Watts Water Technologies, Inc. (WTS) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Watts Water Technologies First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Tim MacPhee, Treasurer, VP, Investor Relations. Mr. MacPhee, you may begin. Timothy M. MacPhee - Treasurer & Vice President-Investor Relations: Thank you, Nicholas. Good morning, everyone, and thank you for joining our first quarter earnings call. Joining me today are Bob Pagano, President and CEO; and Todd Trapp, our CFO. Bob and Todd will provide their perspective and analysis on Watts' first quarter 2016 results, the current market and will update our full year outlook. Following our prepared remarks, we will address questions related to the information covered during the call. The earnings press release and earnings call presentation we issued last evening include some non-GAAP financial measures, and we have included in those documents the necessary reconciliations to GAAP measures. You can find the direct link to the webcast of today's conference call on our website at www.wattswater.com. We will archive the webcast on the site for replay. I'd like to remind everyone that in the course of this call, to give you a better understanding of our operations, we will be making certain forward-looking statements. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Watts Water's publicly available filings with the SEC. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Let me now turn the call over to Bob Pagano. Robert J. Pagano - President, Chief Executive Officer & Director: Thanks, Tim, and good morning, everyone. Now turning the slide three in the earnings call presentation, let me briefly provide a summary for the first quarter. I'm very pleased with the first quarter results were reflective of the cumulative actions we've taken to enhance our portfolio and drive operating efficiencies throughout the organization. In Q1, we saw top-line growth, strong operating margins and EPS expansion. This quarter included some extra shipping days, relative to last year, which positively impacted sales growth and other operating metrics. However, when results are normalized for the extra days, we still delivered a solid start for 2016. Todd will review the quarter's results in more detail in a few minutes. The regional realignment announced in February is moving along well. Munish Nanda has met with all key members of the European team, and has visited most of the sites since he assumed responsibility in late February. Elie Melhem has also incorporated key members of the Middle East sales team into this Asia-Pacific leadership group. Each leader has made changes to improve regional, I meant, enhance the skill-set of the respective management teams. Our key initiatives are moving ahead as planned, and we continue to focus on enhancing the customers' experience with Watts. Our transformation initiatives in the Americas and in EMEA are driving results for us. In March, we began shipping from our new state-of-the-art distribution facility in Columbus, Ohio. This new center of excellence will streamline the distribution process through new management warehouse and scanning technology. We expect to fill customer orders more quickly and move to a single ship process, making it easier to do business with Watts. In early April, we announced that two distribution sites will be closing days and phased out by the end of June. To-date, this brings a number of announced site closures in the Americas to five, helping to achieve our goal of reducing our footprint by 30%. Additional site closures are planned and will be announced in due course over the next several quarters. Cost and expected savings for Phase 2 are still in line with our previous discussions. Our legacy restructuring actions in EMEA are progressing as planned, and we should reap the expected savings we previously identified for 2016. I'm proud to announce that on April 20, we celebrated the grand opening of the Watts Works Learning Center. This new 12,000 square foot facility is located at our corporate headquarters in North Andover and will provide customers, distributors, sales representatives and our associates a hands-on experience with the company's products and technologies. The learning center includes configurable classrooms, demonstration labs and working mechanical rooms that showcase Watts' products in action. We had approximately 450 guests at the grand opening, and we received very positive feedback about the new facility. We are excited to reestablish our position as a leader in training the industry. Finally, we are reaffirming the full year outlook we provided during our February conference call. Todd will review the detailed assumptions again shortly. Moving to the current external environment, let's turn to slide four. Let's begin with the non-residential and residential markets in the Americas. The major indices implied that the non-residential market outlook is somewhat mixed. The ABI has fluctuated with no major positive moves lately while the Dodge Momentum Index was actually down in March. In the non-residential markets we serve, we expect to see uneven growth in 2016. Based on market intelligence, the non-residential market should be up into low to mid single-digits in 2016. Longer term, the largest sub-market for us institutional is projected to grow more steadily over the next few years than the office and commercial submarkets. In Canada, the same submarkets are all forecast to be negative this year. Overall, for 2016, we expect to see slow, but steady growth in the nonresidential end market. The latest data for the residential market is also mixed, both housing starts and permits were down in March and builder sentiment was little changed. However, this data can be lumpy, and we think other macro terms like employment levels, low mortgage rates, and continued momentum in existing home sales should provide a tailwind. We expect solid growth in the residential housing sector for 2016. As has been the case for the last – for the past few years, EMEA is a mixed bag. On a positive note, we have seen some stabilization in France, our largest market. Whether that stability is long-lasting, it's tough to gauge. Certain economies like Russia, the Middle East, and certain portions of Western Europe are directly and indirectly impacted by oil prices. Until there is more clarity on the direction of oil, these regions will continue to lag. And uncertainty over Great Britain's potential exit from the EU and subsequent repercussions is creating an overhang. In Asia-Pacific, China's economy continues to experience structural corrections in the commercial real estate sector that will drag overall growth. On the other hand, we see regions outside of China like Indonesia and Australia with reasonable growth prospects in 2016. Overall, the markets are playing out as we planned for 2016. Now, I'll turn it over the Todd to talk about our first quarter operating results in more detail. Todd?

Thanks, Bob, and good morning, everyone. We're on slide five, which highlights the first quarter financial results. We've generated sales of $344 million, down about 3% quarter-over-quarter. This decline was driven by two factors. First and most significantly was the impact of the exit of undifferentiated products in 2015, which impacted sales by about $30 million or 8%. Secondly foreign-exchange primarily driven by the weaker euro lowered sales by approximately $5 million or 2%. These two items were partially offset by strong organic growth of 6% across all regions and incremental volume of about $3 million from the Apex acquisition. As Bob mentioned, sales growth and other operating metrics were positively affected by approximately two to three extra shipping days, depending on the region in Q1 of 2016 as compared to last year. When normalized for the additional shipping days, organic sales growth approximated 2% in the quarter. We thought the effect was large enough to highlight the numbers with and without the extra dates. From a full year perspective, the extra date in Q1 will be offset with fewer shipping days in Q4, so no change in our full-year outlook, really just the comparison issue within these two quarters. Having said that, our organic sales, operating margins and EPS still demonstrated solid growth even after normalizing for the dates. Please refer to page 17 in the appendix where we provide details of the reconciliation by region. Continuing on, adjusted operating profit of $37 million increased $8 million or 27%. This translated into adjusted operating margins of 10.8%, up 260 basis points versus Q1 last year. In terms of operating margins, the 10.8% represents a first quarter record for Watts, strong volume, favorable sales mix including the exit of undifferentiated products and productivity were the main drivers of the record Q1 margins. Adjusted EPS of $0.57 was approximately 27% better than last year. We estimated that the extra shipping days positively affected EPS by roughly $0.06 in the quarter. From a headwind perspective, the exit of undifferentiated products and a higher tax rate negatively impacted EPS by $0.05 and $0.04 respectively. The effective tax rate of 37.4% is over 400 basis points higher than Q1 last year. About half of the increase relates to a reserve that we booked in the quarter associated with an ongoing tax audit. And the other portion relates to earnings mix which is more heavily weighted to the U.S. So let's turn to the regions and on slide six, we'll review the Americas results for the quarter. Sales were $222 million, down 6% on a reported basis, but up 7% organically. Adjusting for the additional shipping days, Americas organic growth was about 3% in the quarter. We had strong performance from our commercial products like drains, large testable backflows and ACVs as well as solid growth for many of our other core products including water quality, electronics and gas connectors. Divested products were down about $27 million on a net basis as compared to Q1 of last year. This included a little over $3 million in sales to Sioux Chief in this quarter as we completed the transition services agreement as anticipated. AERCO grew at a modest pace in Q1, largely due to product timing, which we expect to be temporary as the backlog remains solid. We expect AERCO sales should pick up during the traditional busier second quarter and third quarters for AERCO. Adjusted operating profit at Americas was $33 million, an 18% increase year-over-year. Operating margin expanded 300 basis points, which was driven by volume, favorable sales mix including the positive impact of divested products, price and productivity which also included the benefit from lower material costs, so overall, a good start to the year in Americas with strong margin expansion. So turning to slide seven, let's review EMEA's quarterly results. Sales of $111 million were up 2% on a reported basis and up 5% organically. Foreign exchange negatively impacted sales by $3 million or about 3% which is less of an impact that we've seen in quite some time. Excluding additional shipping days organic growth was 1%. The organic increase was driven by our water and plumbing products, where we are seeing some stabilization in the French construction markets. We also saw some growth in our electronics business aided by the timing of a large OEM order. Sales in the HVAC and drains businesses were down in the quarter and just as a reminder, we expected that drains would be down due to the shipment of three large projects in Q1 last year that did not repeat. Regionally, we saw a mid-single-digit growth in some of our key countries such as France, Scandinavia and Italy while the Middle East continue to be strong with sales growth over 20% in the quarter. By contrast, we saw softness in Germany, where we continue to experience pressure in the OEM channel, and unfortunately Russia still remains a headwind for us. Adjusted operating profit for the quarter was $10.6 million, an increase of 31%. Operating margins of 9.6% increased 220 basis points as compared to Q1 last year. The margin expansion was driven by volume, productivity including lower material costs and restructuring efforts as well as an easy comps. Overall EMEA's performance is relatively stable for the second consecutive quarter. Now on slide eight, let's review Asia-Pacific's results. In the quarter, sales were approximately $11 million – up 11% on a reported basis and up 7% organically over the same period last year. Excluding shipping days, organic growth was 1% in the quarter, generally in line with our expectations. We continue to experience some project delays in the valve business within China and this is primarily due to the commercial market landscape, which has been down in recent quarters. Conversely, we saw good growth in China in under-floor heating driven by uptick in demand for our (14:32) products. Outside of China, we continue to see strong valve sales. The Apex acquisition generated about $3 million in sales during the quarter, which more than offset the $2 million of impact from the exit of undifferentiated products. Sales outside of China represented 46% of total Asia-Pacific sales in Q1 versus 16% last year, driven by the addition of Apex plus growth in our valve portfolio in countries like Australia, Indonesia and Japan. We expect this trend to continue as we expand our business into more mature co-driven countries. Adjusted operating profit increased $33 million to $2 million in the quarter and adjusted operating margin increased over 300 basis points, 18.6%. The key drivers of the significant expansion were higher trade volume, favorable product mix including higher margin Apex sales and strong productivity. So, overall a solid start to the year for Asia-Pacific. On slide nine, a few items I'd like to point out related to free cash flow for the quarter. As you know, historically Q1 is the slower period for cash and that played out as expected. Our free cash outflow for the quarter was $31 million as compared to a $5 million outflow in Q1 last year. The majority of the incremental outflow relates to our planned inventory increase to support the opening of our new distribution center in Columbus and to establish buffer inventory for other Americas base though (16:13) transformation activities. This decision impacted inventory by roughly $17 million in the quarter and we do expect the inventory balance to ramp down in the second half of the year. We also invested about $4 million more in capital in the quarter to help drive growth and productivity initiatives within our facilities. From a metric standpoint, we improved DSO and inventory turns versus same period last year by 5% and 6% respectively (16:43). It is also worth mentioning that including in investing activities, is a cash outflow of $18 million related to the potential sale of our China entity, which produced undifferentiated products. This is cash that we placed in escrow, which will be returned to us when the sale of that business is finalized, which we expect to happen in the second quarter. On the balance sheet, all cash in the escrow has been classified as restricted cash. Separately, we purchased approximately 268,000 shares of a Class A common stock at a cost of about $12.5 million during the quarter. So while the first quarter is seasonally slow, we fully expect our cash generation will improve as the year progresses and are focused on achieving a 100% cash conversion for the year. So finally turn to slide 10 and the outlook on the year; we are reaffirming our full-year outlook. We continue to expect full year organic sales growth in the low single digits for the organization with sales by region falling in line with our previous guidance from February. We expect operating margins should grow 100 plus basis points, despite the incremental investment to support future growth initiatives. And currently, we expect to spend between $1.5 million and $2 million per quarter for the investments in the final three quarters of 2016. And as I mentioned earlier, we anticipate free cash flow converting at or above 100% of net income. Lastly, I do want to bring to your attention the minor tweak to the outlook and that is around our global effective tax rate, which may be at the high end of this 32% to 34% range for the year that we previously provided, driven by the mix of earnings weighted heavily to the U.S. in the reserve we booked in Q1 regarding the tax audit. So with that, let me turn the call over to Bob before begin Q&A. Bob? Robert J. Pagano - President, Chief Executive Officer & Director: Thanks, Todd. To summarize, the year has started out on a good note. Sales grew in all three regions. We saw healthy growth in operating profits, operating margins and EPS during the quarter. We continue to drive our various rationalization and transformation programs, which we believe should drive better margin performance going forward. And our outlook for the year remains unchanged from our February call. I want to reiterate that we expect to grow our margins in 2016 by 100-plus basis points and we should generate free cash flow at equal to or greater than net income for the year. We're excited about how 2016 has started and we expect to make continued progress as the year unfolds as we execute on our key initiatives. So with that Nicholas, please open the lines for questions.

And our first question comes from the line of Jeffrey Hammond with KeyBanc. Your line is now open. Please proceed with your question.

Hey, guys this is James Picariello. Congrats on a nice quarter here. Regarding the strong margin performance, even excluding the 50 basis point benefit that you guys pointed out driven by the additional shipping days, I mean how sustainable do you think this improvement is to the rest of the year? And maybe can you just talk to what the puts and takes were in the quarter that drove the nice incrementals?

Yes. So James this is Todd. I'll jump in on this one. So, we had actually nice start to the quarter, and we're really happy with the margin performance, but there is a couple of things, I think, it's worth mentioning. I think first and foremost, we had strong sales aided by the extra days in the quarter, right? And this drove some favorability on the absorption line. We also had – I think we had some nice benefit of some commodity tailwinds in the quarter as well. And if you think about where commodities are today, it seems to have – I would say, have troughed in the January timeframe and while we expect to see some continued benefit in Q2, I think as you think about the second half of the year, it's going to be a little bit of, I would say, some tougher comps. We also saw some nice benefit on restructuring in the quarter as well. So between raw material, commodity headwinds, favorable restructuring, as well as the incremental volume, that really was driving our strong margins in Q1. Now to think about it over the course of the quarter, I do – the remainder of the year, I do expect to see some solid margins continuing in the Americas business as a result of transformation initiatives going on there. And I expect to see continued benefit out of EMEA as well as in APAC although a probably moderate, more moderate growth I mean expansions in the two quarters – second quarter and third quarter going out.

Got it. Thanks.

And then one of the questions just on Asia, I mean so Asia was extremely high in the quarter, and I think if you ask us – again besides additional trade sales days we had and the additional margin for the APAC sales, we did have higher amounts of intercompany activities form our China plant to really help support some of the Americas transformation and this drove better factory absorption. So, going forward, we think margins for Asia should normalize in the 10% to 15% of range, really depending on the amount of intercompany form that we drive to that factory.

Got it, very helpful. Thank you. You guys also did mention the effect of tax rate for the year is trending higher towards that 34%, and some of it is tied to an ongoing tax audit. Whatever color you could provide there would definitely be helpful.

Yes. So, we had one tax charge in the quarter, and it approximated about $0.02 for reserves established for an ongoing tax audit. And the remainder of the increase was really driven by worldwide earnings mix being more heavily weighted to the U.S. And so, we expect the full-year effective tax rate will be towards the high-end of the range, the 34%, really just given the reserve change plus the continued waiting (23:15) of earnings in the U.S.

Got it. I will get back in queue. Thanks.

Our next question comes from the line of Kevin Bennett with Sterne Agee. Your line is now open. Please proceed with your question.

Thanks. Good morning, everybody. Robert J. Pagano - President, Chief Executive Officer & Director: Good morning, Kevin.

First question, Bob, can we talk about pricing? I know Todd just mentioned the raw materials. I'm wondering what pricing was in the quarter? And then what do you think given the, I guess, region kind of run-up in commodities, what do you think about pricing for the rest of the year? Robert J. Pagano - President, Chief Executive Officer & Director: Yes. So, when I look at pricing, we've had decent pricing. We've put in price increase in March. We expect about 1% of that to hold and part of our growth assumptions are 0.75% to 1% of growth related to pricing. So, it's been able to hold. We have some contracts with some OEMs, where we do have to pass on the favorability based on LME prices. But overall, we believe we're holding our own on the pricing and we believe we can sustain that for the rest of this year.

Okay, great. And then, I guess, the next question is about your new training center that you opened up, which seems very interesting. I was curious if you could talk about what was the investment there. I guess what was kind of the thought behind that, and what kind of return do you think that will generate over time? Just elaborate on that a little bit. Robert J. Pagano - President, Chief Executive Officer & Director: Yes. So, we spent several million dollars on this new training facility. And really, what we're trying to do is, Watts has so many brands and components and we've tried to put all the components together to show how they all work in the overall system. So, what that does is allows all our people, all our customers, to really look at see all our components in one place. It's a hands-on experience and certainly, we invite you and other investors to come and look at this, because it's state-of-the-art, it really showcases our products, and allows us to get voice of the customers. We train customers and see them, try our product hands-on, put them together, take them in parts, see how they interact. We get to listen to their input on how we can better improve them or other options to do that. So, it's a great new investment. It's always difficult to put a value on this, but I know from past experience that getting the loyal customer, training them very well really drives long-term commitment to your product. So we believe that's one of our key growth initiatives that will play out in the longer term for our company.

Got you, that makes sense. Look forward to seeing you someday. Thank you, guys. Robert J. Pagano - President, Chief Executive Officer & Director: Thank you.

Thank you.

Our next question comes from the line of Kevin Maczka with BB&T. Your line is now open. Please proceed with your question. Kevin Richard Maczka - BB&T Capital Markets: Thanks. Good morning. Robert J. Pagano - President, Chief Executive Officer & Director: Hi, Kevin.

Hi, Kevin. Kevin Richard Maczka - BB&T Capital Markets: So, the shipping days disclosure is kind of a new topic that we haven't really had to think much about in the past. So just to be clear on that, the $0.06 that was a benefit this quarter, you expect a headwind of about that magnitude in Q4; is that the way to think about this?

Yes. So, Kevin, it's nothing more than just the 4%, 4.5% calendar (26:32) close and so the benefit we saw in Q1, we expect to be pretty much fully offset in Q4. So, the 4% organic growth rate probably 50 basis points on the operating income. I think that would be from a modeling standpoint, the right way to think about it. Kevin Richard Maczka - BB&T Capital Markets: Got it. In terms of the margins and the strength in the quarter, and what's sustainable and what's not. I think you're pretty early days on the sourcing initiatives that wasn't one of the callouts here. Can you give an update on that and what are your expectations as we move forward there? Robert J. Pagano - President, Chief Executive Officer & Director: Yes. So, Kevin, it's Bob. Related to our productivity, when we talk productivity, we include sourcing savings. So I would tell you our sourcing savings both from let's call it commodity, but we just follow commodity, but really from our – putting our buying power and leveraging global spend, we're really in full force. So we started seeing the benefits of that in the second half of last year significantly, we called out $4 million of benefits last year, our goal was an incremental $4 million of benefits, just from sourcing unrelated to commodities and we're on track, a $1 million this quarter on that. So, that team is working very, very well and we believe that will continue throughout the quarters. As Todd earlier mentioned, the commodities, basically we saw the lowest commodities in the first quarter, as you know, we start getting tougher comps in the second half of the year. But again, that has been a tailwind for us and our teams are executing very well on those initiatives. Kevin Richard Maczka - BB&T Capital Markets: Got it. And just finally for me, the growth investments, I think it was mentioned $1.5 million to $2 million per quarter going forward, is that a step up from what we saw in Q1? If you gave that number, I missed it. Robert J. Pagano - President, Chief Executive Officer & Director: Yes. So, as we talked about in the fourth quarter of last year, we said we're going to come out lower on the investments, because we really want to see how the economy and the markets were behaving. So, we purposely were lower on our investments, about $1 million in the first quarter. We expect that to ramp up to $1.5 million to $2 million in the second quarter and third quarter and fourth quarters. So again, we're ramping up, we're feeling more confident about the year and the markets based on what we saw in the first quarter. So, we're executing on those initiatives as we go forward. Kevin Richard Maczka - BB&T Capital Markets: Okay, great. Thank you. Robert J. Pagano - President, Chief Executive Officer & Director: Thank you.

Thank you.

Our next question comes from line of Jim Giannakouros with Oppenheimer. Your line is now open. Please proceed with your question. Jim Giannakouros - Oppenheimer & Co., Inc. (Broker): Thanks, good morning guys. Robert J. Pagano - President, Chief Executive Officer & Director: Good morning, Jim. Jim Giannakouros - Oppenheimer & Co., Inc. (Broker): I (29:20) 1Q and to get back in 4Q, but any areas of your business tracking better or worse than initially expected coming into the year, just trying to understand the puts and takes between what you were seeing a few months ago versus your expectations from – I guess from a market perspective or even just from the inventory commodity wind-down, things that are trending better or worse that you can speak to that nets out to your call it maintaining your original outlook? Robert J. Pagano - President, Chief Executive Officer & Director: Yes. Let's start off by some execution issues. I think, the execution of our new distribution center is ahead of schedule which is allowed us to build inventory faster, which is good in allowing us to make the transition. So, I think that's positive. Also EMEA, we weren't exactly sure we thought where we're going to be at with that. As you our guidance is flat to down a little bit, and we saw in the first quarter, it was better. But I think we've taken a cautious outlook for the second half of the year would be the exit potential by the UK and the Greek exit. We just don't know the turmoil that is – when we talk to our local team there, they're optimistic, but we're cautiously optimistic again, because any major issue in Europe, it intends to have an impact on the whole economy there. So, we want to wait and see there before we call it a success and potential to grow further just because the economic uncertainties there. So we're playing a little cautious there in that regard. So that's probably a little better than we expected. All the other things are trending in line with what we expected. Jim Giannakouros - Oppenheimer & Co., Inc. (Broker): Got it. That's helpful. And specifically on North America, I haven't heard about any disruptions in your lead-free foundry. Can you update us on how that's running and at what capacity? And just a quick follow-on, can you estimate how much the milder weather benefited your 1Q? Robert J. Pagano - President, Chief Executive Officer & Director: Yes. So, I didn't – jeez, continued questions on our foundry, but anyway, our foundry is doing well, no interruptions and the teams continue to execute. And we're looking really at our Franklin facility, it's not just the foundry, we've got a large effort to transform the whole machine shop, and really looking at that whole value stream. So, we're on top of it. The team is making great progress and we'll continue to execute. Regarding your second question, we looked at the weather from a weather point of view, and we estimated it was probably impacted us favorably by 1%. But if you recall in the fourth quarter, we called out a large wholesaler order that came in that impacted us by 1%. So, we kind of looked at both those of as netting out from a year-over-year comp point of view. So, weather probably helped us by 1%, but that one large order they got moved into the fourth quarter of last year hurt us by 1%, so they netted each other out.

And then I might add, there's the push out of that one AERCO order as well, Bob- Robert J. Pagano - President, Chief Executive Officer & Director: Yes.

Covered by one point in the quarter as well. Robert J. Pagano - President, Chief Executive Officer & Director: Exactly. Jim Giannakouros - Oppenheimer & Co., Inc. (Broker): Got it. And one follow-up if I may; AERCO, what's the growth implied there in your plan or guidance for North America in 2016?

For 2016? Jim Giannakouros - Oppenheimer & Co., Inc. (Broker): Yes.

It's 10% plus, I would say would be the growth rate for AERCO in 2016. Robert J. Pagano - President, Chief Executive Officer & Director: Yes. It was on the low-single-digits in the first quarter, but that was timing issue. We had a very, very strong fourth quarter, strong double-digits and growth in the fourth quarter. And as you know, that business is very project and lumpy, but the team is on track to execute the growth numbers that Todd just talked about. Jim Giannakouros - Oppenheimer & Co., Inc. (Broker): Understood. Thank you. Robert J. Pagano - President, Chief Executive Officer & Director: Thank you.

Our next question comes from the line of Tristan Margot with Cowen & Company. Your line is now open. Please proceed with your question. Tristan Margot - Cowen & Co. LLC: Hey, guys. Good morning. I just wanted – I know this is very small, but could you address your growth in Asia aside from China and was this expected? Robert J. Pagano - President, Chief Executive Officer & Director: Yes. So, we've had our focus on – we didn't want to be completely relaying on China, especially with all the macro things that are happening there. So, we've been at a conscious effort to grow outside of China; and as Todd talked about Indonesia, Japan, Australia, those are key focus areas that we saw very nice growth in the quarter. So we're becoming – certainly China is the largest portion of that, but we're trying to expand beyond that and that's why we bought the Apex acquisition, which really is in New Zealand. So we're trying to broaden our Asia focus and – so China was in line with what we expected, but the other regions were strong. Tristan Margot - Cowen & Co. LLC: Okay. Thanks. And could you give us some colors on your end markets, specifically in the U.S. maybe on the resi, what you're seeing now and going forward? Robert J. Pagano - President, Chief Executive Officer & Director: Yes. So in my opening comments, I talked about that that we feel good about the residential market. We feel that's strong. Commercial is a little lumpy, but we've seen positive growth from that point of view. So, we're confident in both of those markets this year. Also remember that a large portion of our businesses is aftermarket or repair and placement that tends to follow GDP growth. So you got to look at 60% of our North America business is – really follows that aftermarket replacement business. So, the other portions are on the new construction, so, we're positive on those markets. Tristan Margot - Cowen & Co. LLC: Okay. Thanks. Congrats on the quarter guys.

Thank you. Robert J. Pagano - President, Chief Executive Officer & Director: Thanks.

Our next question comes from the line of David Rose with Wedbush Securities. Your line is now open. Please proceed with your question.

Good morning. Thank you for taking my call. I just want- Robert J. Pagano - President, Chief Executive Officer & Director: Good morning, David.

First of all, I wanted to just say thank you for being straightforward with the additional shipping days; hats off to you for the candor. Second, if we can kind of go through the cost or at least the benefits from reduced raw material costs. Can you give us a percentage or a dollar figure or a margin number, the impact of that (35:59) Robert J. Pagano - President, Chief Executive Officer & Director: David, as you know, we don't talk about commodity cost in detail at that level just because of the competitive nature of it, but certainly it was a tailwind for us, a strong tailwind and we continue to drive that. But not only that, I think as I said earlier in one of the questions is that, our whole focus on global sourcing and how that impacts our supply chain, on-time performance, all of that is a key focus for our team. So, as we look at this, we'll see continued improvement in Q2. I think it's a little tougher comparison as I said in second half of the year, but it's certainly positively impacting our margins.

Okay. And then as it relates to sort of the investment, you highlighted for the remainder of the year, how should we start to think about 2017? I mean, are you going to continue to increase the level of spend for growth or does it sort of flatten or does it drop off, I mean, how should we think about the long-term CapEx? Robert J. Pagano - President, Chief Executive Officer & Director: Yes. So, we believe there is a – yes. So, we believe from a capital allocation point of view, we really want to continue to invest organically. That's the – a key investment opportunity. We believe we have opportunities to invest in both growth and productivity improvements in our factories. So we'll continue to do that investment, but we also expect higher productivity as a result of some of these investments as well as growth. So I would say this year is probably a net cost impacts from those incremental investments, but we continue to invest for the future. We plan on growing and investing and continuing to do that. So I would say, we are going to continue to invest, but we have a high, a key threshold for return on investment and payback, so we're going to make sure we make smart business decisions as we allocate that capital.

Okay. So we should assume that we build on the current number for this year. Robert J. Pagano - President, Chief Executive Officer & Director: I don't know about build. I would say about the same probably.

Okay. And then lastly as it relates to capital allocation, I mean, AERCO was a pretty meaningful acquisition for you last year, and you mentioned that your interest in sort of controls and technology on the waterside. Can you provide us a little bit more color in terms of the verticals? Is it going to be more on the industrial side, residential, is there any interest in the municipal side, given the strength in muni? Robert J. Pagano - President, Chief Executive Officer & Director: Yes. So we look at it – we look at – as you know, we can't control the timing of any acquisitions. We look at all the spectrums. I would say, number one, we're going to stay close to our core. Number two, certainly more of our focus is on the commercial space; municipal, not a heavy focus. I think we're looking at companies come with some municipal experience, but I wouldn't do a flat out pure municipal acquisition just on pure municipal. But overall, I think our focus is more in that residential, commercial, but probably a little more on the commercial side.

Okay. Perfect. Thank you very much. Robert J. Pagano - President, Chief Executive Officer & Director: Thank you.

This concludes today's Q&A session. I would now like to turn the call back over to Bob Pagano for closing remarks. Robert J. Pagano - President, Chief Executive Officer & Director: Okay. Well, thank you everyone. We appreciate your interest in Watts Water, and we look forward to updating you on our Q2 performance in early August. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day. Speakers please stand by.