Watts Water Technologies Inc (WTS) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the 2014 Watts Water Technologies earnings conference call.

Please be aware that remarks made during today's call about the Company's future expectations, plans and prospects constitute 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 ending December 31, 2013, and all reports that 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 those 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 accordance with generally accepted accounting principles.

In reconciliation of the non GAAP financial measures to the most directly comparable GAAP measures is available in the press release dated Tuesday, April 29, 2014, relating to the Company's first quarter 2014 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.

I would like to turn the call over to Dean Freeman, Chief Executive Officer and Chief Financial Officer.

Thank you, Operator, and good morning everyone.

Joining me today is Tim MacPhee, our VP, Treasurer and Head of Investor Relations; and Ken Lepage, Chief Legal and Administrative Officer.

I'm going to give you an overview of our Q1.

We'll start with our latest view of the market dynamics, give you a sense of where those markets are going, give you an update on how we see the segment sells performance of 2014 and how that looks moving forward.

I'll hand the call over to Tim who will give us a detailed financial review.

And when Tim finishes up, I'll just summarize for you all.

So let me just start off with slide 3 and say, you know, we were generally pleased with the quarter.

While we didn't see the revenue growth we expected, we saw solid margin expansion in both the Americas and EMEA, and on a consolidated margin flow through of over 40% on the incremental revenues.

We're also pleased with the rate of order growth that all regions reported as we exited the quarter.

I'll talk a little bit more about that in detail.

Our consolidated sales in the first quarter were up about 2% but organically were essentially flat with the previous year.

Modest increases in Americas and Asia Pacific was offset by organic sales reduction in EMEA.

We delivered an adjusted operating margin in Q1 of 9.2% or 60 basis points higher than prior year, and our adjusted EPS was $0.55 or 10% ahead of last year.

Despite the volume decline in EMEA, the segment saw margin expansion of 70 basis points.

Tim will provide a little bit more color on that.

Not surprisingly, our sales growth was impacted in part on the Americas do to weather-related delays in the quarter as order fulfillment was less than anticipated.

We estimate the impact is approximately 200 basis points in the quarter as a result.

We saw orders and sales pick up as the quarter progressed driven primarily by wholesale.

And orders in the Americas increase 7% in the month of March versus prior year.

So we expect the shipment delays that happened in Q1 to shift in Q2.

We're also encouraged by what we're seeing in terms of order rates in the month of April.

I'll cover that in a follow on section, but across all regions we're seeing continued strength in our order rates and hence the following shipments.

Adjusted margins to the Americas improved 70 basis points led largely by improvements in operational like execution, absorption, product mix, material cost productivity.

About 30 basis points of the improvement was due to the elimination of lead-free transition costs this quarter versus last year in the same quarter.

There was a one-off charge in the quarter that Tim will speak to later that reduced the Americas adjusted margins by about 55 basis points.

So overall we were pleased to see the foundry operations specifically, and the Americas operations in general, improve performance in the quarter.

However, we continue to experience mechanical equipment disruption in the second quarter beginning here in April in the foundry that may preclude us from achieving our targeted productivity performance in the first half of the year.

I'll speak to that issue in a minute.

Finally, we took a couple of sizable charges during the quarter related to restructuring in the Americas and the transformation effort we talked about in the past in EMEA.

So let me just talk on slide 4 about the Americas.

So we do continue to be encouraged by the general residential construction market.

While there has been a recent slowdown in momentum in housing starts to about 440,000 units which is about a six-month low, and sales of existing homes at about 4.6 million units which is about a two-year low.

And lower inventories driving up price, we do see broader positive signs in the general longer term outlook of the residential construction market as industry forecasts continue to have housing starts growing at 20% in 2014 and existing home sales up about 2%.

Many of the industry prognosticators aren't quite clear whether the slow first quarter is weather related or a broader statement of the macro economics in the space, I think that's unclear.

But certainly the longer term outlook for the year and beyond still looks positive.

We're also encouraged by the NAHB remodeling index and the LIRA index, which continue to project double-digit growth in the remodeling space.

Overall we expect continued, as I mentioned, longer-term stable if not positive improvement in the US residential construction market.

For me the best indicator is really what our customers are saying.

I spent a good many weeks here in this first quarter spending a lot of time with our customers, wholesalers, distributors, mechanical contractors and all are pointing to very positive signs for the rest of the year.

We've not seen a substantial broad base pickup in our commercial end markets although a couple of our bellwether early-cycle commercial applications have shown solid growth.

The EBI index has been mostly positive territory during the last 12 months and although maybe not as strong as perhaps expected, we also see commercial lending appears to be heading in a better direction.

Again I'm hearing that specifically from mechanical contractors who work with developers that credit and financing has started to point in a better direction with better availability and access.

So we remain encouraged that a broader-based commercial construction uptick may occur later in 2014.

Turning to slide 5, let me just talk about the markets in EMEA next.

While EMEA was off to a slow start in the quarter, the region is showing signs of sustained stable recovery.

It remains fragile but we can say with some confidence that a recovery to stable market trend is underway.

France was flat.

Italy was down due to continued slower HVAC market activity, and Germany and northern Europe were still down but due in part to a slightly tougher comp from last year, but also because Germany has continued to see slower activity in its OEM heating markets.

However the broader outlook does look more positive as we saw the Eurozone Construction Index as finally gone positive at 1.1% versus last year where it was down almost 4%.

EMEA and emerging markets continue to be a good source of growth as infrastructure investment in the Middle East and emerging Europe continue to be favorable opportunities.

Finally as we mentioned before, and you've heard me say many times, the EMEA economic recovery is fragile.

It appears to be very much headline driven and any negative geopolitical events regarding Russia and Ukraine and associated continued ruble devaluation could tilt things in a negative way.

However, that aside we believe that the Euro market in general is trending positively.

On slide 6, China GDP slowed to 7.4% during the first quarter of 2014 as compared to last year and so down from expectations but still strong.

We had a slower start than expected in China due to project delays, some selective bidding due to competitive pricing by local competitors in the eastern region of China, and slower European export market and some supply inventory availability issues.

But our order intake was quite strong driven by strong March and we entered the second quarter with a solid backlog up 23% driven by growth in valves and heating manifold product growth in northern China.

So in addition we are also working and are in the design phase with several new OEM customers that we expect will yield incremental sales us for in the second half of the year.

Our China market strategy is fully intact, hasn't changed.

We continue to see demand in China for localized products but also for more highly engineered European and US (technical difficulty) products.

We are expanding our sales footprint in Tier 2 and Tier 3 cities within the country in an effort to grow our valve business there.

We expect our momentum in the China markets will increase as the year progresses.

Moving to slide 7, just to provide you some update on our view of the top line outlook by segment.

As I mentioned, we see business volumes picking up in the Americas with growth from residential new construction and remodeling.

We're still not anticipating commercial construction will provide much of a tail wind at this time, but we're hopeful for a second half pickup.

And so while we're certainly not as optimistic as industry forecasts, we do continue to expect our core business growth for all of 2014 in the 6% to 9% range for the Americas.

For EMEA we continue to expect a 1% to 3% decline in sales for the full year 2014 at constant currency rates.

As we talked about we expect the decline will be driven by nominal organic growth on an improving outlook for the year being offset by the product rationalization effort that we discussed in February as part of the EMEA transformation.

Although Asia Pacific was off to a slow start, we do expect the team will execute for the full year against the operating objectives and deliver growth rates of between 15% and 20%.

Finally, moving to slide 8, just like to make a couple of observations regarding the forecast.

As I mentioned our order intake exiting Q1 was strong across all regions.

We're encouraged April orders were also solid about 6% growth in the Americas.

EMEA, in fact, was up 2.5% in April and Asia was up 23%.

So, while one month certainly doesn't make a quarter, we're off to a good start in the second quarter and expect the remainder of the year that our revenue will be in line with our expectations.

Secondly, we have and expect to continue to execute on various cost control programs both in EMEA and the Americas.

To date those plans have progressed as expected and we will continue to execute on our cost reduction initiatives.

Another development to consider is our expectation regarding price increases in the US.

We have announced a price increase that will on average be up around 3.5% in certain select channels and that will go into effect in the next 60 to 90 days.

Next, a couple of matters to keep in mind for the upcoming quarters and perhaps later this year.

First, recall we took a charge in the fourth quarter of 2013 of approximately $3 million as a true up of our rebate reserves.

In hindsight, had we accrued those costs during the course of 2013, we would have reduced our Q2 results by approximately $1 million in rebate charges.

We expect to incur those charges against sales of the Americas during the second quarter of 2014.

And we expect approximately $2 million of similar charges to occur in Q3.

In Q4 we will have the offset resulting from a charge we took in the fourth quarter of last year.

Second, early in the second quarter we experienced a manufacturing issue that disrupted our lead-free production at our New Hampshire facility.

The issue involves a power transformer equipment malfunction and does not relate to the furnace issues we're experiencing in the second half of 2013.

We expect to generate negative variances of approximately $2 million in total as a result, primarily scrap and lost productivity, which will drop through as a charge to earnings during the second quarter.

The $2 million in costs are approximately $600,000 more than the lead-free issues we experienced in the second quarter of last year.

We expect the transformer fix will be a transitory issue, and in fact as of today the transformer has been repaired and the foundry is pouring again after a three-week delay.

We do not expect any disruptions in customer shipments as we have the necessary inventory to support product demand.

And finally, as Tim updates you on our initiatives and cost actions he will highlight about $3.5 million in new incremental savings we expect to generate for the balance of 2014.

Look, from my perspective, the unforeseen issues we experienced both last year and now in Q2 relating to the foundry operation would suggest we haven't solved all the challenges required to achieve our target capacity utilization and efficiency in the plant.

While we have solid performance in our foundry in Q1, the latest transformer equipment issue only makes me cautious about potentially other unknowns we may face in the foundry as the year progresses.

However that said I have directed our top process and technical experts to the foundry to ensure we have completed [would] cause and robust corrective action plans.

We have the technical experts, the process resources in place to identify and prevent these issues from happening again, and getting the foundry back on track.

So with that let me turn it over to Tim who will provide a little more insight into the operating performance of Q1.

Tim?

Thanks, Dean.

Good morning, everyone.

Let's look at the quarter results first and I'll be speaking to the information that are on slides 9 through 12.

On a consolidated basis organic revenue for the quarter was up just under 1%.

By segment the Americas grew about 3.7% organically, EMEA was down 3.5% and Asia was up about 1.5%.

In the quarter, FX reported about 90 basis points tailwind for us.

In the Americas we saw organic sales increase in the wholesale channel by 5%, in the OEM channel was up 1.1% and retail was basically flat.

Increased sales in our residential and commercial flow control product continue to be the primary driver for growth.

But, as Dean mentioned, some poor weather in the quarter hampered sales by an estimated 200 basis points.

The Americas order rates accelerated, as Dean mentioned, and we're up 7% vs.

March of 2013.

The Americas adjusted operating margin in Q1 of 11.2% was 70 basis points higher in the same period last year.

Driving the increase was volume and some sales mix in a relatively quiet operating manufacturing quarter.

We gained about 30 basis points against last year as we didn't experience any material lead-free related production issues.

Included in the adjusted earnings of the Americas, are net legal and trade compliance settlement costs approximately $1.2 million, which reduced the Americas quarterly results by approximately 55 basis points.

And we did not highlight this as a special item in the press release because there was a corresponding, though unrelated, reduction in cost of approximately the same amount in the corporate cost relating to reduced stock compensation.

So on a consolidated basis no effect on adjusted earnings but from a segment perspective the Americas SG&A costs were high and the corporate costs were low by about $1.2 million on a run-rate basis.

If we look at EMEA for the quarter wholesale and OEM sales declined approximately 3% in both of those markets.

German sales were down almost 8% due to continued retrenchment in the solar thermal industry, while French plumbing sales were flat.

However, we have seen positive trends in the Eurozone economic indicators and our order book is stable.

EMEA's adjusted operating margin of 10% in the quarter was 70 basis points over Q1 2013, as EMEA continues to reap the benefits of its restructuring efforts.

We will continue to drive our productivity efforts in EMEA through both the restructuring and transformation initiatives.

Asia-Pacific's organic growth of 1.5% in the quarter, as Dean mentioned, included some project delays, some competitive pricing by local manufacturers and some slow sales of products ultimately earmarked for export to Europe.

Again, orders were up 23% during the quarter and we're working with potentially new OEM customers on new applications.

Adjusted operating margins were just under 13% versus 43% last year.

This is really due to the inter-segment sales which were lower which drives lower absorption.

We also had some one off professional costs and start-up costs for a Singapore sales office.

And we also had some corporate cost allocations, which I'll talk about in a few minutes.

Adjusted operating profit for the quarter, in total, was $33.5 million, an 8.8% increase over the same period last year.

As a percentage of sales our consolidated adjusted operating margin was 9.2% or 60 basis points higher.

Margins expanded through increased sales volume in the Americas, along with better product mix, benefit from the restructuring actions in Europe and some general cost controls efforts in all the segments.

The adjusted tax rate for the quarter was 31.8% versus 28.5% last year.

The increase, primarily due to geographical earnings mix were earnings here in the states and we had a US R&D credit which benefited Q1 last year that didn't repeat this year.

Adjusted EPS of $0.55, again a 10% increase over last year.

The net effect of the current share buyback program was minimal year to year.

So if we go down now to on slides 13 to 15, I'd like to summarize the various ongoing initiatives we have within EMEA and the Americas.

As you'll note on slide 13, from the EMEA restructuring program perspective, our current outlook is consistent with the expectations we talked about last quarter, and we think we had about $700,000 in savings that were realized in Q1 of this year from the restructuring efforts.

We took a restructuring charge of just over $500,000 in Q1 relating to the restructuring effort, related to severance, closure costs and some asset write downs.

Moving to slide 14, the EMEA transformation project that we announced last quarter, the main point to note here is that we expect to reduce that infrastructure cost in 2014 by about $500,000.

Those costs will be deferred into next year.

We took a charge of approximately $2.5 million in the quarter for the transformation effort, mostly related to the ongoing consulting costs like project management, some tax and legal advice, and some severance costs as well.

Finally turning to slide 15, we executed a reduction in force of the Americas, in corporate during early April as part of an organizational realignment.

The expected cost for this action was $2.7 million and we charged that to our restructuring costs in Q1 of this year.

We anticipate the annual savings will approximate $4 million and be fully realized next year.

For the remainder of this year, we expect to realize about $3 million in net benefits.

And the program affected individuals working mainly in our US operation and mostly from our corporate office here in North Andover.

Quickly on slide 16, primary working capital was mostly affected in Q1 by inventory builds to support the lead-free conversion effort.

We also had buildup in payables last year that didn't recur this year's Q1.

in slide 17, free cash flow in the quarter compared to Q1 last year was negatively impacted again by increase in working capital.

Offset by the reduction in capital spend relating to the lead-free investment that we made in 2013 that obviously is going to repeat this year.

Our share buyback program is on track.

We spent about $9.4 million to repurchase shares during the quarter.

And as mentioned the buyback had minimal effect on our adjusted EPS in Q1.

Finally, if you go to the appendix, if you turn to slide 24, I'd like to mention that beginning this year, 2014, we have started allocating certain costs like stock compensation, legal, audit, and IT costs to the segments, which historically have been incorporated in the corporate costs.

Slide 24 provides you with the actual allocations for Q1 and the expected allocations for the remainder of 2014.

And we also recast the Americas segment for 2013 and issued an 8-K a couple of weeks ago on April 15 with the recast numbers.

The reason for the allocation, the cost allocation, what's driving that is our stock compensation costs are increasing year to year.

As a result, actually more people in the pool, or participants in the pool.

So that's the reason really we pushed out these costs.

And we didn't push out last year's cost relating -- we didn't restate 2013's cost in Asia because we thought the costs were immaterial.

So with that I'll turn it back over to Dean.

Thanks, Tim.

To summarize, our consolidated top-line growth was nominal.

We were able to deliver solid adjusted incremental operating earnings for our cost savings driven by the various initiatives in EMEA and through better product mix and operating efficiencies in Americas.

Revenues were delayed due to poor weather in the Americas as we talked about and we expect they'll come back in Q2.

We're very encouraged by what we see so far in the second quarter in growth and are hopeful on improvement in the commercial construction market in the second half of the year.

We took additional cost actions in the Americas which will benefit our organizational effectiveness and our financial results in the second quarter.

Lastly, we have challenges in our foundry.

We expect that they are temporary and we've proven the production model and we're laser focused on preventing any further issues in getting the plant back on track.

So with that why don't we open the line for your questions.

Thank you.

(Operator Instructions)

Our first question is coming from the line of Jeff Hammond from KeyBanc.

Please proceed.

Hey, Jeff.

Can you hear me?

Hello?

Can you hear me?

I can hear you now.

Okay, sorry.

Just on -- maybe to sum up North America, if I have you right, it sounds like the data points and the macro data points you look at are maybe a little more mixed but the tone from your customers is kind of unchanged, and the March and April order rates give you confidence in the 6 to 9. Is that fair?

Yes, that's exactly right.

Okay, great.

Talking with -- we're not just talking about wholesalers that might be bullying up inventories.

We're talking actively to mechanical contractors and the full spectrum of end users to make sure and to better understand the demand dynamics.

Again, all trending very positively.

Okay, great.

And then Asia, can you just elaborate on the margins there which had kind of been trending high teens/20s and what you think the margins look like for the balance of the year in Asia?

We, I think the margins get back to historical run rates.

They tend to be very volume sensitive.

They tend to be very absorption sensitive.

And again, they had a tough start in the first quarter.

They had much lower intercompany sales mix as a function of the stress testing inventory that was being shipped to North America.

And they had a slowdown in the eastern part of China, which affected their trade sales.

Again, they see all of that coming back and expect to be back to historic levels in the second -- through the second quarter and into the second half of the year.

So March, April, those intercompany sales have normalized?

They have.

Okay, great.

And then just final, fine tuning question, with the corporate cost changes, can you give us a corporate expense number for 2014?

Let's see.

Last year adjusted would be just under $28 million.

So I would take that, put a little inflation factor on it and that would give you this year.

Typically if you keep the 2.1% to 2.3% of revenue, you'll be safe.

Thanks.

Thank you for your question.

Our next question is coming from the line of Garik Shmois from Longbow Research.

The first question is just on the consolidated, incremental margins.

It was very good in the first quarter, you outline some of the reasons for it under minimal revenue growth.

I wonder if you could expand upon your view on incrementals for the balance of the year.

Should we expect them to continue to be fairly well above normal levels?

We obviously want to be careful going outside of what we talked about in the past.

What we talked about in the past is a 30% to 35% range.

I think this quarter, to your point, we're more like 42% led largely by Europe.

Their revenues were down and their margins were expanding.

That was the big leverage point.

I think it just speaks to the effect of the work that they have done and will continue to do.

Both in terms of how they're positioning themselves but how they structure the organization.

But we don't want to call out any incremental expansion beyond what we talked about in the past of 30% to 35%.

Fair enough.

Switching to Europe, a couple of questions here.

Weather was very dry in Europe in the first quarter.

And warm.

And warm.

Was there any sort of pull-forward effect in Europe in your sales numbers?

You mean in the fourth quarter of 2013?

No, in this first quarter in 2014.

No, no, nothing material.

And then I guess my last question and it also pertains to Europe.

You know, can you provide a little more color just if trends, I recognize that it's choppy for the time being, but if trends do improve in Europe and there's some green shoots in several economies, what's the typical lag there between macro data points improving and by the time you start seeing sales improve?

You know, that is going to vary region by region and segment by segment.

So I'd be -- I would be totally guessing if I tried to sort of call out a lag between economics -- the broad macro economics and the effect on the results.

Also it obviously matters what's driving the broader economics.

But it is a short cycle business to a certain extent, certainly on the wholesale side.

On the OEM side I would say it's longer cycles so you're probably talking more in the six-month range, frankly, or maybe longer.

On the shorter cycle you might be talking more in the three to six-month time frames.

Okay.

Fair enough.

Thank you.

Thank you for your question.

Our next question comes from the line of Kevin Maczka from BB&T Capital Markets.

Please proceed.

Thanks, good morning.

Hey, Kevin.

How are you?

Great.

Dean, first question, there's a lot going on here in terms of restructuring and realignment.

We know about your European program going all the way out to 2018.

Now we're talking about some actions in the Americas.

I'm just wondering as we think going forward about the Americas, maybe you're not ready to quantify or give specific examples but, is this -- should this be viewed as kind of a coming attraction of more to come or does this position the Americas now the way you'd like to see it positioned?

I think it does position America the way we like to see it positioned from an organizational standpoint.

Obviously we will keep a close eye on execution, on performance, on our ability to obviously drive results in terms of other actions that we may take.

So you never want to say never.

But I think this action was a function of both of taking out some costs, driving performance and improvement, upgrading talent and reorganizing the organization.

I think right now this is -- you know, this is the way we see it.

Now, I will say there are other initiatives under way.

We haven't quite talked about yet and we're not ready to talk about broadly.

But they're more around the operational productivity side of the fence.

You know, we talked and some of you have talked about our efforts with regard to our supply chain efforts and our global supply chain strategy.

We'll probably roll out a little more detail around that in the second quarter.

But to answer your question more directly, this is about the way we see it for now for the Americas.

Okay.

Great.

Just on the price increase, it sounds like we're still seeing some reasonably good data that relates to the North American repair and remodel.

You're hearing good things from your mechanical contractors, customers.

You're announcing a 3.5% price increase that goes in a couple of months.

Can you just talk about -- it's probably too early to talk about response to that, but what's been your experience with rolling out price increases like that and how they stick?

You know, every cycle has different reactions so I want to be careful about sort of painting this in any one way versus another.

I will say I was on the road with customers at the time the announcement came out.

I've not seen any negative republican.

I think they're still in digestION mode.

Some case it is will stick, some cases it won't as we've seen in the paps.

Have are selected markets -- there are selected markets and selected channels and we'll see how it plays out.

I will say, overall, it should be anywhere from 30 bps to 50 bps impact on the top line.

Okay.

Just finally for me, you've got maybe some unknowns that you're a little bit concerned about as it relates to the foundry but some of the things that pressured there that you do know about like the legal and compliance settlement issues, are those done now?

Is that behind us or was that one time and over and done?

Well, you know, I'd love to say it was one time and over and done and we'll never have another legal or compliance issue pop up, but that would not be the smartest thing in the world for me to say.

What I will say--

But I mean for the issues that are known at this point, you know, is this something we should expect $1 million, $2 million going forward or is that at least done?

No, no, again, as Tim pointed out, that was one time.

Okay, okay.

I may have missed that.

All right.

Thank you.

Thank you for your question.

Our next question is coming from the line of Jamie Sullivan, RBC Capital Markets.

Please proceed.

Hi, Jamie.

The question on commercial construction and one of the comments was that you are seeing some of the early cycle Bellwether applications pick up.

Maybe you could bring a little more detail on what you're talking about there and maybe how Watts sees the cycle playing out from a product perspective, what products benefit early-mid late cycle as the commercial construction cycle progresses?

I'll try not to get into too many specifics but when we look at our large diameter back flow products, when we look at our cast iron project activity, we see both of those product families up single digits -- excuse me, double digits or high single digits.

So we would know that those applications, those products, are specific to commercial politics and have been growing, you know, at a fairly positive rate over the last couple of quarter.

So we view that as positive indicators but again I think from our prospective, it's not a broad base snap back on the commercial side.

And, you know, until that kind of happens, you know, we're not prepared to sort of project the significant tail wind on the commercial construction side.

Okay.

That's helpful.

And then on the incrementals, I know you reiterated the 30 to 35.

You also have a lot of restructuring transformation programs going on.

How should we think about that overall?

Should we think about it as 30 to 35 with the savings on top of that?

The underlying is 30% to 35%.

I wonder if you would give some color there.

It all depends.

I think what we're trying to point out when we're talking about slide 8, we're saying look, there could be some continued ongoing head winds related to the foundry offset by obviously actions that were taken.

I'd love to say it's all going to be upside.

And then we have a quarter like we had in the first quarter which was more like 43% flow through.

I think right now we're just being cautiously optimistic and saying we're going to stick to the 30% to 35%.

If we get upside to that, we'll talk about what's driving that and whether that's a new, more positive trend for us in the future.

Fair enough.

Okay, thank you.

Okay.

Thank you for your question.

(Operator Instructions)

Our next question comes from the line of Joe Giordano from Cowen.

Thank you for taking my question.

Quickly on Europe, I'm curious how much of that organic decline that you had was from product rationalizations?

I know that was part of your transformation strategy over there.

How would you categorize the growth on products that are part of your go-forward portfolio there?

I would say none of it or a very, very small piece of it.

It was all sort of market organics and was not a part of our discrete effort on the product rationalization side.

So again as we saw the organic down 3.5% or 3.7% in the first quarter, we have seen a modest snap back here at the end of March and through April on the order of 2.5%.

I think in my comments what I said, look, we expect the organic play -- the organic performance of Europe to be not only flat with reduction for the year of 1% being driven by the efforts on the product rationalization.

And we don't expect that to really take hold until about the second half of the year.

Basically you expect the market overall to recover from where it was in 1Q but then you have your rationalization in the second half.

Yes.

On the US side, I'm just curious, you know, I appreciate that your estimates are driven by your customers and what they're saying.

Would you say -- how would you categorize their order patterns?

Would they be consistent with the growth in sales, the existing sales in that 2% range, in that 20% plus range in housing?

How do you see a lag between the data so far year to date has been much different than those numbers.

I know a lot of other third-party estimates have come in a lot more than the ones in the slide deck.

Where do you see a lag between when potentially weaker data starts flowing into orders?

How would you characterize that?

Obviously it's tough to say.

It also depends on which region we're talking about.

So I was in Dallas recently, it's gang busters down there.

Funny enough even Boston is strong.

So, you know, in southwestern regions, regions where we just got an overall regionally stronger economy, the growth rates are in line with the forecast.

Mid teens type of growth rates.

In other regions is it's more single digits but again with a more positive outlook for the second half of the year.

So it depends on the region; it depends on, obviously, the customer you're talking to.

So it's sort of mixed but I would say broadly we can generalize and say, you know, to a customer it's very positive.

They're expecting an acceleration from here going forward?

That's what we're hearing.

That's what we're hearing.

You always want to be careful.

Optimism can certainly run ahead of itself, but I think our outlook of 6% to 9% is balanced and it's thoughtful and I think it's appropriate given what we're seeing.

Okay.

Thanks a lot, guys.

Thank you for your question.

We have no further questions.

I'd now like to turn the call back over to Dean Freeman for closing remarks.

Okay.

Thanks, everyone.

I'd like to thank you for taking the time to join us today.

We appreciate your continued interest in Watts and look forward to talking to you in our Q2 earnings call in July.

Have a great day.

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

This now concludes.

You may now disconnect.

Thank you for joining and enjoy the rest of your day.