Watts Water Technologies Inc (WTS) 2013 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q1 2013 Watts Water Technologies earnings conference call.

My name is Alex and I will be your operator for today.

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

We will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions)

Please be aware that remarks made during today's conference call about the Company's future expectations, plans and prospects constitute forward-looking statements under the Private Securities Litigations 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 and the Company's annual report on form 10K for the year ending December 31, 2012 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 on at as representing its views as of any future date.

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

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

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

A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release dated Tuesday, 30 April, 2013 relating to the Company's first quarter 2013 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 releases.

And now I'd like to turn the call over to David Coghlan, Chief Executive Officer.

Go ahead please, Sir.

Thanks Alex.

And good morning everyone in place for joining our first-quarter earnings call.

I'll start by providing you a brief overview of the quarter, then will go on and give you our latest new on market dynamics in each of our geographies and a sense of where we see those markets trending as we move further into 2013.

Finally, I'll update our high-level view on how we see our segments performing as 2013 proceeds.

And then I'll hand the call over to Dean Freeman to review our financial performance in more detail.

After Dean's discussion, I'll try and summarize, and then we will open the call up for your questions.

So let me start with an overview of the quarter as you'll see highlighted on Slide 2 of the presentation we posted on our website last night.

Consolidated sales in the first quarter were fairly flat with the previous year, with increases in North America and Asia being offset by a sales reduction in AMEA.

We delivered an adjusted operating margin of 8.4%, are 50-basis points higher than our first quarter 2012 performance.

And our adjusted Earnings per Share of $0.49 was approximately 14% ahead of Q1 last year.

The net effect of last year's share buyback program was $0.02 accretive to this year's adjusted Earnings per Share.

Dean will provide more color on our results in a moment.

If you recall during our February conference call, we talked about the risk that deteriorating market conditions in Europe could extend affecting markets which have held up for us well to date.

Unfortunately that seems to have occurred in Q1.

Southern Europe continues to be affected by eroding markets.

However, we saw France slow down significantly in the first quarter and we also encountered some market softness and delays in shipments to some key OEM customers in Germany during the latter part of the quarter.

However, our Drains business in Europe continues to do well and we continued to see solid growth in developing markets, such as the Middle East.

However, those gains were more than offset by softness elsewhere.

As a result of the drop in volumes in the first quarter, EMEA's adjusted operating margins declined by 60 bps compared to last year's first quarter.

In North America after a slow January, we saw orders and sales pick up as the quarter progressed, driven primarily by the wholesale channel.

Overall our sales growth in North America was in line with the expectations we provided you in February.

With the added sales volume, and solid cost controls enacted by the North America team, we were able to drive up our adjusted operating margins versus last year.

One headwind we did encounter in North America in the first quarter was pricing pressure in the retail channel and to a lesser extent in our Wholesale business, which served to restrict further operating margin expansion in the quarter.

Our DIY customers are being very aggressive in line reviews at the moment and we saw a more challenging competitive environment in certain regions within our wholesale channel.

We also experience cost from our lead free transition program of approximately $600,000 in the first quarter, related principally to labor inefficiencies as our factories began the lead free condition.

These costs are part of the $2 million to $4 million in anticipated first-half costs we provided to you previously.

We believe remaining lead free related costs will be in the $2 million to $3 million range, with the bulk of these costs expected to be incurred in the second quarter.

Operationally, our new lead free foundry has started its initial trial production runs with expectations that we'll be up and running at normal capacity early in Q3.

We have seized production of leaded C and B inventory items as planned and A production is currently coming to an end.

From a customer perspective, we continue to work hard on the education process and on making their transitions as smooth as possible.

In Asia, we continued to build out our plumbing and HVAC capabilities and to broaden our market coverage.

The overall China economic environment remains positive and our Intercompany business is stronger during the quarter which helped with plant absorption.

The end result is that our Asia team delivered another strong quarterly performance.

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

Let me first talk about EMEA.

As I mentioned earlier, the macro headwinds in Europe have increased and affected our Business more deeply in the first quarter than expected.

We estimate French wholesale markets were down 10% to 15% in the first quarter due to a softening economy.

We also saw a slowdown in our German business; partially the result of a softening economy and partially due to weather related delays with some key OEM customers.

As you know, this was Europe's worst winter in 50 years and project work was affected across a number of countries.

Italy continues to be depressed and the political instability there in the first quarter served to create even more uncertainty.

We do expect that our Drains business will continue strong and emerging markets like the Middle East should continue on the growth path.

But overall, I think our market Outlook for Europe is now less positive than the flat growth we had projected at the beginning of the year.

Let's now look at North America.

We see the same trends today in North America as we discussed in February.

Residential new construction is trending up, existing home sales will be steady, and the residential repair and replacement business, as tracked by the LIRA index remains positive.

We have not yet seen a pickup in our commercial end markets and we see others sharing that same view.

We realized the ABI index has been in positive territory for the last eight consecutive months, so we are hopeful that a commercial construction uptick may occur at some point later in 2013.

But just when it may affect our top line, is hard to gauge.

Finally, let's discuss Asia.

China GDP was up 7.7% year over year in the first quarter.

So the overall economy continues to grow steadily.

We are focused on bringing to bear our worldwide capabilities on the Chinese market, where high-end construction engineers and contractors are interested in European and US technologies, and where consumers are increasingly focused on ensuring 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.

And we are expanding our sales footprint into Tier 2 and Tier 3 cities within the country.

So we expect to maintain our momentum in the China market as the year progresses.

And we are also working on some nice opportunities for growth elsewhere in Asia.

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

For EMEA I think we've laid out the challenges there already and we will certainly endeavor to mitigate the downward market pressures were possible.

However, our current Outlook suggests that we'll experience a 2% to 5% decline in sales for the full year of 2013 at constant FX rates.

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

As we mentioned earlier, we are still not anticipating commercial construction to provide any tailwind in the near future.

As a result, we continue to expect core business growth for all of 2013 in the 2% to 5% range.

And we estimate that the effect of expected lead free sales may provide an incremental 1% to 2% to our total North American sales for the year.

Given our solid start in Asia this year, and our expectations that the team will continued to execute well on its sales plans, we have recalibrated our growth expectations up to 20% to 25% growth for the full year.

I've already provided the latest update on cost and timing regarding the lead free program.

As I mentioned we do expect incremental costs in the $2 million to $3 million range in Q2 and suffice to say the project continues as a major initiative for our North American business for the balance of the year.

In response to all our revolving view of the year, we are now planning to accelerate certain operating footprints consolidation programs and SG&A improvements throughout the Company that we had been contemplating.

We also expect to initiate a realignment of our operations to further improve efficiencies where possible.

Those plans have yet to be fully vetted and will require approval by the Board of Directors and other outside agencies prior to implementation.

And so we will keep you informed as these plans progress.

Finally, I wanted to give you an update on our cash allocation priorities.

First, we will retire $75 million of private placement notes in mid May, and we expect to use existing cash to complete this transaction.

Second, our board has approved a $90 million share repurchase program that we expect to execute over the next 2 to 3 years.

The purpose of this program would be to buy back the expected leakage from our various employee option programs.

And we expect to spend approximately $22 million during the remainder of 2013 to buy back stock.

Finally, the board authorized a dividend increase of $0.02 per share to $0.13 per share effective in the second quarter.

Incremental annual spend for this increase will approximate $2.8 million.

This increase, along with the share repurchase program, will provide additional returns to our shareholders.

Let me turn it over to Dean now full will provide you with more insight into our operating performance in the first quarter.

Thanks David and good morning everyone.

I'll keep my comments brief, and I'll apologize in advance if I repeat some of the comments that David made, but I will try to add some color.

So on a consolidated basis, organic revenue was flat, with North America up organically 2.6% offset with EMEA's decline of 5.5%, as David talked about, Asia having another very strong quarter with organic trade sales up 34%.

We had a very slow January in North America despite the fact that it saw an increase of 3% organically in its Wholesale business and OEM channel.

Retail was up slightly less than 1%.

And I would say that we did see an acceleration of growth in wholesale for the quarter as March was up nearly 6% versus the prior year.

As David pointed out, Europe's economic decline was largely driven by continued economic malaise, particularly in France.

France's overall regional market were down about 10% to 15%, with our sales affected on the lower end of that range and declines in Germany driven by OEM project delays largely in the month of March.

Overall, Europe saw declines across all major channels.

Just talking about the margins for a moment.

Year-over-year consolidated gross margin was essentially flat at 35.7% versus prior year.

As EMEA volume declines, price challenges in North America in retail and wholesale, and product mix in North America, the EMEA were offset with productivity gains.

Our gross margin was also impacted by approximately $600,000 of lead free conversion-related inefficiency costs in the current quarter.

We now expect the lead free conversion costs impact to be $2 million to $3 million for the remainder of the year, again, as we talked about last time, primarily in the second quarter.

Adjusted gross margins -- excuse me, adjusted operating margin was up 50-basis points to 8.4% of revenue to $30.5 million or 7.4% increase versus prior year, with the bulk of that coming from volume and lower SG&A in North America, as well as strong year-over-year growth income growth in Asia, all offsetting the decline in Europe.

In increases in our year-over-year corporate expense related to certain legal cost, increase stock and incentive compensation accruals and other personnel related costs in the quarter.

Our effective tax rate on GAAP basis was 27.8%, essentially flat with the prior year GAAP tax rate of 28%.

Last year's lower effective tax rate was driven by certain one-off reserve releases, whereas this year we experienced a lower effective tax rate than our normalized structure rate of about 32%, largely due to earnings mix intra Europe and in China.

David talked about looking at our adjusted EPS from continued operations of $0.49.

This was $0.06 versus prior year with overall earnings increase of close to 11%.

The net effect of the dilution related to our 2012 share repurchase program positively affected EPS by $0.02.

Turning to slide 10.

Just looking at working capital, the entirety of the working capital increase was driven by inventories to support the lead free transition in the balance of the year.

We ended the quarter with $251 million in cash.

In overall, let me just make a couple of comments regarding the outlook that David talked about.

So if you look at the balance of the year, we expect relatively stable to continued organic sales growth North America of 2% to 2.5%, and again, as David talked about, that's largely relying on the recovery of the residential construction market and we made no assumptions regarding the commercial end markets.

And again as David talked about another 1% to 2% of incremental growth due to what we anticipate and estimate to be a lead free pricing.

Asia will continue to be a consistent performer and we believe that while Europe had an unusual sharp drop-off in revenues in Q1, and there continues to be uncertainty, we do see potential for sales declines to moderate for the balance of the year.

We believe the announced cash returned to shareholders, the debt pay down in capital spending represent our continued balanced and disciplined cash allocation strategy.

And finally, as David pointed out, we will be updating you on our next call on the acceleration of improved regional restructuring realignment initiatives currently under review.

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

Okay Dean thank you.

So let me try and summarize.

During the quarter we gained momentum in the North American wholesale market, our key lead free project continued on track, and Asia performed above expectations.

North America and EMEA controlled operating costs well, but margins were impacted by volume reductions in EMEA and by some pricing and mix issues in North America and EMEA.

Looking forward we expect the market in EMEA to remain soft as the year progresses and we expect to begin and/or accelerate various worldwide initiatives to right size our cost structure and improve our performance going forward.

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

Alex would you mind opening up the lines please?

(Operator Instructions)

Kevin Maczka from [BPST] Capital Markets.

Thanks, good morning.

I'd like to ask a couple of margin questions.

First in North America, Q1 last year was especially hard hit on lead free.

We dipped down just below 10% and then snapped back and were above 13% in the second half, I think the expectation wasn't that we would be higher sequentially in Q1, but that maybe that Q1 set such an easy comp, if you will, that we might be better then 11.4%.

Is pricing the biggest issue here?

Was that the Delta, do you think, in terms of your own internal expectations?

Yes Kevin.

If we think about the first quarter last year, you'll recall on the gross margin line we talked about a $2 million hit because of preproduction runs of lead free, and obviously that was reduced.

We had about a $600,000 lead free impact in the first quarter this year.

And so a net benefit, if you like, of 1.4.

As we've also talked about during the year, we started last year with a $2 million surprise due to non-commodity cost inflation.

And we worked throughout the year to mitigate that and to push the water back behind the dam, so to speak.

And we succeeded in that.

So the main Delta, as you mentioned, is price.

Let me just talk about that for a second if I may.

During our comments, we referred to two pricing issues.

The first one relates to our DIY business.

Our two largest DIY customers have been particularly aggressive in line reviews over the last 12 months, and that intensity has continued to pickup, and that has affected pricing in that channel.

And then on the wholesale side, we saw some competitive dynamics in a couple of regions across the South which hurt us.

So, on the retail side we are working hard to drive productivity to offset those price declines.

And on the wholesale side, we will have some price increases coming out, in fact they went out in April.

So, we should see some benefits from that accrue over time.

Kevin this is Dean.

We also, to just add to David's comment, we also had an unusually high lower margins mix shift in our Wholesale business in the first quarter.

As you think about sort of new construction and the product mix in new construction versus repair replace, not that there's a huge margin differential there, but we did see a fairly dramatic increase in our backflow preventers versus our Drains business.

And that created some mix headwinds as well.

Then we also have lower margin items like PEX, which is a plastic alternative to copper pipe, which had been growing rapidly.

So mix is smaller, but another factor.

So if I try to summarize all that--I know you don't like to quantify margin sequentially quarter by quarter, but, going forward into Q2 we've got some moving parts on price where you take some increases in wholesale, but maybe some of these line reviews will be further pressures.

And then you've got the incremental lead free cost hitting.

So, should we be thinking that margins maybe are down sequentially in Q2, or is that not the way to think about it?

You know I think we want to be careful about guiding forward but really, the big driver in the margin in the out years is going to be the improvement in the top line, the revenue growth.

I think the dynamic on lead free will obviously have an impact that will be incremental in terms of the dollar margin.

But from a percentage basis, from our perspective, we don't see a dramatic structural change in what we've seen in the past.

Okay and then maybe if I squeeze one more in.

On Europe, on margin, it looks like if I just annualized the Q1 revenue run rate that puts us in your guidance range for the year on the top line.

We just did about a 9% margin at that rate so is that kind of a sustainable rate we ought to be thinking about for Europe given the top line pressures that we have here?

Yes, I think that's right.

But bear in mind that we are planning some response actions on a global basis as we seek to improve and right size our footprint.

Okay.

Okay thank you.

Thanks Kevin.

Garik Shmois, Longbow Research

Good morning, Garik.

Hi, Thank you.

Hoping that you could provide a little bit more color on the lead free rollout.

Previously you been indicating it's more of a Q2, Q3 transition with respect to customers.

Just wondering if anything has changed over the last quarter.

If you're seeing customers starting to take on inventory here early in the second quarter or if you think this might be a little bit more weighted towards the back half of the year now?

No, I think the conversion period of Q2 to Q3 is still right.

Remember, the way this rolls out is that after December 31, a contractor, a maintenance engineer cannot use a leaded product.

So the wholesalers and retailers are anxious to transition their inventory well in time so they're not caught with any leaded product.

So Q2, Q3 is still the transition period and nothing's changed from that perspective.

If anything, in the near-term, we are seeing our wholesale customers be much more prudent in terms of their order patterns.

So they are certainly being very cautious about inventory and just ordering what they need to make it easier to go through the transition.

Okay.

Thank you.

And then just a follow-up question on some of the pricing issues that you cited in the first quarter in your accounts for an April price increase.

Just wondered what gives you the confidence that you be able to get some of this pricing at this point in time?

Raw material costs have pulled back.

What are you seeing in the marketplace on the pricing side in, number one, that gives you confidence on the increase.

And secondly maybe if you could expand a little bit on some of the pricing pressure that you did see, you mentioned its regional, is there a risk with lower raw material costs some of these items pricing pressure might accelerate beyond the South.

Let's talk about it by the various channels.

Let me start it, if I may, by retail.

If you look at the day-to-day strategies of some of the big players in DIY, there's been an evolution in those strategies.

And now you've got the two biggest players who are very aggressive on line reviews.

And that certainly affected suppliers to that industry.

We've been hurt by that.

One of the things that will benefit us is that if you look at copper, copper has come down over the last quarter and so we certainly hope that reduced copper prices will help to relieve some of that pressure.

And we are also putting a lot of focus on productivity around those products.

But can I expect that the pricing challenges in DIY will lighten up?

No.

The two main players in that industry are aggressively rolling line reviews across a lot of their categories.

If we switch to wholesale, I think there's some local dynamics in play.

And we've been responding to protect our market share position.

I think as the industry moves forward and starts focusing on the lead free transition, all of us will be faced with significantly higher costs.

And our expectation is that the prudent players in the market will act accordingly to deal with that.

Okay and then one last follow-up on that.

You mentioned previously with the lead free transition you are expecting to maintain gross margin percentages on the new products.

Anything change in that outlook after the first quarter?

We are obviously watching it very carefully, but is still too early to have a clear view.

And so we will start to see that as we progress through Q2 and Q3.

But you know we are working hard to make sure that we maintain our margins through that transition.

Okay -- thanks so much.

Jeff Hammond, KeyBanc Markets.

Good morning Jeff.

Hi, good morning guys.

You mentioned in the prepared remarks the trend in North America wholesale and the nice March.

Can you give us a sense of trend into April?

Has that continued?

And then similarly, in Germany, I think you talked about some delays is that kind of aberration in timing or is that a function of demand weakness?

Okay let me deal with each of them in sequence.

If we look at North America, January was a soft month and we saw a lot of our peers describe it similarly.

There were weather issues, there were a bunch of different things.

But it progressed nicely during the quarter and we ended the quarter with some nice solid mid-digit growth.

As we move forward into April, we are seeing some solid orders continue.

But I will say, Jeff, we mentioned two countervailing trends.

We're continuing to see a nice increase due to resi new construction, but as we move mirrored the lead free transition point, it's natural that wholesalers are going to be cautious about laying in inventory.

So they're going to live hand to mouth until that transition is done.

So you've got two slight countervailing trends there that we'll be living through for the next couple of months.

But, we still are very encouraged by the continued increase in resi new construction.

As you know doubt saw, the latest forecasts are saying about a 25% increase in resi new construction for the year.

Were also encouraged by the 5% or so increase in existing home sales projected for the year.

So that continues to point to a gradual improvement in the markets.

And we continue to keep our finger crossed -- fingers crossed that the ABI index will convert into a commercial recovery later in the year.

Switching to Europe, I mentioned that the winter in Europe was the worst for 50 years.

And so a lot of project related work was delayed because of snow, because of freezing temperatures et cetera.

Dean mentioned that we expect our European sales decline to moderate as the year goes on.

But there's an awful lot of moving pieces in Europe.

So, we certainly are hopeful that the sales decline we experienced in Germany will moderate.

But we continue to watch the macro economics in France with concern.

Okay and then just kind of back to margin trajectory.

I guess best case you get some of this pricing through and you get lower copper.

When do you start to see lower copper coming through?

Copper has been declining since the beginning of the year.

Traditionally, given the length of our supply chain, we typically talk about a quarter lag.

As we head into the second quarter, lets say midway into the second quarter we should be seeing some relief.

So if you get this pricing is and you get some of the copper deflation in the margins should lift nicely into the second half of the year.

The other thing from a dollar perspective is that the lead free transition will be taking hold as we move through to the end of the second quarter into the third quarter.

Okay, thanks guys.

Thanks Jeff.

Ryan Connors, Janney Montgomery Scott.

Hi, Ryan, how are you?

I'm well, thank you.

I had a question on--some of your competitors have been kind of making a lot of noise about market share shifts and making market share gains and specific product lines.

And I'm curious what your thought is on that?

I do not hear you mention market share a lot in this discussion one way or the other.

So, curious what your thoughts or reaction is to those types of comments, and whether you think it might be playing a role on some level in the pricing issue to the extent that it exists on the wholesale side?

Ryan, without being privy to the comments that you are seeing, you've got one up on me there.

The thing that I would say is that the areas where we see pockets of growth, such as resi new construction, we are focused intensely on those areas and we are working hard to make sure we get our fair share of that growth.

And then, when it comes to the pockets of -- of defense, if you like, where we've got what we believe is a solid market position.

We are working hard to make sure we defend.

And so, I mention the pricing pressures we saw in some regions of the country in wholesale, and those are areas where people have been attempting to make some movements, if you like, and we've responded.

Okay.

You don't feel that there is any, from a technology and product standpoint, you don't feel like there's any areas where you're deficient and playing catch up in terms of the solution itself?

Look at any good sales team, any good marketing team, is going to point to a new product rollout and really focus on the fundamental features set -- benefit set of those new products.

If we look at the products that form the heart of our portfolio, have there been any technology breakthroughs which changed the game?

No.

Are our competitors rolling out evolutions?

Yes.

Are we rolling out evolutions?

Yes.

And so, it comes down to incremental improvements in product sets, but no fundamental breakthroughs.

So that's the way we are looking at it, and I look with interest to the competitors that you're talking about to see what they're saying and what they're doing.

That's the way we are seeing that.

Okay.

And then kind of a one off, but there was a pretty big announcement during the quarter that a major player in the space was effectively on the block.

Referring to Zurn.

And then there was really no follow through there, and so everyone is left wondering what's happening to that pretty significant asset in the space.

I wonder if you had given us any color from your perspective as a peer there in, I guess, twofold?

Number one, were you involved or are you involved in that process in any way that you're able to comment on.

Even just to editorialize.

And then B, has there been any impact on the underlying business as they are in the left hanging in the balance in that uncertainty?

Gee, Ryan that's a question I really can't comment on.

I do know that the Rexnord earnings call is coming up in a couple days, and it might be a better place to ask it there.

Okay, well I appreciate it.

Thank you

(Operator Instructions)

Jamie Sullivan, RBC Capital.

Morning, Jamie.

Hi this is [Vikbanda] standing in for Jamie, good morning

Good morning, how are you?

My first question is on China and just could you provide some commentary on the sales?

And particularly the margin [transferred]?

You said the margin was 40%, pretty high, it seems, this quarter.

Just some idea what was going on there?

Remember one of the things that you have to bear in mind in looking at our Asia business is that we've got a significant inter Company business which gets eliminated on the top line but provides some nice tail winds to the margin line.

And so if we look at the ships and margin during the quarter, as we finished up our inventory ramp for lead free and for the transition, there was some nice absorption gains in our Chinese factories as they helped us with that ramp up.

And so, that certainly provided some nice tailwinds from an overall margin perspective.

They've been benefiting from, obviously, the volume increases that we talked about.

I think they're on their third sequential quarter of revenue growth over 20%, and as we talked about this quarter over 30%.

They are just as focused as any of our other regions with regard to productivity, so all those things have been big contributors to the margin, as well as the comments that David made

Then if you switch to the other part of your question on Asia, which is the growth side.

Look, you know the Chinese economy, while it has moderated its growth, it's still growing at 7 1/2%.

A level of growth we would love to see replicated in many other parts of the world.

And so, we are obviously taking advantage of that.

Growth is extending from Tier1 into Tier 2 and Tier 3 cities.

And we've been building our capabilities to participate in that broadening growth.

And last but not least, we've identified some very attractive opportunities to gain share by participating in some macro trends within China where the high end architects, engineers, and contractors are increasingly interested in using Western green technology and where consumers are looking for improved comfort and safety.

And so our Western technology leveraged into China is allowing us to take share in the plumbing and heating segment.

Thank you.

The next question I had was on--you used to provide in the call the break out between wholesales and OEM sales for Europe and US.

Could you do that for the quarter?

We are just putting the numbers together.

I think overall at a high level, while Dean is just zeroing in on the specific answer to your question, it's pretty much the same right?

So we are looking at about 60% of our business being in wholesale approximately on a global basis.

Okay.

Okay that's all.

Stuart Shwiff from S&P Capital IQ.

Good morning, thank you.

Could you explain a little bit more about the timing of the lead free conversion.

You were ahead of the curve in ramping up, trying to get ready for 2014.

And in hindsight, based on customer inventories, or as you're getting closer to that do you feel that it was right decision based on your competitors and their position on the timing of converting to lead free?

And where you stand when you started that.

Do you feel looking back you made the right decision at the time?

I think maybe the way you answer that is to say that we made a slightly different decision based on our manufacturing strategy versus some of our peers manufacturing strategies.

So, as I look across the industry, we decided to invest in a dedicated lead free foundry and machining assembly lines in North America, and obviously that required significant CapEx investment and a significant time commitment to get it up and running.

Some of our competitors outsourced castings and machining and some of them have decided to do it in a mixed model line fashion, where they'll pour, machine and assemble leaded and lead free in the same process.

So I would argue that our strategy is different.

I'm not going to comment on whether it's better or worse, it's different.

In terms of timing, the law sets the ultimate constraint which is December 31, 2014.

The law also sets a high bar for our customers, in that previous transitions allowed them to work through existing inventories and transition as those inventories ran out.

This law requires them to stop selling by a certain date, and there's very little they can do with any leaded inventory that remains.

So we simply work back from December 31.

We spent a lot of time talking to our customers and based on their input, concluded that they were likely to shift in Q2 and Q3.

And that's still what we expect to happen.

So were those decisions correct or incorrect?

We still believe the market will transition in Q2 and Q3, and we believe we will be ready to support that transition.

Okay just on Asia, with strength there.

Do you have a target with lyour percentage of sales to grow to?

Our target is to grow double-digit in Asia, and what were saying for the rest of this year is we expect to lift our sales up 20% to 25%.

Okay.

Thank you very much.

You're welcome.

We have no further questions in the queue.

At this time I would like to turn the call back to David for closing remarks.

Okay, thanks everybody for joining and thanks again for your continued interest in Watts Water.

We appreciate you taking the time to join our call today.

And we look forward to speaking with you again during our Q2 earnings call in late July.

All the best.

Thank you for participating in today's conference, this concludes your presentation.

You may now disconnect, good day.

(End of Transcript)