Good morning. My name is Amanda, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2Q 2018 Watts Water Technologies, Inc. Earnings Call. Thank you. At this time, I would like to turn the call over to your host, Mr. Tim MacPhee, Treasurer and VP, Investor Relations. Please go ahead, sir.

Thank you, and good morning, everyone, and welcome to our second quarter 2018 earnings conference call. Joining me today are Bob Pagano, President and CEO; and Shashank Patel, our CFO. Bob will provide his perspective on our second quarter results before turning the call over to Shashank, who will address the results in more detail and offer our latest outlook for the second half of this year. Following the prepared remarks, we will address questions related to the information covering – covered during the call. Today's webcast is accompanied by a presentation, which can be found in the Investors section of our website. We will reference these slides throughout our prepared remarks. 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, to give you a better understanding of our operations, we may 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' 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.

Thanks, Tim, and good morning, everyone. Before I speak to the quarter, I'd like to welcome Shashank Patel to the Watts team. He began on July 2 as CFO and brings a strong financial skillset and wealth of experience from a long tenure at Xylem and ITT. I've known Shashank for over 21 years and believe he will be instrumental in driving our near-term productivity efforts and our long-term strategy. Now, please turn to slide 3 in the presentation, and I'll provide some commentary on the second quarter. The team delivered another strong quarter, including record sales, adjusted operating margin and EPS. We topped $400 million in quarterly sales for the first time, expanded adjusted operating margin and surpassed $1 in quarterly EPS. The results reflect our commitment to driving profitable top line growth through commercial and operational excellence, as well as favorable benefits from tax reform. The Americas delivered strong organic sales growth and solid operating margin expansion during the quarter. The sales increase is partially attributed to the pre-buy impact of our July price increases, but the underlying growth was impressive. APMEA, driven by the Middle East and other regions outside of China, delivered solid organic growth. In Europe, we experienced top line softness within our fluid solutions platform, which in turn drove a margin reduction year-over-year. We have seen limited growth in this platform, along with pricing pressures and the impact of continued inflation. Therefore, we have decided to reduce that platform's cost structure. We are currently finalizing a restructuring plan primarily focused on head count reductions. The cost will be recognized in our third quarter results and highlighted as a special item. Now, let me quickly mention our view on the markets. Overall, the markets are performing as anticipated. In the Americas, growth expectations are still…

Thanks, Bob, and good morning, everyone. First, I'd like to say how excited I am to be joining the Watts team. My first impressions are very positive, and I look forward to working with our investor community over the coming months and years. With that said, please turn to slide 4 and let me walk you through the second quarter results. Reported sales of $408 million were up 8% and represented an all-time quarterly sales record for Watts. Organically, sales were up 5% with strength in the Americas and Asia-Pacific being partially offset by softness in Europe. Foreign exchange, mainly driven by a stronger euro, increased sales by $10 million dollars or 3% year-over-year. As planned, product rationalization was approximately $2 million, representing a 50 basis points headwind in the quarter. Adjusted operating profit was $52 million, an increase of $5 million or 10%. This translated into an adjusted operating margin of 12.8%, up 30 basis points versus last year and a record for the company. This was achieved while continuing to invest approximately $4 million in our growth initiatives. Volume, price and productivity were the main drivers of the record margin performance, more than offsetting general inflation including higher commodity and transportation cost. Adjusted EPS of $1.05 was 27% better than last year and also represented a new all-time record for Watts. Operations drove $0.08 of the increase, while tax reform, lower non-operating expenses and foreign exchange provided $0.14 in total. The effective tax rate in the quarter was 27.6% or 450 basis points lower than the prior year, mainly due to the benefits of tax reform. Year-to-date, free cash outflow was $14 million as compared to a $2 million outflow during the first half of 2017. The incremental outlays related primarily to inventory, tax payments and additional capital…

Thanks, Shashank. To summarize, the business delivered record sales, adjusted operating margin and earnings per share in the second quarter. Much of the upside was driven by the Americas, which continued to deliver a strong operating performance. Europe came in softer than expected, and we are taking actions to address that. APMEA growth picked up in the second quarter, and we expect that to continue into the second half. And we are raising our full year sales outlook based on a strong first half and our most recent expectations for the second half. So, with that, operator, please open the lines for questions.

And your first question comes from the line of Nathan Jones from Stifel. Nathan, your line is open. Nathan Hardie Jones - Stifel, Nicolaus & Co., Inc.: Good morning, everyone.

Good morning, Nathan. Nathan Hardie Jones - Stifel, Nicolaus & Co., Inc.: Well, I'd like to just start off on the increased growth in investments. Clearly, some strong top line here gives you the opportunity to invest a little more. Can you talk about what kinds of things those investments are targeted on? How should we think about the growth investments next year? Do you think they'll maintain at this kind of level? Do they go up even further? Do they come down? Just how we should be thinking about that?

Yes. So, the incremental $3 million investments are going to be focused on connected products, channel expansion primarily in the Middle East and Latin America, training and continuous improvement through the Watts Performance System. So, we believe those actions are going to help us as we go. A lot of times, these investments take three to six months to realize. So, more seeds are being planted to look outwards on that. From an investment point of view into the future, we really look at – we're in the midst of our strategic planning process right now. And with continued growth, we hope to continue to invest more for the future. So, a little early for that; some of these are one-time in nature, but a lot of them will continue into the future and support our growth going forward. Nathan Hardie Jones - Stifel, Nicolaus & Co., Inc.: So, no color on whether it should be up, down or the same in 2019 yet?

Not yet. But I hope to be able to spend equal or more based on where we're seeing volumes and what's happening in the business because we're seeing great return on our investments. And in this environment where acquisitions are at high multiples, I think it's prudent to invest in organic growth. Nathan Hardie Jones - Stifel, Nicolaus & Co., Inc.: Organic investments always have the best return. On the price-cost front, so you talked about implementing price increases in July, if there's any color you can give on how the market has accepted those in the first month they've been out there, any color you can give on where you were on the price-cost equation in the first half and how you think that the price increases in July impact where you are on price-cost in the second half?

Yeah. So, price-cost, I think we held our own in the second – or the first half of the year. I think we talked about realizing about 1% price that more than offset the inflationary costs that we saw. When we look at the second half, we believe we're going to get another incremental 1 point of price in particular in the Americas. So that's giving us confidence. And in July, early indications are positive that we're getting the price. So, it's still too early to say. But, right now, given the inflationary pressures that are out there that everybody is seeing, we believe it's going to stick. Nathan Hardie Jones - Stifel, Nicolaus & Co., Inc.: Do you – you said you could see another point of price in the second half. Does that correspond with another point of inflation that you're seeing? So, you'll remain about the same or are you saying more or less than 1 point of inflation? Just how are you relative to the first half overall?

We think that the incremental 1% will at least cover inflation. So, it should be maybe a little bit positive. Nathan Hardie Jones - Stifel, Nicolaus & Co., Inc.: Great. That helps a lot. Thanks very much.

Thank you.

Your next question comes from the line of Ryan Connors from Boenning & Scattergood. Ryan, your line is open. Ryan Michael Connors - Boenning & Scattergood, Inc.: Great. Thanks. I just wanted to follow up there on Nathan's question there regarding price. I mean, obviously, price-cost has been volatile in copper and brass. I mean, we had a huge run-up earlier in the year. But now, lately, all you read about is the big decline in copper. So, I mean, how does that impact not just your own cost structure, but the tenor of discussions around price? I mean the headlines are kind of out there going the other way now.

Well, copper has been very volatile. It's going up and down. It all depends on what you read about, whether China is slowing or accelerating and how much investment is going into China. So, right now, we believe we can still hold our price. And the big wildcard that we're all looking at right now is these proposed new China tariffs, and that's still out there. And the more we heard that it's going to go from 10% to 25%, we'll be looking at that. And if that does go through, we're going to pass on even a further price increase. Ryan Michael Connors - Boenning & Scattergood, Inc.: Got it. Okay. My other one was in regards to – you mentioned 2% contribution of this pre-buying effect to the growth in Americas in 2Q. Can you just talk about whether that was channel stuffing relative to actual demand pull-through on the end customer side and how that leaves the channel inventory situation for third quarter and what your near-term outlook is for volumes on that basis?

Yeah. So, I think people were trying to buy and fill the channel. On the flip side, July started out pretty strong also. So that would tell us that the overall demand is still in the market. So, we're cautiously optimistic right now, in particular in the Americas, in what we're seeing in the growth. The pipeline is full, the quoting is high and we feel pretty good about North America. Ryan Michael Connors - Boenning & Scattergood, Inc.: Great. And one last one. On this European restructuring initiative that you're going to embark on here, I mean, correct me if I'm wrong, but we've had, over the last number of years, several rounds of restructuring in Europe. I mean, are we at the point where – I mean, I'm surprised there's that much left to do. I guess – so, what – if you could just comment on that – I mean, what was left on the table from the last few rounds – or last couple of rounds and whether we might not be at risk of cutting into bone?

Yeah. We're looking at this, and we're very careful about cutting into bone and stuff. I mean, we're looking at overhead. We're looking at productivity. And yes, we've done recent restructuring. But if you think about it, Europe has not been growing as originally planned in many of our forecasts in our past forecasts. So, I keep on looking for productivity. We're driving productivity and we're investing in particular in our European platforms of drains and electronics, which are growing globally. So, this is more of the fluid solutions business. And as you know, in Germany, we're more tied to OEM business and we're at the mercy of some of the OEMs on some of this, where they can take back some of the work internally. So, we're rightsizing our business for the volume we see, as well as driving productivity. Ryan Michael Connors - Boenning & Scattergood, Inc.: Great. Well, that's helpful. Thanks for your time this morning.

Thank you.

Your next question comes from the line of Mike Halloran from Baird. Mike, your line is open. Mike P. Halloran - Robert W. Baird & Co., Inc.: Thank you. Good morning, everyone.

Good morning, Mike. Mike P. Halloran - Robert W. Baird & Co., Inc.: So, could you talk a little bit about what you're seeing on the hot water side? PVI, AERCO, obviously, a couple of good quarters in a row here after some choppiness before that. How are you looking at the landscape on a forward basis? How sustainable do you think the progress you've seen over the last couple of quarters is? And what's the competitive dynamic right now?

Yeah. So, Mike, we're seeing – we said double-digit growth in that platform and we're seeing robust product demand. And I think a lot of it is with our new product development, et cetera, in there. Some of the smaller competitors that were very aggressive in price on last year, we're seeing them come – they're not as strong. We're still seeing pricing pressure. But our new products development and our new products that we're launching are grabbing – taking back some share from that point of view from the smaller ones. So, again, we feel pretty confident. The team – the pipeline is active. And overall, we feel that will continue through the rest of this year. Mike P. Halloran - Robert W. Baird & Co., Inc.: That makes sense. And then, on the M&A side, capital deployment side, you alluded earlier that multiples are still pretty high. Obviously, your balance sheet is in good shape. Talk a little bit about what the market looks like on the M&A side from a pipeline and actionability and what your alternatives are if you aren't able to push forward any accretive on a returns basis acquisition?

Yeah. Mike, so we really believe in a balanced capital deployment strategy. And our pipeline is full. We're continuing to cultivate relationships. But we're going to be disciplined in that. And you never know when a potential M&A opportunity will come up. So, you keep cultivating. But we're going to be disciplined. And as we said earlier, some of our internal investments are really paying off. So, we've made the strategic decision to go faster and forward with some of those, given the current environment out there. Mike P. Halloran - Robert W. Baird & Co., Inc.: Appreciate the time. Thank you.

Thanks Mike.

Your next question comes from the line of Brian Lee from Goldman Sachs. Brian, your line is open. Brian Lee - Goldman Sachs & Co. LLC: Hey, guys. Thanks for taking the questions. Good morning. I guess another question on pricing. This is an off-cycle price increase. Have you guys seen your peers take similar actions? Just wondering if there is any reason to have guarded optimism around price ticking here as you move through the year.

Yes, this is off-cycle, and we have seen competitors follow through just right with us or behind us. So, yes, they're also, from our intelligence, increasing price also. Brian Lee - Goldman Sachs & Co. LLC: Okay. Great. The second question just – I may have missed this. But on the outlook, last quarter, you guys provided a bit of a region-by-region margin view in addition to the organic growth views. Those were all for positive margin expansion across each of the regions. Wondering where you stand on the margin outlook here by region and if you could speak to maybe some of the drivers around the 50 basis point margin expansion view, which I think is in line with what you said before, 50 bps to 70 bps but I guess is down a smidge at the lower end even on a higher revenue growth outlook. I don't know if that's just related to the mix of the regions here or the incremental growth investments you're making. But any color on that would be helpful.

Yeah. So, in total, it's impacted by the incremental $3 million of investments that we're doing. So, that's part of the story. Certainly, Europe is probably a little softer on the margin improvement that we are expecting, but North America should offset that. So, in general, as Shashank commented in his comments in the second half, we look at the second half is going to increase approximately what the full year margin improvement is going to be. So I'd take a look at that. America is a little higher, Europe a little lower and Asia-Pacific will continue to grow. Brian Lee - Goldman Sachs & Co. LLC: Okay. Thanks, guys.

Thank you.

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

Hey, guys. This is Brad filling in for Jeff. And just one – I just had one on price-cost and specifically the cost side of the equation. I think you're expecting somewhere in the neighborhood of $10 million of price in the second half of the year. Can you bucket out the cost whereas – as it relates to commodities, transport and tariffs as you see it? If you've done that type of granularity, that'd be helpful.

Yeah. We've not done that in the past. And so, we're going to stay away from that. But in general, with transportations, we've seen about a 10% increase with all the trade headwinds and stuff, and we're seeing some of that from some of our products that we do get from China and Europe, particularly on the steel and aluminum. But, in detail, we believe the price and cost equation, that our pricing will more than offset – equal or more than offset the inflationary impacts.

All right. Thank you. That's all for me.

Thanks.

Your next question comes again from the line of Nathan Jones from Stifel. Nathan, your line is open again. Nathan Hardie Jones - Stifel, Nicolaus & Co., Inc.: Hi, again.

Hi, Nathan. Nathan Hardie Jones - Stifel, Nicolaus & Co., Inc.: Could you guys give us any color on what the expected run rate savings are from the restructuring that you're going to do in Europe, if I missed it?

Yeah. We didn't provide it. It's still early on, and we think it's going to approximate $5 million the restructuring and have about a three-year payback. We think about a $0.5 million favorability in the fourth quarter. So that's rough estimates at this point in time. Teams are still working it, but that's kind of the early indications. Nathan Hardie Jones - Stifel, Nicolaus & Co., Inc.: Got to love those payback periods on Europe restructuring, don't you?

I understand. That's the pressure. Nathan Hardie Jones - Stifel, Nicolaus & Co., Inc.: So, just on the European softness, you talked about French de-stocking and you also said some lower wholesale in Germany, so maybe some de-stocking there as well. Plus, you talked about the Americas pre-buying ahead of price increases. I would assume that would normally be what you would've expected in some of those channels in Europe as well, which would imply that maybe the underlying markets are even a little softer there than they appear. Talk about what the underlying demand drivers are that are leading to these de-stocking in the channel over in Europe.

Yeah. So, our price increase in Europe was more in the April timeframe. So I don't think there's any dynamics inside of that, so from a moving in pricing. The July increase was in the Americas to offset the tariff impact that was in there. Regarding the equation here, again, French de-stocking, I think in the second quarter, if you recall, there was a lot of uncertainty with the Italian elections, lot of discussions on trade. So, I think people just laid low a little bit to determine what was happening here. Now, as I said earlier, July looked like a small rebound right now. But, again, the markets down in Europe today and elsewhere just because of trade uncertainties, everybody is thinking that Asia might be slowing and obviously Europe does a lot of transactions in there. So, again, we're paying a cautious outlook in Europe. You know I've always done that because I'm just concerned about that and the high cost structure. So, we always are looking at how we're going to reduce costs, improve productivity, be conservative there. And if we get the incremental volume, that would be great. But let's not plan on it. So that's kind of our color in Europe. Nathan Hardie Jones - Stifel, Nicolaus & Co., Inc.: Okay. That's helpful. So, not really any deterioration in the underlying markets necessarily, just customers being cautious, worried about some of those impacts.

Right. It's a question of – when new construction's happening, people slow down based on uncertainty and the same with the repair and replacement market. I think some of the customers are just – wait-and-see attitude and we hope that will bounce back in the third quarter. But, again, my team knows that hope is not a strategy. So, we're going to be cautious. Nathan Hardie Jones - Stifel, Nicolaus & Co., Inc.: Okay. Thanks very much.

Thank you.

Your next question comes from the line of Joe Giordano from Cowen. Your line is open, Joe. Joseph Giordano - Cowen & Co. LLC: Hey, guys. Good morning.

Good morning. Joseph Giordano - Cowen & Co. LLC: In Europe, do you feel like you're losing share? I guess, like, if you look at some of the headline numbers at least from on the residential side in like France and Germany, they look okay. So, is this – do you think this is a product problem?

I don't believe in France, in particular, that's the case, because, again, we get wholesale reports and it looks like there was a de-stocking in particular in May when they have many, many holidays year-over-year. So that's not what we believe. I do believe in Germany that we talked about, which is merely OEM. A large portion of our business in Germany is OEM related, and we do see some of our OEMs pulling back some work that they've outsourced to us, given probably some of the softness they saw in the second quarter. So, again, that's a timing. We get it, they pull it back, and we have to adjust our labor as a result of that. So, we don't feel a significant market share loss from that point of view. But, again, we're being cautious in our outlook in Europe. Joseph Giordano - Cowen & Co. LLC: And then – okay. And then, in the Americas, what kind of indicators are you looking at kind of on the fringes for potential like inflection points? And I know, like, on the resi side, something like existing home sales on a trailing 12 months has been negative over the last couple of months now for the first time in a while. So, I'm just curious as to what you're seeing in terms of – like kind of incoming conversations there.

Yeah. So, remember, 65% of our business in North America is repair and replace. And remodeling is up. We're seeing the Dodge Momentum is up, the ABI, those things continue to show activity and we're seeing more remodeling in the residential side. Our residential is 35% of our business and 14% of that 35%, so really low numbers tied to new construction so... Joseph Giordano - Cowen & Co. LLC: (00:36:15) existing home sales, right? Would that be a better proxy for renovation spend?

It's a piece of that. But again, a new report came out this morning talking about there's still a belief that the housing is still going to go up and still be fairly healthy. So, we're not seeing the residential fall off that you would look at from a new construction point of view. So, we're still seeing that part of our market very – is performing very well. Joseph Giordano - Cowen & Co. LLC: Okay. Thanks, guys.

Thank you.

Your final question comes from the line of Walter Liptak from Seaport Global. Walter, your line is open.

Hi. This is Steve Friedberg filling in for Walt.

Hi, Steve.

Hi. I got a tariff-related question. How much of the product manufacturing actually comes out of the Asia segment?

What we produce in America? I mean, again, we – our Asia factory, about 40% of their output supports, let's call it, some of the U.S. products. Now, in the U.S., we import products from China. But also, remember there's an indirect impact of some of our suppliers that give us products that they get products from China. However, as you know, we have our own foundry here in North America that does a lot of our work here. So, compared to some of our competitors who outsource a lot of their products to China, we're going to be less impacted with this new potential tariff that's out there. So, again, we're looking at all angles in the tariffs. We're looking at alternative supply chains and accelerating inventory buys, et cetera, to minimize the impact of this. But we're all waiting and seeing on this next round.

Okay. Good. That's what we were thinking. And a follow-up to that, that thought, since you guys have more North American manufacturing than let's say a competitor, are you guys able to increase prices dollar for dollar versus them or maybe a better way of asking it is, is there an advantage? I guess, how hard is – how much is the pricing advantage do you get from being North American based?

I'm not going to comment about pricing in general. I just believe that, as leaders, leaders lead in pricing and we're putting out prices that we believe that will equal or more than offset any inflationary pressure. So, each – individually, I don't comment about us versus our competitors' pricing.

All right. Thanks.

Thank you.

At this time, I would like to turn the call back to Bob Pagano for closing remarks.

Thank you for taking the time to join us today for our second quarter earnings call. We appreciate your continued interest in Watts, and we look forward to speaking with you again in our third quarter earnings call in early November. Take care, and enjoy the rest of your summer.

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect.