Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Watts Water Technologies Earnings Conference Call. My name is Deanna, and I'll be the operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Kenneth Lepage, General Counsel. Please proceed.

Thank you, and good morning. On the call with me today are David Coghlan, our President and Chief Executive Officer; and Bill McCartney, our Chief Financial Officer. Please be aware that remarks we may make 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 our annual report on Form 10-K for the year ended December 31, 2010, and other reports we file from time to time with the SEC. In addition, forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any future date. While we may elect to update these forward-looking statements, we disclaim any obligation to do so. During this call, we 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 February 20 relating to our fourth quarter 2011 financial results, a copy of which may be found in the Investor Relations section of our website, www.wattswater.com, under the heading Press Releases. I will now turn the presentation over to David and Bill.

Good morning, everyone, and thanks for joining our fourth quarter earnings call. I'd like to start by giving you an overview of our fourth quarter and full year results, then summarize some of our key accomplishments from 2011, and move on to give you our latest view on market conditions across our geographies and a sense for where we see things heading in 2012. And I'll review some of the key elements of our fourth quarter performance before handing over to Bill McCartney to review our performance in more detail. After Bill's discussion, I'll summarize, and then we'll open up the call to your questions. So first, let me recap the quarter and the year. Despite challenging activity levels in many of our end markets and pretty volatile commodity costs during the year, we believe we delivered a solid performance in the fourth quarter and that overall, in 2011, we continue to make progress towards improving shareholder returns. In the fourth quarter, adjusted EPS grew by 33% versus the prior year excluding Socla and by 40% including Socla. For the full year, adjusted EPS grew by 5% excluding Socla and by 11% including Socla. Over the full year, our conversion rate of free cash flow to net income was 164%. That's the fourth consecutive year we've converted at a rate in excess of 100%. And our ROIC expanded by 70 basis points to 8.8%. Second, let me talk about some of our key accomplishments during 2011. On the growth front, we positioned ourselves for future growth by making significant progress in integrating our largest acquisition today of Socla, which we acquired earlier in the year from Danfoss. Socla has been a very positive contributor since its purchase. We also expanded our geographic sales reach by putting boots on the ground…

Okay, thanks, David. Looking at the consolidated revenue, $360 million. That's an increase from last year of $43 million or just shy of 14%. The components of the change, we had almost $13 million of organic growth, which is 4%. The acquisition of Socla contributed $31 million, which is 10%, and then we had an adverse impact from foreign exchange of about $900,000. So that totals $43 million or 14%. The bottom line on the EPS front, if you look at our GAAP earnings of $0.46 compared to last year's Q4 of $0.30, so that's an increase of 53%. However, if you look at Table 1 on the press release and look at our as-adjusted earnings, where we removed restructuring and unusual one-off transactions, our as-adjusted number is $0.56 compared to last year's Q4 of $0.40. So that's an increase of 40% versus last year's Q4. And I know some of you are interested in the detail of the restructuring charges and impairments and so on, so to give you that information by segments, if you look at North America, pretax, we had $400,000 of restructuring and $200,000 after-tax. In Europe, the combination of restructuring and impairments was $17.4 million pretax and $14.3 million after-tax. In China, where we recorded a gain on the sale of our subsidiary, TWVC, we had a pretax gain of $7.8 million but an after-tax gain of $12 million. The reason for the increase is we did have some favorable tax positions that we unwound as a result of that sale. And then we had a $600,000 after-tax charge at the corporate level. Looking at some of the segment performance, North America, $199 million, almost $200 million of revenue, an increase of $11 million or 6% versus last year. The components of that change from…

Thanks, Bill. So in summary, we were pretty pleased with our performance for the quarter and the year given the challenging business environment that we're facing. Our full year results were driven by price realization in North America and further progress globally on our operational excellence journey. In addition, Socla performed better than our original expectations, and we added some key bench strength to our management team to further drive improved performance throughout the organization in the future. Looking forward, we expect modest market growth in North America and overall flat markets for us in Europe. We also believe we'll have to continue to deal with volatile commodity costs, and so as a result, price-cost dynamics will remain a challenge that we'll have to deal with on a daily basis. So in this environment, we'll continue to focus on the issues we can control like driving growth through new product introductions, share gain, geographic expansion and smart, disciplined acquisitions by continuing to push forward on operational excellence throughout our business and by making progress on our One Watts initiatives, including strengthening the business through proactive talent management, deploying shared services and implementing common systems and processes. We believe this approach will allow us to continue to deliver improved operating results despite the lack of any meaningful tailwinds from our market environment. So at this time, we'd like to open up the lines and fill any questions you might have. Operator, can you open the lines for questions, please?

[Operator Instructions] And the first question will come from the line of Jeff Hammond, KeyBanc Capital Markets.

Just on price-cost, can you just give us a sense if you look at all-in for 2011? What was, on a net basis, price versus cost? And maybe as you look at '12, is it better or worse than that?

Well, you have to really look at it by market, Jeff. And in North America, on the North American wholesale, we believe that we have covered, and on the North American DIY, we have not covered. It'd be several million dollars. And in our European markets, it would also be several million dollars we did not cover.

Okay, so if you look at '12, is that kind of the same trend you expect, all-in?

Well, I think that if all of our pricing holds where it is, I would expect that we would continue to cover in North American wholesale. The DIY is still going to be -- will be better in '12, but not completely covered. And Europe is still going to be a challenge.

And then on the other side of the equation, Jeff, you're going to have some -- given the lag of copper prices coming through our P&L, you'll have some reduction in copper prices as they reduced in the second half of last year that were flow-through in the first half. And then we'll have some increase in copper prices flowing through the P&L in the second half of the year. So you sort of have to look at it on both sides of the coin.

Okay, great. And then just can you give us what you think incremental accretion is on Socla in '12 then just quantify what you think you're going to get in restructuring savings in '12?

Well, I think Socla, we feel comfortable that, at least in the beginning of the year, well, just the annualization impact of Socla, if you will, we should pick up at least $0.05. And then we should pick up a little bit as the year progresses, and we continue to see some of the integration savings, if you will, of Socla as we continue to do that. On the restructuring front, we just finished our -- one of our plant consolidation in North Carolina. So that is just starting to run through the P&L. So there'll be a couple of million dollars there, and that's really the main one, I think. The French one is really -- we should see some modest improvement in France, but we have the bulk of that saving running through now.

The next question comes from the line of Garik Shmois, Longbow Research.

First question is if you could break out in the fourth quarter how much of the organic growth, both in Europe and North America, was pricing versus volume or give us a rough ballpark, please.

In North America, it's probably about 50-50, and in Europe, it's going to be heavily skewed towards unit volume. I don't have the exact percentage, but...

No, that's fine. And then just secondly, if you could talk a little bit about inventories. I think coming into the last call, you were concerned that there was going to be some potential de-stocking in the fourth quarter. Just wondering if that occurred at wholesale, both in our North America and in Europe, and where, perhaps, wholesale inventories are right now.

We did see some de-stocking in retail in the third quarter, and we were concerned that, that trend might spread a little bit in the fourth quarter. But to be honest, we didn't see any meaningful further de-stocking in our customer base in the fourth quarter. Having said that, our customers are still running with incredibly lean inventories, and so that creates a competitive advantage for us in that those with fastest deliveries can very often pick up some incremental business.

Okay. Did you see any prebuy ahead of the January price increases in some of these -- in some of your markets?

No.

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

On the January price increases, did you say the magnitude of those increases, and is that primarily in the wholesale market? And do you have any color yet since that was in January on how well that's sticking?

It's very early, Kevin, and most of the price increases were in Europe. We went after selective products and select markets. So it's tough to put an across-the-board number on it. But yes, it was heavily in the wholesale channel. And because they were announced in January, it typically takes a little bit of time for it to work its way into the market. And so we don't have a feel just yet as to how they're being realized. We did do a couple of narrowly focused price increases in North America on a couple of wholesale products, and obviously, we're still working on the retail side through the line review process to try and get as much as we can to stick.

Okay. So we've got some price increases coming as we get out a few months. You also mentioned we've got lower copper coming in the first half, higher in the second half. I'm just trying to get a sense for margins. We've been everywhere from 9% to 12% in 2011 and 10% in the fourth quarter. Is 12% or something close to it reasonable again with your organic growth outlook and this view on lower copper prices in the first half?

Well, I don't think we're going to bite on 12% on this call, Kevin, to be honest with you, okay? I mean, we still -- our goal is 12% operating earnings, and we're going to get there through a combination of continuous improvement, footprint consolidation, leveraging our fixed overheads and SG&A. But we're also going to need a little bit of volume to get there. So I don't think we'd get there just on pricing copper issues alone. I don't see that.

Right, but that should be a little bit better in the first half than it was here in Q4. It sounds like it's what you're saying.

Yes, it is.

The next question comes from the line of Ryan Connors, Janney Montgomery Scott.

A couple of questions. First off, you talked about the organic growth. Can you -- and you talked a lot about the new start environment in commercial and residential. Can you talk a little bit about remodeling and repair and replacement and whether -- how that's fairing relative to the new start area?

We see -- we've got a better feel for the remodeling -- the repair, replace, upgrade market in North America, and we feel it's holding up reasonably well. What we're hoping is that as consumer sentiment solidifies around the improving economy, that there may be some pent-up demand which gets released, but we're not seeing that yet. And so the way we're looking at our repair, replace, upgrade business is that it's been pretty consistent through the downturn, and we're sort of planning for a continuation of that.

Okay. And then in terms of Europe, a couple of questions there. So first off, I've been hearing some rumblings about a return of subsidies for renewable energy products in Germany and driven by desire to stimulate the economy to stave off recession. Have you heard any of that or possibly have any update there on the renewable energy side?

Yes, we've heard the same rumblings, and they're sort of -- again, it's a 2-sided story. On the one side, the German economy is attempting to cut costs where it can, like many other European countries, and so there's a discussion around the financial benefits of those types of subsidies. On the other side, I think those concerned about the environment in Germany are slowly waking up to the fact that when you stop producing power with new plants, you're going to start importing power from Eastern Europe from coal plants. And so is that better for the German environment than worse? And so they're starting to realize that maybe, we ought to put more money back into renewable energy. And so it's not clear to us yet how that plays out.

Okay. And then finally, just kind of a longer-term thematic question, you mentioned the pricing headwinds in Europe and the more fragmented nature of your markets there. Is there any evidence that the challenging times there are driving industry consolidation that will, long term, improve pricing? I mean, it doesn't seem like -- you're doing okay, but it doesn't seem like you're making abnormal excess returns over there. So if those smaller competitors aren't following suit on pricing, one would assume they're hurting pretty bad. I mean, is there any effort that there'll be -- that, that competitive environment will shrink?

We hear noise about a number of our competitors struggling financially, and we also hear noise about, in a number of markets in Europe, the banks tightening up a lot on companies who are missing repayment dates or, perhaps, not living by covenants. And so you put all of that together again, and you'd certainly see -- you'd expect to see the screw tightening on some companies who are struggling. But are we seeing wholesale or significant consolidation in the industry? No, we're not. And so the things that we're trying to do is to say, look, we've got to push as hard for price as we possibly can, and then we've got to ramp up our focus even more on operational excellence. And so we mentioned earlier in the call that we've completed a pretty major program in France. We're also working on a handful of smaller programs dotted throughout Europe in terms of restructuring programs, and we're putting a lot of focus onto driving our continuous improvement programs into our European plans so that we can become a lot more efficient and productive. And so if the consolidation then occurs and a couple of our competitors go away, well, then that's a little bit of benefit on top.

And the next question comes from the line of Todd Vencil, Sterne Agee.

So Bill, going back to the sort of price-cost, you talked about the fact that in a couple of areas, you think you lagged with the price in 2011, and then you sort of thought that some of those areas may continue to lag in '12. My question is, is that sort of -- are you thinking that it'll further lag in '12, or just you won't completely catch up through the lag from '11?

I don't think -- I don't mean to say it's going to get worse, Todd, because I don't believe that. I think that we will be better. We'll be equal or better on all fronts, but we won't have completely recouped on the North American DIY and in Europe. But we will be better in '12 than we were in '11 on this issue.

Got it. So a bit of a tailwind, even though you may not catch all the way back up?

Yes, correct.

Got it. And then on the charges and the extraordinary items, Bill, can you parse out between COGS and SG&A for the quarter?

Yes, it's all SG&A, Todd.

The next question comes from the line of Jeremy Hellman, Divine Capital Markets.

Just going back to the Northern European exports, do you have some clarity into where geographically those exports may be going if they're weighted anywhere?

What we're largely talking about there is our OEM business in Northern Europe, and the largest market for our OEM business in Northern Europe is Germany. And so there's 2 things happening. First of all, German OEMs, for instance, the larger boiler companies, are taking share outside of their home markets. And so we're being pulled along with that, and so they would be some of the larger markets in other parts of Western Europe, France, U.K., et cetera.

Okay. And then another geographic question...

Then just to finish the question, the other piece then is that they're focused heavily on exporting into developing markets like Eastern Europe and, in some cases, into China. And we're being pulled along by that as well.

Okay. And then second question for me, geographically, just trying to refresh my memory, regarding Mexico, saw a statistic recently that they've got a pretty significant residential housing unit deficit that they're talking about, something on the order of 9 million units, and just wondering what your views are on the Mexican market. Is that more commodity-type stuff without regulations where you need them to be to make it an attractive market for you guys, or is this something that you're looking at?

Well, we are looking at Mexico. In fact, we had a team down there last week. But the Mexican market is a very different market for our types of products than Europe or North America. So for example, most Mexican homes are fed by gravity feed, so they put a tank on the roof and the water flows. And then that type of situation, the type of products that are in our sweet spot like backflow preventers, pressure regulators, thermostatic mixing valves, they're just not used. In the commercial space, the codes in Mexico continue to evolve, but they're not at the point that codes are in either the U.S. or in Western Europe. And so there are some opportunities in Mexico, and we're looking at which ones we can take advantage of. But there's nothing like the same sort of content for our types of products in the residential or commercial building there yet.

The next question comes from the line of Jamie Sullivan, RBC.

I'm wondering if you saw any actual benefit from weather maybe helping some of the repair, replacement activity?

I think it probably does help us moderately because the construction markets don't get as interrupted as they would if you had a tough winter. But then that's partially offset by the fact that the heating season this Q4 was weaker than normal because typically what happens, Jamie, is that the heating season starts in September, where the wholesalers bulk up for the season. And then we get another wave of orders that come through late in Q4 as they depleted their September orderings and inventories and whatnot. And that second wave was very, very mild because people in North America, the boilers aren't cranking like they usually do. So the heating season was -- the weakness there offset some of the favorableness we got from the mild winter.

Right. Okay, that's helpful. And in terms of 2012, you talked about your macro outlook. Are there any particular product categories where you're more optimistic or more cautious?

We picked a couple of different product categories that we're pushing, and we've talked about them in previous calls, and so those still remain the product categories we're working. So for instance, we've got a couple of initiatives around water quality, where we're continuing to work with Home Depot on a number of pilots through their home install program in I think it's approximately 200 stores. We're continuing to work the launch and commercialization of our water quality line through plumbing wholesalers. And we're continuing to push our new scale prevention product, this is a saltless water-conditioning product called OneFlow, into vertical markets where we see opportunities. Similarly, there's a lot of work going on to push our BLÜCHER product line in a number of new geographies: Middle East, [indiscernible] Europe and even in North America, et cetera. On the other side, the areas that we're probably seeing some headwinds, but they're largely weather-related, would be the heating business in North America because of the winter. And then as we go to Europe, the area we're seeing headwind because of the subsidies would be some of our products that go into renewable energy applications. But as we mentioned during the call, that's being offset through growth in our Radiant product line in Europe. So hopefully, that didn't confuse you too much.

No, that's great. And then I guess just one on margins in terms of the organic incrementals going into 2012, do you still feel good about a 35%-plus number?

What we mentioned that we saw on the fourth quarter, where we saw organic growth dollars coming through, they converted at about a 37% rate. So yes, we're still comfortable with the 35%-or-so conversion rate on incremental volume.

[Operator Instructions] The next question comes from the line of David Rose, Wedbush Securities.

A couple of questions. One is I was wondering if you could talk a little bit about Socla's organic revenues in the quarter, if you have that data, what they were. Two is thoughts on the health of your European distributor channel, if any of the distributors fell out, went out of business. And then just briefly, a couple of key initiatives for the first half and second half of 2012.

David, organic, you mean what they've -- for us, it's completely acquisitive growth. You're talking 0 organic growth rates?

Right.

Okay. Socla was essentially flat on the quarter versus last year's Q4, even though they have been up several percentage points on a year-to-date basis because they're seeing some very nice growth, particularly in Eastern Europe. Did that answer the question?

Yes. And then if you can talk about the health of your European distributors and then lastly, key initiatives for the first and second half of 2012.

We haven't seen any significant changes in our European distributors, and to go beyond that, our largest channel in Europe is still the wholesale channel. We've seen some movement in the wholesale industry in some ways, to more disaggregation and another ways, to more aggregation. So there's no one single trend. But we don't see any negative impact in Europe on any of our distributors or our wholesale customers.

Okay, great. And then lastly, any of the key initiatives on your operational excellence program or any new initiatives for either the first half or second half.

Well, as Bill said, we finished off some of our significant restructuring programs in North America. We are still executing on a couple of small ones in Europe. We have a facility closure in Sweden that we're working through, and we've just pretty much done a small facility closure in Italy. And so those will start to bleed through. We haven't made any announcements about the next -- about any further consolidations in Europe, and we'd be loathe to talk about them because were we to do anything, we'd have to discuss them with the workers' council to effect it first.

But we can expect additional manufacturing footprint reductions then sometime in the second half?

Yes, we are -- as we got through the current slew, that gives us an opportunity to sit back and see around the world where there might be further opportunities and to start to put together that slate of candidates, so to speak.

[Operator Instructions] We have a follow-up question from the line of Kevin Maczka, BB&T Capital Markets.

On this expansion into Russia, Poland and the Middle East, can you just talk about where we are on that? Has that really started to move the needle at all, and if not, when do you think it might?

Well, we're starting from a modest base. And so in terms of a meaningful contribute to the corporate whole, it's not at that point yet. But wherever we see double-digit growth of a meaningful base, within a couple of years, I think it will be meaningful.

Okay. And then just the last one for me, David, can you remind us of the Socla seasonality? Because I think they did $0.03 to the bottom line this quarter but $0.06 in Q3.

Socla historically, Kevin, has very little seasonality, so if you look at what we were expecting when we bought Socla, we were talking sort of $0.03 to $0.035 a quarter of contribution to Watts, and we hit $0.03, so it was at the lower end of the range in the quarter. But still, for the year, the run rate were at the high -- we actually slightly exceeded the high end of the range that we gave, which was $0.18. So it's just a -- they had a little bit of slowdown in their revenue. We don't believe that it's indicative of any type of change in the trend that they've been on and so on. So we're still -- our initial discussions with The Street was sort of $0.14 to $0.18, so we're sticking with the high end of that range or a little bit better.

And this concludes the question-and-answer portion for today. I'd now like to turn the call back to David Coghlan for closing remarks.

Okay, so thank you for your interest. And again, the key point that we just like to emphasize is that our focus is on driving things that we can control in a market environment where we've lost about $200 million of volume. And the result of that is that's delivering peak earnings in the trough. And so our expectations going into 2012 are to plan for very moderate growth and continue to focus on the internal initiatives that we can drive to deliver improved shareholder value. So we appreciate your continued interest in Watts, and thanks for taking the time to join us today.

And thank you again, ladies and gentlemen, for your participation. This concludes today's conference. You may now disconnect, and have a great day.