Good morning. My name is Lindsey and I will be your conference operator today. At this time, I would like to welcome everyone to the Watts Water Technologies, Inc. Corporated Fourth Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Tim MacPhee, you may begin your conference.

Thank you. Good morning, everyone. And welcome to our fourth quarter and full year 2016 earnings conference call. Joining me today are Bob Pagano, CEO and President; and Todd Trapp, our CFO. Bob will discuss our key accomplishments in 2016, provide an overview of our fourth quarter results, discuss our 2017 goals and address the macro markets. Todd will offer his detailed analysis on our fourth quarter and full year results and provide our initial outlook for 2017. Bob will then summarize our discussion and following our prepared remarks we will address questions related to the information covered during the call. Today's webcast is accompanied by a presentation, which can be found in the Investor Relations section of our website. We will reference these slides throughout our prepared remarks. For purposes of todays call all references to key performance metrics will be on an adjusted basis unless otherwise indicated and non-GAAP financial information and metrics have been reconciled and are included in the appendix of the presentation. Before we begin, 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 could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, Watts Water's is 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. Now let me turn the call over to Bob Pagano.

Thank you, Tim, and good morning, everyone. We’re on slide three in the earnings call presentation where I'll provide an overview of this past year and initial thoughts on 2017. 2016 was a transformational year for Watts. We made excellent progress on many initiatives that we identified as important to our future success. Financially, our efforts delivered a record performance in adjusted operating margin and adjusted EPS for the full year. Now let me briefly comment on our quarterly results. Our fourth quarter performance was in line with the outlook we provided in November. We expected and achieved marginal sequential improvement in organic growth. Adjusted for shipping days, our consolidated sales were flat as compared to down 1% in Q3. In the fourth quarter, growth in Asia Pacific was offset by some softness in EMEA while the Americas were flat. Notably, we achieved strong adjusted margin expansion again this quarter, up 100 basis points driven by our focus on portfolio enhancements and continued cost savings initiatives. Cash flow also continued to be a very good story for the company. Todd will provide additional color on the financial results in a few moments. Now let’s discuss our accomplishments for the year. First is putting the right people in place to drive our strategy forward. As you will recall, we initiated several key senior level management changes to drive a One Watts mindset. Munish Nanda took over responsibilities for Europe including Eastern Europe, while Elie Melhem assumed responsibilities for the Middle East and Africa. We made these changes to simplify our organization and employ a more global business approach. Munish realigned platforms and leadership in both Europe and the Americas and created some global product platforms like drains, water quality and electronics. This enabled us to focus on the voiced of our…

Thank you Bob, and good morning, everyone. I’m on slide five which shows the fourth quarter results. We delivered sales of $342 million down 5% quarter-over-quarter, both on a reported and on our organic basis, which was inline with our expectations. The organic sales decline was primarily driven by a reduction in shipping days in the quarter. As you will recall, we mentioned back in early 2016 that because of the way our fiscal calendar fell, we gained approximately four shipping days in Q1 and lost a similar number of days in Q4 when compared to 2015. Excluding the effect of fewer shipping days in Q4, organic sales were flat. We also had several puts and takes which offset one another. The 2015 exit of on differentiated products and the negative impact of currency was a headwind of $13 million or 4% in the quarter. Fully offsetting these reductions were the acquired sales of PVI and Apex. Adjusted operating profit of $37 million increased 5% despite the lower sales. This translated into an adjusted operating margin of 10.9% up 100 basis points versus Q4 of last year. Favorable sales mix including the exit of undifferentiated products and continued benefits from productivity and restructuring actions more than offset incremental investments in sales and marketing, R&D, and IT. Adjusted EPS of $0.64 was 8% higher than last year and a Q4 record for the Company driven by strong operating performance. The effective tax rate in the quarter was 32.9% consistent with last year. So overall, a similar result to Q3 as we delivered strong operating margin in EPS performances, despite a sluggish topline. As Bob mentioned, we focused on those aspects of the business that we could control and executed accordingly. Moving to the regions, let’s turns to slide six and discuss…

Thanks Todd. Please turn to slide 13 and let me summarize our discussion. We’ve continue to execute on our transformational strategy that we outlined in 2015. Our team has worked diligently to focus on the customer, drive a one Watts culture and align our businesses. Operationally and financially we delivered on our 2016 commitments. We are approaching 2017 with some caution given what we saw on the second half of 2016 and uncertainty associated with the new administration's ability to translate campaign promises into policy and new legislation, the pace and timing of which is unknown at this point. We are currently seeing a pause in the marketplace as customers are delaying projects until there is more clarity on proposed legislation. Therefore, we think our growth in the first half of 2017 will be marginal and will accelerate in the second half of this year. As Todd mentioned we plan to deliver continued margin expansion in 2017 while continuing to invest for future growth. And finally, we’ll continue to be disciplined in capital deployment expected to spend wisely on CapEx, strategic M&A and returning excess cash to shareholders. Over the last two years we have made substantial progress in our journey to become a leaner customer centric organization. These years we’re about stabilizing our foundation driving transformation and seed planning for the future. This year we will be keenly focused on growth through solution selling, geographical expansion, new product introductions and key account management. I'm confident our team will continue to deliver on its commitments for 2017 and beyond. With that, operator, please open the line for questions.

[Operator Instructions] And our first question comes in the line if Ryan Connors with Boenning & Scattergood. Your line is now open.

Great. Thanks for taking my questions. And thanks for the detail outlook for 2017, very helpful. I had a bit of a bigger picture question on the policy side, Bob, I know there’s not too much you can say in detail about the direction this will go, but can you at least give us some quantification of the company's presence in Mexico as it relates to assembly and/or manufacturing and how material that is and how that shift in the last few years with the realignment and how you look at the different scenarios about what's being talked about there in terms of a border tax, adjustment tax, and how that could or could not impact Watts?

Thanks, Ryan. Yes. So, when we exited undifferentiated products, a lot of that was produced in Mexico, so our exposure in Mexico is very limited. Our bigger exposure is imports from China. We are a net importer, but I would say it's not as material as maybe some of our other competitors would have. So, as you know we have a foundry in the local area here in the U.S., as well as our boilers are mainly produced in the U.S. So again, we have some exposure, but I would say it's not as much is maybe others would have.

Okay. And does that exposure, is it manufacturing or are you exporting components say from the U.S. for assembly in Mexico? Is that…

It's primarily we’re importing products to be assembled in the U.S.

Got it. Okay.

We do export some products out, but it’s primarily import, and we’re reviewing alternatives. We do have the ability to bring more stuff to our local foundry, as well as we’ll look at other capabilities inside the U.S. so we’re reviewing all alternatives at this point in time until we -- there's more clarity on this.

Got it. Okay. And then the other was just kind of a housekeeping update from last quarter, you talked about kind of some distinct kind of dealer disruption related to some of the product realignment and that was pretty discrete and isolated in nature, but can you just update us on that topic as well?

Yes. We’re seeing similar just like we thought, you know that carrying over -- carried over to Q4 and it's good to carry into the first half of next year and we put that in our guidance assumptions. And the second thing we’re doing is continuing to look at our product portfolio which is in EMEA. We are getting rid of about $5 million worth of DIY and also related to our exited of undifferentiated products, we have the same issue inside of China at this point time. So, again we’re continuing to watch our portfolio as you know we have many, many SKUs and we continue to look at the tail end of those SKUs.

Got it. Okay. That’s helpful. Thanks for your time this morning.

Thanks, Ryan.

Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Your line is now open.

Hey, good morning guys.

Good morning, Jeff.

I want to dig in a little bit here on slide 11, particularly some of the headwinds. First, can you talk about commodity inflation, maybe just remind us your inputs, how big is copper and copper-based products. How big do you think that -- gross headwind I think our commodities and then what you're doing on pricing actions to kind of mitigates that?

Sure. As Todd mentioned copper is going up, we’re seeing that, but we don't give out the details of our copper exposure for competitive reasons, but I'll tell you when we are planning a price increase to mitigate that. We believe it will stick and we’re implementing that in February as we speak. So we’re on top of that. We believe our pricing actions will mitigate the copper increase.

Okay. And then is there a way to quantify what the incremental year-on-year benefits are for both the transformation and then the offset on the investment side as you look at 2017?

Jeff, this is Todd. So I think in 2017 it’s going to be very similar to what we saw in 2016 and so most of the restructuring transmission benefits are going to be in that, and I would say in that $10 million range. And from an investment perspective I would say we’re going to make similar types of investments in those that cost $6 to $7 million range in 2017 as well. So pretty similar to what we saw in 2016.

Okay. And then just finally, Europe is kind of been a tough market to grow. It seems like more broadly, lot of my other companies have been seen at least some modest growth. Just help me understand what you think really needs to happen there to start to – kick start the growth?

I think it's really centered around the political uncertainty with all the elections going on. We’re strong in France and that where most of the political uncertainty is at this point in time. We have seen some positives in Italy, so we’re optimistic in that regard. But Germany is for us we primarily sell to the German boiler OEMs and they’ve had difficult times. So, when you look at it we’re being somewhat conservative in our looking until more things are known based on these elections. So I think France is the one I'm probably most concerned about. The UK, we do a little bit business there and there were some timing issues in the fourth quarter with our drains business there. But again, it's nice to see a little growth from Italy and from a Russia point of view that's been down. We think it's going to be relatively stable at this point in time and maybe even a tick up.

Thanks, guys.

Thank you.

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

Good morning, guys.

Hey, Mike.

Good morning, Mike.

So, just a quick clarification on the 1Q comment, was that flat, slightly down revenue comment? Was that organic or was that in all in revenue number?

It was an all in number.

Great. And then second question on the heating and hot water solution side, it's good to see some progression from 3Q levels, maybe talk about what the competitive environment looks like? How you think that that business is performing relative to the environment? And to get through this year what do you think it will take to get back towards that normalized long-term growth rate that you guys talked about?

Mike, we believe 2017 we’re going to get back to that normal run rate to which is at the high single digit. We did see competitive pressure in particular when there's lumpiness in projects it gets very competitive out there. And we’ve seen some new entrants trying to come in, but we were excited at the recent ASHRAE Show to unveil our brand new product that we believe is a differentiator in the marketplace. So we believe we have the ability to put that new product out there which differentiates us from our competition, but we are planning a return to high single digits in the heating and hot water solutions group.

Great. Appreciate that. And then last one. Just on the capital deployment side maybe just some thoughts on how the pipeline looks for today? How valuation levels look like in the market and how actionable things are from your perspective?

Yes. So, I can't comment on any specific transaction, as you know, clearly our pipeline remains full. We keep on looking at them. Evaluations are similar to what I think we’re seeing in the current marketplace. No real change. Be you we keep on looking and developing our relationships at this point in time. So, other than that I am not sure of anymore details I can comment on that at this point.

Okay. Appreciate it. Have a good one.

Thank you, Mike.

Your next question comes from the line of Jim Giannakouros with Oppenheimer. Your line is now open.

Good morning, Bob, Todd, Tim.

Good morning, Jim.

On the statement of that you are pivoting toward growth, I think that I take that as an investment statement. Is that more of a North America statement or does that apply in EMEA as well?

It is primarily North America and Asia-Pacific, but we are investing in Europe, and particularly in our electronics platform and other differentiated products like drains where we believe we have a competitive advantage. So, it’s growth in all areas and as you know in our business, as we said earlier, we planting a lot of seeds. Those seeds may take multiple years to go forward. Again, we believe it’s important that we continue to plant those seeds. We’re spending more in R&D, sales and marketing and looking at continued geographical expansion.

Got it. And, thank you. Just to be if we can get a little more granular as far as your expense base in 2017. Appreciating that you are still doing a little more of a growth investment. You’re talking about expanding sales marketing, IT, you’re stepping up R&D. How are those buckets comparing versus 2016? And are we at a run rate or any of those kind of step ups temporary or nonrecurring in nature?

Well, Todd can get more specific, but I know in R&D in particular, we plan on spending more in that area than we have in the past, probably 2.1% of sales at this point in time. As well as investing in sales and marketing, and plus the run rates. Our training facility, as an example, wasn't started until April. So, we’ll continue to have those run rates into next year. But we’re continuing our focus in those areas as well as with the new acquisition certainly our operating expenses in particular sales and SG&A will continue to go up.

Got it. Okay. And just to be clear on the 1Q commentary, I mean the tough comps. Is that -- should we be thinking about that as weather-related? We obviously had barely a winter last year, very mild. Is that what we should be thinking about, it’s really just weather or was there something going on specifically in North America that we should be factoring? Thanks.

So, Jim, if you think about Q1 last year, I mean, from the top line perspective we had a strong start I think across all regions. And when you turn to the margin, from a margin perspective, I think every region in Q1 last year expanded margins in excess of 200 basis points. So I think it’s more of just an overall comp issue than it has anything to do with weather at this point in time. I think the other thing, just important to keep in mind is some of the DIY and product rationalization will impact Q1 somewhere in that $7 million to $8 million range. The Americas will also benefit from approximately $13 million of acquired sales of PVI during the quarter and the other thing that’s a headwind a little bit is FX, so FX last year was about 110, 111. Today the Euro rate is 106. So that could be a little bit of a headwind from a top line perspective, as well. But I think its more of a comp issue than anything about weather.

Appreciate it. Thank you.

Thank you.

[Operator Instructions] Our next question comes from the line of Ryan Cassil with Seaport Global. Your line is now open.

Good morning.

Good morning, Ryan.

Could you flush out what you are thinking on the boilers business? I think that’s kind of seeing the biggest change in growth dynamics over the last couple of quarters. Are you thinking this is more of a short term issue, or perhaps is it a bit of a turning point in the commercial/non-res cycle?

No. We don't believe that it’s a turning point at all. We believe there’s opportunities, I think just with the uncertainty in the stimulus and what was happening, projects just got pushed out and delayed, and we remain disciplined in our pricing because we didn't want to give up margin, so I think it is a pause. Our projects that we see in backlog, they haven't been released, but it just been more lumpy, but as I said earlier, I believe that business is going to grow high single digits again this year. So that’s what our planning. We’ve introduced a whole slew of new products in that segment. So we are pretty excited about it.

Okay. Sort of the front log of that business, any color you could give there? Are you seeing sort of a healthy pipeline of new work for that business, thinking of the backlog?

Sure. The project pipeline looks strong. What we did is, if you recall the first after of last year that business was strong. We saw a big dip in the Q3. It was flattish in the fourth quarter, and so we got some tough compares in the first half of this year and I think it will be more smoother in the second half of next year. But overall projects visibility, and remember a large portion of that business is retrofit, where we believe we have high paybacks to convert to more efficient condensing boilers. So there is also a payback to people for switching their boilers to do that. So, overall we feel confident that we will get back on track with that business.

Okay, great. And then you mentioned new products and introducing products and new geographies. I know boilers you talked about that in the past. Just from a timing standpoint, do you think that’s a benefit to 2017, or introduced those products in 2017 really the bigger sales uptick is in 2018 story.

I think it’s a bigger impact in 2018. I think 2017 is again we’re seeding that. We did get some approvals recently on some of our boilers, but some of these markets, in particular China as an example, the condensing market is new. So it’s going to be slow to adopt. But they are clearly looking for more higher efficiency products. So, that is an opportunity for us. But again, we’ve got to work with policy and drive some of that. So its not going to be instantaneous, we believe over the long run its right seed to plant.

Okay. And then last one from me just going back on the price increase for February. Is this -- are you expecting to get any net pricing outside of labor and raw material inflation? And then, could there be -- just given the rise in raw materials as quickly as we’ve seen for products like copper. Is there a period in the short term where you get squeezed, and then you put through that price increase and it kind of all works itself out? Any color or cadence there would be helpful?

Yes. We don't believe it will be a negative squeeze at all, because we purchased product in advance of these increases, so we are a little in front of it, not through hedging but just pre-buying. So we believe net-net, it’s should be even. We’re certainly going to drive toward positive price this year, but, again, it all depends on the environment and how competitive its out there.

Great. Thank you.

Thank you.

Thanks, Ryan.

Our next question comes from the line of Joe Giordano with Cowen. Your line is now open.

Hey, guys. Thanks for taking my question.

Hey, Joe.

Good morning, Joe.

On M&A when you look across your geographies and I guess some of the market uncertainties it’s tough to tell these some markets break up and down from here. So how does kind of guide your outlook in terms of what you are willing to pay when it’s kind of uncertain which direction some of these businesses are going? So how do you move from there and how does that like impact your discussion?

Well, Joe, the first thing we look at is what is the strategic potential and how does that fit in to our overall strategy and we sometimes -- I don't want to get caught up in some of the noise. We’re clearly looking at the long term. So we would put valuation differences based on some of those certainty, but the first criteria is what is the strategic implication to our business and do we believe that will make a stronger portfolio for us. So, that’s our first criteria. And then some of the uncertainty that all turns into valuation at this point in time related to that, so, again, we’re focused on the strategy and then valuation and clearly we’re going to disciplined in this environment.

Okay, great. And then, a little bit more on the AERCO delay that you have been seeing. Is there any specific like submarket that you call out there?

Not really. I mean, we have seen it across the board. That’s why it’s been widespread from that perspective. So, again, it is competitive out there. But again we believe we have a superior product and a valued differentiator from our competitors. So, again, timing, lumpy, and, just driven by uncertainty

Okay. And then, one clarification, Todd. On the realized savings and the investments you mentioned like $10 million in savings and then $6 million to $7 million in investment. I assume that the $10 million in savings was an incremental $10 million versus last year. Is the $6 million to $7 million in investment spending like the same level as from last year or is that $6 million to $7 million like incremental, so you are really looking like a net like three?

Yes, so I would say from the restructuring side, that $10 million is incremental year-over-year from 2016 to 2017. On the investment side, that $6 million to $7 million that we talked about is incremental investments.

Okay. Fair enough. And then last clarification, are the organic outlooks that you guys presented for across the segments, are those inclusive of the rationalization in those like low single digit or whatever the last segment?

Yes. It is. I mean, all the growth rates we talked about have the product rationalization included in there.

Great. Thanks, guys.

Thank you.

Thank you, Joe.

There are no further questions in queue at this time. I’ll turn the call over to Mr. Bob Pagano for closing comments.

So in closing I’d like to thank you for taking the time to join us today for our fourth quarter earnings call and we appreciate your continued interest in Watts Water Technologies. We look forward to speaking with you again during our Q1 earnings call in May. Thank you.

This concludes today’s conference call. You may now disconnect.