Good morning. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Watts Water Technologies Second Quarter 2019 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to Mr. Tim MacPhee, Treasurer and Vice President of Investor Relations. Sir, please go ahead.

Thank you, and good morning, everyone. Welcome to our Second Quarter 2019 Earnings Conference Call. With me today are Bob Pagano, President and CEO; and Shashank Patel, our CFO. Bob will provide his perspective on our second quarter business results before turning the call over to Shashank, who will address the financial results in more detail and offer our latest outlook for the second half of this year. Following the prepared remarks, we will address questions related to the information covered during the call. Today's webcast is accompanied by a slide 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. Let me remind everyone that during the course of this call, to give you a better understanding of our operations, we may be making certain forward-looking statements. These statements are subject to numerous risks and uncertainties that could cause our 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 I will turn the call over to Bob Pagano.

Thanks, Tim, and good morning, everyone. Please turn to Slide 3 in the presentation, and I'll provide our quarterly overview. Thanks to our dedicated team, we drove solid growth in the quarter, delivering record results for sales, operating margin and EPS. We continue to execute on our strategy of driving profitable growth while also continuing to fund incremental investment opportunities. Organically, we saw a positive sales growth in the Americas and Europe while APMEA's softness persisted in the quarter. The Americas continued to experience broad growth amongst a number of key product categories and channels, while Europe saw stronger-than-anticipated growth due to the timing of Drains projects. APMEA's growth was hindered by continued sluggishness in Korea and project timing in the Middle East. We addressed the latest round of tariff increase in the U.S. with additional price increases, which went into effect on July 1. We will continue to monitor market reaction to these enacted price increases as the second half progresses. Shashank will review the financial details with you in a few moments. Now briefly, a quick view on the markets. During the second quarter, the end markets performed, for the most part, as we had anticipated. Looking forward, major indicators, like the ABI and Dodge Momentum Index have been consistently flashing slowing growth signals over the next 6 to 9 months. Europe macro data continues to signal softness and market growth in APMEA remains spotty depending on the region. We are maintaining our full year organic sales growth outlook for 2019. We expect organic growth in the second half of the year will moderate in the Americas and Europe as compared to the first half, given the impact of some tougher second half comps and the slowdown in overall market growth. And we continue to expect our adjusted…

Thanks, Bob, and good morning, everyone. Please turn to Slide 5, and I will walk you through the second quarter results. Reported sales of $417 million were up 2%. Organically, sales were up 4% with strength in the Americas and Europe being partially offset by softness in APMEA. Foreign exchange, mainly driven by a weaker euro, decreased sales by $9 million or 2% year-over-year. Adjusted operating profit was $56 million, an increase of $4 million or 7%. This translated into an adjusted operating margin of 13.3%, up 50 basis points versus last year and a record for the company. We attained this margin while continuing to invest approximately $4 million in our growth initiatives during the quarter. Price and productivity were the main drivers of the record margin performance, more than offsetting general inflation and the growth investments. Adjusted earnings per share of $1.09 was 4% higher than last year and also represented a new all-time record for Watts. Operations drove an $0.08 increase that was partially offset by higher nonoperating expenses and negative foreign exchange translation movements. The effective tax rate in the quarter was 28.4% or 80 basis points higher than the prior year, mainly due to a mix of earnings. Year-to-date, free cash flow was a positive $5 million as compared to a $14 million outflow during the first half of 2018. The incremental improvement of $19 million in cash flow was due to higher income, reduced inventory levels, reduced tax payments and slightly lower capital spending as compared to last year. We made progress in the second quarter and consistent with our historic seasonal patterns, we expect that cash generation should continue to improve in the second half. During the second quarter, we repatriated approximately $19 million in cash. Year-to-date, we have repatriated about $30 million…

Thanks Shashank. To summarize, the business delivered record sales, operating margin and earnings per share in the second quarter. This was driven by the Americas and Europe, both delivering a solid operating performance during the quarter. We are maintaining our full year sales and operating margin outlook and are pleased with the progress to date around our smart and connected product strategy. So with that, operator, please open the line for questions.

[Operator Instructions] Your first question comes from Nathan Jones with Stifel. Your line is open.

This is Adam Farley, on for Nathan. Looking at the 2H organic growth guide, is the lower growth in 2H - in the second half simply a function of tougher comparisons? Or does it imply that Watts is potentially gaining share given some of the slowness in some of your end markets?

Adam, thanks for the question. When we look at it, first of all, if you look at last year, in particular, the Americas had a comp in the second half of - it was up 10%. So we have difficult comps. And secondly, we do believe the market is slowing a bit. So it's still growing, but just slowing in the second half as compared to last year. So it's a combination of that. And I think the team is doing a great job in the current environment, and we continue to believe we're driving growth in this tough market.

And then just turning to APMEA, you expect growth to pick up in the second half. I think you called out Middle East project timing and then also some pickup in China. What kind of gives you the confidence there? And just any other additional color would be great.

Yes. Sure. First of all, China, we saw growth come back in the second quarter, primarily in our valves under - our valves for our data centers. And so that's positive. And we see the pipeline continuing in the second half. Middle East, same thing. It's a timing issue. The political uncertainties that happened, let's call it, in the first half of this year, we're beginning to build a backlog, and we're going to see that come out in the second half of the year. So that gives us the confidence based on our backlog and what we see. And I think there's easier comps in the second half in that region.

Yes. And that's - and on that point, if you recall, in China, in the second half of last year, we were down double digits. So the comps do get easier in China in the second half.

[Operator Instructions] Your next question comes from Walter Liptak of Seaport Global. Your line is open.

This is Steven Friedberg, filling in for Walt. So I want to turn to the operating leverage. It looks like a second quarter in a row looked good. You guys kind of call out same thing, price, volume, productivity, with a slower-than-expected growth in the second half, I guess, can the level of 35% to 40% of incremental margins be continued?

Yes. Yes. So it's more in the range of 25% to 30% as far as operating leverage. And based on what we've got in play from a productivity standpoint and our outlook on inflation, we expect that to continue in the second half.

And then going back to the original question on the call regarding second half growth. I know on the Q1 conference call, you guys kind of talked down expectations a little bit. You said in recent housing data as well as housing affordability, it looks like Q2, you guys pulled out a great 6% organic growth in Americas. I guess, the question being is with the same current tone as of Q1, as in this call, has the second quarter growth rates caused you to rethink any of your, I guess, comments on the market outlook?

No, I think the market is playing out just like we thought. I mean, we began the year knowing that the first half we felt was going to be stronger than the second half, number one, because of market conditions, but number two, because we had such a strong second half with - of last year relative to pricing increases, et cetera. So it's kind of playing out just like we had expected in the markets.

And then if I could just ask one more. I know this earnings season; we've seen a couple of companies call out stable housing or even improving housing data. Are you guys seeing anything in an underlying market that can confirm this as mentioned?

Well, when you look at it, if you recall, about 35% of our business is residential and of the residential, two-third of that business is multifamily for us. So single-family homes, in particular, in the Americas, is a low part of our business, and we tend to be on the higher end of those homes. So with recent interest rates decreasing, single family starts, especially the beginning ones, I think that's sounding like that's going to go forward. But that's not a market that we heavily play in. So right now, the markets are playing, as I said earlier, in alignment with what we are - our expectations are.

Your next question comes from Jeff Hammond with KeyBanc. Your line is open.

Just on Europe, I mean, that business seems to be holding in better, given some of the macro worries. Where do you - where are you kind of most concerned as you look into the back half, either your product- or region-wise? And then margins really progressed nicely in the first half just kind of sustainability of that kind of margin improvement in Europe, should we just kind of stay in this slow growth environment?

Yes. Thanks, Jeff. When I look at Europe right now, we had a good quarter in our Drains business. That was very positive for us. As we look into the second half, what we saw and what we're seeing is we had, again, tough comps last year. As you know, our quarter was strong over 3% in the second half of last year. So we're comping against that. I mean, fundamentally, the European market we're hearing is slowing, we're seeing some of that. We have some strength in Germany. This quarter, we took - we gained some share with a couple of new customers in Germany, small customers. So again, I think the market, in general, is about the same. We've done a lot of margin improvement based on the restructuring that we've done and you've seen over the - in the fourth quarter and the first half of this year. So our goal is to keep driving margins and be cautious about the market as we have and keep on growing, in particular, our Drains business, which is a global business and our global electronics business. And your second question was the margin question. I'll let Shashank grab.

Yes. In the margins question, I mean, beyond the normal productivity over cost, et cetera, we have done a better job on price. Price came in more favorable than we expected. So the teams have been working really hard on the value prop and driving more price out of the market, albeit under tougher market conditions. And then - so that's primarily been the drivers there is that aspect of it and then the Drains business Bob talked about and that's on the marine side, obviously, that drives a slightly better margin profile as well. So that's helped the operating margin. And then the last piece is the restructuring. We did do an additional $1 million of restructuring. And we got some savings out of that, and that will continue in the second half as well to help the op margin performance.

And then a lot of your peers have kind of talked about weather being an issue. I don't think you guys really mentioned it. How do you think weather is impacting or not impacting the business? And then maybe specifically to the AERCO PVI business, how those performed? And if weather creeped in at all there?

Yes. So when we look at it, we believe weather had a small impact, right, especially in our self-central regions, in particular. It's difficult to quantify because we have pull-ins a little bit that Shashank talked about, but approximately 1%, I would believe, it impacted that. And I think that did have an impact with the HHWS platform in the quarter. But again, we're at our mid-single-digit run with those guys on a year-to-date basis, and that's in alignment where we expect to end the year at.

And then - so can you just talk about what price was in the first half? And what you think the contribution is - in the second half is, given kind of the new price increase?

Yes, in the second quarter, slightly more than half of the growth was price-related in the U.S. In Europe, obviously, a lot less, because, obviously, there's not the tariff impact that drove the price. As you look at the second half, I mean, look, it's too early to tell right now. We just announced the July 1 price increase. It's a very dynamic market, and there's price elasticity. So we've tapered down our expectations based on what happens as we go through the second half.

So just on that follow-on price increase, what are the - I guess, what are the dynamics on the cost side that are driving a price increase? Because it seems like most of the tariffs and inflation was through and some of the input costs are moderating.

So in - at the end of May, May 25 I believe it was, the 10% tariff from - on the imports from China went to 25%. So the additional 15% that was supposed to be tacked on in January finally got tacked down at the end of May, and that's what drove the July 1 price increases for the U.S.

And then just final question, it's been quiet on the M&A front. Just given some of the macro uncertainty, are you seeing valuations start to come your way on deals? And what does that mean for maybe actionability on the pipeline?

Yes. Jeff, it's always difficult to time acquisitions and look at - I think our pipeline continues to be full. We're cultivating and looking at acquisitions like we always have in our balanced capital allocation strategy. So multiples, they're all over the place. So it's difficult to exactly say what's coming in or not. So again, I think it's something we keep on monitoring, we'll continue to cultivate and still deploy our balanced capital allocation strategy.

[Operator Instructions] Your next question comes from Joe Giordano of Cowen and Company. Your line is open.

This is Robert, in for Joe. I just have a quick question about the incremental investment spending. I see your guidance for $12 million this year. I just wondered how much came through in the first half this year so far?

Yes. Out of the $12 million, roughly $7 million was in the first half and the other $5 million will be in the second half.

There are no further telephone questions at this time. I would now like to turn the call back over to Bob Pagano, President and CEO.

Thank you for taking the time you joined us today for our second quarter earnings call. We appreciate your continued interest in Watts and look forward to speaking with you again at our third quarter earnings call in early November. Enjoy the remainder of your summer. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.