Good day, ladies and gentlemen, and welcome to the Q3 2008 Watts Water Technologies earnings conference call. At this time, all participants are in listen-only mode. (Operator instructions) I would now like to turn the call over to Mr. Kenneth Lepage, General Counsel. Please proceed, sir.

Thank you. Before Pat and Bill begin their presentation, I want to inform you that various remarks they may make about the company's future expectations, plans and prospects constitute forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various factors, including those discussed under the heading "Risk Factors" in our annual report on Form 10-K for the year-ended December 31st 2007, and other reports we file from time to time with the Securities and Exchange Commission. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we disclaim any obligation to do so and therefore you should not rely on these statements as representing our views as of any date subsequent to today. I will now turn the presentation over to Pat O'Keefe. Patrick O’Keefe: Thank you, Ken, and good afternoon, everyone. Welcome to our third quarter conference call, and thank you for your continuing interest in Watts. Following my remarks, Bill McCartney, our CFO, will provide you with financial highlights for the company in total, and Bill will also discuss individual sector results. Then we will address any and all of your questions. The third quarter results were in line with our internal expectations and generally consistent with what we shared with you during the second quarter earnings call. Bill will take you through the third quarter details in just a moment. Obviously, the past quarter has been turbulent as the worldwide credit crisis and subsequent government intervention have caused large gyrations in the financial…

Okay. Thank you, Pat. Revenue for the quarter $379 million, was up $38 million or 11%. Net income at $16.7 million, represented a decline of $1.4 million or 7.5%. Earnings per share from continuing operations at $0.46, which was a decline of $0.01 and you compare that to consensus estimates of $0.45. On a consolidated basis, the revenue of 38 – the increase of $38 million was composed of the following. The organic growth on a consolidated basis was up $1 million or 0.3 of a point. The foreign exchange, mostly the euro, was up $10.5 million, or 3%. And then contributions from acquired companies was up $27 million or 8%. And that totals the $38.8 million or 11.4%. What I'd like to do now is just, as we did last quarter, just kind of walk you through a bridge on our earnings per share and compare it to last quarter – last year's third quarter, and then we're going to go into a more detailed discussion on the segments. But if you recall, last year's third quarter we earned $0.47. We have to add $0.10 to that when we eliminate or to make it comparable to this year, $0.10 for restructuring charges. The accretion from our stock buyback program, as Pat mentioned earlier is $0.02. We have acquired 2.4 million shares since this time last year. The change in the foreign exchange rates versus last year contributed $0.02. Last year, the average rate on the euro was $1.37. This year it was $1.48, so we picked up $0.02 there. The inclusion of the results of Blucher had a dilutive impact of $0.01. We were expecting, as you recall, Blucher to be dilutive about $0.04 this quarter. So Blucher itself did a little bit better than we were expecting and…

(Operator instructions). Your first question comes from the line of Michael Schneider with Robert Baird. Please proceed with your question. Michael Schneider – Robert W. Baird: Good afternoon, guys. Patrick O’Keefe: Hi, Michael.

Hi, Michael. Michael Schneider – Robert W. Baird: Maybe first we can just talk about the wholesale channel. I'm curious it sounds like the unit declines were maybe a little more steep than even the second quarter. And is that just because you have more pricing coming through in the wholesale channel in North America?

I think what we've seen, Mike, is sort of mid-single digit declines there in terms of unit volume, offset by some pricing. Michael Schneider – Robert W. Baird: Okay. And then you were supposed to go out with somewhat select price increases in September. Can you give us a sense of did those go out, and the extent they were successful? Patrick O’Keefe: Yes, most of the price increases, Mike, relate to – particularly relate to iron products. And they went out in August and were in effect, basically, by early September. I think they're well justified based on what's happened with the cost of iron, so most of them are, at this point in time, in place and holding. Michael Schneider – Robert W. Baird: Okay. And then as you look now into Q4 and 2009, you've been very successful in passing price along for the last two years, especially in copper products. Give us a sense of what you expect in the wholesale and retail channels now that copper has been cut in half. Patrick O’Keefe: I would expect that – let me talk about what's happened in the past. When you had a period of rapid inflation in our industry it's been followed by a period of sort of graceful deceleration in pricing. So you have deflationary period. But it's been at a relatively slow pace. The reason I attribute that to, Mike, is because all members of the channel would like to see price stability. So they're all resisting price declines and allowing those to go through. Now, the other, I think, I would expect that it would be – that the pricing would – we'd be under some pricing pressure, but I would expect that we'd hold on to a good portion of the gains…

Your next question comes from the line of Kevin Maczka with BB&T Capital Markets. Please proceed with your question. Kevin Maczka – BB&T Capital Markets: Pat, Bill, how are you? Patrick O’Keefe: Good, Kevin.

Fine, thank you. Kevin Maczka – BB&T Capital Markets: You touched on the commodity issue and the fact that you may see some pricing pressure there, but when you look at the cost side of that, did you forward buy many of your big commodity purchases like copper and others so that you might not see a more immediate impact on the cost side or should you see some cost benefit as early as Q4? Patrick O’Keefe: Go ahead.

We have some buys that we've done, but we were forecasting internally here that the sort of $2 copper would start to come into our cost of goods in the second quarter of '09, and that's typical of the lag that we see, because we always have somewhere between four months to five months of material on hand, and then that's really the issue. We have some pre-buying that we've done, but it's still within our four month to five month window. Kevin Maczka – BB&T Capital Markets: Okay. And then there were some of the things that like lower commodity costs and some of the other cost side actions that you announced tonight that you're taking and still some price increases, in the face of these volume declines that you expect in '09, do you think it's possible to maintain this 32% or so gross margin, given that some of those things ought to offset the deleveraging from lower volumes?

We're still in our planning cycle right now, and it's a little early for us to say what our margins are going to be. We're – what we're trying to do is react to all the things that we can control, and in case, the volume does – those volume numbers do hit us we want to be ahead of the curve. So it's little early to say. Kevin Maczka – BB&T Capital Markets: Okay, and then –

We think that when you look at the – some of the main components here of copper, which that hopefully will give us an opportunity to widen the margins a little bit, and significant reduction in our SG&A around all these salary cut backs, there is a lot of opportunity for cost reductions which we're following up on here. Kevin Maczka – BB&T Capital Markets: Okay. And then two questions on Europe quickly, if I could, Bill. Mid-single digit volume decline I think is what you're expecting in '09. Are you expecting something similar with Blucher as well? And the second question is some of the alternative energy products that were so strong last quarter. Are those expected to hold up much better given what energy prices have done lately?

What we – what – the comments that Pat shared with us was that the core business of Europe will be down about 5 points, but we still expect Europe to hold its own, and that does not – Blucher will not be going down by 5 points. So the growth of Blucher offsets a lot of that – all of it. Patrick O’Keefe: The two offsets you have are Blucher coming in strong and alternative energy remaining strong.

Right. Kevin Maczka – BB&T Capital Markets: Okay. So it's not just the addition of Blucher, but Blucher you actually expect to grow even as a standalone unit. Patrick O’Keefe: Especially – you have two factors. It's growing on its own, but you also have the fact that we only had it for a portion of the year.

Right. Kevin Maczka – BB&T Capital Markets: Okay. Great. Thanks, guys. Patrick O’Keefe: Okay.

Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Please proceed with your question. Jeff Hammond – KeyBanc Capital Markets: Hi. Good afternoon, guys. Patrick O’Keefe: Hi, Jeff.

Hi, Jeff. Jeff Hammond – KeyBanc Capital Markets: Just back to near-term trends, it doesn't sound like you've seen a big change near-term, but is there anything that you've seen over the last month or so, we've kind of hit the pinnacle of this financial turmoil in terms of any customer segment acting particularly different, any kind of channel destocking? Patrick O’Keefe: Yes, the thing I worry about is the last issue, which is channel destocking, which I'm very fearful that as we approach year-end you're going to see some significant destocking on top of the destocking that they've gone through year-to-date. So my concern is, is that you have wholesalers who are very reluctant to carry inventories across the year-end. Jeff Hammond – KeyBanc Capital Markets: Okay. And – Patrick O’Keefe: We have the same issue in retail. Jeff Hammond – KeyBanc Capital Markets: And then, any pieces of the business over the last month or so that you have seen some marked deterioration whether it be renovation or any sub-verticals? Patrick O’Keefe: We don't have visibility to that extent because we're going through retailers not going through wholesalers. Our visibility is a little bit blurred in the near-term. We can see trends longer-term because of our discussions with our customers, but near-term I think you basically have a market that's frozen. And I don't think that's particular to one channel of distribution. I think that's particular to the fact that homeowners are finding it difficult to get liquidity, or they're reluctant to make commitments to major purchases. Jeff Hammond – KeyBanc Capital Markets: Okay. And then, just moving over to China, I think you gave some color on '09. You thought the business would grow modestly. Is that excluding this Tianjin impact or is that – Patrick O’Keefe: Yes, that's excluding Tianjin. The issue with Tianjin is we have it under contract to be sold. We're hoping that with that sale being approved here at the end of November that we put some of those – some of the more serious operating losses behind us. Jeff Hammond – KeyBanc Capital Markets: So can you give us a sense of what Tianjin on a full-year basis adds in terms of revenue contribution and operating loss that would go away?

About $8 million to $9 million of revenue, Jeff, in there, depending on the quarter, third to half of the operating loss. Jeff Hammond – KeyBanc Capital Markets: Third to half of the operating loss that you're experiencing now? Patrick O’Keefe: In China. Jeff Hammond – KeyBanc Capital Markets: Okay. So when you get – I guess when you sell that – I mean, what's the path that kind of breakeven or back to profitability in China? I mean, what's the best guess time frame?

Right now we're looking at continued improvement in '09, and I think we'll be well on our way mid-year to late 2009. That's our best estimate right now. Jeff Hammond – KeyBanc Capital Markets: Okay. And then can you give us a sense of how much copper you buy on an annual basis?

Jeff, as you know, we've been reluctant to get into being so specific on that, so I continue to be reluctant, if you don't mind. Jeff Hammond – KeyBanc Capital Markets: Okay. Great. Thanks, guys. Patrick O’Keefe: Okay.

Your next question comes from the line of Curt Woodworth with J.P. Morgan. Please proceed with your question. Curt Woodworth – JP Morgan: Hi. Good afternoon, guys. Patrick O’Keefe: Hi, Curt. Curt Woodworth – JP Morgan: I guess in terms of thinking about the low to mid-single digit number you outlined, that was a volume number, correct, Pat? Patrick O’Keefe: Yes. We're talking about sort of mid-single digits. Curt Woodworth – JP Morgan: Okay. Patrick O’Keefe: On volume in North America. Curt Woodworth – JP Morgan: Right. And I mean, if I just took 5% of the top line off, and I know you have additional acquisition revenue coming in with full year Blucher, but you'd be looking at a sales decline of about $74 million. Obviously you'd have to add back some for Blucher. Your incremental margins have kind of vacillated between 10% and 15%. So that kind of implies an EBIT loss on the base business of roughly $7 million to $11 million. And you've outlined – and that's my math, obviously. And you've outlined some of the restructuring to-date that you think is going to save you about, I believe, $500,000. Can you identify or quantify any incremental savings that you think you can get? I know you're not comfortable maybe quantifying what you announced this quarter, but can you give us a sense of how much cost you could really take out in '09 if things did deteriorate to that degree? Patrick O’Keefe: We're going through that budgeting process right now, so you're a little bit premature in asking the question. Curt Woodworth – JP Morgan: Okay. Patrick O’Keefe: We don't have a comprehensive view on that at the moment. We have pretty good clarity on individual pieces – Curt Woodworth – JP Morgan: Got it. Patrick O’Keefe: – like the reduction in force and the salary freeze and some other things, but not collectively. Curt Woodworth – JP Morgan: Okay. In terms of Blucher, do you still expect $0.20 of accretion in '09?

We said it was $0.05 a quarter, so we're going to have $0.05 of that in fourth quarter, so you're really talking about $0.15 I think in '09. Curt Woodworth – JP Morgan: Okay. Patrick O’Keefe: We had a little bit of FX effect depending on what happens with the currency. Curt Woodworth – JP Morgan: Okay. And I guess just in terms of FX, you said it would be about a $0.02 to $0.03 hit to the fourth quarter. So if it were to stay at that level into 2009, I mean is the current thinking that would be roughly maybe a $0.10 negative impact in 2009?

It's probably $0.12 to $0.14 in that range. Curt Woodworth – JP Morgan: Okay. And then this last question, for Europe, what percent of your sales are into alternative energy? Patrick O’Keefe: We haven't broken it out.

Yes, we haven't really broken it out separately, Chris, but, I mean, it's half – prior to Blucher, half our business was OEM. Now it's probably about 40 percent. And so it could be as much as half of that, rough estimate. Curt Woodworth – JP Morgan: Okay, so it could –

We also get a lot of pull-through sales. Because we're selling the alternative equipment, we get the sales on the regular equipment as well. So you get both. Curt Woodworth – JP Morgan: Right. I'm just trying to figure out a better way to model that, because you said the wholesale was down 6 points, but the alternative energy offset all of that and then some. I think core was up 4. So it would imply that you saw massive percentage growth in the alternative to get the whole segment that much positive. So I'm just trying to get a little bit of better handle on –

Our OEM business in Europe was up 16% in the quarter, that was – it ended the quarter at 44 million euros from 38 million euros last year. Curt Woodworth – JP Morgan: Yes, okay. And you think about maybe half of that would be alternative energy, roughly?

It's a very rough estimate. Curt Woodworth – JP Morgan: Okay. And then, do the margins on those product lines vary – have much variance between your core OEM boiler type sales? Patrick O’Keefe: Not really, no. Curt Woodworth – JP Morgan: No? Okay. Patrick O’Keefe: They average similar margins. Curt Woodworth – JP Morgan: Got it. Alright, great. Thanks a lot, guys. Patrick O’Keefe: Okay.

Your next question comes from the line of Michael Rooberg [ph] with Boenning & Scattergood. Please proceed with your question. Michael Rooberg – Boenning & Scattergood: Good afternoon, guys. Just taking a step back – can you hear me? Patrick O’Keefe: Yes.

Yes. Michael Rooberg – Boenning & Scattergood: Just taking a step back, we've seen asset prices come down significantly, a pretty wholesale exit from the scene of financial buyers. I know you mentioned earlier that bolt-on acquisitions are the only things that you're looking at going forward. Within that space, is there anything in particular, any particular type of technology or any particular type of product line that most interests you right now? Patrick O’Keefe: We have a couple of targets we're looking at closely, and they typically fall into highly – they're product lines where we think that there's a sustainable differentiation, where they have something that's unique, something that is somewhat price resistant and things of that nature. But the problem we have at the moment is that there's a gap, I think, because my expectation is, is that there's going to be a reset in terms of pricing on deals and the multiples will come down substantially just because the number of people who will be in a position to make offers on businesses will be substantially different six months from now than it has – than it was six months ago. The other thing is, is that you're going to see the effects of a recession in their EBIT numbers – in their EBITDA numbers. So I expect that the whole – the acquisition pricing will be readjusted here in the next 6 months to 12 months. Michael Rooberg – Boenning & Scattergood: Okay. My other questions have been answered. Thank you. Patrick O’Keefe: Thank you.

Your next question comes from the line of Christopher Glynn with Oppenheimer. Please proceed with your question. Christopher Glynn – Oppenheimer & Co.: Thanks. Good evening. Patrick O’Keefe: Hi, Chris. Christopher Glynn – Oppenheimer & Co.: Just, sorry if I missed it. Could you mention what D&A was in the quarter?

I have that. D&A is – year-to-date, Chris, it's $34 million. I don't have the quarter here. Christopher Glynn – Oppenheimer & Co.: That's great. And can you ballpark what the purchase accounting was at Blucher?

Inside of that D&A number? Christopher Glynn – Oppenheimer & Co.: It is all inside it, including the inventory write-up?

Yes, that is – it's in there. Not all of it, but – in Blucher, the – we were expecting it to be about $0.04 dilutive. It was about $0.01 dilutive. Okay? The results were a little bit better than we were expecting. Their margins were a little bit higher. Their revenue was a touch higher as well. I don't have the specific D&A here with me right now on just Blucher though. Christopher Glynn – Oppenheimer & Co.: Okay. And the retail number just looks really good against the residential environment we're in. Can you talk about that a little bit and maybe a little more detail on the price would speak to that as well. What the pricing was in North America? Patrick O’Keefe: You're referring to the retail sector? Christopher Glynn – Oppenheimer & Co.: Yes, and then pricing across the North America segment, perhaps. I'll take whatever you want to give. Patrick O’Keefe: The way I would describe pricing in the third quarter, it was relatively stable. Now, the question, I think, that we've got to – we're grappling with at the moment is what's going to happen on pricing going forward if copper maintains the level at which it has taken itself down. Now, I'm a believer that the market is going to be reluctant to give that back, because it's been so hard fought to get pricing as we've gone forward. But I don't think – in the third quarter we didn't see anything unusual. The pricing movement that we took in the quarter was substantially cast iron products, where the material cost was significantly higher than what our pricing was prior to the price increases, we just simply caught up. Christopher Glynn – Oppenheimer & Co.: Okay. And then just to the level of overall resilience, I mean, the overall sales decline in retail is just pretty minimal against the environment we're in. Patrick O’Keefe: Right.

Yes, it was a solid quarter in retail in the environment. You're absolutely right. I mean, we were down about a million bucks, and that was primarily because of timing on rollouts and buybacks and what not. So I think the guys in our retail space deserve a lot of credit. They had a solid quarter. Christopher Glynn – Oppenheimer & Co.: Okay. And then the other solid thing, the tax rate. It sounds like you've done some things that permanently lower your tax rate. What would be thinking about as a placeholder there for '09? It certainly sounds like it would be lower than we might have thought previously.

We have – when we did the Blucher deal we were able to do a little bit of tax planning, which, I would say, it's a little early, Chris, but maybe 0.5 a point lower than historical. But I'm not – Patrick O’Keefe: Yes, Chris, I think we're going to have to give you some guidance on that in January.

Yes. It's just a little early to say that just yet. Christopher Glynn – Oppenheimer & Co.: Okay. Great. Thanks for your help. Patrick O’Keefe: Okay.

Your next question comes from the line of Keith Hughes with SunTrust. Please proceed with your question. Keith Hughes – SunTrust Robinson Humphrey: All my questions had answered. Thank you.

(Operator instructions). Your next question is a follow-up question from the line of Michael Schneider with Robert Baird. Please proceed with your question. Michael Schneider – Robert W. Baird: Pat, Bill, could you just clarify – I think I might have crossed two different comments. Pat, you started the call by saying you would have expected mid-single digit declines in Europe in 2009. Again, is that unit volumes or is that revenue on the core business and then again offset by Blucher? Patrick O’Keefe: It's revenue declines on the core business before offset for two things. Blucher would be a positive offset, and the other positive offset would be the sales to the alternative energy applications. Michael Schneider – Robert W. Baird: Okay. And then in North America did you also say you expect mid-single digit declines in '09? Patrick O’Keefe: Yes. That's correct. Michael Schneider – Robert W. Baird: You do. Okay. And is that primarily then again the wholesale channel because of the commercial exposure, or is there something unique about the DIY comparisons or rollouts – ? Patrick O’Keefe: No, primarily the commercial marketplace softening up. Michael Schneider – Robert W. Baird: Okay. That's all I have. Thank you. Patrick O’Keefe: Okay.

Your next question comes from the line of Michael Coleman [ph]. Please proceed with your question.

Good evening. Patrick O’Keefe: Hi, Michael.

Could you just go through kind of the unit economics of the alternative energy for the end user? What kind of payback they're getting or what's driving aside from high energy costs? What's driving that sales level? Patrick O’Keefe: Yes, there is two things that drive that sales level. One is the fact that there is a number of subsidies across Europe, and to a certain extent those subsidies are being endorsed by other countries around the world, where they are subsidizing the installation of any more energy efficient applications, particularly solar applications, geothermal heat pump applications and things of that nature. So a lot of this is being driven by subsidies that make it more affordable and reduce the payback on those systems. The second issue is I think there's – we saw this year people who were ignoring somewhat the economics of that and investing in those systems because of the noise around $100 plus oil. Now, the question, I guess, going forward is how much is that going to relax as a result of the noise around $100 plus oil going away? So that's the issue. But, in general, you have two factors. One is the subsidies and two is you have the movement of people to do – to move toward green technologies and more energy efficient technologies, even without the subsidy or even without the short economics.

Okay. One other thing, the $900,000 restructuring, could you just break that out between North America and China?

Let's see here, we've got $500,000 in North America. There's about $100,000 in Europe and about $300,000 in China.

Okay. Thank you.

Okay. Patrick O’Keefe: You're welcome.

Your next question comes from the line of Christopher Glynn with Oppenheimer. Please proceed with your question. Christopher Glynn – Oppenheimer & Co.: Yes. Something caught my ear on Mike Schneider's question about the alternative energy in the European next year. I think previously you had just expected that to kind of run solidly this year, the alternative energy. Now it sounds like you're looking for that to continue pretty solid in '09. Did I hear that correctly? Patrick O’Keefe: We don't have – we've got to be careful, because we don't have that good a visibility in terms of what's going to happen with demand. We have a solid backlog throughout the fourth quarter. We're starting to book some orders into the first quarter, but it's too early to tell. Christopher Glynn – Oppenheimer & Co.: Okay, but maybe you've become incrementally more positive on the sustainability of it at any rate? Patrick O’Keefe: I think that's true. Christopher Glynn – Oppenheimer & Co.: Okay. And then just lastly on Blucher, better than you had expected or guided in the quarter. Should that inform our thinking about the $0.15 for next year?

I'd hold on your $0.15. Christopher Glynn – Oppenheimer & Co.: Got it. Patrick O’Keefe: We said earlier, you're going to have a little bit of a – when you translate that back into US dollars, depending on what your assumption is regarding the Euro-US dollar exchange rate, you have that issue to deal with. Christopher Glynn – Oppenheimer & Co.: Definitely. Okay. Thanks again.

Okay.

There are no further questions at this time. I would now like to turn the call back over to Mr. Pat O'Keefe for closing comments. Patrick O’Keefe: Thank you very much for your continued interest in Watts Water Technologies. We look forward to speaking with you again in our February conference call. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.