&A.

Bob.

Robert J. Pagano: Thanks, Shashank. On slide nine, I'd like to summarize our discussion before we address your question. 2023 closed out on a strong note with record Q4 sales, operating margin, and adjusted EPS. Our teams overcame many challenges and did an outstanding job addressing our customers' needs. We're excited about the addition of Bradley and Jocent to our family of brands and solutions.

Thanks, Shashank on slide nine I'd like to summarize our discussion before we address your questions.

2023 closed out on a strong note with record Q4 sales operating margin and adjusted EPS. Our teams overcame many challenges and did an outstanding job of addressing our customers' needs.

We are excited about the addition of Bradley and Joseph to our family of brands and solutions. We are focused on integration and ensuring a seamless transition and are pleased with the progress to date.

Robert J. Pagano: We are focused on integration and ensuring a seamless transition and are pleased with the progress to date. We expect a more challenging 2024 with a softer market. As we've said, our portfolio is agnostic to end markets, and our teams will pivot to the growing sub-verticals as needed. We are focused on controlling what we can, and we'll take advantage of profitable market opportunities enabled by our robust balance sheet. Our business model, which includes a large repair and replacement component, provides a durable base that drives a steady revenue and cash flow stream.

We expect a more challenging 2024 with softer market conditions as we've said our portfolio is agnostic to end markets and our teams will pivot to the growing sub verticals as needed.

We're focused on controlling what we can and will take advantage of profitable market opportunities enabled by our robust balance sheet are.

Our business model, which includes a large repair and replacement component provides a durable base that drives a steady revenue and cash flow stream.

Operator: We remain focused on executing on our long-term strategy, continuing to invest incrementally for the future in driving our digital strategy. Our balance sheet remains strong after our acquisitions of Bradley and JOSAM and provides ample flexibility to support our capital allocation priorities to create value for our customers and shareholders. Our acquisition pipeline remains strong, and we'll continue to monitor attractive opportunities that expand our solutions, geographic presence, and growth. We continuously monitor economic conditions and our market. Our highly experienced team is well-positioned and has proven more than capable of executing through the economic cycle and adapting to meet our customers' needs in any environment. With that, operator, please open the line for questions. Thank you. If you have a question, please press star one on your telephone keypad. If you wish to withdraw your question, simply press star one again.

We remain focused on executing on our long term strategy continuing to invest incrementally for the future and driving our digital strategy.

Our balance sheet remains strong after our acquisitions of Bradley and Joe Sam and provides ample flexibility to support our capital allocation priorities to create value for our customers and shareholders.

Our acquisition pipeline remains strong and we will continue to monitor attractive opportunities that expand our solutions geographic presence and growth.

We continuously monitor economic conditions in our markets are highly experienced team is well positioned and has proven themselves more than capable of executing through the economic cycle and adapting to meet our customers' needs in any environment.

With that operator, please open the line for questions.

Thank you if you have a question. Please press star one on your telephone keypad. If you wish to withdraw your question simply press Star one again.

Jeff Hammond: Your first question comes from the line of Jeff Hammond with KeyBank Capital Markets. Your line is open. Hey, good morning, everyone.

Your first question comes from the line of Jeff Hammond with Keybanc capital markets. Your line is open.

Hey, good morning, everyone. Thanks for all the great detail here.

Jeff Hammond: Thanks for all the great detail here. Just want to jump in, I guess a couple areas where you cited some, you know, maybe weakening one, just multifamily, is this more of a concern? Are you starting to see that yet?

Right.

Just wanted to jump in I guess, a couple of areas where you cited some.

Maybe weakening one.

Multifamily is this more of a concern or are you starting to see that yet.

Robert J. Pagano: And then, you know, separately, just give us a sense of how your heat pump business has grown for you guys. What do you think, you know, how much pressure you see from that market? Thanks. Yeah. Good morning, Jeff.

And then separately just give us a sense of.

I know the heat pump European pump business has grown for you guys. What you think how much pressure you see from that market. Thanks.

Good morning, Jeff, Yes, so we're not seeing multifamily decreasing yet, but given the housing the starts the permits et cetera, that's where we're concerned right.

Robert J. Pagano: Yeah. So, we're not seeing multifamily decrease yet, but given the housing, the starts, the permits, et cetera, that's where we're concerned, right? So, it's, we believe it's just a matter of time and more concern in the second half of the year. Regarding heat pumps, we're seeing softness in our OEM business, which sells heat pumps and other ancillary equipment around the world. And we saw that in Q3 and it, you know, held up in Q4, and we also saw that in January. So, it's in line, there's an overstock of the heat pumps, for sure, and then the ancillary products. A lot of that's being driven by the incentives that we talked about earlier that have, you know, they've slowed down those incentives. So, a lot of people are waiting for them, but the OEMs are drawing down their inventory. Okay, very helpful.

We believe it's just a matter of time and more concerned in the second half of the year regarding heat pumps.

We're seeing softness in our OEM business, which sells heat pumps and other ancillary equipment around there and we saw that in Q3.

Held up in Q4, and we also saw that in January so it's in line. There is overstock of the heat pumps for sure and then the ancillary products a lot of that's been driven by the incentives that we talked about earlier that have.

They've slowed down those incentives so a lot of people are waiting for those but the Oems are drawing down their inventories.

Okay very helpful.

Jeff Hammond: Maybe just give us a sense of, you know, what you announced on pricing, if you think pricing is back to a more normal level, and then just how to think about incremental margins, I guess, particularly for North America X, some of the acquisition dilution. From a pricing standpoint, you're right; we are back to pre-pandemic levels. So we're assuming a 1 to 1.5% price realization for this year, and that's obviously on the back of much lower inflation than we've experienced over the last three years. In fact, in the pre-pandemic days, right, we used to focus on driving a lot of productivity. So it's price and productivity more than offsetting inflation, and incremental investments to drive margin expansion. And I think we'll be back to that in 2024.

Maybe just give us a sense of.

What you announced on pricing if you think pricing is back to a more normal level and then just how to think about incremental margins I guess, particularly for North America ex some of the acquisition dilution.

Good morning, Jeff from a pricing standpoint, we you're right we are back to pre pandemic levels.

We're assuming a one to one 5% pricing realization for this year and Thats, obviously on the back of lower much lower inflation than we've experienced over the last three years and back to the pre pandemic days right. We used to focus on driving a lot of productivity, so as price and productivity more than offsetting inflation incremental investments to drive them.

Margin expansion and I think we're back to that in 2020 for productivity, we're driving a lot on the global sourcing initiatives. We took some restructuring actions and then productivity in the plant and outside the plant as well.

Robert J. Pagano: Productivity, we're driving a lot on the global scorching initiatives. We took some restructuring actions and then productivity in the plant and outside the plant as well, and then incremental margins x the acquisition. Including acquisitions, we're looking at 20 basis points of off-margin expansions if you take the acquisitions out for the year. Okay, thanks guys. Thank you. You are next.

And then incremental margins ex the acquisitions.

Excluding acquisitions, we're looking at 20 basis points of op margin expansion.

You take the acquisitions out for the year.

Okay.

Okay. Thanks, guys.

Thank you our next.

Mike P. Halloran: Your next question comes from the line of Mike Halloran with Robert W. Baird. Your line is open. Hey, good morning, everyone. Good morning. So, it certainly makes a lot of sense in the prepared remarks when you think about the leading indicators you referenced and, You know, I hear you have some concerns in specific pockets as you work through the year. What's the channel saying, and how far out does that visibility stretch as you sit here today?

Your next question comes from the line of Mike Halloran with Robert W. Baird. Your line is open.

Hey, good morning, everyone.

Good morning.

So.

So certainly makes a lot of sense in the prepared remarks, when you think about the leading indicators you referenced.

I have some concern in specific pockets as you work through the year, what's your what's the what's the channel thing and how far out does that visibility stretch.

We sit here today.

Robert J. Pagano: You know, the leading indicators have a lot of moving pieces, a lot of different end markets below the hood. So I guess I'm just a little bit more curious what the feet on the ground are specifically saying right now. Yeah, so Jeff, um, you know, we're a book and ship business, as you know, so we have very short lead times. So we're having a lot of discussions with contractors. The larger contractors are busier, they tend to move around, you know, so we're watching that very closely.

The leading indicators have a lot of moving pieces and a lot of different end markets below the hood. So I guess I'm just a little more curious with the feet on the ground are specifically, saying right now.

Yes, so Jeff.

Look we're a book and ship business as you know so we have very short lead time. So we are having a lot of discussion with contractors the larger contractors are busier.

They tend to move around so we're watching that very closely.

Robert J. Pagano: You know, there is concern in general about the second half of this year, and we're watching that. But as we said earlier, we'll pivot to the areas that are growing, and our products and teams will move to those areas as appropriate, and then, and then how You mentioned multiple times, bouncy capacity, perfectly comfortable to pursue deals. What's that pipeline look like?

There is concern in general on the second half of this year and we're watching that but as we said earlier, we will pivot to the the areas that are growing and our products and teams will move to those areas.

Appropriate.

And then and then how are.

You mentioned multiple times balance sheet capacity perfectly comfortable to pursue deals with that pipeline look like and do you think that the opportunity is to have a little bit more consistent cadence of M&A as we look forward.

Robert J. Pagano: And do you think that the opportunity is to have a little bit more consistent cadence of M&A as we look forward? Yeah, so you know, the pipeline remains full. And we continue to monitor that you can never ever predict the timing of acquisitions, you know, you work on these for years, and then they all of a sudden pop up.

Yes, so the pipeline remains full and we continue to monitor that you've never ever can predict the timing of acquisitions you work on these for years and then they all of a sudden pop up so we're watching that closely we're continuing to develop those relationships and.

Robert J. Pagano: So we're watching that closely. We're continuing to develop those relationships. And, you know, we'll wait and see. But I would say, in general, the pipeline is healthy. And it's just none of us can, you know, determine exactly the timing of any of these things at this point in time.

We'll wait and see but I would say in general the pipeline is healthy and it's just none of us can.

Determine exactly the timing of any of these things at this point in time.

Shashank Patel: And then, thank you for that. And one last quick one here. Shashank, what's the percent impact of the four shipping days that you guys are assuming in the first and fourth quarters, and are those created equal given how December can sometimes track? Q1 is about 5-6% of incremental revenue based on those 4 shipping days. This is a leap year, so you actually end up getting about 3 of those days back in Q4.

And then thank you for that and one last quick one here.

Shape, what's the what's the percent impact of the four shipping days that you guys are assuming in the first and the fourth quarter and are those created equal given.

In December can sometimes track.

Track.

In the quarter.

Yes, so Q1, it's about 5% to 6% of incremental revenue based on those more shipping days.

This is a leap year. So you actually end up getting about three of those days back in Q4. When you look at the split by quarter. It's about the same impact, but instead of 5%, 6% pegged to the tier three to four in Q4.

Shashank Patel: When you look at the splits by quarter, it's about the same impact, but instead of 5-6%, you probably get 3-4% in Q4. I appreciate it. Thanks, everyone. Thank you. Thank you. Your next question comes from the line of Joe Ahlersmeyer with Deutsche Bank. Your line is open. Hey, good morning, everybody. Thanks for taking my question. Good morning.

Got it appreciate it thanks, everyone. Thank you. Thank you.

Your next question comes from the line of Joe <unk> with Deutsche Bank. Your line is open.

Hey, good morning, everybody. Thanks for taking my questions.

Good morning.

Yeah.

Joe Ahlersmeyer: Yeah, great progress on the margin has continued this year. I think slide six says it all, your ability to offset some of the headwinds here. Maybe if you could just talk about what you're assuming at this point for raw material inflation or deflation in 2024, and then also about how some of the early pricing is going, the pricing that you put in in the first quarter. From a raw material standpoint, Joe, I mean, we've assumed about a two to three percent inflation on raw materials. The biggest components for us are brass and copper.

Progress on the margin continued here in the year I think slide six says it all.

Your ability to offset some of the headwinds here, maybe if you could just talk about what youre assuming.

At this point for raw material inflation or deflation in 2024, and then just talk also about how some of the early pricing is going the pricing that you put in the first quarter of 'twenty four.

From a raw material standpoint, Joel I mean, we've assumed about 2% to 3% inflation on raw materials I think its components for us our brass and copper and we do we do lock in as we've talked about three four months ahead. So we got good visibility into the kind of April time period.

Shashank Patel: And we do, you know, we do lock in, as we talked about three, four months ahead. So we have good visibility into the kind of April time period. And so far, that's good for the first quarter.

And so far that's good for the first quarter as far as pricing, we don't talk about pricing until the quarter has done and we've announced the price increases and then we'll report on what the price realization was in Q1, when we do our call in early May for Q4, the price realization was approximately 2%.

Shashank Patel: As far as pricing, we don't, you know, talk about price until the quarter is done, and we've announced the price increases. And then, you know, we'll report on what the price realization was in Q1 when we do our call in early May. For Q4, the price realization was approximately two percent.

Okay. Thanks Shashank.

Joe Ahlersmeyer: Okay, thanks, Shashank. The CapEx guide, the step up, maybe you could just give some building blocks to what that reflects. And congrats on bringing down the ERPs, as somebody that used to work in those. 30 kind of makes me sweat.

The Capex guide the step up maybe you could just give some building blocks to.

What that reflects and congrats on bringing the ERP is down to somebody that used to work and those 30 kind of makes me sweat.

Shashank Patel: But is any amount of that capitalized over the coming years? going to be, you know, expanding. No, there's a good portion that will be capitalized in 2024.

But is there any amount of that capitalized over the coming years or is this going to be expensed.

Well it seems like there's a good portion that you said, there's about there's a good portion of that will be capitalized in 2024, you see the step up in Capex part of that is M&A related part of that is the ERP. So there'll be a good portion of the ERP that will be capitalized in 2024.

Joe Ahlersmeyer: You see the step up in CapEx. Part of that is M&A related, but part of that is the ERP. So there'll be a good portion of the ERP that will be capitalized in 2024. Alright, thanks a lot guys, good luck.

Understood Alright, Thanks, a lot guys. Good luck.

Joseph Giordano: Thank you. Your next question comes from the line of Joel Giordano with TD Cowan. Your line is open. Hi, this is Danon on behalf of Jill.

Thank you.

Your next question comes from the line of Joan Tier D&O with TD Cowen Your line is open.

Okay.

Hi, This is zane on for Joe I, just wanted to ask about the sequential as Youre seeing in inflation are you seeing the normalization sort of slowed down a little bit.

Danon: I just wanted to ask about the sequentials you're seeing in inflation. Are you seeing the normalization sort of slow down a little bit? And has inflation stayed relatively high in recent months? On the materials side, you know, materials started coming down. I mean, copper, steel, they have a different cycle, but they started coming down early last year.

As inflation stayed relatively high in recent months.

So on the materials side materials started kind of Ami accomplished they have a different cycle, but they started coming down early last year quite frankly over the last couple of three months, they've gone up a little bit, but they do bounce around a little bit on the compensation side, which is obviously the second biggest element of cost.

Shashank Patel: Quite frankly, over the last couple, three months, they've gone up a little bit, but they do bounce around a little bit. On the compensation side, which is obviously the second biggest element of cost, we have seen compensation a little bit softer, but there's still inflation out there on the compensation side across Europe and the American continent. Thank you for that. And are you guys, are the Red Sea issues impacting you guys at all? Yes, they are. So far, great. Yeah, go ahead. No, go ahead, Shashank. You've got it.

We have seen compensation slot the compensation side, a little bit softer, but there is still inflation out there on the on the compensation side across Europe and the Americas.

Thank you for that and are you guys.

Are the ritzy issues impacting you guys at all.

Yes, they are so great.

Yes go ahead Bob.

No go ahead sure. Thank you got it.

Shashank Patel: Yeah, so we do get goods in Europe from China that used to go through the Red Sea. And obviously, now they're going through the ports in South Africa. So there's extra time as well as the cost for container cargo. You've read about it.

Yes, so we do get goods in Europe from China that used to go through at CN, obviously now they're going through the ports in South Africa. So there's extra time as well as the cost of a container cargo you have read about it they've gone up certainly not at the levels, we experienced during the <unk>.

Shashank Patel: They've gone up. Certainly not to the levels we experienced during the supply chain disruptions, but they have gone up significantly over the last six, eight weeks. Great. Thank you so much for that.

Biking disruptions, but they have gone up significantly over the last six eight weeks.

Great. Thank you so much for that.

Adam Michael Farley: Thank you. Once again, ladies and gentlemen, if you have a question, it is star one on your telephone keypad. Your next question comes from the line of Adam Farley with Stiefel. Your line is open. Yeah, good morning, everyone.

Thank you.

Once again, ladies and gentlemen, if you have a question. It is star one on your telephone keypad.

Your next question comes from the line of Adam Farley with Stifel. Your line is open.

Yes, good morning, everyone.

Shashank Patel: My first questions are around European margins. Can you provide some color on what drove the positive mix in the quarter? And should we expect any positive mixed impacts going forward? So the positive mix in Q4, as Bob talked about, our OEM-driven business was down primarily because of heat pumps and insulating equipment that tends to be lower margin, whereas our France business, which has higher margins, more on the plumbing side, held up pretty well. So we had a favorable mix there.

Our first questions are around European margins could you provide some color on what drove the positive mix in the quarter.

And should we expect any positive mix impacts going forward.

So the positive mix in Q4, as Bob talked about our OEM driven business was down primarily because of heat pumps that ancillary equipment that tends to be lower margin, whereas our France business, which is higher margin more on the plumbing side.

That held up pretty well, so we had favorable mix there.

Shashank Patel: As well as from an off-margin perspective, we did benefit from lower costs of raw materials in Q4. And that was, as I said, the buys we had made early on in the beginning, in the June-July time period. So the combination of those two factors drove the off-margin in Europe.

From an op margin perspective, we did benefit from lower cost of raw materials in Q4 and that was as I said the buys we had made early on in the.

Beginning in the June July time period. So it's a combination of those two factors that drove the op margin in Europe.

Robert J. Pagano: Okay, thank you for that, Shashank. And then on America's growth. Maybe just try a little more detail on, You know, what markets are driving the continued growth in valve products, and then, on the flip side, what markets are driving the declines in gas connectors? Thank you. Yeah, so look at institutional light industrial. It has been positive. Single family is basically flattish.

Okay. Thank you for that Shashank.

Then on America's growth.

Maybe just provide a little more detail on on what.

Markets are driving the continued growth in valve products and then on the flip side what markets drove the declines in gas connectors. Thank you.

Yes so.

Institutional light industrial has been positive.

Single family is basically flattish.

Robert J. Pagano: Multifamily is slight, slight growth; we're expecting it to temper off in the second half of 2024. And then, you know, in general, the gas connectors are in primarily in specialty type applications. Some of it is destocking, and some of it is in residential niches, right? We're talking generators, we're talking gas appliances, things like that, that are moving up and down.

Multifamily is slight slight growth, we're expecting it to temp.

Temper off in the second half of 2024, and then in general the gas connectors are in.

Primarily and.

Specialty type applications. Some of it is destocking and some of it is in <unk>.

Residential niches right, we're talking generators, we're talking gas appliances things like that that.

Robert J. Pagano: And if you recall, we had available capacity and took a lot of share in prior years related to having our products, our gas connectors in North America produced, and a lot of our competitors get them overseas. So we knew we'd give a little bit back in market share in that area, but we capitalized on it in 2023. Thank you. Thank you. Thank you. There are no further questions at this time. I will turn the call back to Bob Pagano for his closing remarks. Alright, 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 May to discuss our first quarter results. Have a good day, and stay safe. This concludes today's conference call. We thank you for joining us. You may now disconnect your lines, www.microsoft.com, www.microsoft.com

Moving up and down and if you recall we.

Had available capacity and took a lot of share in prior years related to having our products our gas connectors in North America produced and a lot of our competitors get them overseas. So we knew we'd give a little bit back end market share in that area, but we capitalize.

In 2023.

Okay, great. Thank you.

Okay.

Thank you.

There are no further questions at this time I will turn the call back to Bob Pagano for closing remarks.

Alright, Thank you for taking the time to join US today. We appreciate your continued interest in watch and look forward to speaking with you again in may to discuss our first quarter results have a good day and stay safe.

This concludes today's conference call. We thank you for joining you may now disconnect your lines.

Okay.

Okay.

Yeah.

Yeah.

Yeah.

Yeah.

Yeah.

Yeah.