Tim MacPhee - Treasurer and Vice President, Investor Relations Bob Pagano - President and Chief Executive Officer Todd Trapp - Chief Financial Officer.

Jeffrey Hammond - KeyBanc Capital Markets Joe Giordano - Cowen & Company Brian Lee - Goldman Sachs Jim Giannakouros - Oppenheimer.

Good morning. My name is Marianna and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

I would now like to turn the call over to Tim MacPhee, Treasurer and VP, Investor Relations you may begin your conference..

[Technical Difficulty] Following our prepared remarks we will address questions related to the information covered during the call. Today’s webcast is accompanied by a presentation, which can be found in the Investors section of our website. We will reference these slides throughout our prepared remarks. [Technical Difficulty].

Ladies and gentlemen, this is the operator. I apologize that there will be a slight delay in today’s conference. Please hold and the conference will resume momentarily. Thank you for your patience..

Okay. Today’s webcast is accompanied by a presentation, which can be found in the Investors section of our website. We will reference these slides throughout our prepared remarks. Any reference to non-GAAP financial information is reconciled in the appendix of the presentation.

Before we begin, I would like to remind everyone that in the course of this call, to give you a better understanding of our operations, we will be making certain forward-looking statements. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from such statements.

For information concerning these risks and uncertainties, see Watts’ publicly available filings with the SEC. The company disclaims any intention or obligations to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Now, let me turn the call over to Bob Pagano..

Thanks, Tim and good morning everyone. Please turn to Slide 3 in the presentation, where I will provide some commentary on the second quarter. Watts delivered another solid quarter in line with our expectations and what we communicated back in April.

For the second consecutive quarter, we reported a record adjusted operating margin and adjusted EPS despite a muted top line. Operating margin expanded 60 basis points to 12.5%, which helped drive an 11% increase in adjusted EPS.

We continue to execute on our various transformation initiatives, including portfolio rationalization, sourcing and restructuring actions, which is driving our double-digit earnings growth. As expected, we did see a modest sequential improvement in organic sales growth. Excluding product rationalization, organic growth was 1% in the quarter.

Growth in both Europe and Asia-Pacific was tempered by flat performance in the Americas, where an increase in our valves and drains products was offset by AERCO’s expected headwinds in tougher comps. Todd will review the financial results in more detail shortly. Now, let me make a few comments on our end markets.

In the Americas, we still expect low to mid single-digits growth in both the non-residential and residential markets. As you recall, the market for condensing boiler products in the U.S. had softened in the first quarter. We saw that trend reverse in Q2 and now it is essentially flat for the year.

In Europe, the overall macro environment is relatively stable although there appears to be slightly more optimism in countries, like France and Germany as we exit the second quarter. And in Asia, recent GDP and construction data remain positive and we expect that trend to continue as well for the second half of the year.

We continue to invest for growth with the goal to drive innovation, reinvigorate the front end of our business and accelerate productivity all with a focus on enhancing the customer experience with lots. Incrementally, we invested approximately $2 million in the quarter.

Also in September, we will hold our Third Annual Innovation Summit in North Andover. This meeting will bring our sales and engineering teams from around the world together to understand our broad capabilities, share ideas and identify new and innovative breakthroughs to drive further growth. Finally, we are reaffirming our full year outlook for 2017.

We expect organic growth rates will improve in the second half versus the first half mainly due to improved market conditions, new product introductions and geographic expansion. And we expect our operating margin for the full year should approximate 12%.

Now, I will turn the call over to Todd to talk about our second quarter operating performance and provide a little more detail on our second half outlook.

Todd?.

Thanks, Bob and good morning everyone. I am on Slide 4 which shows the second quarter results. Reported sales of $379 million were up 2% reflecting the impact of the PVI acquisition, which added approximately $14 million or 4% in the quarter. Foreign exchange mainly driven by a weaker euro negatively impacted sales by roughly $5 million or 1%.

Organically, sales were flat with growth in Asia-Pacific being offset by a slight decline in the Americas. I will talk more about the regional performance in a few minutes. As expected, we saw about a $5 million negative impact in the quarter from product rationalization. Excluding this item, organic sales were up about 1%.

Adjusted operating profit of $47 million increased $3 million or 8%. This translated into an adjusted operating margin of 12.5%, up 60 basis points versus last year and a record quarter for the company. Excluding the dilutive impact of the PVI acquisition, adjusted operating margin grew over 80 basis points.

We attained this margin while continuing to invest in our growth initiatives. Productivity, restructuring and transformation benefits were the main drivers of the record margin performance. Adjusted EPS of $0.83 was 11% better than last year. The $0.83 also represented a new record quarter for the company.

This increase in EPS was driven primarily by strong operational performance and to a lesser extent a lower tax rate. The effective tax rate in the quarter was $32.1 million, about 250 basis points lower than the prior year mainly due to the mix of worldwide earnings. Turning to cash, on a year-to-date basis, free cash outflow was $2 million.

This was a $9 million improvement over the same period last year mainly due to the timing of capital spent. We do expect that capital spend will pick up in the second of the year as we increased investments at some of our manufacturing sites and IT tools which will help drive future productivity improvements across Watts.

Also important to note and consistent with our history, we expect that our cash generation will improve in the second half as we are focused on achieving 100% cash conversion for the year. So overall, we are pleased with our second quarter performance as we set new highs in adjusted operating margin in earnings per share.

Turning to the regions on Slide 5, let’s review Americas’ results for the quarter. Sales of $251 million were up about 5% on a reported basis mainly driven by the acquired sales of PVI. Organic sales were down 1% and flat when excluding approximately $2 million in anticipated product rationalization.

Stronger sales in our valves and drains products were offset by anticipated softness in AERCO and water quality. AERCO was impacted primarily by tough comps and a softer repair and replacement sales and our tankless water heaters. AERCO’s boiler product lines was relatively flat in the quarter.

At AERCO we did see order rates improve as the second quarter progressed, partly driven by the success of our new platinum boiler line. We also expect that the overall U.S. condensing boiler market will be better in the second half versus a flat first half. As a result we expect the headwinds that we have seen at AERCO should subside beginning in Q3.

PVI also continued to perform well as sales were up double digits in the quarter, driven by strong growth in our gas condensing water heaters. PVI’s year-to-date growth is outperforming the overall market and we expect that trend to continue. Adjusted operating profit in the Americas was $41 million, a 5% increase year-over-year.

Operating margin was steady at 16.5%. Productivity and transformation savings offset the dilutive impact from the PVI acquisition and continued investments to fund future growth. So for the Americas a marginal top line improvement from what we saw in the first quarter and continued strong operating performance..

Moving to Slide 7, let’s review Asia Pacific’s results. In the quarter sales were approximately $17 million, flat on a reported basis and up 2% organically over the same period last year. Excluding product rationalization of $2 million, organic sales were up 15%.

It’s a similar story to what we saw in the first quarter as strength in China more than offset flat performance outside of China.

Excluding product rationalization our China sales grew over 40% due to the continued strong demand for under-floor heating products used in residential applications and new products that we launched in our commercial valves business.

Sales outside of China were flattish, mainly driven by timing of project releases in the Middle East, offsetting the strong performance in Korea. Adjusted operating profit in the quarter for Asia Pacific increased 47% to $2.2 million, which translated into adjusted operating margin of 13%.

The key drivers of the 380 basis point margin improvement included increase in inter-company sales which drove favorable plant absorption as well as continued productivity savings. In summary, Asia Pacific performed very well during the quarter with increased organic growth driven by sales within the China market.

Finally, turning to Slide 8 and our outlook for the second half of the year, on a consolidated basis, we expect organic sales growth in the second half to improve as compared with the first half performance.

By region, the Americas should see consistent growth from relatively healthy end markets with AERCO returning to growth after being down in the first half. In Europe, we expect modest improvement given the stable outlook for our end markets.

And in Asia Pacific, sales should pick up in the back half of the year as our China business continues to expand and we see a rebound in activity in the Middle East and Southeast Asia. Our consolidated adjusted operating margins grew by 40 basis points in the first half of 2017.

We expect slightly better year-over-year margin expansion in the second half as productivity and cost savings continue to be realized. And we see more drop through from anticipated incremental top line growth. We still expect operating margin to approximate 12% to the full year, up 60 basis points versus 2016.

Finally, we are forecasting strong cash flow generation in the second half, consistent with our performance over the past several years. With that, I will turn the call back over to Bob before we begin Q&A.

Bob?.

Thanks Todd. To summarize, we experienced record adjusted operating margin and adjusted earnings per share in the second quarter and are reaffirming our full year outlook. We continue to drive our various transformation programs and are investing in key areas to help drive our future performance and create shareholder value.

So with that, operator, please open the lines for questions..

[Operator Instructions] Your first question comes from the line of Jeffrey Hammond. Your line is open..

Hi, good morning guys..

Hey Jeff..

So just on North America second half, what do you – can you just talk about outside of maybe just easy comps in AERCO and the abatement of product rationalization, what else are you seeing outside of that that would support the acceleration in the growth rate?.

Yes. So Jeff as we look – we look at that momentum index, ABI index and just our channel checks our product pipeline and just the overall mood in the marketplace. So I mean just spend some time with all our rep organizations they feel positive about the signs.

If you remember last year we had a lot of political uncertainty in the second half of last year. And I think some of these projects that were slowed down are starting to move forward. So we feel cautiously optimistic inside the Americas..

Okay, great. And then can you just talk specific to AERCO, some of those what you are seeing in terms of some of these projects breaking free and any feedback you are getting on some of the new product? Thanks..

Yes. So it was good to see AERCO’s, we started seeing the orders pickup in the boiler section and as we proceeded through the second quarter the interesting thing the benchmark is getting very – platinum line is getting very positive feedback in the marketplace and we are starting to close some orders.

So our backlog is improving as well as our teams are seeing the project pipeline improved too. So we feel good about their ability to return to growth in the second half of this year..

Okay, great. Thanks Bob..

Thanks..

Your next question comes from Joe Giordano. Your line is open..

Good morning, guys..

Good morning, Joe..

Hey, just starting in Americas again, can you just kind of square the commentary around AERCO with PVI and like what’s driving those differences in near-term performance, is it comps, we don’t have as much historical context for PVI.

So, if you could just kind of comment on that?.

Yes. Well, PVI, we acquired in November. So we have been talking about organic growth. PVI, we have seen double-digit growth year-to-date. So, we feel good about that, their condensing commercial boiler line or water heater line mainly in gas. So, we don’t have an electric portfolio.

AERCO is primarily a condensing commercial boiler manufacturer and our sweet spot is a million BTU and above, so also inside of AERCO is tank less [Technical Difficulty] looking at the activity and we feel good about both businesses and you will start seeing PVI in the fourth quarter or start moving over towards our organic growth..

Fair enough. And if I look at Europe, the data in France just on the macro data, it started to improve pretty materially.

I know you mentioned in your comments that the rationalization is offsetting that, but absent that do you expect kind of like apples-to-apples or organic acceleration in that market in second half?.

Yes, if you remember the elections happened in the later in the second quarter, so having been in Europe, about 70% of our businesses is repair and replace. There is not a lot of booming construction going on in France right now, but our team over in Europe is very optimistic and we are expecting to return to growth in the second half of the year..

Okay.

And then how much you are embedding in your estimates for savings in the second half and how much – and if you can comment maybe on like price cost that you are seeing right now?.

I will grab the price cost and I will Todd handle the savings, but price cost right now certainly we have seen copper prices have increased and actually increased a lot more just recently in the last few weeks. But what we are seeing right now we have been able to pass our price increase went into effect in March through the wholesale channel.

We are seeing that stick some of our competitors have announced price increases. We have yet to see them implement that. But overall we expect – we saw little under point inside of our wholesale channel in the second quarter. And we expect that to continue as our agreements with our various customers start rolling that out.

So overall, we believe we will be able to pass on price in the marketplace and we are counting on our competitors do the same..

And Joe, your comment on or your question on how much have we seen in terms of transformation savings. We talked about a $10 million full year savings in ‘17 and we saw about $6 million of that in the first half and expect to see $4 million of that in the second half..

Okay. If I could sneak in one more, if you could – any update on the operations of the new U.S.

distribution center, how is that going right now?.

It’s going very well. Our team is excited about that. Things are going very well. We continue to see improvements every single day in that group. So, as you know the heavy lifting of our restructuring is behind us with the facilities. I think, right now it’s optimizing all of them and will continue to optimize them. We will never be done with that right.

We will always be looking for continuous improvement. But the tough stuff or the heavy moves all of that is behind us. So, we are just now optimizing these new sites..

Okay. Thanks, guys..

Thank you..

[Operator Instructions] Your next question comes from the line of Brian Lee. Your line is open..

Hey, guys. Thanks for taking the questions. Maybe just specifically on PVI, I wanted to walk through a little bit of the puts and takes going forward. You mentioned it’s outgrowing the market for you guys. So, it sounds like you are taking share.

Can you walk through what’s – what maybe some of the drivers are behind that and then how sustainable you think that is going forward? And then secondarily on PVI, just the margin impact, does that start to let up and lap the November acquisition timing or is that something that could become more of a reversal in tailwind before that?.

Yes. So, regarding PVI in the product, we are having success, because we have a premier product line that has one of the best warranties in the industry and the product is performing very well. So they have had some new products, they are being successful and feel good about what they are doing.

Again, lot of small numbers, just a small business you’ve got small numbers, it’s a $50 million business. So when you look at double-digit growth, it’s still on a small number. We need to continue that. We feel very good about that. We feel good about the new product pipeline inside of that.

And then from a margin point of view, when you look at our margins in any acquisition we have incremental integration costs. So we have – they are fully integrated at this point in time. The teams are working there. So, we feel that the drag on our margins will get better in the second half of the year, yes, less drag in the second half of the year..

Yes. We still expect their margins to be up high single-digits for the year..

Right..

Okay, okay, great. And then just on drains, I think you guys have said in the past that the drains tend to be a leading indicator for your new construction driven volumes.

Did you guys see steady growth in 2Q versus 1Q or any sort of acceleration and then how are you thinking about the trends in that particular category as you move through the back half of the year? Thanks, guys..

Yes, so the – yes, we saw growth in the second quarter and we continue to see that playing forward. The other part of that is we have a new product line related to our stainless steel drains really when the food and beverage and industrial type marketplace that we brought over from Europe and that also is in the craft brewery market.

So, we have seen some success in that area that’s part of our geographic expansion initiative here in the Americas. So, again drains looks good. And as you said, it is a positive early indicator, which also gives us some good momentum going into the second half of the year..

Alright. Thanks, guys..

Thank you..

Your next question comes from Jim Giannakouros. Your line is open..

Good morning, guys..

Hey, Jim..

Good morning, Jim..

AERCO, positive if I missed it, I mean I get that the market stabilized in the second quarter versus what you were seeing in the first quarter, have competitive pressures there or aggressive pricing subsided there or was it really just volumes coming back relative to what you were seeing 3 months ago?.

Well, I think from a market point of view, we saw some project delays. I think the whole market saw that. We saw them release start – being released in the second part of the second quarter and that started making us feel a lot more positive.

The projects were never canceled, but we have seen a lot of new competitors enter to the marketplace from Europe and the market is very competitive. So, it’s important for us to continue with our new product development and deliver the most efficient boiler – commercial boiler in the market. So, we continue to do that.

We believe our Benchmark Platinum is the great new product and we are having good success with that early on. So, we feel good about that..

Understood. Thanks. And I guess along those lines, as you think about your product portfolio how that evolves over time and obviously using acquisitions to move that along going forward. Just given the vision that you guys have for what were you going to take it over longer term.

Should we be thinking your isolating M&A to system sales or no nonexclusively maybe there are some areas that you can beef up core in developed markets or is there more fertile ground in Asia-Pac, for example?.

Jim, we continue to look in all of those areas. I think it’s difficult to pinpoint timing on acquisitions. As you know, multiples are very high. So, we continue to cultivate acquisitions in all of those areas. So, I don’t want to exclude any of those, but certainly we are looking at more – how we can more – provide more solutions to our customers.

We are looking at technology to enhance our projects and filling gaps and regional exposure. So, again we are looking at all those areas, but we will be very disciplined as we move forward with that..

Got it. And one last one if I may. Europe, margin there the way I understand it that kind of tough to do any kind of incremental restructuring that would move the needle and get that margin up from where you are.

The way I understand it is that it’s really going to be top line leverage, but are there areas where you can outside of leverage see margin expansion potential and if you can isolate where just so I can better understand, because I know Europe is obviously a bunch of buckets and not just one?.

Yes. I think our biggest focus is really investing in our higher margin growth businesses which are really drains and in our electronics businesses. So, those are opportunities to outperform and handle the margins on that.

So, we will continue with our normal purchasing savings, our lean initiatives inside our organization to continue to take cost out of the process, let attrition impact that, but part of the goal is just to invest in new products in some of those higher margin, more growth oriented businesses..

Thank you..

Thank you..

There are no further questions at this time. I will now turn the call back over to Bob Pagano for final comments..

Thank you for taking the time today to join us for our second quarter earnings call and we appreciate your continued interest in Watts. We look forward to speaking with you again in our third quarter earnings call in early November. Take care and enjoy the rest of your summer..

This concludes today’s conference call. You may now disconnect..