Q4 2019 Earnings Call

Water technologies fourth quarter 2019 earnings conference call at this time, all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you'll need to press star one on your telephone if you require any further assistance. Please press star zero I'd now like to hand, the call over too.

Tim Macphee Treasurer, and VP Investor Relations. Please go ahead.

Thank you good morning, everyone welcome to our fourth quarter full year 2019 earnings conference call.

With me today, a Bob Pagano, CEO and President Fisher Shanker till our CFO.

Bob will discuss our key accomplishments this past year and touch upon our 2020 priorities in the macro markets. He will also offer insight into the estimated corona buyers impact to watch and update you about smart and connected initiatives.

To shake will offer a detailed analysis of our fourth quarter in full year results and provide our initial outlook for 2020.

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 Investor Relations section of our web site.

We will reference this presentation throughout our prepared remarks.

Reference to non-GAAP financial information is reconciled in the appendix to 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 actual results to differ materially from such statements.

Information concerning these risks and uncertainties CF publicly available filings with the SEC.

The company disclaims any intention or obligation 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.

Thank you, Tim and good morning, everyone.

Please turn to slide three in the earnings presentation, which summarizes our accomplishments for this past year I will also provide some initial thoughts on 2020.

I'm very pleased with our performance in 2019.

Team delivered another year of record results as solid organic sales growth combined with our one wants performance system drove record adjusted operating margin and adjusted earnings per share.

Last February we mentioned, we expected to see more tempered organic growth in 2019 as compared to 2018.

2019 pricing Tailwinds were expected to abate and moderating end markets were anticipated, especially in the second half of the year.

And that is how the year played out.

For the year, we saw solid organic growth of 4% driven by a number of factors, including decent end market demand in the Americas, a positive price cost dynamic in the first half of the year and benefits from our new product development efforts.

We introduced new smart and connected solutions and expanded our traditional mechanical plumbing product offerings. This year.

Full year sales also increased due to late August acquisition of back flow direct which expands our backlog product offering in fire protection applications to help meet our customer needs.

The acquisition also bring some respected talent impact flow technologies.

Another 2019 goal was continued expansion of our adjusted operating margin.

This year, we increased consolidated adjusted operating margin by 60 basis points, driven by price realization volume growth and productivity initiatives.

Margin expansion was inline with our original expectations for the year. Despite an incremental 3 million of investment spend above our original plan as we accelerated funding for growth and productivity.

In total we invested in incremental 15 million in 2019 to benefit the future.

We estimate about 80% of the total investment spend this year related to front end commercial growth projects and 20% to productivity.

One area of reinvestment included the continued enhancement of our industry leading training capabilities.

In 2019, we opened one additional training facility in the UK.

We now have nine training sites worldwide and we delivered approximately 60000 training sessions, 150% increase over 2018.

From an operating perspective. This was the fourth consecutive year, we've achieved record adjusted operating margin and adjusted EPS results.

I'd like to thank all my watch colleagues for making that happen.

The tank will discuss the fourth quarter and full year results in more detail momentarily.

Looking back on the entire year, we maintained our strategic focus on growth through commercial excellence and customer intimacy, new product innovations, including smart and connected product introductions and driving a culture of continuous improvement.

Looking ahead, let's review our key priorities in general market expectations for 2020.

We want to continue to drive topline growth through new products and solutions with a focus on our smart and connected portfolio.

We will also drive commercial excellence by staying close to our customers and look for opportunities to expand geographically into new regions, either organically or through acquisition.

We want to expand adjusted operating margin through volume and incremental productivity.

Productivity will continue to expand through our one watts performance initiatives.

Finally, we expect to continue to reinvest a portion of the productivity savings into R&D, selling and marketing in IP systems.

On future growth and productivity.

Now, let's talk briefly about how we see the market shaping up in 2020.

The economic data remains mix as we enter 2020, the potential Corona virus impact only creates more uncertainty and I'll speak to that subject in a moment.

From a macro perspective, GDP forecasts and most of our major regions, including the us the Eurozone, Canada in China are all expected to moderate as compared to 29 team.

With GDP growth decelerating from 10 to 50 basis points, depending on the region.

In the Americas expectations vary by sub markets.

New residential construction in general looks to be on an upswing with lower interest rates full employment and readily available credit driving anticipated mid single digit growth in housing starts in 2020.

However, in multifamily where we have more plumbing content starts are expected to grow more modestly in the low single digits.

And the Lyra index is anticipating the growth rate of homeowners spend on repair and replacement projects will moderate to 1.5% in 2020 from 5% to 7% in recent years.

We anticipate slower growth than the total non residential market as compared to 2019.

The index has been fairly flat on trailing 12 month basis.

But in key regions like the northeast the indexes negative.

Recently, the Dodge momentum index has been positive.

However, the average index was down for all of 2019, so that could portend slower growth in 2020.

And the December AI, a consensus construction forecast for 2020 has moderated with total nonresidential growth reduced by 90 basis points from their original July consensus expectations.

In Europe. The overall outlook is generally stable was slower GDP growth as I mentioned previously.

Regionally, we expect to see nominal construction growth than our major markets.

In the Asia Pacific region. The overall economy was expected to remain fairly steady with GDP slightly down.

China GDP is now anticipated to be down noticeably due to the impact from the Corona virus.

Middle East GDP is expected to grow in 2020.

However is also the area most likely to be influenced by adverse geopolitical issues and the potential knock on effects from the Corona virus due to decrease short term energy demand.

Macro forces, including continued trade complex, Iran. Iraq tensions 2020 elections in the us and Germany's manufacturing slump all require close monitoring as the year unfolds.

Now I'd like to provide an update on the Corona virus potential impact on our business. Please turn to slide four.

We're diligently watching how events unfold concerning the Corona virus.

We have curtailed travel into and out of China.

Our sourcing team is monitoring the impact to our global supply chain, and taking actions where possible to mitigate the risk of significant disruptions.

Our focus is on the safety and well being of our approximately 300 employees in China and the customers they serve.

Today, we're not aware that any of our employees have been infected with the virus for which we are grateful.

Currently the assumption is our manufacturing and distribution facilities, which are over 400 miles away from Blue Han should be back to normal operations by early March.

We expect multiple logistic issues, including our supply chains ability to ramp up their production.

Further round in shipping transportation bottlenecks may cause additional delays.

We expect this afternoon's operations will be the most affected in Q1, both from a sales and manufacturing perspective, and we anticipate that America's in Europe sales and manufacturing may also be affected due to the impact on the supply chain.

Looking at the potential financial impact on consolidated Q1 results. We estimate sales may be reduced by $10 million to $20 million and our operating margin may be flat to down slightly as compared to Q1 last year.

In a few minutes shank, we'll be discussing our full year outlook for 2020, which includes the expected impact of the Corona virus.

This is a very fluid situation, but we wanted to provide as much transparency on the financial impact based on what we know now.

Now I'd like to provide an update on our smart and connected products initiatives. Please turn to slide five.

We continue to drive our connect control conserve strategy, which aims to deliver 25% of our products were connected capabilities by 2023.

Our presence last week at the HR trade show highlighted our recently launched solutions as well as our customer digital experience capabilities.

We're happy to report that in 2019, the pace of growth of our connected products was two times the rate of growth of watts as a whole.

This help raise our sales and connected products to low double digits in 2019.

We have a solid pipeline of projects under development across all our businesses.

From a digital experience perspective, we've been successful and expanding the use and adoption of tools, which simplify our customers access to key information needed for their jobs.

The key actions around this had been the standardization and consolidation of digital tools like our web sites building information modeling and product information management data and our spec solution offering.

On slide six let me highlight two more smart and connected product solutions.

The watts snow melt system is a great example of integrating products and technologies from multiple disciplines within watts to create a comprehensive connected solution that solves and industry problem.

The snow melts system includes sensors controls valves manifolds and pipes to deliver hot water to a slab after expenses a drop in temperature that can result in snow or ice precipitation.

Typical applications include sidewalks around hotels and hospitals, whereas noted on the slide a hell of pad at a local New York Hospital.

This system insurers connectivity control and conservation all aligned to our strategy.

On the right side of this slide you'll see a typical valve actuator, which electrically opens and closes valves usually in a large commercial facility.

Our acts Mark solution allows for remote monitoring and controlling a valves that are normally placed high end of piping system and are not easily accessible.

The mobile App receives a multitude of data, including the number of cycles total operating time and temperature among others and provides the ability to control the valid remotely.

The X. Mart is a connected solution that increases visibility accessibility and control of the plumbing system.

We are excited about what the future of smart and connected systems is bringing to our customers watts and the industry.

We'll continue to update you on the progress of this initiative.

Now Shashank will review our results for the fourth quarter and full year and offer our initial outlook for 2022 shank.

Thank you Bob and good morning, everyone.

Please turn to slide seven which highlights our fourth quarter results.

Reported sales of $400 million were up 3% with organic sales up 4% offset partially by a 1% foreign exchange headwind.

Organic increase was driven by growth in all three regions acquired sales approximated $2 million in the quarter.

Will review regional performance momentarily.

Adjusted operating profit of $50 million, a 10% increase translated into an adjusted operating margin of 12.5%.

80 basis points versus last year, and a fourth quarter record for watts.

Benefits from price volume productivity, and restructuring savings more than offset higher inflation and incremental growth and productivity investments.

Investments totaled $4 million in the quarter.

Adjusted earnings per share of one dollar increased 14% versus last year and was another fourth quarter record for the company.

Earnings per share growth was driven by 11 cents from operations.

Net positive below the line items or two cents, mainly lower interest charges and foreign exchange translation as a headwind of one sent in the quarter.

Adjusted effective tax rate in the quarter was 27.2% marginally lower than last year.

Free cash flow for the full year was $165 million, an increase of 22% over 2018, driven by higher income.

Inventory reduction is a lower income tax payments and good use capital spending.

Free cash flow conversion was 125%.

Over the course of the year, we paid down debt by $45 million.

We invested $29 million in capital expenditures, which equates to a 94% reinvestment ratio.

Getting 2019, we also returned $51 million to shareholders in the form of dividends and share repurchases.

Our net debt to capitalization ratio declined to 8.4% at year end as compared to 14.3% in the prior year due to the debt reduction and cash generated by operations.

Our balance sheet continues to be in excellent shape and provide substantial flexibility to address our capital allocation priorities.

In summary, a solid finish to another record year.

Moving to the regional results, please turn to slide eight.

In the Americas reported sales increased by approximately 5% to $268 million.

Organically sales were up approximately 4% broad growth in plumbing drains electronics and water quality products.

We also saw solid growth in heating and hot water solution products as some projects, which had been delayed look at least as expected.

Acquired sales from the backlog direct acquisition approximated $2 million and added about 1% of growth in the Americas during the quarter.

As anticipated price was a smaller contribution to growth as compared to the first half of 2019.

Americas adjusted operating profit for the quarter increased 6% to $46 million.

Adjusted operating margin expanded 20 basis points to 17%.

The margin increase was driven by price volume and productivity, which more than offset incremental investments and higher inflation.

We made approximately $1 million more in investments than we had expected coming into the quarter.

So another quarter of solid growth and strong operating profit performance for the Americas.

Turning to Europe sales of $114 million were down 1% on a reported basis.

Organically sales were up 2%.

Foreign exchange, mainly the euro was a headwind of about $4 million on 3% in the quarter.

From a platform perspective growth was driven mainly by strength in drains which was up low single digits in land base sales and up mid single digits in marine based applications.

So the solution sales were up nominally mostly driven by strong performance in electronics.

Plumbing and HVAC sales were flat during the quarter.

By region, we saw growth in Germany, France, and Italy during the quarter.

In Germany growth was driven by drained sales into marine applications as well as increased electronics volume.

France growth was driven by stronger demand in the wholesale market and in land based drain applications.

It'll be saw strength in the plumbing wholesale and OEM markets.

The Nordics one down marginally as growth in drains was offset by a softer OEM channel.

And the UK continued to be weak due to the ongoing impact of Brexit.

Adjusted operating profit in Europe was approximately $13 million, a 6% increase over last year.

Adjusted operating margin of 11.8% increased 90 basis points, primarily due to price volume and productivity, including restructuring savings, which more than offset investments and inflation.

In summary, yes moderate top line improvement along with restructuring benefits delivered a solid operating performance in the quarter.

Now, let's review at me as fourth quarter results.

Sales approximated $19 million up 18% on a reported basis with 20% organic growth being partially offset by a 2% foreign exchange headwind.

We saw double digit growth across the region.

Outside China growth was driven by the Middle East and Korea.

Really saw growth in Saudi Arabia, and in plumbing applications throughout the region.

In Korea, a few large projects are delivered and within China commercial valve sales continued to be strong.

Adjusted operating profit of $3 million was up 67% versus last year.

Adjusted operating margin up 470 basis points, driven by higher third party volumes.

Data product and regional sales mix productivity and cost controls, partially offset by lower intercompany volume investments and inflation.

The apnea delivered a solid top line and operating income expansion.

On slide nine let me speak to the full year results.

Well 2019 reported sales were $1.6 billion up 2% on a reported basis and an all time record.

The increase was primarily driven by organic growth of 4%, which has offset partially by foreign exchange.

Adjusted operating margin was 12.9% in 2019 up 60 basis points and another record for watts.

Nice volume productivity and restructuring benefits, whether driving factors.

Important to note the margin expansion is net of funding incremental investments of roughly $15 million $3 million more than we originally budgeted.

Adjusted full year earnings per share of 4007 cents, well is up 9% versus the prior year.

The increase was driven primarily by improved operating performance and lower interest costs offset partially by negative foreign exchange translation movements year over year.

We have provided the last three years results to highlight the progress we've been making by consistently executing our strategy.

About one half of the 2018 adjusted earnings per share expansion benefited from tax reform and other below the line movements, but overall the improved operating performance during the last few years as be noteworthy.

Now on slide 10, let's discuss the general framework, we considered in preparing our 2020 outlook.

Let's look at expected headwinds.

As Bob has already discussed in detail, we anticipate the current on virus should negatively impact us.

We see GDP moderating in many of the major regions, we serve and the underlying construction markets continue to moderate as well.

So that should translate into lower activity this coming year.

Consistent with our ongoing strategy, we are going to incrementally invest for the long term growth of the business, especially in initiatives that are commercially focused including investments to drive our smart and connected strategy.

Skilled labor is impacting the overall building market as well as project timing.

We anticipate this will continue into 2020, which could cause some lumpiness in our results.

In the middle column themes that we'll continue to monitor.

There are a number of geopolitical concerns that could impact Asia Pacific and the middle East as well as Europe, something we'll continue to monitor and action is necessary.

Great issues are still influx.

Phase one of the U.S., China trade agreement has been assigned and we expect the impact of walks in 2020 will be minimal.

We'll have to see our phase one rules are going to be enforced and how it may impact trade with other countries.

At this point, we have not factored in any type of changes as they are unknown.

The call back in 2016, the election process created uncertainty in the us which caused our markets to slow.

Projects being delayed until there was some clarity in the election results.

We think that uncertainty could repeat during the upcoming election cycle.

The business could be impacted especially in the second half of this year.

Now looking at anticipated Tailwinds.

We expect to benefit from our new product introductions, including additional smart and connected products.

We expect to drive continuous improvement throughout one lots performance efforts with additional productivity initiatives within our factory walls as well as in the S. Una functions.

We expect additional margin expansion as a result of those initiatives.

Except for the impact of the Corona virus, we anticipate they may be less economic uncertainty in 2020 as compared to last year.

Brexit has moved forward the us MCV agreement has been signed and as being more constructive activity lately regarding tariffs.

Finally, let's review our outlook for 2020.

On slide 11, we have provided our major assumptions.

Our full year outlook includes the expected impact of the Corona virus, which as Bob mentioned assumes our activities are back to normal by early March.

At this time it is difficult to ascertain the full impact in 2020, and therefore, we have widened our sales and operating margin outlook range is especially in appia.

We estimate that America should grow organically, 2% to 4% with anticipated growth across many of our product lines.

We expect adjusted operating margin in the Americas to expand as well from volume leverage and productivity initiatives.

From a phasing perspective, we expect stronger quarter over quarter revenue growth in the second half of 2020 as compared should be tougher in the first half given the timing of price increases that positively impacted the first half of 2019.

Well Europe, we're forecasting organic sales growth of minus 1% to up to present.

Adjusted operating margin should expand from productivity, including the incremental benefits some restructuring.

In apnea, we expect organic sales may range from down 5% to up 5% 40 year and we anticipate adjusted operating margin may decline against our 2019 levels.

Both are being affected by the expected first quarter impact of the Corona virus.

Margin may be impacted as well by intercompany volume.

Overall on a consolidated basis, we anticipate watts organic sales to increase approximately 1% to 3% in 2020.

We estimate our consolidated adjusted operating margin should expand between 30, and 50 basis points, which includes approximately $13 million of incremental investments.

Now a few other key inputs to consider for 2020.

We expect corporate costs to be in line with 2019 about $43 million for the year.

Interest expense should be roughly $12 million.

Our estimated adjusted effective tax rate for 2020 should approximate 28%.

Capital spending is expected to be in the $40 million range as we continue to reinvest in our manufacturing facilities in systems, which will support future growth and productivity.

Depreciation and amortization should be approximately $48 million for the year.

We expect to continue to drive free cash flow conversion equal to a greater than 100% of net income.

We are assuming a 1.12 euro us dollar foreign exchange rate for the full year.

Please recall that for every one cents movement up or down in the Euro dollar exchange rate our European annual sales are impacted by approximately $4 million and our annual any exposure is impacted by one set.

We expect our share count should approximate 34.1 million.

For the year.

Finally, a few housekeeping items to consider for the first quarter.

Bob has already provided our latest estimate of the consolidated impact of the current of various for the quarter.

From a regional prospectively I believe about half of that sales impact will affect apnea and the other half in Americas in Europe.

A couple other points to be mindful law regarding the topline.

First sales growth year to year will be negatively impacted by one less shipping day in the first quarter this year.

That impact sales by about 1.5%.

We'll take that day up in the fourth quarter.

Secondly, as I mentioned before we had some tough first half compares.

So for first quarter, we see Americas organic growth at the low end of its full year range, Europe inline and apnea likely experiencing negative drilled in the quarter as a result of the Corona virus impact.

As Bob discussed we estimate our operating margin will be flat to down slightly in the first quarter as compared to the first quarter last year due to the current a virus.

Regionally, we anticipate nominal margin improvements in the Americas in Europe should be offset by a margin reduction in apnea.

Acquired sales should approximate $2 million in the first quarter.

We expect incremental investments of about $3 million in the first quarter $2 million in the Americas $800000 in Europe and $200000 in EMEA.

The investments will be partially offset by about $500000 of incremental restructuring savings in Europe.

Adjusted effective tax rate should approximate 28% inline with our full year projection.

Corporate cost should approximate $11 million in the quarter.

We anticipate foreign exchange could be ahead of it in the first quarter given current rates as compared to the first quarter of 2019.

With that I'll turn the call back over to Bob to summarize our discussion before moving to keep any.

Bob.

Thanks for sharing please turn to slide 12, and let me summarize our discussion.

We were pleased to deliver record results for the company in 2019.

Our outlook for 2020, anticipates moderating growth and continued margin expansion.

Martin connected products are gaining momentum and we expect they should continue to drive growth in 2020.

Productivity and efficiencies gained through our one wants performance system should expand operating margins.

We plan to deliver strong free cash flow and as always we'll remain disciplined in our capital deployment.

We have provided our current assumptions of the expected Q1 impact of the Corona virus.

We will be closely reviewing how this development and other potential macro headwinds could affect customer sentiment and the construction markets.

We intend to continue to focus on becoming a leaner more customer centric organization.

Im confident our team will work through the near term issues as we focus on and execute what we can control.

With that operator, please open the lines for questions.

If you'd like to ask a question at this time. Please press Star then the number one key on your Touchtone phone if you'd like to Mci. Your question press. The pound key your first question comes from Nathan Jones with Stifel.

Good morning, everyone.

Good morning.

Well, but let's start with.

A discussion on some of the investments.

It's a million incremental coming up in 2020 on the back of Steve staying in 2019, and I think a number somewhere in that area in 28 Canyon, maybe 2017 as well so we're starting to.

Invest fairly heavily in the basin as you were talking three 400 basis points of margin.

That you've increased the investments over the last few years. So I'm wondering if you could talk about what benefits you've seen from that in times of I Dunno vitality index kind of new product revenue generation. What it is one of the tangible results that you're seeing from these investments and what are the tangible results you.

Expect to see in the future from these investments.

Yeah. Thanks, Nathan I mean look at a one of things when I got here little over five years ago was we reviewed our pipeline of new product development products projects and are.

They were very low in lot of a more meat to type products, we really needed to reinvigorate our new product development process and look for breakthrough type products and you know investments. So what's exciting now is we have a bunch a new ideas both in research and look what.

I call execution stages in our pipeline. So the exciting thing is shashank earlier talked about 80% of our investments are really related to growth investments in the remaining are driven by productivity and regional expansion. So a lot of our smart and connected in the initiatives, which are really revitalizing our portfolio.

Is what we're focused on we had an older portfolio of products and now we're reinvigorating them, we're looking at solutions versus components and all of that we believe is driving above market growth. So we don't give out vitality, but I'll tell you. We've now started tracking to internally and we've been seen.

And improvements over the last several years and again the team is motivated and.

We're also looking at incremental operating margins as you see we're doing both investments and driving incremental operating margins at the same time, which is a great balance incident rate as a result.

You said over the last three full years, we've invested over $45 million.

And when you look at that the R&D spend is gone up from one an African sales due to an emphasis sales, but it's not only NPD, but also market expansion because weve put feet on discrete as well as invested in training centers in Sandra and also invested in resources to drive the productivity, which is funding a lot of this as well.

Okay. My follow up question, despite having a unit put these investments and you guys have continued to deliver kind of these 50 basis points of margin expansion, a year, which really mainstay core operating performance is up more like a 100 150 basis points each year over the last 234 years.

You are talking about product getting productivity. These hearing at inside the four walls and also out of SG and I.

Can you talk a little bit about what those plans.

And how how far into the future you can continue to deliver these kind of productivity date.

You guys have produced year over the last four or five years.

Yeah, and as you said over the last three four years, it's been productivity within the factory walls, there's still more work to do around that in the Americas, but more so in Europe and other regions and over the last year. We've now started focusing with the one wants performance system in productivity outside the factory loans and also a big focus on indirect material spend which Don.

Good like in the back half of last year. So we think there's a lot more in a lot more links to gold is lot more opportunity over the next three to five years, which is going to drive the op margin improvement as well as continued funding investments will need for for example on the smart and connected side.

[noise] do you guys say the other incremental investments in growth here or have we reached the kind of plateau level are you continuing to find good investments to make that could say that this VC investment in R&D going from two and after three three and a half where do you think we should end up at.

Well, we continue to look at our pipeline in the Great thing is the pipeline we have to draw a line in the sand with our team. So we have more ideas and we can fund right now which is a great problem to have right now. So again, it's all about balance we certainly like to improve.

Our R&D spending and get it up into the three 3.5% over the long run, but again, it's going to be focusing on the quality of those type projects and again, we look at internal rate of return in making sure that these projects will generate the future. So again the momentum is building and the teams are excited about it.

That's helpful I'll pass it on thanks very much.

Thank you.

Next question comes from Ryan Connors, with Fannie and Scattergood.

Great. Thanks, good morning.

Morning, I actually wanted to too.

You mentioned the positive momentum in housing and obviously, we see that in the macro data. It makes sense given that you've got the strong strong job market mortgage rates et cetera, but are you seeing anything specifically.

In your order boards in your channel.

Inventory situation anything specifically that that tells you that is beginning to actually play out on the ground in terms of an acceleration in resi.

Well I think it's important that we backup a little bit and talk about like 60% of our business is commercial 40% of our businesses residential of that residential two thirds of that's multifamily and one third is residential and then when you break that 65% is repair replace which tends to follow.

The GDP and 35% new constructions, so about four or 5% of our business as a company use in new construction residential so it's hard to really see at that granularity that level, but you know the orders the stocking levels, we believe stocking levels were sound.

By our channels at the end of the year. We didn't think there was no any pull backs on that and we had a slower start in January that was due to the holidays and one less workday and then certainly with the Chinese new year that impacted that but weve seen some pickups in February here. So overall I think what we're seeing.

The first started two years in line with our overall guidance here.

Okay.

And then when talking about pricing you go back about a year and a half when the tariffs went in and you had a pretty sizable set of price increases I recall was something like.

Towards a 15% depending on the product line and obviously that was.

From a shock to the system for customers and Shashank you mentioned, how it's too early to say what this phase one trade deal does but in terms of the price cost.

Dynamics and market customer expectations, I mean, how what's the pricing outlook and.

Situation in terms of price cost management now that it looks like we may be you know in a different chapter in this whole tariff situation.

Yeah, we've been maintaining that.

We've been our prices been ahead of costs and we think pricing as we said earlier were will start moderating in the second half of 19 and into 2020. So again, we continue to believe we'll be in front of that it just lower pricing, probably a little less than 1%.

It is in our assumptions for 2020.

And Ryan.

So and last year, if you look at the whole of last year, we did add more type and use price so to speak in Americas.

About half of total growth was prices here is about 1%. So a lot less and most of that is in the first half because we lap in the second half.

But on the type situation.

Where we got impacted was on the list one two and three was on components and that 25% type is still there nothing is happy with that it's only to list floor aided the kind of went down from 15% to seven and 8%, but on that list are in fact was minimal.

Okay.

And then last one was just had a kind of a bigger picture question you know its.

Water quality is not a huge business for you, but it's material enough that you do mentioned it.

In the press release as being a tailwind and we think about.

Corona virus, we think about things like P. fast in the U.S. It seems like with a lot of these.

Health contamination type scares that that would be a tailwind for kind of residential.

Commercial level you know.

At the PTAB type treatment products, which I know you're Premier product line. For example is that something that's driving that strength in water quality or is that something something else.

I'm really a lot of the growth is in our HF scientific business, which is really being driven based on ballast water testing. That's now required in the coast guard. So we're seeing a lot of strength in that area and that some of our growth, but your comments are actually true in something that we're watching.

Residential as you know water quality is not the bigger portion of our business, we're really focused more on commercial growth with our one flow and some of our other products, but again, we are seeing some growth in each one of our product lines in water quality and your point as well taken and that's the areas that we're focused on.

Okay. Thanks for your time.

Thank you.

Next question comes from Jeff Hammond with Keybanc.

Hey, good morning, guys.

Yes.

Just wanted to good color on the Corona virus impact just wanted to clarify what did you say on at me a sales in the in the first quarter.

We said in that dump the 10 to 20 million range about half was apnea in the first quarter.

Okay.

Okay, and then just moving over to Europe, I mean that you've kind of had this consistently kind of low growth no growth market, but this year or 19, I think Ed.

Significant margin improvement and just want to see what's in the pipeline for kind of margin expansion in Europe.

We continue in this kind of muted environment.

Yes, so when you look at Europe, we've seen growth in our Bluebird drains business in or electronics and the other businesses have grown just at a more moderate pace and the two businesses that are growing have a higher margin than the other two businesses as well as last year, we did substantial amount of restructuring so we got a little.

The restructuring and I think should think mentioned about a half a million dollars of incremental restructuring savings were seeing but the big restructure was last year. So each one of our businesses, we focus on improving margins all the time and that's our focus with our one wants performance system. So I think there's opportunities, but as you said, we had big margin impact.

Movements in 2019, I think as you saw in our guidance that will moderate a little bit and we did get the team did a nice job driving prices while in 2019, and obviously, we're going to continue with that just on the restructuring, though the incremental savings from restructuring in Europe in 2020 will be approximately $2 million.

Okay, and then do you expect that mix dynamic to continue were.

Luker and the controls business.

Continues to grow.

Yes, that's the plan what we don't know in particular, you're seeing some negative readings out of Germany, right now and as you know we do a lot of OEM business in that area and that's an area of concern because we have a lot of fixed costs and that volume impact on us we'll hit as hard so again, we got a balanced.

Both of those discussions so and that's kind of really what the Europe numbers of I've been doing over the past several years as we focus on low growth controlling our costs driving those two other growth businesses and the other two businesses, we're investing slightly to begin looking at growth opportunity.

But again, we're cautious of our German OEM business at this time.

Okay can you just talked about.

What your heating and hot water solutions business grew in 19.

And what you're seeing there from a market perspective into 20.

Yes, so overall I think we're in a.

About.

Little over 3% for that business year over year, we had they had a really strong fourth quarter. We had some project timing issues in the third quarter. So again, we believe there's opportunities to grow in that business you know in that three to four 5% range somewhere in that that's our focus in that area again, it's highly competitive but we're focused in the near.

Part of that in the commercial.

Market a million be to you and above and we've had a lot of new product developments in that and we'll have continued new products. The recent HR show that I know you attended you saw some of those products and again, that's a key focus and it really is part of our overall solution strategy as a company.

Yeah, absolutely a that the the the boost showed really well this year. So congrats on that I'm just final one M&A.

Certainly the balance sheet kind of continues to improve with the cash flow generation.

Just maybe update us on pipeline and just really how much time do you think can.

How much time do you guys spend considering like a larger type deal that would push up your leverage a little bit. Thanks.

Yeah, I mean, the M&A front, we're always looking cultivating relationships and as I've always said, we're going to be disciplined and as you know in the last quarter. We've walked away person from some from some deals so from our point of view, it's hard to predict its got a tied to our overall strategy and.

Again, we evaluate small medium and large deals all the time and we'll continue to do that so in total I can't predict that Jeff as you know, but our pipeline is full and we continue to look for opportunities where it makes financial sense.

Okay. Thanks, guys.

So.

Next question comes from Joe Giordano with Cowen.

Hey, guys good morning, and Joe.

I'm just curious I mean, a lot of companies, they're talking about Corona virus in the first quarter end I'm. Just curious it seems like there's risk of things, maybe extending longer than people, giving credit for or slower ramp ups and I'm just curious as to how you thought that process through in like the rest of your like the nine months.

After first quarter Outlooking like whats kind of built in for the pacing of getting back to normal.

Yes, so the way we've been looking and we've had extensive meetings I talk to my head of Asia Pacific Daily as well as our entire organization is focused on this so this you know what's nice about this is we can leverage our global footprint from a manufacturing point of view, but we're looking at key components, where we might have.

Bottlenecks or you know a large sourcing of that is inside of China. So we're looking at it we're putting contingency plans, but a lot of our suppliers are beginning to come back to work and that's why we kind of felt that the beginning of March is where we're going to see if and when we looked at the numbers. The range of you know 10 to 20 million.

Half of that is to shrink said was really in the ATMI a region. The other is the other side with based on.

Supply chain slowdowns now we believe other than apnea, because right now in China, they're not doing any construction right now everything is a standstill and it's difficult at this point to assume that that's going to come back, but the rest of the world. We believe will is just a timing issue and it will come back from that demand. So again.

We're putting all our resources. The teams are as we speak or looking at all the potential bottlenecks and we're leveraging our all our global resources around this.

Fair enough and then you have any kind I apologize. If you said this initially in your prepared comments a how did you want to commence late but can you talk about momentum in the U.S. commercial market just from a from a maybe I can institutional building standpoint, what you're seeing there.

Yeah from an institutional market I think that is the best part of the market that still holding up at this point in time, you know as you know 65% of our business is repair replace that tends to follow GDP. The new construction that we talked about we're seeing growth, but just at a slower growth and in particular in the northeast we see.

Some slowing and that's one of our stronger markets and you know some of that is slowing right now, but overall, we see growth is just at a slower growth with the institutional markets, obviously being the biggest opportunities for us in a key focus area.

Thanks, guys.

Thank you. Thank you.

Once again, if you'd like to ask a question. Please press star one on your telephone keypad, we have a question from Brian Blair with Oppenheimer.

Good morning, everyone. Thanks for taking my questions.

Right.

I was hoping you could offer little more color on the early days of owning back slow direct and how it's affected year. Your R&D efforts and maybe in any initial feedback from customers, having those assets in the watts portfolio.

Well the integration has gone really well, we've fully integrated that into our facility. So about other facility and.

They are performing as we expected right now so there's not much comments and the teams are executing and it's giving us a new product line and R&D you know that'll be a longer term discussion at this point time, but those teams are working really well together and we're really excited about this acquisition.

Okay fair enough and it looks like the deal was modestly accretive at the outset, how should we think about 20 Twond EPS contribution.

I think luck.

The incremental sales are not not significant so when you look at incrementally PS. It's it's minimal in 2020 after amortization.

Got it.

And you commented on overall funnel.

You clearly have a strong balance sheet solid cash flow.

If the right opportunity or opportunities came along Shashank, what do you view is near term dry powder.

So I'd say that to get near time, you don't want.

Near term dry powder or overall balance sheet, Oh right opportunities going on.

So based on where we stand on the balance sheet and leveraging up to a comfortable to an equity ratio I think or about $800 million on dry powder is what we had.

Got it appreciate the color. Thanks.

Thank you.

Once again, if you'd like to ask a question. Please press star one on your telephone keypad once again that start when asked the question.

And we do not have any telephone questions. At this time I'll turn the call over to Mr. panel.

Thank you and in closing thank you again for taking the time to join US today for our fourth quarter earnings call. We appreciate your continued interest in Watson look forward to speaking with you during our first quarter earnings call. It may have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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