Good morning. My name is Leandra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Watts Water Technologies Fourth Quarter 2017 Earnings Conference Call. [Operator Instructions] Mr. Tim MacPhee, Treasurer and VP Investor Relations, you may begin your conference.

Thank you, and good morning, everyone, and welcome to our fourth quarter and full year 2017 earnings conference call. With me on the call today are Bob Pagano, President and CEO; and Todd Trapp, our CFO. Bob will discuss our key accomplishments this past year. He’ll provide an overview of our fourth quarter results, discuss 2018 focus areas and address the macro markets. Todd will offer a detailed analysis of our fourth quarter and full year results, discuss the impacts of tax reform and provide our initial outlook for 2018. 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 this presentation throughout our prepared remarks. And any reference to non-GAAP financial information is reconciled in the appendix of the presentation. Before we begin, I’d like to remind everyone that during the course of this call, we’ll be making certain comments that constitute forward-looking statements. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially. For information concerning these risks and uncertainties, see Watts 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. Starting with Slide 3 in the earnings presentation, I’ll provide an overview of this past year and give some initial thoughts on 2018. I am very pleased with the great progress we made in 2017. Our transformation programs were completed and we experienced solid performance in the Americas and in Europe. Both helped us to achieve record adjusted operating margin and adjusted earnings per share for the second consecutive year. We continued seed planting to drive future growth and we began to realize some benefits of that effort during 2017. Now let’s review some of the quarter’s financial highlights. Our strong fourth quarter performance was in line with the outlook we provided in November. We achieved year-over-year and sequential improvement in our top line, reflecting consolidated organic sales that were up 3% versus Q4 in 2016. Excluding product rationalization, organic sales were up 4% in the quarter with solid growth in all three regions. We again delivered strong adjusted operating margin expansion in the quarter, driven by higher volume and productivity. 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 review some of our accomplishments for the year. First, a principal focus for the team in 2017 was completing the announced transformation and restructuring programs. We captured the savings we anticipated from these efforts, while enhancing our customers’ experience with Watts and improving our logistics and planning processes. With these endeavors behind us, we can now devote even more of our resources to address top line growth and lean activities. Our second key focus is to continue to drive customer intimacy and commercial excellence. To that end, we continue to enhance our industry training…

Thank you Bob, and good morning everyone. I am on Slide 4, which highlight the fourth quarter results. Sales of $366 million were up 7% on a reported basis and up 3% organically. Excluding the impact from expected product rationalization, organic sales increased 4% with growth in all regions. I’ll provide more color on the regional results in a few minutes. Foreign exchange, mainly the euro, positively impacted sales by 3%. Adjusted operating profit of $42 million increased 12%. This translated into an adjusted operating margin of 11.4%, up 50 basis points versus last year and a Q4 record for Watts. Benefits from volume, transformation savings and productivity more than offset higher material costs and incremental growth investments. Adjusted EPS of $0.74 increased 16% versus last year driven by strong operations. The $0.74 represents another Q4 record for the company. The effective tax rate in the quarter was 31.7%, slightly lower than last year due to the mix of worldwide earnings. Free cash flow for the full year was $127 million, an increase of 24% over 2016. Excluding the impact of the tax reform charge, free cash flow conversion was 129%. Over the course of the year, we paid down net debt of over $150 million. We also invested $29 million in CapEx, which equates to 100% reinvestment ratio. The majority of our capital investments are high ROI projects, which will help drive growth and productivity over the next several years. During 2017, we also returned $44 million to shareholders in the form of dividends and share repurchases, a continuation of our balanced capital allocation approach. So in summary, Q4 played out as we thought. The sales momentum we anticipated for the second half of 2017 was realized and we delivered record adjusted operating margin and EPS, while still investing…

Thanks, Todd. If you would, please turn to Slide 12 and let me summarize our discussion. The year finished strong and we are excited to again deliver record results for the company. We successfully completed our transformational strategy, which in turn strengthened our foundation to drive further growth. We are approaching 2018 with some optimism, given what we saw in the second half of 2017. We are all well positioned for this environment. With that said, the recent equity market volatility has created some uncertainty. We’ll be watching closely how this impacts customer sentiment and the construction markets. As Todd mentioned, we plan to deliver solid margin expansion in 2018, while investing for future growth and continuing to deliver strong free cash flow. As always, we remain disciplined in our capital deployment strategy. Over the last three years, we have made substantial progress in our journey to becoming the leaner more customer-centric organization. We stabilized our foundation, executed on announced transformation efforts and invested for the future. This year, we’ll be keenly focused on growth through geographical expansion, new product introductions and key account management. I am confident that our team will continue to deliver on its commitments for 2018 and beyond. With that, operator, please open the line for questions.

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

Great, thanks for taking my question and thanks for the detailed remarks, he covered most of – when I was looking for a couple ones though. One, Bob, can you update us on, sort of, the channel distributor inventory situation as the outlook improves? Is there a restocking going on, or what’s the latest there?

Yes. In general, I think, in North America, we believe stocking levels are just fine. I think, if you remember in Q4 of last year in Europe, we saw some destocking levels in particular in the drains area and we saw that come back up to speed in this quarter of this year. But overall, we’re – I think there is ample inventory in the system right now.

Got it, okay. My second one, I recognize you may not want to get too deep in the weeds discussing individual product line. I’m going to give this a shot anyway. In the last quarter, you called out backflow as an area that you thought was defensible against online type competition. But since then, you’ve got this backflow direct guy out there really making some very bold claims about trying to revolutionize that market, and even making those claims directly to the investment community. So I want to give you a chance to kind of give the Watts side of that story, at least for the Cliff Notes version.

Sure. And normally we don’t talk about product lines. But again, long-term, this individual – again, I probably shouldn’t go into some of this level of detail. But we believe in the long-term, our channels are strong and we offer complete offerings and solutions versus they offer one single product line and in the end, we believe the overall solution will trump the individual component. So anyway, that’s all I’m going to comment about that.

Okay. Well, that is actually helpful. Thank you.

Okay. Thanks, Ryan.

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

Hey, good morning, guys, this is James Picariello.

Good morning, James.

Good morning. So can you just provide your current assessment of price cost for 2018 commodities, clearly a headwind given current raw material inflation trends, namely copper. I mean, do you still expect net positive price for 2018? I think, you also talked about the channel reception of your November price increase? Thanks.

James, this is Todd. I think from a material inflation standpoint, we saw a significant jump last year when copper went from an average of $2.20 in 2016 to $2.80 in 2017. And during the year we did expand margins by 50 basis points. So if copper stays at the current levels, a little over $3, I think it was a little over $3 yesterday, now that would definitely result in some incremental headwinds in 2018. With that said, we’re still seeing some really solid performance out of our sourcing organization, which is helping to offset some of the material inflation. Couple that with our Q4 pricing action, we should be able to offset copper at these current levels. Again, something we’re watching very closely, but we feel like we’re well positioned at this point in time.

Okay. And just a reception on the price increase, have competitors followed? Have you gotten any pushback or –?

Right now it’s too early to tell, when we announced in the fourth quarter most of our competitors announced in the beginning of the year. So I think it’s too early to tell, but as of now, we’re feeling okay, at this point in time.

Got it. And then just in your prepared remarks, you touched on AERCO and PVI, I believe. Can you just give your assessment of what’s your place in the quarter, what your outlook is for those businesses in 2018? Should we think about anything in particular in terms of the cadence for the year? Thanks.

Yes. The Heating and Hot Water, overall platform was down low single digits. PVI had some slight growth as well as AERCO was down a little bit. When we look at the market, AERCO’s strength is in the 1 million BTU and above, and that tends to be more lumpier, because it’s highly spec, it’s in the condensing side of that. And with no low natural gas prices, the conversion from non-condensing to condensing, is more lumpier than we would’ve expected. But overall, given the institutional growth we see growing faster in 2018, we believe that business is poised for mid-single-digit growth in total.

Okay. All right, thank you.

Thank you, James.

Thank you.

Your next question comes from the line of Brian Lee with Goldman Sachs.

Hi there, guys. This is Hank Elder on for Brian.

Hi, Hank.

Hi, Hank.

So what are the capital allocation priorities for that cash repatriation and then does that fuel potentially a more attractive M&A or capital return? And then does that also drive some of that CapEx increase year-over-year?

Yes. So Hank, currently we’re reviewing all options at this time, but as you heard in my opening remarks, we are spending a little bit more in CapEx as well as some more incremental investments in the U.S. in 2018 versus 2017. And we’re also looking to potentially pay down some debt. So still early in the process of reviewing all of the options at this point in time and as – we’ll shed more light as the timing comes – as the timing plays out.

All right, that’s helpful. And then on the effective tax rate for 2018, should we assume that 28% is kind of the longer-term rate as well under the new regime, or is there some one-time stuff in 2018?

I mean, again, it reflects what we know today and there’s still a lot of tax planning analysis that are going on. So I think, from a modeling standpoint, 28% is what I’ll use going forward.

Thank you, guys. I’ll hop back in queue.

Thank you.

Your next question comes from the line of Walter Liptak with Seaport Global. Your line is open.

Hi, thanks. Good morning, guys.

Hey, Walter.

Good morning.

And congratulations on the record year, nice to see. I wonder, if I could ask, first, just about the 50 to 70 basis points of margin improvement and I wonder if you could bucket those for us. How much is coming from restructuring? How much is coming from picking up some of the price cost that you lost last year, volume, et cetera.

Yes. So listen, I can tell you about it. I mean, with the transformation in our rearview mirror, the big focus for us heading to 2018 is going to be around point optimization to lean, continued sourcing initiatives and functional excellence within SG&A. As I mentioned in my opening remarks, price realization will definitely be a key driver for us, for Watts in 2018. We do expect to see restructuring savings of about $5 million in 2018 as well. And consistent with the last several years, we’re going to invest a portion of that back into new product developments, selling and marketing, R&D and IT tools to the tune of about $10 million. But bottom line, in order to get some of that 50 to 70 basis points of margin expansion, we do need to see top line growth. So we do expect to see solid margin across all regions at this point in time, but it’s going to come from top line growth as well as some internal initiatives.

Okay. Well, it sounds like with the 3% in your outlook, you’re going to get some growth. So that looks good. I wonder if you could, kind of, go in to a little bit more detail about the fourth quarter pricing? Was it across the board? What was the data that was early in the quarter? And did you lose some sales if your competitors didn’t raise prices until January? I’m wondering if you could provide some color around that uptake of the pricing?

Yes. So we announced at the end of Q3 effective in the middle of Q4 and various agreements scattered that throughout the year. I don’t think we lost any pluses or minuses in the quarter. I don’t think that changed anything. So in general, I believe, starting out the year, we’re starting to see it. Again, it’s early in January. We’ll watch it throughout the quarter, but again, we’re culturally optimistic at this point in time that it will stick.

Okay, great. And then last one for me. Bob, I think you commented on the outlook maybe a little bit uncertain because of the stock market volatility? And I wonder if you could just comment, is your business so sensitive that with the volatility in the last couple of weeks, you saw sales changing or our being held back as a result of what’s been happening on Wall Street?

Walter, it’s too early to tell. My 30-plus years of experience in this market, normally when there’s uncertainty, projects just get stalled a little bit, right? So they start and go. It’s too early, we haven’t seen anything notable in any of our daily sales that we monitor. But normally projects that get funded, people will just stall and with the uncertainty in the market, nobody use the accelerate things. So if anything, it stalls. It’s just something we got to watch and look at and make sure we’re pacing and sequencing our investments accordingly.

Okay. Just to be clear, you did not see like a slowdown in sales, it was just a concern that if it goes on, maybe there could be a push out in projects?

That’s correct.

Okay. All right, I understand. Thank you.

Thank you.

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

Good morning, guys. This is actually Jake Seide on for Joe.

Hey, Jake.

Good morning, Jake.

Good morning. Just two questions for me, one on Europe, you guys mentioned that fluid solutions did low single digits in the quarter. Just wondering how the recovery is going and what you see going forward? And then second, in APMEA, just curious on the margin side, the volume declined, is that associated with the rationalization from the sales? Or is that a separate volume? Thanks.

Okay, let’s start with Europe. We did some OEM recovery in the fourth quarter, which was positive for us. In the third quarter, that was not strong. So we saw a rebound in that, maybe a little restocking in the fourth quarter, but again, too early to tell, but generally positive heading into next year. Regarding Asia-Pacific, I think we have to remember in Asia-Pacific that they produced a lot of the undifferentiated products that went into North America. So we exited North America, they lost, let’s call it the intercompany pricing and I’ll just use an average of cost plus-10%. They lost that margin as well as they discontinued the production of that product. So you can imagine the cost per product that they had to fulfill, had decent margins when they were producing a large amount for North America. As that volume went down, they’ve subsequently exited all of that product line and which had a lot of margin. So now we have to backfill that volume to cover all our – there’s significant fixed cost when you’re running an organization in Asia, and that’s why we’ve been putting a large investment on growing inside of China and outside of China to leverage our large fixed cost there. So it is going to be a little bumpy as we grow in there but we believe we’re underpenetrated in the region and have ample opportunities to grow. And that’s what our team’s focused on.

Great. Thanks, guys.

Thank you.

Thanks, Jake.

There are no further questions at this time. I would like to turn the call back over to Bob Pagano for final comments.

Thank you. In closing, thanks again for taking the time to join us today for our fourth quarter earnings call. We appreciate your continued interest in Watts Water Technologies and we look forward to speaking with you during our first quarter earnings call in May. Have a great day.

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