Watts Water Technologies Inc (WTS) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2012 Watts Water Technologies earnings conference call.

(Operator Instructions).

And now, I'll read the Safe Harbor.

Please be aware that remarks made during today's call about the Company's future expectations, plans, and prospects continue forward-looking statements 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 the Company's annual report on Form 10-K for the year ended December 31, 2011, and other reports the Company files from time to time with the Securities and Exchange Commission.

In addition, forward-looking statements represent the Company's views only as of today and should not be relied upon as representing its views as of any future date.

While the Company may elect to update its forward-looking statements, it disclaims any obligation to do so.

During this call, the statements made 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 in the press release dated Tuesday, February 19, 2013, related to the Company's fourth-quarter 2012 financial results, a copy of which may be found in the investor relations section of the Company's website at www.WattsWater.com under the heading press release.

For the first time, we are providing a PowerPoint presentation of today's conference call, which is available on our website under investor relations at www.wattswater.com.

I would like to turn the call over to Mr. David Coghlan, the Chief Executive Officer.

Please proceed, sir.

Thank you very much.

Good morning, everyone, and thanks for joining our Q4 earnings call.

First, just to reiterate what [Pareeta] said, we've posted for the first time a presentation to support this call on our investor relations page in the webcast link.

So if you don't already have that presentation, we'd urge you to go get it, and it'll make the call a lot easier.

So we appreciate your interest in Watts Water and thanks for joining us.

I'm going to begin by providing you a brief overview of our financials and the business highlights for the full year.

Then I'll talk about market conditions in our key regions; give you a sense at a very high level at how we're looking at 2013; and update you on our Lead Free initiative, which, as you know, is a key initiative for us in 2013.

Dean Freeman will then take you through our fourth-quarter performance in more detail, and after Dean's discussion, I'll summarize and open the call to your questions.

So let me start with an overview of 2012, which you'll see highlighted on page 2 of the presentation.

We think 2012 was solid, but mixed, given that different economic and business dynamics in each of our three key segments provided unique challenges and opportunities.

In North America, after a disappointing first quarter, we were able to improve our operating results sequentially during the year as Lead Free transitions costs abated and as we mitigated the impact of non-commodity cost increases.

Our retail end markets showed steady growth throughout the year, likely driven by the repair and replace end market, and we saw the early signs of a pickup in our residential new construction business late in the year.

But we have not yet seen a pickup in commercial.

In Europe, Middle East, and Africa, or EMEA, I would characterize our performance as resilient.

We experienced pockets of growth, especially in central Europe, eastern Europe, and the Middle East, and our drains business on a pan-European business was strong.

However, those gains were more than offset by persistent macroeconomic issues in much of Europe, particularly Italy and France, which are key markets for us.

And in Asia, our team made good progress in building the foundations for a growth platform based on our global (multiple speakers) and HVAC capabilities.

We delivered an adjusted operating margin of 9.5%, or 80 bps below our 2011 performance, mostly driven by the net volume declines in EMEA and investment in people and systems in EMEA, Lead Free transition costs in the US, and the mix effect caused by stronger growth in our lower-margin retail business in North America.

Our adjusted results did trend positively as the year progressed, especially in North America and Asia.

Adjusted earnings per share at $2.18 was flat with 2011, with the net effect of acquisitions, FX, and the share buyback resulting in $0.08 of incremental earnings per share in 2012.

Our cash flow conversion rate was 148%, representing another strong year of cash generation for the Company.

This is now the fifth consecutive year where our cash flow conversion rate was greater than 140%, an achievement that we're particularly proud of.

We made one acquisition in 2012, that being the acquisition of tekmar in North America, which fits in nicely to our HVAC product platform.

And because the acquisition market was fairly quiet, we invested approximately $66 million in a 2 million share buyback, which occurred primarily in the second quarter of 2012.

We continued to work in our footprint consolidation efforts in both North America and Europe, on our continuous improvement programs throughout the Company, on our systems integration project in Europe, and we continue to expand our One Watts concept to help drive performance and leverage throughout the Company.

In summary, our 2012 operating results were solid, followed a disappointing first quarter.

We made strides in our target emerging markets and in certain product lines, like drains.

Our core business results in Europe were affected by macroeconomic issues, which still pervade much of the continent.

And in North America, our growth was predominantly from lower-margin retail sales.

We also made investments in people systems and in our Lead Free initiative, which, although disruptive to earnings in the near term, we believe will serve us well as we move into 2013 and beyond.

Now if you turn to slide 3, let's discuss the current market conditions and where we see them trending in 2013.

Let me first talk about EMEA.

During 2012, we worked to mitigate the macro effects on our end markets by targeting selective share gain opportunities in our core markets by leveraging our broad product range and our quick-turn order fulfillment capabilities; and two, by growing our BLUCHER drains business, and three, by expanding in the Middle East and central and eastern Europe.

So while southern Europe was a drag on our business throughout 2012, we were able to mitigate much of its effects through these actions.

However, as we mentioned last quarter, we are approaching 2013 with an air of caution.

Recent news reported European fourth-quarter GDP fell by 2.3%, suggesting Europe's economic and financial issues are far from over.

As Dean will discuss, we saw our French business soften again in Q4 and our German sales were fairly flat as well.

So as we look forward into 2013, we remain cautious about the macroeconomic landscape in Europe.

Let's now look at North America.

We're hopeful that the positive trends of 2012 in the residential markets will continue into 2013.

We expect continued growth in residential new construction in North America.

Existing home sales, we believe, should be steady in the 4.5 million to 5 million range, which is encouraging for our residential repair and replacement business, and the LIRA index, which tracks trends in remodeling activity, came out recently with positive expectations for the first- and second-quarter remodeling spend.

On the other hand, our view of commercial construction is still somewhat opaque.

As mentioned, we've not seen a pickup yet in our commercial end markets, and other competitors have recently shared the same view.

However, the ABI Index has been in positive territory for the last five months and was positive for eight months in 2012.

So we are hopeful that a commercial construction uptick may occur at some point later in 2013, but just when it may affect our topline is hard to gauge.

Finally, let's discuss Asia.

As we mentioned, throughout 2013 we believe that our longer-term growth prospects in Asia are bright.

We anticipate a significant opportunity for us to grow in the domestic China marketplace and we're making some nice progress in laying the foundations for sustained growth there.

China's economy is growing by roughly 7.5%, and a significant portion of the domestic GDP is accounted for by real estate, including construction.

We are focused on bringing our worldwide capabilities to bear on the Chinese market, where high-end construction contractors are interested in European and US technologies when spec'ing their jobs and where consumers are increasingly focused on comfort and safety in their homes.

As a result, not only are we seeing demand in China for our localized products, but also for our more highly engineered German, Italian, French, and US manufactured products.

If we move to slide 4, I'll provide you our 30,000-foot view of how we see 2013 shaping up.

We see business volumes picking up in North America with growth from residential new construction and remodeling.

Commercial construction is still an enigma to us, and at this point we're not anticipating a tailwind from that market.

In 2012, our North American topline grew organically by just under 2%.

We anticipate that we can grow in 2013 in the low to mid single digits.

In EMEA, we expect economic issues to persist in a number of key countries, which in turn could drive uncertainty in our end markets.

We also anticipate that we will continue to expand our Middle East and eastern European business, and we expect our German OEM business and our drains business to remain steady.

Looking at EMEA in total, then, we see a year of flat growth on a constant-currency basis in 2013.

Switching to Asia, we expect our growth trends there to continue into 2013 as we continue to expand geographically within China and build foundations in other parts of Asia, and we're comfortable that we should grow our topline in that region in the low to mid teens during 2013.

As always, we'll remain active in the acquisitions market, looking for businesses that will expand our product footprint at customers, provide geographic expansion opportunities, or complement our existing product lines with new or innovative technology.

As you may be aware, a major initiative for the US business is the transition of about $300 million of existing product sales from leaded to leadfree by January 2014.

We do expect some headwinds in the first half of this year as we continue this transition, and I'll discuss this with you in more detail momentarily.

Finally, we will stay focused on operational excellence by continuing to strategically review our available operating footprint and by consolidating operations where possible, and also by driving our continuous improvement efforts throughout the Company.

Moving to slide 5, let me update you on our Lead Free journey.

We spoke with you at length on the last conference call regarding our Lead Free initiative.

We explained the legislation driving the change; our two-pronged strategy of, one, differentiating ourselves as a leader in the marketplace and, two, maintaining our gross-margin percentages as we transition to the higher-cost products.

We talked about the operational changes and investments we're making, the transition timeline involved, and the educational process we're helping to drive in the industry.

From a customer perspective, the larger retail customers have taken the lead in changing over their product SKUs to leadfree.

We believe they want to prevent confusion with their end customers and avoid having dual inventories of the same product on their shelves.

Wholesalers are becoming more aware of the transition issues and many appear to be focusing on the Q2/Q3 timeframe to transition their products to leadfree.

Operationally, our leadfree foundry is moving ahead as planned with commissioning of the plant scheduled for the mid-second quarter of this year.

We're spending over $20 million on the new foundry and new equipment, with about $7 million spent in 2012 and about $13 million to be spent in 2013.

So total capital spend for the Company in 2013 will be elevated because of the leadfree conversion, as high as $41 million, and beyond 2013 capital spend should moderate to more historical levels.

We have also completed vendor audits of our key suppliers to ensure our supply chain can be compliant with the new requirements.

We expect some choppiness in cash flows and inventory levels over the first couple of quarters in 2013 as we build up our leadfree inventories in advance of our transition, and we expect inventories to be at more normal levels by year-end.

And we expect to generate some negative manufacturing variances for a quarter or two before and after we commission our new foundry and transition our plants to leadfree production.

At this point, we're still reviewing the plans and working on mitigation actions, but we estimate those costs could be in the $2 million to $4 million range and mainly affect Q2.

The costs incurred come from the ramp-down of production and inventories of leaded, higher sourcing costs during the transition, and startup variances as leadfree production comes online.

So in summary, this is a significant change for our plumbing business and for the entire industry in the US, but the transition is progressing as planned, and we're working very hard to make the transition as seamless as possible for our customers and our business.

Let me now turn it over to Dean who will provide you with more insight into our operating performance in Q4.

Thanks, David, and good morning, everybody.

I'll keep my comments brief, and if you are following along in the slide presentation, I'll start on slide 7 with the 2012 financial highlights.

I'll also offer some comments with regard to the quarter and some of the regional performance as well.

So looking at the year on a consolidated basis, we saw about 1% of organic growth, largely driven by North America of about 2%, offset by EMEA decline of 1.5%, with Asia contributing the balance.

North America did see an increase of about 7% organically in its retail channel with about 0.5% growth in the wholesale channel.

Europe's decline was largely driven by continued economic malaise in France and Italy and somewhat offset by stronger sales in our European drains business, which came out of northern Europe, Germany, Scandinavia, as well as eastern Europe, and growth in the Middle East.

I should also point out that, while off a much smaller base, Asia saw 18% organic growth in the year and 30% in the fourth quarter alone.

Adjusted operating margin was down by 80 basis points in the year, with the bulk of that coming from North America, driven by the impact of the leadfree conversion preproduction productivity declines and, as I mentioned earlier, heavier shipment mix to the lower-margin retail channel in the year.

Looking at adjusted EPS from our continued operations, as David pointed out, of $2.18, again flat year over year with a net $0.08 benefit coming from share dilution, with earnings from acquisitions and foreign exchange offsetting each other in the year.

For the fourth quarter, we saw organic growth of about 1%, again driven by an increase in North America of 2.4%.

North America saw retail growth of approximately 9% in the quarter and about 0.5% growth in wholesale.

Overall, Europe saw a decline of about 2.2% organically in the quarter as it continued to see declines due to the economic cycle, but continued to see growth in its pan-European drains business and increased sales in the Middle East.

Adjusted operating margins were essentially flat year over year in the fourth quarter, with Europe offsetting declines in North America.

And looking a little bit further down on the income statement, just a couple of items I'd like to bring to your attention.

Our effective tax rate in the quarter on a GAAP basis was 23.8%, and that rate was driven by favorable tax adjustments in Italy related to a change in tax law that took effect in the fourth quarter.

Further, our mix of profits in Europe was skewed by lower tax jurisdictions, which helped reduce the effective tax rate as well.

Secondly, in discontinued operations we recorded the disposal of our well water pump business, Flomatic.

That was originally purchased as part of the Socla acquisition.

We recorded a loss on disposal of approximately $3.8 million in the fourth quarter, and the financial statements for 2012 and 2011 have been recast to include Flomatic in DiscOps.

The operating results for Flomatic were immaterial in both years.

For the quarter, adjusted earnings per share from continuing operations were $0.61 for the quarter, with $0.04 coming from dilution and acquisitions, offset by about $0.01 for foreign exchange.

Skipping to slide 12, again if you're following along, I'm on primary working capital, which was 25.3% of sales, with inventory being the biggest driver year over year.

Inventory increased $10 million year over year, with $6 million from operational increase related to leadfree buffer inventory and the balance coming from foreign exchange and from the tekmar acquisition.

We also generated $132 million in operating cash flow and approximately $105 million in free cash, which, as David previously mentioned, was 148% of net income.

Finally, looking at our 2013 financial outlook, as David mentioned we anticipate capital spending of approximately $40 million.

We'll retire $75 million in private placement debt coming due in May and we'll confer with our Board in Q1 regarding dividends and any improved share buyback program.

Our growth focus will center around leveraging North American residential recovery; emerging-market growth in Europe, Middle East, and in China.

We'll keep acquisitions on the radar in support of our core business as we consider non-organic growth opportunities.

And finally, as David talked about, as part of our review of our Lead Free transition plans, we do expect some possible one-time charges related to the foundry startup and transition productivity impact with select customers in the second quarter.

And now, I'll turn it back to David for final comments.

David?

Thanks, Dean.

In closing, as Dean mentioned, we believe we delivered a solid fourth quarter in a year where we've continued to build momentum after a disappointing start.

For the year, our Asia team delivered very solid results.

Our North America team improved its performance sequentially from Q1, while executing on a challenging leadfree conversion process, and our EMEA team worked diligently to negate some very strong macro headwinds and deliver a very respectable performance in 2012.

Looking ahead to 2013, the market dynamics are mixed, depending on the region and the end market, but we expect to deliver operating-profit growth through continuing emerging-market expansion, productivity and cost containment, and execution of our Lead Free strategy.

So with that, why don't we open up the line to your questions?

Pareeta, can you open the line, please?

(Operator Instructions).

Kevin Maczka, BB&T Capital Markets.

Good morning, Kevin.

First of all, I guess, I appreciate the additional color in the slides and the topline guidance for 2013.

My first question is on your North America guidance for 2013.

We were up organically about two points in 2012.

I'm just trying to gauge the level of conservatism here, if you will, on the low end of that low to mid single-digit range because the residential story, that data is well documented getting much better.

The LIRA data, which you mentioned on the call, is starting to look a lot better.

Is it the commercial side that's really holding you back there from maybe having even more robust growth plans for 2013?

Yes.

And [Ryan], what might help is to sort of put the numbers in context a little bit.

So I'm just going to talk about round numbers, but it may just help you do some math and sort of see how we ended up with our growth numbers.

So our North American business is about $700 million, round numbers.

So about 50% of that is commercial and about 10% of it is Canada.

And so, that leaves you with the US residential business of about $280 million.

Now given the softness of residential new construction over the last several years, if we assume that 70% to 80% of our residential business is repair/replace upgrade and 20% to 30% residential new construction, you can do some math around a 10%, 20%, 30% growth rate in residential new construction, and you'll start to see where we ended up with.

So, for example, based on those numbers, a 20% growth rate in residential new construction revenues in 2013 would be somewhere around 1.5 to 2.5 points of growth in our overall North American business.

So that's sort of the way to think about it.

Got it, very helpful.

In terms of margin on that, so if we do fall in this low to mid single-digit organic growth range with what you've done in your cost structure and your facility rationalization and you have further SG&A plans for this year, are we still looking at incrementals on the order of 35% here, based on what you've done on the cost side?

Well, what we've historically said is that when we get some volume, it should drop at about mid-30%s.

Okay, so no reason to think differently, then.

Okay.

No.

Then obviously, we'll have separate issues like Lead Free conversion and the choppiness there, but on the fall through, no.

And then, finally from me, segueing into the Lead Free, so you've got perhaps $2 million to $4 million of additional cost coming in Q2 with the foundry commissioning.

Is it fair to think that margins -- I know you maybe don't want to get into quarterly progressions here, but we kind of move sideways in Q4, and then we take a step back based on that $2 million to $4 million headwind in Q2.

Is that a fair way to think about the first half?

Yes, Kevin, hi, it's Dean.

So yes, I think it's fair.

Obviously as we size the impact in the second quarter, you know, we'll see the degradation of margin there.

But for the balance of the year, I think sort of a normalized run rate basis like we've seen in the second half in 2012 is probably reasonable.

Okay, thank you.

As you saw in 2012, first half, we had about 8.5% margins on an adjusted basis.

The second half was about 10.5%, on average.

Okay, I'll get back in queue.

Thank you.

Jeff Hammond, KeyBanc.

Hey, Jeff, good morning.

Hey, good morning.

So it sounds like -- if I'm doing the math right, it looks like you had an $8 million headwind, all in, for Lead Free in 2012 and that goes to $2 million to $4 million?

Of course, the headwinds are -- and the $2 million to $4 million we're trying to zero into the second quarter on, Jeff, yes.

So obviously the reasons, the drivers are different.

So last year, we were focused heavily on supplier audits to make sure they have the capabilities to meet our Lead Free requirements.

That took a lot of our sourcing capability.

Within our plants, we were running hundreds of PPAPs, which took away our manufacturing, engineering, and lean capabilities.

As we move into 2013, the drivers become different because we're bringing in inventory, which we're buying from third parties to create buffer for the transition.

We'll be ramping down our plants in terms of production of leaded product and there'll be some absorption issues.

And then as we transition, we'll be ramping back up where they'll be some absorption issues.

So while the numbers you have are right, the drivers are different.

Okay, and then I know there was the issue of putting through a price increase and how much of that where you going to be able to translate.

Do you have a better sense of how that plays out?

Do you see kind of a net positive there or is that a potential incremental headwind into 2013?

Jeff, our objective is to maintain our gross margin percentages as we switch to leadfree.

Obviously, a key impactor of that is competitive behavior, and the transition is most likely going to happen over the next several months.

We don't have a feel for that yet.

So we'll be working very hard to maintain our gross margins, and as you know, leadfree products have a significant cost premium.

Okay, so it sounds like this is a net tailwind into 2013, and then you apply the 35% incrementals?

Well, the 35% incrementals won't help us on any extra revenue associated with leadfree because that extra revenue will be to cover cost.

Okay, okay, that's helpful.

And then, just real quick, can you give us what your -- I think you gave us a little bit of a range, but maybe at the midpoint how you think -- what your housing start assumption is, in your numbers?

We're trying to be careful, and we're looking at probably another 20% lift in residential new construction.

Okay, great.

Thanks, guys.

Mike Halloran, Robert Baird.

Morning, Mike.

Hey, morning, guys.

So, just trying to close the loop on the leadfree side, any sense for how the competitor response has been?

You know, I know we've talked in the past about fragmented marketplace.

Some of the smaller competitors are likely going to have a more difficult time meeting these standards.

Any sense there of how many competitors have been able to move this forward and what that landscape looks like?

At this stage, Mike, the problem is we are -- we would have to answer that question based on second-, third-, fourth-hand news about people's intentions, and so it's difficult to put any facts around it, and so we really need to wait and see.

But we do know, because we've been working with various industry groupings, contractor groupings, wholesaler groupings, et cetera, with other manufacturers to educate the industry, we do know that just about all of the significant important players in the industry are working hard on this issue.

Now again, the other point I'd make is that this issue is a much bigger deal to us -- we've got $300 million of revenue affected -- than it would be to perhaps some other peers that you look at in the industry.

That makes sense, and then from a -- I know the foundry and the production comes on full bore starting about the third quarter this year.

Do you think demand commensurately comes in at that time as well or do you expect it to be a little bit more gradual as you work towards the first part of next year?

Well, we'll be coming up to speed early in the second quarter with our foundry and our new production processes for leadfree.

And we've built an inventory buffer which gives us some degrees of freedom in terms of when the actual transition happens.

So the way I describe it is our retail customers are transitioning as we speak.

Our C and B items, we've stopped production of leaded quantities, and we'll be transitioning late in the first, early in the second our As.

Our channel surveys tell us that our wholesale customers are looking at a transition in the second and third quarter.

So many of them turn their inventory 10 to 12 times, so they'll start with their C and B items in the second quarter and move to their As end of the second, into the third.

That's what we're hearing from our customers.

We're spending a lot of time with them so that we understand what they'd like to do and can support them.

And then, two real quick housekeeping items.

The interest expense, could you -- you have $75 million of debt rolling off.

What was the rate of that $75 million?

Then, also, how to think about the effective tax rate going forward from here?

Sure, so let me just start with the effective tax rate.

I think structurally, we're still in the 33%, 34% range.

I don't anticipates that structure will see a significant change in there.

We're still trying to work through what the structural impact of the change in Italy is, but for modeling purposes the 33% range is about right.

And in terms of the rolloff of the $75 million tranche, that's about a rate of about -- cost of debt of roughly 5%, 5.5%.

Great.

I appreciate the time, guys.

Thank you.

David Rose, Wedbush Securities.

Good morning, David.

Good morning, gentlemen.

A couple of follow-up questions on Lead Free.

Well, first of all, I was trying to understand the math behind the guidance as well, because there's an implication that you do have some price increase going in, and that you've talked about roughly it's a 15% headwind in costs.

And if you look at the guidance of 1.5% to 2.5% organic growth in the residential market for North American market, you're not including the price increase in that.

Is that clear?

When we talk about residential, correct.

Okay, so we would have to apply a price increase above that to get to sort of a nominal number?

Yes.

That's right.

Okay.

And then, if we can go back to some of the work that's being done in Europe, one of the initiatives you have is the ERP, and we've talked about this in terms of your plans, Dean, in terms of systems upgrades.

Can you provide us a little bit of color on the headwind from the ERP in Europe and what more we should expect in terms of potential headwinds and benefits?

I don't think, David, that you should expect to see any significant increase in spending in Europe on ERP.

I think we did Germany.

We're now planning to do the UK, but I don't think you'll see any uptick in cost spending.

Okay, and in North America, are there any other structural actions that need to be taken, that you need to do?

Most of our business in North America is already on a core ERP system, and so any changes are going to be incremental.

Okay, perfect.

Thank you very much.

I'll go back in the queue.

Thanks, David.

Jamie Sullivan, RBC Capital.

Hi, Jamie.

Hi, this is [Sid Brango] standing in for Jamie.

Hi, Sid.

Hi, good morning.

The first question was regarding trends in Europe.

Do you see Europe bottoming out at some point of time during 2013 or how do you see that happen -- proceeding?

Well, I think you raise two separate issues there.

The growth in our drains business is really driven by new products, a really great, great improvement in our funnel management process, and resultant share gain.

If we look at our European business in general, it's tough to call.

In the fourth quarter, we saw softening in France, which is an important market for us.

We had been seeing some very strong business coming through from our German OEMs.

That also softened in the fourth quarter.

And so, the way we're trying to look at it is, hey, let's expect some further softness as we go into 2013 and let's continue to work the strategy that helped us this year by trying to mitigate that by going after share in our core area, by going after growth in emerging markets, and by continuing to drive our drains business.

And so, when we put all those pieces together, we're suggesting flat in 2013.

Okay.

And with respect to trends in China, is that market improving there or what type of projects are happening there which are sort of -- or is there a market-share gain taking place, being the new player there?

How do you --

Our China business is really focused on plumbing and HVAC.

We're in the very, very early stages of establishing, as you said, a drains business in China.

And so, the impact of drains in China on our business there would be immaterial.

If we look at the Chinese market, we're seeing a little bit of firming over the last couple of months.

We're continuing to see growth further from the east coast in Tier 2, Tier 3 cities.

And so, when we put everything together, a growth rate in 2013 similar to what we saw in 2012 is our expectation.

Okay.

And just the last question on the North American wholesale versus residential.

Generally, is there a disproportionate impact on the leadfree transition on the wholesale channel sales as compared to the residential?

Or any other reason for the discrepancy between the growth rates between the two?

Between -- I think you're referring to the discrepancy between retail and wholesale.

Yes, yes.

No, there's no disproportionate effect of leadfree, but what we see happening is, slowly but surely, the impact of residential new construction is starting to feed through in our wholesale business, and we saw some progress as we came towards the end of the year, and we're feeling good about the rate of bookings that we're seeing in the early part of this year.

However, on the retail side, we see that business heavily driven by repair/replace/upgrade, and so it's a different dynamic.

Okay, that was all.

Thank you.

Hopefully that helps answer your question.

Yes, thank you.

Todd Vencil, Sterne, Agee.

Hi, Todd.

Hi, good morning.

(Multiple speakers).

Just a quick housekeeping question from me.

Can you tell us the amount of revenue in North America, the split between retail and wholesale?

So for the fourth quarter, if we just talk organically, retail is about $50 million and wholesale's about $155 million.

All right.

So then, okay, so you guys had been --

And that excludes foreign exchange and any (multiple speakers)

Yes, okay, I think that works.

Thanks a lot.

Jeff Hammond, KeyBanc.

Hey, guys, just a couple of quick follow-ups here.

How should we think about the margin trajectory in Asia?

You know, you've been putting up pretty healthy returns.

I know you kind of adjust for transfer pricing over time, but how should we think about the margins there?

While the biggest driver of the margins in Asia are obviously the fact that we've got a mix of trade business and then we've got a very significant intercompany business where the revenue nets out.

And so, I think you should look for consistency.

Yes, we've seen some fairly strong sequential improvement in Asia, about 50 basis points sequentially and about 120 basis points on a year-over-year basis.

I think that starts to level off as the growth levels off.

But as David pointed out, there is a big intercompany part of that business, as well as a trade business that's (multiple speakers)

But you ran around 30% margins in that business.

That should hold?

Yes, on a trade basis, yes.

And again, bear in mind that the intercompany elimination has a big impact on that.

Right, right, okay.

On that basis, yes.

And then, how should we think of corporate expense on a full-year basis in 2013?

I don't think there's any big change.

It'll be roughly 2% of revenue.

Okay, and I think you mentioned in your prepared remarks, you know, bolt-on acquisitions.

Can you just talk about the pipeline and anything?

There's been a couple of properties out there of size that have been mentioned that may be a fit.

But maybe just talk about what you're seeing in the pipeline and what your appetite would be on a larger-type deal.

As you know, to date the two largest acquisitions that we've done were Socla and BLUCHER.

We do continue to keep our eyes open for strategically appropriate larger properties, and if you look at our capital structure, cash on hand, et cetera, we've got a lot of degrees of freedom to go north of the size associated with BLUCHER and Socla.

In terms of the environment, you know, there is some -- there's a lot of interesting properties out there, and our challenge is to really zero in on those that fit with our strategy and will help propel us forward.

And we're also being very, very cautious in terms of what we pay for those deals so that we can ensure a solid return.

Beyond that, there's not a lot more I can say.

So if you take the properties that you think fit strategically or are at least within the ballpark, I mean, is that still a healthy pipeline or does that narrow it down quite a bit?

It does narrow it down quite a bit.

Obviously, if we were interested in significantly expanding our portfolio into other areas of the building industry or of the water industry, there's quite a few properties out there.

But we want to remain pretty close to our core.

We're certainly open to step-outs, but not leap-outs, if I could use that phrase.

So as you think about it that way, that certainly helps you separate the wheat from the chaff, and there's a smaller universe as a result.

Okay.

Thanks, guys.

Thank you.

Garik Shmois, Longbow Research.

Garik, good morning.

Hi, good morning.

Thank you.

I might have missed this, but I was wondering if you could provide how much of the retail growth in North America was driven by organic growth versus restocking in the channel?

I think it's going to be predominantly organic growth.

Okay.

And you did mention that retail was a little bit ahead of wholesale with respect to taking on leadfree product.

Was there any pricing benefit in the fourth quarter as a result of the favorable mix there?

No, not in retail.

There (multiple speakers) no favorable pricing benefit.

And again, remember, Garik, the strategy is to maintain our margins.

Yes, yes, no, understood.

Thank you so much.

Jim Young, [Gabriello].

Hi, good morning.

Hey, Jim, how are you?

Good.

I'm looking forward to see you guys next week.

Likewise.

David, you mentioned about the ABI Index being positive for most of last year, and that typically is a leading indicator for your commercial construction.

Could you talk more about how you see that dynamic unfolding?

And when would that kind of start improving your commercial construction business?

Well, if we go back in history, Jim, typically ABI is a 12-month leading indicator, and so, from that perspective, we were looking carefully to see what that would mean.

We've now had eight months of pretty solid ABI numbers.

So as we look at our funnel of management activities, one of the things we're hearing is that there's a lot of jobs coming off architects' drawing desks, but there's still an awful lot of caution around financing those jobs.

Okay.

So the sort of historical trends may not play out because of the constraints for financing of commercial buildings.

So it's really been the financing issue.

Is it because investors are still kind of cautious in terms of funding into the market?

We're not experts in this area, Jim.

We'll just give you our view, but our view is that there are jobs on the drawing board, they're coming off the drawing board, the developers are looking for financial market support, loans.

And that lending activity is still pretty rigorous, time consuming, and there's a distinct break between the jobs that come off the drawing board and come through the financing process.

If some of these projects do proceed, where would you see it first in your business?

Would you see it in certain areas or in product lines?

What we're attempting to do is to follow the commercial marketplace by key vertical, and so some of the verticals that we're looking hardest at would be, for example, the hotel industry.

As we dice and slice our vertical markets, we're seeing a lot of architectural work going on in the hotel industry.

That is an opportunity, a rich opportunity, for us.

The way to think about it is, if there's a lot of activity going on in distribution centers, for example, and a lot of activity going on in hotels, the more people-intensive a building is, the more opportunity there is for us.

Right, okay.

Great, okay.

Thank you so much.

(Operator Instructions).

Stewart Scharf, S&P Capital.

Good morning.

Thank you.

Good morning.

Based on your geography and product line, where do you see shift over the next, say, three to five years?

There's a lot of opportunity, I think, in drains and re-use, and that's a small part of your business, water quality.

And of course, in Asia it's only 2% now, and in emerging markets.

Where do you see the largest change over the next few years?

If we try to break it into two areas, first of all, from a geographic perspective, we obviously are seeing the emerging markets that we're targeting growing faster than our core markets of western Europe and North America.

So the three geographies that we're focused on would be central and eastern Europe, Middle East, and China.

And as we start to see significant progress there, then we'll turn our attention to the next tier of geographies where we're doing some seeding at the moment.

So the first area would be -- on the geography side would be emerging markets.

If we switch to products, the markets that our drains business, which you refer to, are tied to is really commercial construction, and I think it's fair to say that as you look at North America and Europe, commercial construction hasn't come back yet.

And so, that business is going to be heavily tied to the rebound in commercial.

So in the near term, the products where we see significant growth in would have those tied to residential new construction.

And then, beyond that, we've been driving our innovation machine to start to ramp up the introduction of new products, and over the last couple of quarters, we've introduced some and we are hopeful that they'll have impact.

So that's maybe the best way I could answer the question.

Broadly, I'd just add to that, from a secular basis, energy products that support energy efficiency and water conservation, I think as you talk about a longer-term trend, will continue to be pre-eminent and prominent in the growth rates amongst the regions that David talked about.

Okay, thank you very much.

Thank you.

Jamie Sullivan, RBC Capital Markets.

Hi, this is Sid, just a follow-up.

In terms of margin trends from North America and Europe, could you provide some color on that for 2013 and in the quarter?

We're not going to guide forward.

I think as we talked about earlier, Europe is going to be challenged.

We anticipate that.

As you can see, we did see some price stickiness in Europe that offset some of the organic declines.

We're focused on emerging markets, and I think as you think about the continued expansion of the drains business, that's sort of a product mix profile that suggests that margins should be relatively stable to the extent that volume holds.

I'll just be careful with my comments in North America.

I think you've seen that on a relative basis when you look at sort of gross margins, notwithstanding the shift mix to retail, they held their margins.

They were only down on a sequential basis 20 basis points and year over year about 160 basis points, despite the fact that retail was up 7% in the year.

But as the broader market expands and the higher-margin wholesale market starts to recover, I would expect those margins to be stable as well.

Okay, thank you very much.

Thank you for your question.

We have no question now, so I would like to turn the call over to David Coghlan for closing remarks.

Please proceed.

Thanks, Pareeta.

In closing, I'd just like to thank all of you for taking the time to join us today.

We very much appreciate your continued interest in Watts Water.

We thought there were some great questions today and we appreciate that interest.

And we look forward to speaking to again during our first-quarter earnings call, which we've scheduled for early May, so look forward to chatting then.

Thanks, everybody.

Thank you, ladies and gentlemen, for your participation in today's conference call.

This concludes the presentation.

You may now disconnect and have a good day.