Good morning, my name is Denise and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Watts Water Q3 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. Tim MacPhee, Treasurer and VP of Investor Relations, you may begin your conference.

Thank you and good morning everyone. Welcome to our third quarter 2018 earnings conference call. On the call with me today are Bob Pagano, President and CEO; and Shashank Patel, our CFO. Bob will provide his perspective on our third quarter results and the global markets. Before turning the call over to Shashank, he will review our results in more detail and offer our latest outlook for the remainder of 2018. Following our prepared remarks, we will address questions related to the information covered during our 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, we will be making comments that constitute forward-looking statements. These forward-looking 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. Let me now turn the call over to Bob Pagano.

Thanks, Tim, and good morning, everyone. Please turn to Slide 3 in the presentation where I'll provide an overview of the quarter. Overall, I was very pleased with our performance in the third quarter. The team again delivered a record quarterly performance in sales, adjusted operating margin and earnings per share. Organic sales, grew at levels we have not seen in any quarter since 2007. Consistent with our first half performance that growth was led by the Americas. We also maintained the earnings momentum from the first half. Operating margin was an all time record for Watts and adjusted EPS was a record for Q3 with another quarter of double-digit growth. These results reflect the continued execution of key strategic initiatives including our commitment to profitable growth, delivering customer value and driving continuous improvement. Given our strong performance, we're increasing our projected investment spending from 13 million to 15 million for the full year. We spent approximately 5 million in the third quarter for investments about 1 million more than was originally contemplated. And we plan to increase our fourth quarter spend by an additional 1 million to 4 million. We are aggressively funding projects that we believe will help future growth and productivity. Now let me make a few comments about the regions. In the Americas we delivered double-digit organic sales growth, driven by price and volume expansion in many of our key plumbing, drains and boiler and water heater product lines. Looking at the end markets. US nonresidential markets remained healthy, we see steady growth continuing, especially in the institutional vertical which is our strength. US residential market indicators, including permits, housing starts, remodeling activity and higher interest rates all lead us to be a little more cautious regarding the residential end market going forward. Regarding the Americas…

Thanks Bob, and good morning, everyone. Please turn to Slide 4 and we will discuss the third quarter results. Reported sales of $391 million, were up 7% driven by strong organic growth of 8%. Foreign exchange was a $3 million headwind or 1% during the quarter. The over drive in organic growth as compared to our August outlook in the Americas and to a lesser extent in Europe was due to strength in underlying markets. As expected, the impact of product rationalization was minimal, totaling about $1 million in the quarter or a 30 basis point headwind, primarily in Europe. I will talk more about our regional performance in a few minutes. Adjusted operating profit was $50 million an increase of 10%. This translated into an adjusted operating margin of 12.9% up 30 basis points versus last year and an all-time record for the company. We attained this margin while continuing to expand our investments in growth and productivity initiatives. Price volume productivity and restructuring partially offset by higher commodity and logistic inflation were the main drivers of the record margin performance. Adjusted earnings per share of $0.99 was a 24% improvement over last year and a new third quarter record for the company. Earnings per share increase was driven equally by strong operational performance and benefits from lower below the line costs, including a lower income tax charge and lower non-operating costs. Foreign exchange was a $0.01 headwind in the third quarter as compared to the same period last year. The effective tax rate in the quarter was 28.4% 450 basis points below last year driven by the benefits of tax reform. Turning to cash on a year-to-date basis, free cash flow was $43 million a 25% decrease, as compared to the same period last year. The decrease was…

Thanks, Shashank to summarize, the positive momentum from our many initiatives continued as we delivered another record quarter. We increased sales, expanded operating margin and drove double-digit earnings growth, while continuing to invest in new products and technologies and new geographies. The investments will help drive our future performance in 2019 and beyond. So with that, operator please open the lines for questions.

[Operator Instructions] Your first question comes from Nathan Jones with Stifel. Your line is now open.

Like to start with, got a couple questions on the Europe market here. You guys are saying and this is America's first, you guys are seeing a tremendous ramp up in organic growth in the Americas this year, you’ve made a ton of investments to drive that growth. I think we can safely say that the underlying markets haven't ramped up like your revenue has, which would imply that you taking some market share there but the Europe growth has stayed pretty flat. Can you talk about the potential for you to start gaining some market share in Europe, the way you have in the Americas, I know you’re still doing some repairs in the European market, but maybe a year or two out are we looking at a similar situation where all of these kind of investments could drive the same kind of out growth in Europe that you've seen this year in the Americas.

Yes when we look at Europe. We've got a breakdown our businesses into two parts. Third of our business is electronics as well as drains business. And as I said in my prepared remarks we're expanding our drains capabilities in Europe. So we feel good about how we're performing in those two businesses in particular, because we do those -- those businesses are growing and we believe growing faster than the market. regarding the other two thirds of the business, that's a little bit more difficult because the third of that is OEM related, and we are sometimes at the mercy of those OEMs at that point in time. So we are having additional new product developments in those sectors, but not as near as much in those other markets. So those tend to follow more of a GDP growth markets inside of Europe. So we are investing more in electronics and drain side and that's where we believe our growth is going to be.

Just sticking with Europe your plus 4 organically this quarter versus minus 2 in 2Q '18. Can you talk about geographically or by product what drove the turnaround there? You still sounding pretty cautious on the Europe market which I guess is typical of you Bob? But maybe just a little more color on what drove the increase and where the caution is going forward?

Yes, so we had nice growth like I said in the electronics and the drains business, but we saw an OEM bounce back in the third quarter from our German business. And if you really look at their Q3 performance and the Q2 it was basically flattish because we are negative in Q2. And you know our OEM margins are lower margins. So we saw that bounce back. But Italy was basically flat Germany was up and France was basically flat. So again, these markets were cautious and again, when you look at some of the leading indicators I still think there's caution out there. So you are correct I am cautious because I want to make sure our spending is proper in those and then we right size the business accordingly, and with most of our focus in new product development is in the other two platforms of electronics and drains.

On the restructuring in Europe should you be at that annual $5 million savings run rate by the end of '19?

Yes as we said I think in the second half of '18 its 1.5 million and then in '19 we will see the full 5 million or close to the 5 million run rate.

Yes, but that will be an incremental 3 million over 2018 savings, which is about $2 million.

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

Just I mean it looks like we are getting some cross currents Europe China new res, as you look out into '19 how do you think things shape up? And just on the new Res Com and are you just reacting through some of the macro data or are you actually seeing some flow in that thing?

Yes, so '19 it’s a little early Jeff, we are going through our operating plan reviews in the upcoming weeks so we will inform you in February. Regarding residential, it's more about what we are hearing right now and I think we should break up our residential little bit so everybody understands that. As you know 60% of our business is commercial, 40% is residential. But when you break up at residential piece two thirds of that is multifamily and then the third is single-family homes and if you look at it, our exposure 65% is repair and replacement. So if you look at single-family new construction we are not significantly exposed but we are cautious and hearing the same things that everybody else is reading about but we are not dependent on North America single Resi expansion and new construction fully.

Okay, great. And then Bob on the latest price increases does that includes section 301, list 3 and the 25% step up or do you have to contemplate additional pricing and then just talk to me about any changes you are contemplating to your supply chain as a result of some these peers.

On the price increase and you’re right, that third phase. Our price increase includes that and contemplates, it was 10% that kicked in September. And then there's another going up to 25% on Jan 1 that 25% is up in the air at the present moment but our price increase contemplated those.

From a supply chain point of view we're actively working our suppliers based on the stronger dollar, as well as looking in many other places including our North America capabilities producing locally as you know we have our large foundry here in North America and you know we can produce more here.

And then one more can you just talk about the market opportunity, understand what's driving the market in North America what’s the size, what’s the competitive landscape. How do you plan on going to market and penetrating that opportunity?

So it's a decent sized market, I'm not going to get into market specifics but what I would tell you is that market is primarily a lot of local players in the local region that do customized stainless steel and we believe we have the ability leveraging our PDI facility that is an expert in stainless steel welding in capabilities where we can automate that as well as standardize it for a larger customers. So we look at that opportunity we've been importing products from Denmark and we done really well in the in the craft brewery market and we believe we can continue to expand beyond you know that really with the food and beverage type focus on that market and there's other stuff in the lighter industrial but our focus right now is more on food and beverages as we ramp up. So again we tested it by bringing stuff in from Denmark and now we’re comfortable and we been growing nicely in that, so we now are going to build local capabilities at our PVI facility.

Your next question comes from Brian Lee with Goldman Sachs. Your line is open.

On the China slowing, this has been kind of the trend here for the past several quarters as you called it out and this quarter seems to be a low watermark if I read into the double digits relative to the way you characterized it in the past few quarters, and I know it's not a huge market for you but can you level set us when your exposures stands there now and how you are thinking about this is somewhat share related or this broader weakness and just maybe the outlook for some recovery there.

So when you look inside of our China business, first of all our APMEA business is about 60% outside of China and 40% inside of China. But when I first started we are 90% in China and I felt we were too exposed to China, so our strategy has been to expand outside of China, given the political things that are happening in China, we wanted to be careful, as well as its lower margins inside of China. So when you look at it you then have to break the market down by two different pieces, the first piece is the residential piece, which is really the under floor heating and we talked I think several quarters ago, how there was a shift from individuals purchasing to more of a contractor purchasing for the whole building. And that shift is handled or has changed which has really changed our market because it's very low-margin in some of that so we are in it, but we are in it let's call it on the high-end of that marketplace versus let's call it the average. So that's competitive and by definition, we would be losing market share but you know when I'm looking at profitable growth that's really the focus. The commercial side of that business is more lumpy that’s project related we have a lot of data centers and we saw some competition start to buy some jobs in the quarter. So again we tried to remain disciplined in that area. It's still a focus for us. Our teams are focused on growing that market and we believe we will probably see something similar in Q4 maybe a little more growth and less of a decrease out of China and then or flattish somewhere in that range, but we'll be up mid-single digits to high low -- somewhere in the 5% to 7% we believe in APMEA in that region. Again, our focus is on profitable growth and we are finding more profitable growth outside of China.

Second question was just on the -- everyone's topic these day is price cost. Just how should we be thinking about the trend here going forward? Are we sort of seeing peak realization? Or do you think there is more of a spread you can capture here and then I guess how should we be thinking about the operating margin in that context? I know you are down about 10 basis points from the year but that’s seems to be related more to your own investments as opposed to the price cost dynamic but if you could speak to that thank you.

Brian I think the price cost, we have seen a lot of inflation tariffs have been minimal I think really when you will see the tariff impact to us based on our inventory turns is really heading into next year. So we've been proud that we have been in front of this thing getting price in advance that's why we have invested more. Again to set us up to grow for the future. So we believe between our price our supply chain and our productivity that's allowed us to stay in front of this thing and that's why we're increasing our investment. So that's been the focus. I think when you look at price now, I think you will probably see more price as some of these 301 tariffs start hitting and everybody increasing price, but I think as you get into next year you're going to lap some of those bigger price increases that everybody saw in Q3 and Q4 of this year.

Okay, fair enough. And then maybe one last housekeeping one, I might have missed this but there was some other income of around 900k in the quarter could you elaborate on what that was and if that line item persistent to the future?

I think the bulk of it is FX so as we saw with the Chinese currency getting lower almost at the 6.9 level so we had favorable foreign exchange that happened in the quarter. We had a similar situation in the second quarter on our foreign exchange from the transaction perspective. But it's primarily driven by the Chinese currency.

Your next question comes from Joseph Giordano with Cowen & Company. Your line is open.

This is Rob in for Joe. I just wonder if you could give us some color about your distributor inventory levels. And how much steam you see left in the North American commercial market in terms of growth?

Yes, from a channel perspective I think it's healthy. I think it's probably slightly above average as the channel buys in front of this inflationary tariff environment, however I also believe the commercial market based on our backlog, our quotation, activity as well as our discussions with our field that it's you know still pretty decent out there. So we feel good about the commercial market heading into 2019. And the teams are going to get more than our fair share of that business.

[Operator Instructions] Your next question comes from Walter Liptak with Seaport Global. Your line is open.

Want to ask about volumes versus price and you may be specific about the Americas in the quarter, how much did price contribute to that 10% organic.

Little over 3%, Walt.

And then turning to just some follow-ups on Europe. The cautious comments that you made I wonder if as you went through the quarter there were things that changed I know third quarter tends to have some longer holidays and things I wonder if there is something in the Europe numbers that cause you to think little bit more carefully about how the trend would look in the fourth quarter.

So the way we look at it in the third quarter and during the second quarter of Europe. We are down a couple percent, we're up 4%. And then if you look at last year. Our fourth quarter for Europe was up 5%. So we got a difficult compare next year. So that's why we're thinking modest growth in the fourth quarter. So that's how we are framing it Walt.

Okay, great. And you kind along the same lines with China during the quarter, were you able to see a month on month change in China.

Again, China is the residential market has been soft, it's continued to be soft so no real change there, maybe a little bit of an uptick. The commercial market is very project oriented and lumpy and sensitive. So again, it's hard to see any trend there. We do believe there's spending on the commercial side of that market and our teams are focused on that. But again, our focus is on profitable growth but were not going to go after projects to lose money. So that's clearly, our focus.

Your next question comes from Mike Halloran with Baird. Your line is open.

So two clarifications, one clarification one question. The first clarification is on to China, India, APMEA growth rate that you’re expecting fourth quarter. Was that 5 - 7% all an organic number or is that inclusive of that FX number that you threw out there Bob.

It was organic.

And then second could you help right size where those APMEA margins are tracking. Obviously it grew stronger this quarter, that can move around quite a bit depending on intercompany transfers and other factors. How should we think about that for the fourth quarter and then what’s the good run rate to think about for next year.

The APMEA margins in the third quarter as you saw we have a very solid third quarter and that was driven by higher intercompany volumes, so we did some buys ahead of the tariffs that helped drive productivity in our factory in China as well as some transfer pricing margins, which aren't that significant quite frankly and then we had some foreign exchange favorability. So what happens in the fourth quarter is as long as the FX rates hold up we will still get that foreign exchange favorability, but the intercompany volume does come down in the fourth quarter versus the third quarter. So still healthy margins in the fourth quarter, but slightly lower than the third quarter on a sequential basis.

And there are no more further questions queued up at this time. I'll turn the call back over to Bob Pagano for final comments.

Okay. Thank you for taking the time to join us today for our third quarter earnings call. We appreciate your continued interest in Watts. We look forward to speaking with you again at our fourth quarter call in February. Thanks again.

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