Good day, ladies and gentlemen, and welcome to the Q2 2014 Watts Water Technologies Earnings Conference Call. My name is Adrian, and I will be your operator for today. [Operator Instructions] As a reminder, I would like to advise this call is recorded for replay purposes. Please be aware that remarks made during today's call about the company's future expectations, plans and prospects constitute forward-looking statements under 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 the company's annual report on form 10-K for the year ended December 31, 2013, and other reports the company files from time to time with the Securities and Exchange Commission. In addition, forward-looking statements represent the company's views only as of today and should not be relied upon as representing it's views of any future date. While the company may elect to update these forward-looking statements, it disclaims any obligation to do so. During this call, the speakers may refer to non-GAAP financial measures. These measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release dated Tuesday, July 29, 2014, relating to the company's second quarter 2014 financial results. A copy of which may be found in the Investor Relation section of the company's website at www.wattswater.com under the heading Press Releases. I would now like to turn the call over to Tim MacPhee, Vice President of Investor Relations. Please proceed, sir.

Thank you, Adrian. Good morning, everyone, and thank you for joining our second order earnings call. Joining me today are Bob Pagano, our President and CEO; Dean Freeman, our CFO; and Ken Lepage, our General Counsel; and Ken Korotkin, our Corporate Controller and Chief Accounting Officer. Bob will begin by providing you some headline comments concerning the second quarter results. Then he is going to share with you some perspective of his first 8 weeks on the job since joining Watts. Bob will also give you our latest view on the market dynamics in each of the 5 geographies and a sense of where we see those markets trending as 2014 progresses. Dean will then review our financial performance for the quarter and year-to-date in more detail. He will also provide you with an update on our full year sales outlook, our various initiatives and an update on the second half forecast. Bob will briefly summarize and then we will open up the call to your questions. So with that, let me turn the call over to Bob Pagano.

Thanks, Tim, and good morning, everyone. Let me start with an overview of the quarters you see highlighted on Slide 3. Overall, we are pleased with the quarter as revenue grew by 8%, 6.5% organically, with all regions delivering organic growth. The Americas emerged from a weather-induced slow Q1 with a solid organic growth, especially in our wholesale market. EMEA also delivered organic growth driven by the OEM market despite the many macro headwinds in Europe. And Asia-Pacific was able to rebound from a slow Q1 by delivering 20% plus top line growth in the quarter. We saw sales orders pick up in the Americas, driven primarily by the wholesale channel. Exiting the month of June, orders increased in the Americas by almost 9% against the prior year. Asia-Pacific orders were up over 50% as we exited June. EMEA order rates were down slightly about 3% for the second quarter. Our number of our EMEA customers are signaling some caution for the second half of this year. So while there continues to be a strong quoting activity, converting quotes into orders has slowed. Our adjusted earnings per share of $0.69 was 21% up Q2 last year. Much of the increase was driven by the continued progress EMEA is making with its various restructuring and transformation efforts. With moderate organic top line growth of about 2%, EMEA was still able to expand its adjusted operating margins by 300 basis points to 11.7% as compared to last year. Consolidated operating margins were flat with last year, as the Americas experience headwinds in manufacturing related to production levels in our foundry and the effects of the transformer issue, which was highlighted during our Q1 conference call. Dean will provide you more color momentarily. Finally, we took additional charges during the quarter related to…

Thanks, Bob, and good morning, everybody. I'll try to run through this as quickly as I can. I know you all want to get to the Q&A. And again, I apologize if I repeat anything Bob talked about, but I will try to offer up a little bit more color. So on a consolidated basis, as you see, organic revenue for the quarter increased 6.5% over prior year, again, sort of across all segments. Growth in Americas, up 2.3%; EMEA, 2.3%; Asia, 23%. We also had a bit of FX benefit of about 1.5% in the quarter. Adjusted operating profit up 8.5% over last year and as a percentage of sales, consolidated adjusted operating margins were essentially flat at 10.3% compared to last year. As we saw margin expansion in EMEA, it was largely offset by the declines in Americas. And I'll talk a little bit more about that in a minute. So a bit more detail on the growth, it was across all regions and virtually comprehensive across all channels during the quarter. Again, we saw strength in the Americas, primarily wholesale channel, up almost 11%, retail was up just about 3%. OEM channel was a little bit flat in the quarter and increased sales principally in our residential end markets, as I think Bob was talking about. But also in our commercial flow control, products were key drivers for the quarter. As Bob noted, very nice bounce back from Q1, weather-related volumes. The America order rates continued to be strong. And as of the end of Q2, were up about 9% versus last year. The Americas adjusted operating margin of 12.2% in the quarter trailed the same period last year by about 150 basis points. And again, as Bob mentioned, and I'll offer up a little bit more…

Thanks, Dean. To summarize, we had a solid organic revenue growth in the second quarter and we are able to deliver a 21% increase in adjusted EPS in the quarter through cost savings driven by the various initiatives in EMEA and through lower FX and interest charges. Manufacturing absorption and foundry inefficiencies related to the transformer issue curtailed consolidated margin expansion as compared to the prior year. Absorption may continue as a headwind in the second half, but the P&L effect should not be as material as in the second quarter. So with that, Adrian, can you open the lines for questions?

[Operator Instructions] Your first question comes from the line of Kevin Maczka of BB&T Capital Markets. Kevin R. Maczka - BB&T Capital Markets, Research Division: First question maybe is more for Dean. But if you can just -- to be clear on the foundry issue, the specific transformer issue you had is behind us now, but the issue we have going forward that pressured us mostly in Q2, and will continue to in the second half, is related to absorption because that has been down and it's very slowly ramping, is that correct?

Yes. That's correct. Let me give you some numbers. So I think we talked about $2 million of impact in the second quarter related to the transformer. On a comparative basis, that was a net $600,000 that we talked about. And then we had an incremental $4 million, $4.5 million of absorption-related headwinds as we ramped up the foundry much slower than we anticipated. Kevin R. Maczka - BB&T Capital Markets, Research Division: Okay. So there, I think, was a mention of $4.4 million in the slide. That's the absorption issue?

[indiscernible] Yes. Kevin R. Maczka - BB&T Capital Markets, Research Division: Okay. But the transformer issue is behind us now, we're going to slowly ramp the foundry back up. And your best guess now is what? By the time we get to Q4, that's running at full speed and we're not talking about this anymore?

Well, I mean, look, I think they continue to make progress. We, obviously, anticipate progress in the third quarter and continue the progression in the fourth quarter. And that's our hope. We've been cautious about making any commitments about the recovery, the timing of the recovery, I think appropriately. But I will tell you, exiting the second quarter, the team makes consistent and continued improvement in ramping the foundry back up and getting it to target utilization. Kevin R. Maczka - BB&T Capital Markets, Research Division: Okay. And then just a follow-up also on the Americas margin. The rebate issue, did you quantify that? If you did, I missed it. But is that -- and is that still an issue of timing this year versus last year?

Largely -- yes. It was largely timing, the timing issue we talked about, the $1 million. There was an incremental increase associated with mix. Wholesale grew so strongly, we had a lot of rebatable sales mix in the quarter. And then there was a little bit of timing related to our Drains business. But largely, it was related to the timing that we talked about in the first quarter. Kevin R. Maczka - BB&T Capital Markets, Research Division: Okay. And just finally for me on EMEA margin, can you just give a little more color there on why that was so strong? I know the restructuring is part of it, but the bigger year for restructuring savings is next year, not Q2 of this year. So can you give us a little more color there? Was there some mix or other favorable impact?

No. They -- look, they got a lot of volume leverage. They performed, they outperformed expectations. I would tell you, largely though, the volume leverage 2.3% growth was somewhat unexpected. And when it came through, they obviously took advantage of it. But they are clearly executing, I would say, and I think I can say reasonably, ahead of expectations. But again, we're going to be very cautious about how we model the outlook.

Your next question comes from the line of Ryan Connors of Janney Montgomery Scott.

A couple of big picture questions from our end. Bob, I appreciate your comments about kind of initial impressions on joining the company. And one of the big parts of the investment thesis in the stock is the ability to take the company kind of from good to great, so to speak, and affect a step change in the margin over the next couple of 2 or 3 years. Can you kind of give us your impressions on that specific issue at this stage? Give us your view on that and where you think those levers are that have the potential to be pulled to get the company there.

Absolutely. So Ryan, Good to Great is one of my favorite books. And that's one of the reasons why I joined Watts is, I believe, there was huge potential upside in the margins side. As I've -- my first 8 weeks here, I've looked at the facilities, looked at the team. And we've done a lot of acquisitions over the many years. And as we look to at our platforms and where we're going, I think it's -- we have opportunities to integrate them better, better utilization. And as I said earlier, really drive Lean through the organization and a One Watts mindset. So we don't leverage ourselves very well. We're -- the teams are working on that right now. And I think the investment thesis still holds true here. There's upside margin potential and that's the key focus area, especially as we get into our strategic and operating plans. And as we, in particular, look at North America and the opportunities. So the key focus for us right now is getting that foundry online, up to where it needs to be. That's a clear foundational effort. And I've personally brought in some people from the past that I've known who are foundry experts. They're working with the team and making some good progress. So that's the key focus, but as I've said before, I'm continuing to look at the platform and opportunities for growth.

That's great. And then second one, just more of a philosophical question. I mean, you -- both you, yourself and Dean come from companies that do issue formal EPS guidance. I know the disclosures have improved. We get real solid guidance now on the top line outlook and so forth. What's your philosophy about maybe introducing an actual EPS guidance as we move forward?

Great question, Ryan. And I think we'll talk that over with the board and various other people to make sure where we go. But you're correct, in the past companies I've been with, we have given guidance. But we try to give you general guidance here, overall, so you can see where we're going. I think some of the lumpiness of what we've seen during this foundry conversion to lead-free. It's been bumpy, but we'll look at that and give you an update as we come forward in the near future.

Great. And then, finally, just the last more tactical one for me, just a clarification. The OEM strength in Europe, I think, the press release cites it up about 8% or so. Was that really, predominantly, the electronics business in Germany, Dean, that you mentioned up 16%? Was that kind of the main driver of that?

Well, it was certainly associated with strengthening HVAC. I think we saw an inflection point on the electronics business that helped that. But I think the base business grew near that level with obviously, a nice inflection point from the electronics business. So the channel, overall, in both categories on the HVAC side but also in the electronic side grew very nicely.

Your next question comes from the line of Garik Shmois of Longbow Research.

First question is, I'm just trying to get a little bit of clarification around your comments with respect to North American order growth and your full year guidance. You indicated orders were up from 9% exiting the quarter. Sales were, frankly, better than you had anticipated in 2Q. Seems like you're getting some pricing in the channel that will help the back half of the year, but you did narrow by 100 basis points the top end of your guidance. So I was just wondering maybe if you can provide a little bit more color on what you're seeing that made you a little bit more conservative relative to your prior outlook?

Look, I think it's just a narrowing of the range. I think that we still think of the recovery in North America as slow. We know there were points of inflection related to price and to, what I call, snapback from the first quarter. So I think we're just being cautious. I think we're being careful. We don't want to characterize all of the growth in the second quarter as sort of broadly economic and demand driven. There was definitely some effects of the price increase that we announced and certainly, the effects of the snapback from the first quarter. So it just to suggest the moderation of the outlook.

Okay. That's very helpful. I guess, just shifting just to point of clarification with respect to the rebates. I think, previously, you had called out, maybe...

$1 million.

Yes. It was $1 million in the quarter. I think it was expected to be about $2 million headwind in the third quarter and then a $3 million benefit in the fourth. Are those pretty good assumptions to still use?

Yes I think so.

Okay. And then just lastly, bigger picture. Bob, you talked a little bit about leveraging One Watts and focusing on operations, but it has been a couple of years since the company has made a sizable acquisition. Just wondering if we can get your thoughts on perhaps tapping into the balance sheet, your thoughts on free cash flow use and growth through M&A moving forward.

Sure. Certainly. We continue to look and evaluate our pipeline. We continue to expand. And I do believe that acquisitions do fit in our longer-term strategy here. So we're continuing to evaluate and look at some. And I don't see any in the very near term, but as we look throughout the rest of this year and into next year, I do believe we'll become active in looking at acquisitions.

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

So maybe -- Bob, can you expand on kind of this One Watts philosophy and what maybe, it all entails in terms of expansion and what you're going to do at Watts? And then maybe just on this Americas assessment, speak to maybe what you see are some of the near-term opportunities?

Yes. So let's talk about the One Watts. And again, a lot of our businesses, I call them were in silos, and really focusing on their small businesses. We have many, many brands, many, many products. And a lot of it, we haven't consolidated our efforts and looking at how we can sell to each other and leverage each other's production capabilities, et cetera. So more of what I call an integration strategy, how do we leverage one another, leverage electronics, for an example, throughout the world. And leverage our capabilities through our manufacturing platforms around the world. So that's an opportunity. When you look in the Americas, in particular, as we assess this, some of that same concept falls through in the One Watts. We need to look at our facilities, our distribution centers. We need to look at our overall footprint and our capabilities, what our portfolio looks like and how are we going drive margin on an overall basis. So overall, I think there's opportunity to leverage that. And clearly, we need to improve our overall margins. So we'll be looking at our organization, our structure, our product portfolio, all the things you'd normally do as you look to drive margin improvement. And I don't want to forget about Lean, right? Lean is a huge opportunity. We have some great examples in some of the smaller sites. We need to bring it back to the bigger sites and leverage that capability around the world. So I've changed here. We've had a focus on operational excellence. I'm bringing in the concept of commercial excellence, which is really about front-end process, how do we price, how do we differentiate and how do we leverage our capabilities in the front end, that ultimately impact the back end, really, in the operations side. So we're expanding our focus from operational excellence to commercial and operational excellence. And I believe there's opportunities there.

Great. And then just a couple of quick clarifications. The order numbers you gave, the plus 9%, the plus 56%, is that a June order number or a 2Q order number?

June, it was June.

Okay. And were those the strongest periods or what was kind of order rates for the quarter period?

Well, the -- yes. It was a point of inflection in the month of June. And overall, orders were slightly above the sales rate that we saw in the quarter.

Are those trends carrying over into July?

Well, so from an order rate perspective, we have seen some softness. I think we talked about softness in EMEA. I think we certainly -- we're calling out the Americas as sort of flattish at this stage. But the month of July, it's a tough month to draw any trends from in terms of the overall quarter. So -- look, we're encouraged by the trends we're seeing. We're encouraged by what our customers are telling us. We are encouraged by the demand profile that we saw coming out of the second quarter. And so we'll see how it plays out for the balance of the year.

And just to add a little more color, Asia had strong orders in July. In the Americas, remember, we put -- announced a price increase in June. We saw some of that snapback. And so July being flattish is actually okay by us. We're seeing our wholesale national accounts double-digit growth in the channels, so we're seeing some positives inside of that. So we're cautiously optimistic.

Okay. Good. And then just last clarification, did you say the foundry headwind is $4 million to $4.5 million in the second half of the year? More weighted to 3Q?

No, no. We said that was what we saw in the second quarter.

Okay. And within that kind of 90 to 110 basis point margin expansion, what are you building in for foundry headwinds in the second half?

I think what we're modeling is about $2.5 million, about half of that $4.5 million recovering in the second half of the year. So call it $2 million to $2.5 million.

Kevin Bennett of Sterne Agee. Kevin C. Bennett - Sterne Agee & Leach Inc., Research Division: I just had one quick question to continue to beat the dead horse with the foundry issue. Can you guys just talk about what exactly is going on there? I mean, is this a demand issue that it's just not great enough to produce or are we still trying to figure out how to produce? Or I mean, what's exactly the issues there after you fixed the transformer, I get that, but if you could just elaborate on that, that would be great.

Let me let Bob give you some comments and then, I'll jump on.

So Kevin, when you shift from, let's call it, leaded to unleaded or non-leaded product, it really is a complex material, right. And we're leading the efforts in auto pouring this product. And there's been some difficulties in what I call fine tuning the process to get the required output, right. And that's have been a big balance. The other part of this thing is with all the buildup in inventories throughout the channels as the conversion happened, the supply chain and what I call level loading that. And I'll tell you, I have a lot of experience in foundries and -- shifts in volumes significantly up and down don't do well in foundries, they're used to a nice, steady flows. So we're trying to get the supply chain through all the channels back-level loaded, as well as getting the production capabilities on a more consistent basis. So we're working our way through that. We probably underestimated the transition timing of that, but the teams are working diligently through that process.

Kevin, so let me just add to those comments, which are obviously, very accurate. In the second quarter, post-transformer resolution, I would say, a discrete decision was made to stop -- remember, we are both buying and making materials. And the production ramp-up is a function of the absorption. And the conversion of purchase materials to produce manufactured materials was a process that had a certain level of assumption in terms of the timing of that conversion and the volume of that conversion. But the team made a very discrete decision to slow all that down, stop bringing in material. Do a full risk and mitigation assessment of all mechanical and production-related equipment. Because, again, this is like the third or fourth -- the transformer was the second, third or fourth mechanical issue that we've had in the foundry. And then, third, really look at the material productivity issues that they were having and make sure that as we ramp the foundry back up, we don't create -- we've solved one problem but then inadvertently created another. So the teams slowed down the production, slowed down the volume, resolved the issues, did the risk mitigation and now we're back in, what I'll call, a very slow ramp-up. Kevin C. Bennett - Sterne Agee & Leach Inc., Research Division: Got you. That's super helpful. And then just to clarify, I think you answered this with Jeff's question, but in second half guidance, we're looking for, I guess, on a year-over-year basis, an incremental $2.5 million drag from the under absorption?

Yes. We're calling out just another $2.5 million as a function of the slower ramp-up. Kevin C. Bennett - Sterne Agee & Leach Inc., Research Division: Got you. And I assume that's probably more pronounced in 3Q than 4Q, right?

I would expect that there's a glide slope, yes, yes.

[Operator Instructions] Your next question comes from the line of Joe Giordano of Cowen.

Just -- I'm curious as to what kind of -- and so as we stand in June, we're in the Americas business, the big recovery from the weather kind of put you right on track for the bottom end of that revenue guidance. The data most recently in new home sales, those kind of things, seems to be losing some momentum. So I'm curious, what kind of pick up are you guys modeling in, in that market for the second half?

Well, I mean, you can do the math on what we did in the first half and sort of the midpoint of the second half that we're modeling. I think our assumption is that, I think, we're trying to be careful. We see the same data on the housing recovery. There's a fair amount of debate whether that was weather related from the first quarter or whether there's something structural related to some of that news. I think our channel checks suggest that it's still a robust recovery. We're obviously going to be careful about that. And again, we've not modeled a whole lot related to the nonresidential commercial side. So I think we're just trying to be thoughtful about it. I think we're trying to be careful about it, but at the same time, I think the outlook that we've put out there is reasonable, it's rational. But I think we're still being cautious.

Okay. And what was the magnitude of the price increase you announced in June?

3%, 3.5%.

3.5%.

Okay. And I know you haven't talked about like 2015 and any sort of explicit guide. But when you talk about the rationalization in Europe kind of taking a little bit longer, how much of -- what kind of bleed are you kind of planning into 2015? If you can somehow -- how should we think about that?

There's not a significant bleed. I think we guided to $10 million of savings into 2015. The product rationalization, if anything, will add more to that. I don't see any significant deviation from that guidance.

Your next question comes on the line of Kevin Maczka of BB&T Capital Markets. Kevin R. Maczka - BB&T Capital Markets, Research Division: Just wanted to touch on the supply chain opportunity. That was kind of notably absent here in the conversation so far. And I think, Dean, you had hinted last quarter that it's early, but maybe you might be ready to give a little more color on that issue now. Can you just kind of give us an update on where we stand or if you're still intending to kind of provide a little more detail on the opportunity there?

Yes. So this is Bob. I'll comment on that. So supply chain is a big part of our focus and I should have of mentioned that earlier on one of the other questions. We have a new individual that's leading our global supply chain, which has a large company experience. Leveraging our One Watts capabilities earlier than we've discussed, we have the opportunity to consolidate our purchasing capabilities and look globally on that. So we have an initiative that we're starting. We believe there's opportunities. And as we begin quantifying that, we'll provide you more color. But at this point, the teams are formed. We're beginning to look at it, but I believe there's opportunities to leverage our global stand from a commodity point of view.

So Kevin, yes, I talked about the $750 million of sort of purchased materials. 75%, 80% of our cost of our revenue -- or cost of goods, excuse me. The big part of our cost structure I've talked about the opportunity. We have had teams working on it. But I think, in terms of commenting further, it's important that we put it within the context of the broader strategy. We put it into the context of Bob's vision and expectation in terms of how we, in an integrated way expand margins, which include looking at our footprint, looking at our products, our portfolio, looking at our organizational design. So from my mind, it's much more appropriate to put that into context across the broader initiative than to try to carve it out at this stage. And as Bob talked about, we'll have an update for you in the third quarter.

Your next question comes from James Giannakouros of Oppenheimer & Co. James Giannakouros - Oppenheimer & Co. Inc., Research Division: Quick -- high level on the sales in Americas. Can you give us a sense, and I'm sorry if I missed it, of price and volume contribution to growth that you achieved in the first half and expectations there that are implied in your guidance for the second half.

I think we said the price on a full year basis was 50 bps overall. And I think it was probably worth a point in the first half of the year. James Giannakouros - Oppenheimer & Co. Inc., Research Division: Okay. And then that 3%, 3.5% price increase, that's specific to Americas, right?

Yes. And then wholesale. James Giannakouros - Oppenheimer & Co. Inc., Research Division: And then wholesale, got it. Okay. And again, just high level on the commercial quoting side, is there any -- are there any areas that you can kind of specifically point out that are driving material strength in the early stages of a recovery there?

When you say call out, it's -- are you talking channel wise or are you talking about regionally? James Giannakouros - Oppenheimer & Co. Inc., Research Division: I'm talking -- well, I'll take regionally, I'll take end market. I mean, I know that certain areas within commercial help you a little bit better just from a content perspective.

Yes. So I guess I'll say regionally. I'll let Bob jump in if he's got any color. But regionally, it's clear. It's very strong in the Northeast, in the south -- Southwest, so the Dallas, Texas area, the West area. Again, as you kind of follow some of the large urban centers, but also the large stronger developing regions of the country, that's where you see commercial growth. In reconstruction outlook, they did an industry snapshot at the end of June, that the largest sector, the fastest-growing sector right now is office, followed by a little bit of hospitality and even institutional is coming back a little bit. They're reporting an inflection point. I think they called June over June up 14%, 15% and March -- May to June, up 33%. So there's clearly a point of inflection. It does not seem to be necessarily one region versus another. It seems to be sort of comprehensive in some of the growth regions that I just talked about. And again, what we track internally is sort of the bellwether projects and products that we sell into those commercial markets. Again, we saw -- we see continued strength in those areas. But in terms of specific OEMs or developers or even specific regions, I cannot offer you any more color on that. James Giannakouros - Oppenheimer & Co. Inc., Research Division: That's helpful. And one last one, if I may. Again, on the foundry, just to make sure that I heard you correctly. It sounds to me that the slower ramp doesn't -- I shouldn't be reading into a potential loss of share or an inability to meet current demand, is that right?

No, no. We've had redundant supply in our inventory levels. We've had a very solid and consistent redundant supply chain that allows us to produce to demand. We machine those sourced castings in our manufacturing operations here, so we control quality, we control distribution. So we've been able to obviously keep up with the demand.

Sir, you have no more questions at this time. I would now like to turn the call over to Bob Pagano for closing remarks.

Thank you, Adrian. So in closing, I'd like to thank you all for taking the time to join us today for our Q2 earnings call, and we very much appreciate your continued interest in Watts Water. We look forward to speaking with you again during our Q3 earnings call in late October. Thank you very much.

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