Watts Water Technologies Inc (WTS) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 Watts Water Technologies earnings conference call.

My name is Deanna, and I'll be the operator for today.

At this time, all participants are in a listen only mode.

Later, we will conduct a question and answer session.

(Operator Instructions)

I would now like to turn the conference over to your host for today, Mr.

Kenneth LePage, General Counsel.

Please proceed.

Thank you, and good morning.

On the call with me today are David Coghlan, our President and Chief Executive Officer, and Bill McCartney, our Chief Financial Officer.

Please be aware that remarks we may make during today's call about the company's future expectations, plans, and prospects constitute forward-looking statement under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various factors, including those discussed under the heading Risk Factors in our annual report on form 10K for the year ended December 31, 2010.

And, other reports we file from time to time with the SEC.

In addition, forward-looking statements represent our views only as of today and should not be relied upon as represent our views as of any future date.

While we may elect to update these forward looking statements, we disclaim any obligation to do so.

During this call, we may refer to non-GAAP financial measures.

These measures are not prepared in accordance with Generally Accepted Accounting Principles.

A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available the press release dated February 20 relating to our fourth-quarter 2011 financial results.

A copy of which may be found in the investor relations section of our website, www.wattswater.com, under the heading Press Releases.

I will now turn the presentation over to David and Bill.

Good morning, everyone, and thanks for joining our fourth quarter earnings call.

I'd like to start by giving you an overview of our fourth quarter and full-year results.

Then summarize some of our key accomplishments from 2011.

And, move on to give you our latest view on market conditions across our geographies and a sense for where we see things heading in 2012.

Then, I'll review some of the key elements of our fourth quarter performance before handing over to Bill McCartney to review our performance in more detail.

After Bill's discussion, I'll summarize and then we'll open up the call to your questions.

So, first, let me recap the quarter and the year.

Despite challenging activity levels in many of our end markets, and pretty volatile commodity cost during the year, we believe we delivered a solid performance in the fourth quarter.

And, that overall, in 2011, we continued to make progress towards improving shareholder returns.

In the fourth quarter, adjusted EPS grew by 33% versus the prior year excluding Socla and by 40% including Socla.

For the full year, adjusted EPS grew by 5% excluding Socla and by 11% including Socla.

Over the full year, our conversion rate of free cash flow to net income was 164%.

That is the fourth consecutive year we've converted at a rate in excess of 100%.

And, our ROIC expanded by 70 basis points to 8.8%.

Second, let me talk about some of our key accomplishments during 2011.

On the growth front, we positioned ourselves for future growth by making significant progress in integrating our largest acquisition to date, Socla, which we acquired earlier in the year from Danfoss.

Socla has been a very positive contributors since its purchase.

We also expanded our geographic sales reach by putting boots on the ground in an office in the Middle East and by significantly strengthening our sales force in Asia.

We managed commodity volatility through pricing initiatives that helped balance the cost price equation in North America.

On the operational excellence front we made progress on our footprint optimization programs by completing two major restructuring initiatives, one in the US and one in Europe, and a number of smaller restructuring programs.

And, by expanding our position in low-cost countries, by opening a new manufacturing plant in Mexico.

We also made progress on our continuous improvement journey by driving additional productivity in working capital initiatives throughout the business and by investing and building our continuous improvement resource base.

Lastly, we strengthened our leadership team by recruiting experienced leaders from quality companies for key positions around the world.

And, we maintained our strong capital structure by focusing on cash generation, and by taking an advantage of our dip in the stock price to repurchase 1 million shares of our common stock for $27.2 million.

Now, let's discuss the market environment we are dealing with and where we see those markets heading in 2012.

Residential construction in 2011, as you know, was a mixed bag with single-family new home sales down 6% and single-family housing starts down 9% from 2010.

Housing starts of 307,000 in 2011 were the lowest on record.

On the plus side, existing home sales did increase year-over-year by 2% and multifamily home starts increased 54% over 2010.

Commercial construction for much of the year was stifled.

And, copper prices reached an all-time high in April of 2011 then receded somewhat as the year progressed before trending up again through February of this year.

In Europe we saw a continued divergence in market activity with the northern European countries making some gains while countries in the South are either flat or down.

So, as we look forward into 2012, we believe North America may grow modestly as the US economy appears poised to continue its steady but slow growth.

Recent statistics on housing starts and new housing permits have been positive particularly driven by multifamily construction.

But, we still see foreclosure overhang, distressed sales, and high employment levels as a barrier for significant growth in residential construction in 2012.

We believe existing home sales should be steady and that's encouraging for our repair and replacement business.

Commercial construction expectations are uneven at best.

The ABI has provided positive signs with consecutive good news in November and December.

But, our best guess on nonresidential construction calls for minimal growth in 2012.

In Europe, there's a lot of talk about a Pan European recession.

And, we did note that Euros own GDP was negative in the fourth quarter of 2011 at about negative 0.3%.

We are, of course, concerned about that and we are watching with great interest as European leaders deal with the myriad of issues in front of them.

So, this is how we are presently looking at Europe for 2012.

Many of the northern European countries rely on export sales to help fuel their economies.

If the euro remains depressed exports of systems containing Watts products should remain steady.

In these northern European markets new construction growth may be muted during 2012 but the repair and phase-in upgrade market should continue.

Amongst countries linked sovereign debt issues, Italy is an important market for us and the economic situation there causes us some concern.

However, a significant portion of our a Italian production is exported.

Our exposure to other affected countries like Greece, Ireland, and Spain is small.

If we look beyond the Euro zone, we see opportunities to expand our sales into Russia, Poland, and the Middle East.

And, if we look across our product lines, our drains product lines are expected to grow in both land-based and marine-based applications.

Now, a major challenge in Europe will continue to be to commodity cost and our ability to defend our margins against a fragmented competition.

We are responding to recent escalating copper prices by announcing price increases in a number of our key markets.

So, in general, although growth may lag North America in 2012, our expectations for Europe are not as conservative as some others.

But, if a deep recession were to take hold in Europe, then our expectations would certainly need to be adjusted.

Turning to Asia, our operations there are still small at present.

So, any growth there won't necessarily move the needle in the short-term.

But, we see promising long-term growth prospects in Asia.

China's economy is expected to grow by roughly 8% in 2012, and a significant portion of the domestic GDP is accounted for by real estate including construction.

A recent Wall Street Journal article noted that the Chinese government is in the process of building 36 million subsidized apartment units for low-income families by 2015 with 7 million apartments projected to be constructed in 2012.

We hope to tap into China's continuing expansion by enhancing our distribution and sales channels and emphasizing our key brands in plumbing and HVAC applications.

We're also looking outside China into other markets in Southeast Asia to expand our presence throughout the region.

Now, I'd like to talk briefly about our fourth quarter performance.

Overall, we thought we had a solid fourth quarter.

On the revenue front, we delivered 4% organic growth and 14% overall growth if we include Socla.

Operationally, we expanded our adjusted operating margins by 70 basis points due to tight controls over operating costs in the quarter.

Our gross margins in the quarter were essentially in line with the fourth quarter of last year.

And, we were able to leverage about 37% of each additional organic sale made in Q4, over Q4, last year directly to the bottom line.

We did have a couple of individual transactions in the fourth quarter which are worthy of note.

First, we took an impairment charge of $11.3 million after-tax related to a European subsidiary.

This resulted from a look at the business and its current prospects based on changes in end markets and a deemphasis of certain product lines.

Secondly, we had an after-tax gain of approximately $11.4 million as we finalized the sale of the subsidiary in China.

We had been awaiting government approvals and final closure with the buyer and these loose ends were completed in Q4.

We continue to be more successful in passing on commodity costs in the North American wholesale channel then we have been in Europe and in the North American DIY channel.

As we've noted previously, European markets tend to be fragmented and we face competition from family-run companies that price aggressively to maintain business and employment levels.

We did see a slight reduction in copper costs during the quarter.

So, the price cost gap narrowed.

However, that benefit was offset to some extent by lower absorption in our factories as business naturally tailed off during the holidays, as we conveyed to you during our last call.

We have announced selected price increases in certain markets in both Europe and North America, effective for January, in an attempt to further balance price cost issues.

Within Europe, Germany continued to perform well during the quarter.

Especially for products sold into the radiant heating marketplace.

And, our European drains business continued the upward momentum that began in the second quarter both in its traditional Nordic region and elsewhere such as the Middle East.

We also saw growth in our traditional pre-insulated piping product lines used in district heating and cooling applications.

Socla continued its solid performance by generating $0.03 in adjusted EPS in the fourth quarter.

For the year, Socla contributed $0.13 in adjusted net income.

Which, on a run rate basis, is slightly above our original high-end estimates for a full-year of $0.18.

In the North American retail market, pricing gains continued to be difficult to attain as the larger big box retailers are transitioning to annual line reviews where they put an entire product line out to bid in an effort to obtain a better price.

We have made progress on price in our retail channels, but we still have work to do.

Our challenge would be to differentiate ourselves with superior service delivery and product breadth.

We believe we have the product offerings, including low-lead products, and the distribution capability that the bigger retailers want in a key sourcing partner.

Finally, we continue to see benefits coming through from various continuous improvement and footprint consolidation programs which are part of our operational excellence strategy.

These also helped to contain inflationary cost measures.

So, let me turn it over to Bill now, who will provide you with more insight into our operating performance in Q4.

Okay, thanks, David.

Looking at the consolidated revenue, $360 million that is an increase from last year of $43 million, or just shy of 14%.

The components of the change, we had almost $13 million of organic growth which is 4%.

The acquisition of Socla contributed $31 million, which is 10%.

And then, we had an adverse impact when foreign exchange of about $900,000.

So, that totals $43 million, or 14%.

The bottom line on the EPS front, if you look at our GAAP earnings of $0.46 compared to last year's Q4 of $0.30, so that is an increase of 53%.

However, if you look at table 1 on the press release and look at our as adjusted earnings where we remove restructuring and unusual one-off transactions, we're -- our as adjusted number is $0.56 compared to last year's Q4 of $0.40.

So, that's an increase of 40% versus last year's Q4.

And, I know some of you are interested in the detail of the restructuring charges and impairments and so on, so to give you that information by segment.

If you look at North America, pretax we had $400,000 of restructuring and $200,000 after-tax.

In Europe, the combination of restructuring and impairments was $17.4 million pretax and $14.3 million after-tax.

In China, where we recorded the gain on the sale of our subsidiary TWVC, we had a pretax gain of $7.8 million but an after-tax gain of $12 million.

The reason for the increase is that we did have some favorable tax positions that we unwound as a result of that sale.

And then, we had a $600,000 after-tax charge at the corporate level.

Looking at some of the segment performance, North America, $199 million, or almost $200 million of revenue increase of $11 million, or 6%, versus last year.

The components of that change, from an organic standpoint $8 million, or 4%, the acquisitions which we have some Socla revenue in North America.

So, that is $2.7 million, or 1.5%.

And, a small adverse impact from the Canadian exchange rate of $200,000.

So, that totals $10.8 million, or 5.7%.

On the wholesale side, revenue increased $9.6 million to close out at $160 million, that's 6.5% and the retail at 39.5% increased 3%.

So, again, as David mentioned earlier, we saw some solid performance in some of our plumbing and heating products.

Particularly on the plumbing products, particularly black flow, offset by a little bit of softness on the heating season because we've had such a warm winter in North America.

Looking at Europe, $154 million of revenue, that's an increase of 27%, or $32 million.

The components of that change, from an organic standpoint $5 million, or 4%.

Again, the weakening of the euro versus last year Q4.

So, we had an adverse impact of $1 million or about slightly less than 1%.

In Socla's revenue, in Europe was $28.3 million, or 23%.

So, that totals $32 million or just shy of 27%.

And, again, in Europe, David mentioned we had some very good performance into Eastern Europe particularly Russia and Poland.

Germany's under floor radiant heating sales into our OEM marketed did well.

Strong sales from Blucher partially offset by some weakness in our Italian wholesale market.

China sales at $6 million were essentially flat with last year so there is no significant changes there.

Looking at the gross margin, 35.7% in the quarter and that's up about 10 basis points versus last year's fourth quarter.

We look at the margins without Socla, they are also a 35.7%.

So, Socla is running as we expected very close to our overall corporate average for gross margin.

When we look at the margin, we did have some improved pricing in our North American DIY.

Pricing in North American wholesale seems to be holding.

In Europe, again, competitive pricing atmosphere, but, we are trying to offset as much of that as possible with productivity improvements through our continuous improvement operating system at Watts.

The SG&A at $92 million, that's an increase of $8 million versus last year but it is a reduction of 100 basis points relative to sales at 25.6%.

So, just to walk through the change from last year.

Last year's fourth quarter we had $84.3 million of SG&A.

From an organic standpoint our SG&A declined by $400,000.

The FX caused a decline of $100,000.

And, an inclusion of the acquisitions, primarily Socla, increased it by $8.3 million.

So, that brings us to a total of $92.1 million for the quarter.

The operating earnings on an as adjusted basis, $37.2 million.

That's 10.3% of revenue an increase of 70 basis points versus last year, or 23% from an absolute standpoint.

And, again, David mentioned earlier, the increase in operating earnings from an organic standpoint was $4.8 million which is 37% of our increase in organic revenue.

So, we continue to see the benefit of our continuous improvement in footprint projects there.

Below the line, other income and expense increased from $5 million to $6.8 million.

The primary contributors there were some increase in interest expense associated with some additional debt for the Socla acquisition.

And, just some foreign exchange charges where we have to mark our working capital to market below the line.

On the tax front, the tax rate was 12% versus last year's 38% that includes all of our restructuring charges and whatnot.

That low rate is reflected -- or is caused by the favorable tax positions that we unwound in China as a result of the sale.

If you exclude those unusual tax bookings that we had, the tax rate in the quarter would have been 32% which is close to our normalized rate.

We typically run about 33% in the quarter.

So, net income on an adjusted basis, almost $21 million, or an increase of 36% versus last year.

As we mentioned earlier, our net debt to cap at 14%.

Which, so we're in good shape on the balance sheet.

We had $250 million in cash with $250 million available on our revolver and that's the result of the strong free cash flow conversion of 164%.

So, with that I'll turn it back to David.

Thanks, Bill.

So, in summary, we were pretty pleased with our performance for the quarter and the year, given the challenging business environment that we are facing.

Our full-year results were driven by price realization in North America and further progress globally on our operation excellence journey.

In addition, Socla perform better than our original expectations.

And, we added some key bench strength to our management team to further drive improved performance throughout the organization in the future.

Looking forward, we expect modest market growth in North America and overall flat markets for us in Europe.

We also believe we'll have to continue to deal with volatile commodity costs.

And so, as a result, price cost dynamics remain a challenge that we'll have to deal with on a daily basis.

So, in this environment, we'll continue to focus on the issues we can control right driving growth through new product introductions, market share gain, geographic expansion, and, smart disciplined acquisitions.

By continuing to push forward on operational excellence throughout our business, and by making progress on our One Watts initiatives including strengthening the business through proactive talent management, deploying shared services, and implementing common systems and practices.

We believe this approach will allow us to continue to deliver improved operating results despite the lack of any meaningful tailwinds from our market environment.

So, at this time, we'd like to open up the line and field any questions you might have.

Operator, can you open the lines for questions, please?

(Operator Instructions)

Jeff Hammond, KeyBanc Capital Markets

Hi, good morning, guys.

Hi, Jeff.

Just on price cost, can you just give us a sense if you look at all in for 2011, what was price -- on a net basis, price versus cost?

And, maybe, as you look at '12 is it better or worse than that?

Well you have really look at it by market, Jeff.

And, in North America, on the North American wholesale we believe that we have covered.

And, on the North American DIY, we have not covered, it would be several million dollars.

And, on -- in our European markets it would also be several million dollars where we did not cover.

Okay, so, if you looked at '12, is that the same trend you 'd expect, the all in that you --.

I would think that -- I think that if all of our pricing holds where it is, I would expect that we would continue to cover in North American wholesale.

The DIY is still going to be -- will be better in '12, but not completely covered.

In Europe, it's still going to be a challenge.

And then, on the other side of the equation, Jeff, you're going to have some -- given the lag of copper prices coming through our P&L you'll have some reduction in copper prices as they reduced in the second half of last year that will flow through in the first half.

And then, we'll have some increase in copper prices flowing through the P&L in the second half of the year.

So, you sort of have to look at it on both sides of the coin.

Okay, great, and then, just can you give us what you think incremental accretion is on Socla in '12.

And, just quantify what you think you're going to get in restructuring savings in '12?

Well, I think Socla, we feel comfortable that we -- we spent the beginning of the year, well just the annualization impact of Socla, if you will, we should pick up at least $0.05.

And then, we should pick up a little bit as the year progresses and we continue to see some of the integration savings, if you will, of Socla as we continue to do that.

On the restructuring front, we just finished our -- one of our plant consolidations in North Carolina.

So, that is just starting to run through the P&L.

So, there will be $2 million there.

And, that's really the main one.

The French run is really -- we should see some modest improvement in France.

But, we have the bulk of that saving running through now.

Okay, thanks, guys.

Okay, Jeff.

Garik Shmois, Longbow Research

Hi, thank you.

First question is if you could break out in the fourth quarter how much of the organic growth, both in Europe and North America, was pricing versus volume?

Or give us a rough ballpark, please?

It's -- in North America it's probably about half and half and in Europe it is going to be heavily skewed towards unit volume.

Great.

I don't have the exact percentage, but --.

No, that's fine.

Thanks for that.

And then, just secondly, if you could talk a little bit about inventories.

I think coming into the last call you were concerned that there was going to be some potential destocking in the fourth quarter.

Just wondering if that occurred in wholesale both in North America and in Europe and where perhaps wholesale inventories are right now?

We did see some destocking in retail in the third quarter.

And, we were concerned that that trend might spread a little bit in the fourth quarter.

But, to be honest we didn't see any meaningful further destocking in our customer base in the fourth quarter.

Having said that, our customers are still running with incredibly lean inventories.

And so, that creates a competitive advantage for us in that those with fastest deliveries can very often pick up some incremental business.

Okay, did you see any pre-buy ahead of the January price increases in some of these -- in some of your markets?

No.

Okay, great.

Thank you, very much.

Kevin Maczka, BB&T Capital Markets

Thanks, good morning.

Hi, Kevin.

On the January price increases, did you say the magnitude of those increases?

And, is that primarily in the wholesale market?

And, do you have any color yet since that was in January on how well that's sticking?

It's very early, Kevin, and most of the price increases were in Europe.

We went after selective products in select markets.

So, it's tough to put an across the board number on it.

But, yes, it was heavily in the wholesale channel.

And, because they were announced in January, it typically takes a little bit of time for it to work its way into the market.

And so, we don't have a feel just yet as to how they're being realized.

We did do a couple of narrowly focused price increases in North America on a couple of wholesale products.

And, obviously we're still working on the retail side through the line review process to try and get as much as we can to stick.

Okay.

So, we've got some price increases coming as we get out a few months.

You also mentioned we've got lower copper coming in the first half, higher in the second half.

I'm just trying to get a sense for margins, we've been everywhere from 9% to 12% in 2011 and 10% in the fourth quarter.

Is 12%, or something close to it, reasonable again with your organic growth outlook and this view on lower copper prices in the first half?

Well, I don't think were going to bite on 12% on this call, Kevin, to be honest with you, okay?

We still -- our goal is 12% operating earnings.

And, we're going to get there through a combination of continuous improvement, footprint consolidation, leveraging our fixed overhead, and SG& A.

But, we're also going to need a little bit of volume to get there.

So, I don't think we get there just on pricing copper issues alone, I don't see that.

Right, but that should be a little bit better in the first half than it was here in Q4?

It sounds like what you're saying.

Yes, it is.

Okay, thank you.

Thank you, Kevin.

Ryan Connors, Janney Montgomery Scott

Good morning, Ryan.

Thank you, good morning.

Hi, Ryan.

Couple of questions.

First off, you talk about the organic growth.

Can you -- and you talked a lot about the new start environment in commercial and residential.

Can you talk a little bit about remodeling and repair and replacement?

And, whether -- how that's faring relative to the new start area?

We see -- we've got a better feel for the remodeling -- the repair replace upgrade market in North America.

And, we feel it's holding up reasonably well.

What we are hoping, is that as consumer sentiment solidifies around the improving economy, that there may be some pent up demand which gets released.

But, we're not seeing that yet.

And so, the way we are looking at our repair replace upgrade business is that it is been pretty consistent through the downturn.

And, we are planning for a continuation of that.

Okay, okay.

And then, in terms of Europe, couple of questions there.

So, first off, been hearing some rumblings about a return of subsidies for renewable energy products in Germany and driven by a desire to stimulate the economy to stave off recession.

Have you heard any of that or possibly have any update there on the renewable energy side?

Yes, we have heard the same rumblings.

And, they are sort of -- again, it's a two-sided story.

On the one side, the German economy is attempting to cut costs where it can like many other European countries.

And so, there is a discussion around the financial benefit of those types of subsidies.

On the other side, I think the -- those concerned about the environment in Germany are slowly waking up to the fact that when you stop producing power with nuclear plants, you're going to start importing power from Eastern Europe from coal plants.

And so, is that better for the German environment than worse?

And so, they're starting to realize that maybe we ought to put more money back into renewable energy.

And so, it is not clear to us yet how that plays out.

Okay, and then finally, just a longer-term thematic question.

You mentioned the pricing headwinds in Europe and the more fragmented nature of your markets there.

Is there any evidence that the challenging times there are driving industry consolidation that will long-term improve pricing?

It doesn't seem like -- you are doing okay, but it doesn't seem like you're making abnormal excess returns over there.

So, if those smaller competitors aren't following suit on pricing, one would assume they are hurting pretty bad.

Is there any effort that they'll be -- that that competitive environment will shrink?

Well, we hear noise about a number of our competitors struggling financially.

And, we also hear noise about, in a number of markets in Europe, the bank tightening up a lot on companies who are missing repayment dates or perhaps not living by covenants.

And so, you put all that together again and you certainly see -- you'd expect to see the screw tightening on some companies who are struggling.

But, are we seeing wholesale, or significant consolidation in the industry?

No we are not.

And so, the things that we are trying to do is to say, look, we've got to push as hard for price as we possibly can.

And then, we've got to ramp up our focus even more on operational excellence.

And so, we mentioned earlier in the call that we've completed a pretty major program in France, we're also working on a handful of smaller programs dotted throughout Europe in terms of restructuring programs.

And, we're putting a lot of focus on to driving our continuous improvement programs into our European plants.

So, that we can become a lot more efficient and productive.

And so, if the consolidation than occurs and a couple of our competitors go away, well then, that's a little bit of benefit on top.

Okay, well, that is very helpful.

Thanks, for your time.

Thank you.

Todd Vencil, Sterne, Agee

Thanks, good morning, guys.

Good morning.

Bill, going back to the price costs.

You talked about the fact that in a couple of areas you think you lagged with the price in 2011.

And then, you thought some of those areas were going to continue to lag in '12.

My question is, is that sort of -- are you thinking that it will further lag in '12 or you won't completely catch up with -- through the lag from '11?

I don't think -- I don't mean to say it's going to get worse, Todd, because I don't believe that.

I think that it's -- we will be better, we'll be equal or better on all fronts.

But, we won't have completely recouped on the North American DIY and in Europe.

But, we will be better in '12 than we were in '11 on this issue.

Got it, so a bit of a tailwind even though you may not catch all the way back up?

Yes, correct.

And then, on the charges in the extraordinary items, Bill, can you parse out between cogs and SG&A for the quarter?

Yes, it's all SG&A, Todd.

Got, it, thanks, guys.

Okay.

Jeremy Hellman, Divine Capital Markets

Hi, good morning, guys.

Good morning, Jeremy.

Just going back to the northern European exports, do you have some clarity into where geographically those exports may be going if they are weighted anywhere?

Well, what we're largely talking about there is our OEM business in northern Europe.

And, the largest market for our OEM business in northern Europe is Germany.

And so, there's two things happening, first of all, German OEMs, for instance the larger boiler companies, are taking share outside of their home markets.

And so, we are being pulled along with that.

And so, they would be some of the larger markets in other parts of Western Europe, France, UK, et cetera.

Okay, and then, another geographic question.

And then, just to finish the question, the other piece then is that they are focused heavily on exporting into developing markets like Eastern Europe.

And, in some cases into China.

And, we are being pulled along by that as well.

Okay, and then, second question for me geographically, and just trying to refresh my memory, regarding Mexico.

Saw a statistic recently that they've got a pretty significant residential housing unit deficit that they are talking about.

Something on the order of 9 million units.

And, just wondering what your views are in the Mexican market?

Is that more commodity type stuff without regulations where you need them to be to make it an attractive market for you guys?

Or is this something that you are looking at?

Well, we are looking at Mexico.

In fact we had a team down there last week.

But, the Mexican market is a very different market for our types of products than Europe or North America.

So, for example, most Mexican homes are fed by gravity feed.

So, they put a tank on the roof and the water flows.

And, in that type of situation, the type of products that are in our sweet spot, like backflow preventers, pressure regulators, thermostatic mixing valves they're just not used.

In the commercial space, the codes in Mexico continue to evolve.

But, they're not at the point that codes are in either the US or in Western Europe.

And so, they're are some opportunities in Mexico.

And, we're looking at which ones we can take advantage of.

But, there is nothing like the same content for our types of products in a residential or commercial building there, yet.

Okay, thanks.

Jamie Sullivan, RBC

Good morning, Jamie.

Good morning.

Hello.

I'm wondering if you saw any actual benefit from weather maybe helping some of the repair replacement activity?

I think it probably does help us moderately.

Because the construction markets don't get as interrupted as they would if you had a tough winter.

But then, that is partially offset by the fact that the heating season, this Q4, was weaker than normal.

Because typically what happens, Jamie, is that the heating season starts in September where the wholesalers bulk up for the season.

And then, we get another wave of orders that come through late in Q4 as they've depleted their September orderings and inventories and whatnot.

And, that second wave was very, very mild because people in North America, the boilers aren't cranking like they usually do.

So, the heating season, the weakness there offset some of the favorableness we got from the mild winter.

Right, okay, that is helpful.

And, in terms of 2012, you talked about your macro outlook, are there any particular product categories where you are more optimistic or more cautious?

We've picked a couple of different product categories that we are pushing and we have talked about them on previous calls.

And so, those still remain the product categories we are working.

So, for instance, we've got a couple of initiatives around water quality, where we are continuing to work with Home Depot on a number of pilots through their home install program.

And, I think it is approximately 200 stores.

We are continuing to work the launch and commercialization of our water quality line through plumbing wholesalers.

And, we are continuing to push our new scale prevention product, this is a saltless water conditioning product called OneFlow, into vertical markets where we see opportunities.

Similarly, there is a lot of work going on to push our Blucher product line in a number of new geographies, at least in Eastern Europe and even North America, et cetera.

On the other side, the areas that we are probably seeing some headwinds, but they are largely weather related, would be the heating business in North America because of the winter.

And then, as we go to Europe, the area we are seeing headwind because of subsidies would be some of our products that go into renewable energy applications.

But, as we mentioned during the call, that's being offset through growth in our radiant product line in Europe.

So, hopefully that didn't confuse you too much.

No, that is great.

And then, I guess just one on margins.

In terms of the organic incrementals going into 2012, you still feel good about a 35% plus number?

Well, we mentioned that we saw in the fourth quarter, where we saw organic growth dollars coming through, they converted at about a 37% rate.

So, yes, we are still comfortable with the 35% or so conversion rate on incremental volume.

Great, thanks very much.

Okay.

(Operator Instructions)

David Rose, Wedbush Securities

Morning, David.

Good morning, gentlemen.

Couple questions.

One is I was wondering if you could talk a little bit about Socla's organic revenues in the quarter.

If you have that data, what they were?

Two is, thoughts on the health of your European distributor channel if any of the distributors fell out, went out of business?

And then, just briefly, a couple key initiatives for the first half and second half of 2012?

David, when you -- organic, you mean what they have changed?

For us, it's completely acquisitive growth.

But, you're talking their organic growth rates?

Right.

Yes, okay.

Socla was essentially flat on the quarter versus last year's Q4 even though they have been up several percentage points on a year-to-date basis because they are seeing some very nice growth particularly in Eastern Europe.

Does that answer the question?

Yes, and then, if you could talk about the health of your European distributors.

And then, lastly key initiatives for the first and second half of 2012?

We haven't seen any significant changes in our European distributors.

And, to go beyond that, our largest channel in Europe is still the wholesale channel.

We've seen some movement in the wholesale industry as, in some ways, to more disaggregation and in other ways to more aggregation.

So, there's no one single trend.

But, we don't see any negative impact in Europe on any of our distributors or our wholesale customers.

Okay, great, thank you.

And then, lastly any of the key initiatives on your operational excellence program or any new initiatives either for the first half or second half?

Well, as Bill said, we finished off some of our significant restructuring programs in North America.

We are still executing on a couple of small ones in Europe.

We have a facility closure in Sweden that we are working through.

And, we just pretty much done a small facility closure in Italy.

And so, those will start to bleed through.

We haven't made any announcements about the next -- about any further consolidations in Europe.

And, we would be loathe to talk about them, because were we to do anything we would have to discuss them with the Workers Council Effective first.

But, we can expect additional manufacturing footprint reductions then sometime in the second half?

Yes, we are -- as we got through the current slew, that gives us an opportunity to sit back and see around the world where there might be further opportunities.

And, to start to put together that slate of candidates, so to speak.

Okay, great.

Thank you, very much.

Okay.

(Operator Instructions)

Kevin Maczka, BB&T Capital Markets

Hi, again, thanks.

On this expansion into Russia, Poland, and the Middle East, can you just talk about where we are on that?

Has that really started to move the needle at all?

And, if not, when do you think it might?

Well, we're starting from a modest base.

And so, in terms of a meaningful contribute to the corporate whole it's not at that point yet.

But, wherever we see double-digit growth of a meaningful base within a couple of years I think it will be meaningful.

Okay, and then, just the last one for me.

David, can you remind us of the Socla seasonality?

Because I think they did $0.03 to the bottom line this quarter but $0.06 in Q3?

Socla, historically, Kevin, has very little seasonality.

So, if you look at what we were expecting when we bought Socla, we were talking $0.03 to $0.035 a quarter from a contribution to Watts.

We hit $0.03.

So, it was at the lower end of the range in the quarter.

But, still for the year, the run rate, we were at the high -- we actually slightly exceeded the high end of the range that we gave which was $0.18.

So, it's just -- they had a little bit of slowdown in the revenue.

We don't believe that it is indicative of any type of change in the trend that they have been on and so on.

So, we are still -- our initial discussions with the street was $0.14 to $0.18 and we are sticking with the high end of that range or little bit better.

Okay, thank you.

Okay.

This concludes the question-and-answer portion for today.

I'd now like to turn the call back to David Coghlan for closing remarks.

Okay, so, thank you for your interest.

And, again the key point that we'd just like to emphasize is that our focus is on driving things that we can control in a market environment where we have lost about $200 million of volume.

And, the result of that is a business that is delivering peak earnings in the trough.

And so, our expectations going into 2012 are to plan for very moderate growth and continue to focus on the internal initiatives that we can drive to deliver improved shareholder value.

But, we appreciate your continued interest in Watts and thanks for taking the time to join us today.

And, thank you again, ladies and gentlemen, for your participation.

This concludes today's conference.

You may now disconnect and have a great day.