Dean P. Freeman - Chief Executive Officer, President and Chief Financial Officer Timothy M. MacPhee - Vice President of Investor Relations and Treasurer.

Jeffrey D. Hammond - KeyBanc Capital Markets Inc., Research Division Garik S. Shmois - Longbow Research LLC Kevin R. Maczka - BB&T Capital Markets, Research Division Jamie Sullivan - RBC Capital Markets, LLC, Research Division Joseph Giordano - Cowen and Company, LLC, Research Division.

Good day, ladies and gentlemen, and welcome to the Q1 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 other 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.

A 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 now like to turn the call over to Mr. Dean Freeman, Chief Executive Officer and Chief Financial Officer. Please proceed..

Thank you, operator, and good morning, everyone. Joining me today is Ken Korotkin, our Chief Accounting Officer; Tim MacPhee our VP, Treasurer and Head of Investor Relations; and Ken Lepage, Chief Legal and Administrative officer.

Obviously, 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 sales performance in 2014 and how that looks moving forward. Then 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 on Slide 3, and say 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 our 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, we're 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, about 10% ahead of last year. And despite the volume decline in EMEA, the segment saw margin expansion of 70 basis points. And Tim will provide a little bit more color on that.

Not surprisingly, our sales growth was impacted in part in the Americas due to weather-related delays in the quarter, as order fulfillment was less than anticipated. We estimate that the impact is approximately 200 basis points in the quarter as a result.

We saw orders in sales pick up as the progressed, driven primarily by wholesale, and orders in the Americas increased 7% in the month of March versus prior year, and so we expect the shipment delays that happened in the Q1 to ship in Q2. We're also encouraged by what we're seeing in terms of order rates in the month of April.

We'll cover that in the follow-on section, but across all regions, we're seeing continued strength in our order rates, and hence the following shipments. Adjusted margins in the Americas improved 70 basis points but largely by improvements in operational execution, absorption, product mix, material cost, productivity.

About 30 basis points of the improvement was due to the elimination of a lead-free transition cost this quarter versus last year in the same quarter. And there was a one-off charge in the quarter that Tim will speak to in a minute -- will speak to later, that reduced the Americas adjusted margins by about 55 basis points.

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 target of productivity performance in the first half of the year. I'll speak to that issue in a minute.

And finally, we took a couple of sizable charges during the quarter related to restructuring in the Americas, and the transformation effort we've 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, there are about 440,000 units, which is about a 6-month low, and sales of existing homes at about 4.6 million units, which is about a 2-year low, and lower inventories driving up price.

We do see broader positive signs of a general longer-term outlook of the residential construction market as industry forecast continue to have housing starts growing at 20% in 2014, and existing home sales up about 2%.

And many of the industry prognosticators aren't quite clear whether the slow first quarter was weather-related or a broader statement of the macroeconomics 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 from a modeling index and a LIBOR index, which continue to project double-digit growth in the remodeling space. And overall, we expect continued, as I mentioned, longer-term stable if not positive improvement in the U.S. residential construction market.

And for me, the best indicator is really what our customers are saying. I've 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-based pick up in our commercial end markets, although a couple of our bellwether early cycle commercial applications have shown solid growth. The ABI Index has been mostly in 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 specially 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 at 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, it is showing signs of sustained stable recovery.

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

France was flat, Italy was down due to continued slow rates for 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 Germany has continued to see slow activity in its OEM heating markets.

However, the broader outlook does look more positive as we saw the Eurozone construction index has finally got positive at 1.1% versus last year where it was down almost 4%. EMEA 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, EMEA economic recovery is fragile, and it appears to be very much headline driven. And any negative geopolitical events regarding Russia and the Ukraine, and the associated continued ruble devaluation could tilt things in a negative way.

However, that aside, we believe that the euromarket in general, is trending positively. On Slide 6, China GDP slowed to 7.4% during the first quarter 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 eastern region of China and slower European export market with some supply inventory availability issues. But order intake was quite strong, driven by strong margin.

We entered the second quarter with a solid backlog, up 23%, driven by growth in valves and heating medical product growth in northern China. So in addition, we are also working in the design phase with several new OEM customers that we expect will yield incremental sales for us 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 U.S. infraction products. And we're expanding our sales footprint in Tier 2 and Tier 3 cities within the country, an effort to grow our Valve business there.

We expect the momentum in 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. So as I mentioned, we see business volumes picking up in Americas with growth from residential new construction and remodeling.

We're still not anticipating commercial construction will provide much of a tailwind at this time but we're hopeful for a second half pickup. And so while we're certainly not as optimistic as industry forecast, 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.

And 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 in April orders were also solid at about 6% growth in the Americas. EMEA, in fact, was up 2.5% in April and Asia was up 23%.

So while 1 month certainly doesn't make a quarter, we're off to a good start in the second quarter and expect that 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 U.S.

We have announced the price increase that will, on average, be up around 3.5% in certain select channels and are going to 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've 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 New Hampshire facility. The issue involves a power transformer equipment malfunction, and does not relate to 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 loss productivity, which will drop through as a charge to earnings during the second quarter. The $2 million in cost 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 3-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 that we expect to generate over the balance of 2014.

And look, from my perspective, the unforeseen issues we've 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 had 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 good 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 bit more insight into the operating performance in Q1.

Tim?.

Thanks, Dean, and good morning, everyone. Let's look at the quarter results first, and I'll be speaking to the information that are on Slides 9 to 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 provided about a 90-basis-point tailwind for us. In the Americas, we saw organic sales increase in the wholesale channel by 5%, and the OEM channel was up 1.1% and retail was up -- was basically flat.

Increased sales in our residential and commercial flow control product continue to be the primary driver for growth, while as Dean mentioned, some poor weather in the quarter hampered sales by an estimated 200 basis points. Americas order rates accelerated as Dean mentioned, and were up 7% versus March of 2013.

And the Americas adjusted operating margin in Q1 of 11.2%, was 70 basis points higher than the same period last year. Driving the increase was volume and some sales mix, a relatively quiet operating manufacturing quarter. We gained about 30 basis points against last year's. We didn't experience any material lead-free related production issues.

Included in the adjusted earnings in the Americas, our net legal and trade compliance settlement cost of about 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 in adjusted earnings, but from a segment perspective, the Americas SG&A costs were high and the corporate costs were low by about a $1.2 million on run rate basis. If we look at EMEA for the quarter, wholesale and OEM sales were -- declined approximately 3% in both of those markets.

Our German sales was down almost 8% due to continued retrenchment in the solar-thermal industry. Our 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 with respect of its restructuring efforts. We will continue to drive our productivity efforts in EMEA through both the restructuring and the transformation initiatives.

Asia Pacific's organic growth of 1.5% in the quarter, as Dean mentioned, included some project delays and competitive pricing by local manufacturers and some slow sales of product ultimately earmarked for exports to Europe. Again, orders were up 23% during the quarter, and we're working with potentially new OEM customers and new applications.

Adjusted operating margins were just under 13%, versus 43% last year. This was really due to the intersegment sales which were lower -- which drives lower absorption and we also had some one-off professional costs and some start-up costs for a Singapore sales office.

And we also had some corporate cost allocations, which I'll talk about it in a few minutes. Adjusted operating profits for the quarter in total is $33.5 million, 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.

Margin 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 or earnings here in the States, and we had a U.S. R&D credit, which benefited Q1 last year but 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 we go now to -- on Slide 13 to 15. I'd like to summarize the various ongoing initiatives that we have within EMEA and the Americas.

So 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 of 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, into 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 our infrastructure costs 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 for severance costs as well. And finally turning to Slide 15.

We executed a reduction in force in Americas in corporate during early April as part of an organizational realignment. The expected cost of this action was $2.7 million, and we charged that to our restructuring cost 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 benefit. And the program affected individuals working mainly in our U.S. 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 toward the lead-free conversion efforts.

We also saw a buildup in payables last year that didn't reoccur in this year's Q1.

And 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 '13 that obviously, didn't repeat this year. Our share buyback program is on track.

We've spend about $9.4 million to repurchase shares during the quarter. And as mentioned, the buyback had a minimal effect on 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 in 2014, we have started allocating certain costs like stock compensation, legal, audit, and IT costs to the segments, which historically have incorporated in the corporate cost.

Slide 24 provides you with the actual allocations in 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 recap 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 of actually more people in the pool are participants in the pool. So that's the reason we pushed out these costs.

And we didn't push out last year's cost relating to -- we didn't reach the 2013 costs for EMEA and 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 through 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 will 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, we've proven the production model and we're laser-focused on preventing any further issues and getting the plant back on track. So with that, why don't we open up the line for your questions..

[Operator Instructions] Our first question is coming from the line of Jeff Hammond from KeyBanc..

Maybe just 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 unchanged and the March, April order rates give you confidence in the 6 to 9, is that fair?.

Yes, that's exactly right. Talking with -- and we're not just talking about wholesalers that might be pulling up inventories, we're talking about -- we're talking actively to mechanical contractors and the full spectrum of end users to make sure and to better understand the demand dynamics. And again, all trending very positively..

Okay great.

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

Well, I think the margins get back to sort of 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 historical 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, can you -- with the corporate cost changes, can you give us a corporate expense number for 14?.

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 will give you this year..

Yes, typically, if you keep it to 2.1% to 2.3% of revenue, you'll be safe..

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

First question is just on the consolidated incremental margins, it was very good in the first quarter and outlined some of the reasons for it on the minimal revenue growth.

Just wondering 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?.

Now look, we obviously want to be careful of going outside of what we've talked about in the past, I think what we talked about in the past, is a 30% to 35% range like this quarter to your point, we're more like 42%, is led largely by Europe. I mean, their revenues were down and their margins were expanding. So -- and 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 structured the organization. But we don't want to call out any incremental expansion beyond what we've talked about in the past of 30% to 35%..

Okay, fair enough. And I guess just switching to Europe, 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 on the fourth quarter of 2013?.

No, in this first quarter in 2014..

No. Nothing material..

Okay, and then I guess just my last question, and it also pertains to Europe.

Can you provide a little bit 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?.

That is going to vary region by region and segment by segment. So I would be totally guessing if I try to sort of call out a lag between economics, broad macroeconomics and the effect on the results and also, obviously, matters what's driving the broad 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 are probably talking more in the 6-month range, frankly, or maybe longer. On the shorter cycle, you might be talking more in the 3- to 6-month timeframes..

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

Dean, first question on -- 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.

And 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 Americas the way we'd 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.

I think this action was a function of both -- of taking out some cost-driving performance and improvement, upgrading talent and reorganizing the organization. And I think right now, this is the way we see it. Now I will say there are other initiatives underway, 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. 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 bit 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. And then just on the price increase, it sounds like we're still seeing some reasonably good data as it 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 our price increases like that and how they stick?.

Every cycle has different reactions. 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. Not seeing any negative reaction, I think they're just still in digestion mode.

In some cases it will stick, some cases it won't, as we've seen in the past. Again, they're in selected markets and selected channels and we'll see how it plays out. I would say overall, it should be -- it'll be worth 30 to 50 bps impact on the top line..

Okay, and then just finally for EMEA, 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 have pressure there that you do know about, I think legal and compliance settlement issues, are those done now, is that behind us, or was that one-time and over and done?.

Well, I'd love to say "It was one-time and over and done and we will 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 is...

But I mean for the issues that are known at this point, is this something we should expect $1.2 million going forward or is that at least done?.

No, no, that's -- those -- again, as Tim pointed out, that was onetime..

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

Dean, a question on commercial construction in one of your comments was that you're seeing some of the early cycle bellwether applications pickup.

Maybe you can provide a little bit more detail on what you're talking about there, and maybe how one sees the cycle playing out from a product perspective, what products benefit, early mid late cycle as the commercial construction cycle progresses?.

Yes. So 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 large cast iron project activity, we see both of those product families up single digits -- excuse me, double digits or high single digits.

And so we would know that those applications, those products are specific to commercial applications and have been growing at a fairly positive rate over the last couple of quarters. So we view that as positive indicators. But again, I think from our perspective, it's not a broad-based snapback in the commercial side.

And until that kind of happens, we're not prepared to sort of project a significant tailwind on the commercial construction side..

Okay, that's helpful.

And then on the incrementals, I know you reiterated the 30% to 35%, but 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%, just wondering if you'd give some color there?.

Well, it all depends. I think, what we're trying to point out, I think when we're talking Slide 8, I think we're saying look, there could be some continued ongoing headwinds related to the foundry, offset by obviously, actions that we're taking.

I mean, I'd love to say "It's all going to be upside." And then we'll 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 in saying we're going to stick to the 30% to 35%.

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

[Operator Instructions] Our next question comes from the line of Joe Giordano from Cowen..

Just quick on Europe, I'm curious as to how much of that organic decline that you had was from product rationalizations. I know that was part of your transformation strategy over there.

And so how would you categorize the growth on products that are part of your go-forward portfolio there?.

Yes, so what we've called out -- I would say none of it or maybe a very, very small piece of it. It was all sort of market organics, and was not a part of our discreet effort on the product rationalization side.

So again, as we saw the organics around 3.5% or 3.7% in the first quarter, we have seen a modest snapback here at the end of the March and through April on the order of about 2.5%.

So I think in my comments, what I said is, "Look, we expect the organic play -- the organic performance of Europe to be nominally flat with a reduction for the year of 1% to 3% being driven by the efforts on the product rationalizations." And we don’t expect that to take hold until about the second half of the year..

Okay. So basically, you expect the market overall to recover from where it is -- from where it was in 1Q but then you have your rationalization in the second half, okay..

Yes. That's our -- yes..

Okay. And then on the U.S. side, I'm just curious, I appreciate that your estimates are good and really by your customers and what they're saying.

Would you say that -- how would you categorize their order patterns, would they be consistent with the growth in sales or existing sales in that 2% range and that 20-plus percent range in housing? Or how would you see a lag between -- the data so far year-to-date has been much different than those numbers and a lot of -- some -- I know a lot of other third-party estimates have come in a lot more than the ones in the slide deck.

So where do you see a lag between when potentially weaker data starts flowing into orders or how would you categorize that?.

Obviously, it's tough to say. I will say that -- it also depends on which region we're talking about. So I was in Dallas recently, and it's gang busters down there but even Boston is strong.

So in Southwestern regions, regions where we just got a overall regionally stronger economy, the growth rates are in line with the forecast, in the mid-teens type of growth rates. In other regions, 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 that to a customer, we're positive..

I know 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..

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..