Watts Water Technologies - Q4 2017

Transcript

Operator (participant)

Good morning. My name is Leandra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Watts Water Fourth Quarter 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Tim MacPhee, Treasurer and VP Investor Relations, you may begin your conference.

Tim MacPhee (VP of Investor Relations and Treasurer)

Thank you, and good morning, everyone, and welcome to our fourth quarter and full year 2017 earnings conference call. With me today are Bob Pagano, CEO and President, and Todd Trapp, our CFO. Bob will discuss our key accomplishments this past year. He will provide an overview of our fourth quarter results, discuss 2018 focus areas, and address the macro markets. Todd will offer a detailed analysis of our fourth quarter and full year results, discuss the impact of tax reform, and provide our initial outlook for 2018. Bob will then summarize our discussion, and 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 website.

We will reference this presentation throughout our prepared remarks, and any reference to non-GAAP financial information is reconciled in the appendix of the presentation. Before we begin, I'd like to remind everyone that during the course of this call, we will be making certain comments that constitute forward-looking statements. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially. For information concerning these risks and uncertainties, see Watts' 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.

Bob Pagano (CEO, President, and Director)

Thank you, Tim, and good morning, everyone. Starting with slide three in the earnings presentation, I'll provide an overview of this past year and give some initial thoughts on 2018. I'm very pleased with the great progress we made in 2017. Our transformation programs were completed, and we experienced solid performance in the Americas and in Europe. Both helped us to achieve record adjusted operating margin and adjusted earnings per share for the second consecutive year. We continued seed planning to drive future growth, and we began to realize some benefits of that effort during 2017. Now, let's review some of the quarter's financial highlights. Our strong fourth quarter performance was in line with the outlook we provided in November.

We achieved year-over-year and sequential improvement in our top line, reflecting consolidated organic sales that were up 3% versus Q4 in 2016. Excluding product rationalization, organic sales were up 4% in the quarter, with solid growth in all three regions. We again delivered strong adjusted operating margin expansion in the quarter, driven by higher volume and productivity. Cash flow also continued to be a very good story for the company. Todd will provide additional color on the financial results in a few moments. Now, let's review some of our accomplishments for the year. First, a principal focus for the team in 2017 was completing the announced transformation and restructuring programs. We captured the savings we anticipated from these efforts while enhancing our customers' experience with Watts and improving our logistics and planning processes.

With these endeavors behind us, we can now devote even more of our resources to address top-line growth and lean activities. Our second key focus is to continue to drive customer intimacy and commercial excellence. To that end, we continue to enhance our industry training programs around the world. As an example, our Watts Works Learning Center in North Andover enjoyed a successful second year, providing customers, distributors, sales representatives, and employees a hands-on experience with the company's products and technologies, and in the process, providing us invaluable feedback on customer needs. In the U.S., we trained over 12,000 people, including online and on-site in North Andover and at many lunch-and-learn settings. In 2018, we'll continue to expand the customer experience with a new learning center at our St. Pauls, North Carolina, facility. Third, our seed planning is beginning to yield results.

Over the past couple of years, we invested in sales and marketing and R&D to introduce new products to the marketplace and to drive geographic expansion. We saw success during the year in under-penetrated regions like Korea and Latin America, and new products like IntelliStation, SmartSense, and Benchmark Platinum have been well received in the marketplace. These products all originated from our new product development initiatives. Finally, our operational and commercial efforts yielded strong financial results. On an adjusted basis, we delivered record full-year operating margin in earnings. This is the second consecutive year that we achieved record results on both metrics, and we again converted free cash flow at greater than 100% of net income. Overall, another great performance turned in by the team. When I look back at 2017, it was truly a rewarding year.

Many of our long-term initiatives helped drive our operating improvements, proving that our strategy is working. Moving into 2018, let's talk about some of our key priorities and general market expectations, which are summarized on slide three. With our major transformation initiatives behind us, our efforts in 2018 will be more focused on commercial excellence to improve our organic growth trajectory. We expect to continue to introduce new products, expand geographically, and concentrate on key account management. We expect adjusted operating margin will continue to expand as volumes increase. We also expect to drive future productivity in our plants through lean and in SG&A through functional excellence. We are in the early innings of lean and have ample opportunity to standardize and streamline our processes.

We expect to continue to reinvest a portion of the productivity savings in selling and marketing, R&D, and IT systems to fund future growth. Additionally, the recently passed U.S. tax reform is a positive for Watts, and we anticipate beginning to realize benefits in 2018. Todd will provide more details shortly. Now, let's talk briefly about how we see the market shaping up this coming year. In general, much of the economic data is net positive for Watts in support of a continued growth. In the Americas, we expect the residential and non-residential markets should grow year-over-year. Low unemployment, a tight supply of existing homes for sale, builder sentiment, and fairly consistent housing starts, as well as recent positive permit growth, all indicate a steady residential market in 2018.

In non-residential, much of the recent forward-looking data, like the ABI and Dodge Momentum Indexes, are trending positively. We expect institutional growth may be offset by softness in the office and commercial subsegments. Institutions require more complex plumbing and heating solutions, so growth in that sector is particularly beneficial to Watts, given our expanded product offering. In Europe, the overall outlook is generally stable. Total Europe construction spending is expected to continue to grow. Regionally, we expect to see low single-digit construction growth in some of our major markets, like France, Germany, Italy, and the Nordics. In the Asia Pacific region, the economy is expected to remain steady, with China GDP slightly down, but still at robust levels. Middle East GDP is expected to grow in 2018.

Total construction spending in China is expected to moderately improve in 2018, with incremental non-residential spending offsetting a softer residential market. Other Asia Pacific regions should remain relatively stable. We've seen recent volatility in the equity markets, which is driving uncertainty and could be a potential headwind to economic growth. We'll be watching closely customer reaction to this latest development. Finally, certain macro forces, like the effect of inactive proposed U.S. fiscal policies, Chinese debt implications on the residential construction market, and numerous geopolitical concerns in Asia Pacific and the Middle East, all require close monitoring as the year unfolds. In summary, we anticipate another year of overall market growth. Todd will now review our results for the quarter and full year and offer our initial outlook for 2018. Todd?

Todd Trapp (CFO)

Thank you, Bob, and good morning, everyone. I'm on slide four, which highlights the fourth quarter results. Sales of $366 million were up 7% on a reported basis and up 3% organically. Excluding the impact from expected product rationalization, organic sales increased 4%, with growth in all regions. I'll provide more color on the regional results in a few minutes. Foreign exchange, mainly the euro, positively impacted sales by 3%. Adjusted operating profit of $42 million increased 12%. This translated into an adjusted operating margin of 11.4%, up 50 basis points versus last year in a Q4 record for Watts. Benefits from volume, transformation savings, and productivity more than offset higher material costs and incremental growth investments. Adjusted EPS of $0.74 increased 16% versus last year, driven by strong operations.

The $0.74 represents another Q4 record for the company. The effective tax rate in the quarter was 31.7%, slightly lower than last year due to the mix of worldwide earnings. Free cash flow for the full year was $127 million, an increase of 24% over 2016. Excluding the impact of the tax reform charge, free cash flow conversion was 129%. Over the course of the year, we paid down net debt of over $150 million. We also invested $29 million in CapEx, which equates to a 100% reinvestment ratio. The majority of our capital investments are high ROI projects, which will help drive growth and productivity over the next several years.

During 2017, we also returned $44 million to shareholders in the form of dividends and share repurchases, a continuation of our balanced capital allocation approach. So in summary, Q4 played out as we thought. The sales momentum we anticipated for the second half of 2017 was realized, and we delivered record adjusted operating margin and EPS while still investing for the future. Moving to the regions, let's turn to slide 5 and discuss the Americas results. Reported sales increased 5% to $234 million. Organically, sales were up 3%, with solid growth in plumbing, drains, and water quality, which more than offset slightly lower volume in boilers. Americas adjusted operating profit for the quarter increased 11% to $37.8 million. Operating margin expanded 90 basis points to 16.2%.

The margin increase was driven by volume and continued strong productivity, including transformation savings, which more than offset growth investments and higher material costs. So another quarter of solid sales growth and strong operating profit performance for the Americas. Turning to slide six, let's review Europe's results. Sales were $116 million, up 14% on a reported basis. Foreign exchange was a tailwind of about 9 points in the quarter. Organically, sales were up a strong 5%. From a platform perspective, drains was up double digits due to strength in both land and marine-based applications. Fluid solution sales, which include HVAC, plumbing, and electronics, grew organically low single digits due to some recovery in our larger end markets, early benefits from our cross-selling initiatives, and some favorable comps. By geography, we saw solid growth in France, Germany, and the Nordics.

In France, growth was driven by a stronger demand for our valves and plumbing products. Nordics saw strength in commercial drains, while Germany experienced higher OEM sales, partially due to new product introductions. As expected, Italy was negatively impacted from a continued slowdown in the market for energy-efficient products, similar to what we saw in Q3. Adjusted operating profit in Europe was $11.8 million, a 33% increase over last year. Operating margin of 10.2% increased 140 basis points, primarily due to higher volume and productivity, including restructuring savings. So as expected, Europe saw some recovery on the top line and delivered a solid operating performance in the quarter. Now, moving to slide seven, let's take a look at Asia Pacific's results for the fourth quarter. Asia Pacific sales were $17 million, flat on a reported basis and down 1% organically.

Excluding product rationalization, organic sales increased by 9% in the quarter. Sales within China grew 22%, with strong growth in commercial valves, which are sold into data centers and semiconductor plants, being partially offset by lower demand for our residential heating products. As discussed last quarter, we continued to see softness in our heating products due to some government restrictions on loans for residential investments. Sales outside China increased 1% due to higher plumbing and valve sales in New Zealand and Australia, being offset by product timing in Korea and the Middle East. Adjusted operating profit of $1.4 million was down versus last year, driven by lower intercompany volume and growth investments. I am now on slide eight. Let me speak about the full year results. For 2017, reported sales were $1.46 billion, up $58 million or 4%.

The increase was primarily driven by acquired sales of 3%. Excluding product rationalization, consolidated organic sales were up 2%, with growth in all regions. Adjusted operating margin was 11.9%, up 50 basis points and a new record for Watts. Sales mix, transformation and restructuring benefits, and continued productivity were the driving factors of the record margin. Also important to note, the margin expansion included incremental investments of roughly $8 million. Adjusted EPS of $3.02 was up $0.35, or 13%, versus prior year. The increase was driven by improved operating performance and a reduction in our effective tax rate. EPS of $3.02 was also a record for Watts. Please turn to slide nine, and I'll provide some details on the U.S. tax reform and its impact on Watts.

In the fourth quarter, we recorded a net charge of $25 million as a result of the U.S. tax reform. Included in the net charge is a one-time mandatory repatriation tax for cumulative undistributed foreign earnings. Partially offsetting this was a credit to remeasure our deferred tax liabilities at a lower tax rate as of December 31st. We expect to pay the one-time deemed repatriation tax over the next eight years, in line with the new law, with about $4 million in payments due this year. We estimate our effective tax rate will approximate 28% in 2018, about 5 percentage points lower than 2017. The 2018 effective tax rate includes a reduction in the statutory rate, but also adds back certain previously allowed deductions that, under the new law, are no longer available to us.

We currently anticipate repatriating approximately $125 million in 2018. We've made this estimate after considering regional working capital needs, withholding tax considerations, and individual country limitations on cash movements. We will evaluate future repatriations beyond 2018 in line with our expected worldwide capital requirements. I would like to emphasize that the information provided is based on our current interpretations of the tax reform legislation, which are subject to refinement and change as further guidance is provided by the U.S. tax authorities. Now, turning to slide 10, let's discuss the general framework we considered in preparing our 2018 outlook. Let's look at the expected headwinds. Commodity costs, mainly copper, increased dramatically during 2017, and the current forecast from IHS is that it will remain at elevated levels in 2018.

Consistent with our ongoing strategy, we are going to reinvest in the business, especially in initiatives that are commercially focused. Product rationalization will be a headwind again in Europe and Asia Pacific, but overall, at a reduced level. The amount is approximately $9 million, and it has been included in our estimated organic growth rates for the 2018 outlook. In the middle column, you can see some of the items that we'll continue to monitor. US fiscal policies could impact our business in 2018. At this point, we do not know how our customers will reinvest their expected cash benefits from the tax reform. Infrastructure legislation is too early in the process, with few details and timing yet to be determined. There have been some concerns in China around high debt levels and a hyperactive real estate market.

As mentioned, the government has taken steps to temper the residential markets, but how successful that effort will be, and the knock-on effects on commercial markets and the overall Chinese economy, is yet to be determined. As Bob mentioned, there are a number of geopolitical concerns that could impact Asia Pacific and the Middle East, something we'll continue to monitor. Finally, looking at the anticipated tailwinds. We are hopeful that the early actions we undertook with pricing in the fourth quarter of 2017 should help mitigate some of the commodity inflation. We'll be watching the commodity markets to determine if further pricing actions are necessary. Restructuring benefits should provide margin tailwind again this year. And as I just discussed, the effects of tax reform should be beneficial to Watts in 2018.

Lastly, the euro is currently strengthening against the US dollar, which is positive for our year-over-year reported results. Finally, let's review our outlook for 2018. On Slide 11, we have provided our major assumptions. Starting with sales, we estimate that Americas should grow organically 3%-5%, with solid growth across most of our product lines. We expect operating margin in the Americas to expand as well from volume leverage and productivity initiatives. For Europe, we are forecasting organic sales growth of 1%-3%. We expect to see improved performance in both fluid solutions and drains based on 2017 second half results and continued positive end markets. We expect another year of operating margin expansion due to higher volume and continued productivity, including restructuring savings.

In Asia Pacific, we expect organic sales growth to increase between 7%-10% for the year, with strong growth both inside and outside of China. Asia Pacific will deliver solid margin expansion as well, primarily due to higher volume. Overall, on a consolidated level, Watts' organic sales are estimated to increase approximately 3% in 2018. We estimate our consolidated operating margin should expand between 50-70 basis points, which includes approximately $10 million of incremental investments. Now, a few other key inputs to consider for 2018. We expect corporate costs to be fairly flat with 2017, about $37 million for the year. Interest expense should be roughly $17 million, and as I mentioned, our estimated effective tax rate for 2018 is 20%.

Capital spending is expected to be in the $38 million range as we continue to reinvest in our manufacturing facilities and systems, which will support future growth and productivity. Depreciation and amortization should be approximately $50 million for the year. We expect to continue to drive free cash flow conversion equal to or greater than 100% of net income. And finally, we expect our share count should remain flat at a minimum, with the buyback program offsetting creep. Before I turn the call back over to Bob, a few housekeeping items on Q1. We're expecting consolidated organic growth in the first quarter to be slightly below our full year expectations. Europe will be negatively impacted by a couple of shipping days due to the Easter holiday at the end of March.

We expect some of the product timing in the Middle East and Korea that we saw in Q4 will continue into Q1 and lower Asia Pacific's growth rate. Both situations we consider timing issues that will correct themselves during the remainder of 2018. We expect incremental investments of about $2.5 million in the quarter, $1.5 million in the Americas, and $1 million in Europe. These investments will be partially offset by about $1 million in incremental restructuring savings, about $500,000 each in the Americas and Europe. With that, I'll turn it over to Bob before moving to Q&A. Bob?

Bob Pagano (CEO, President, and Director)

Thanks, Todd. If you would, please turn to slide 12 and let me summarize our discussion. The year finished strong, and we were excited to again deliver record results for the company. We successfully completed our transformational strategy, which in turn strengthened our foundation to drive further growth. We are approaching 2018 with some optimism, given what we saw in the second half of 2017. We are all well positioned for this environment. With that said, the recent equity market volatility has created some uncertainty. We'll be watching closely how this impacts customer sentiment and the construction markets. As Todd mentioned, we plan to deliver solid margin expansion in 2018, while investing for future growth and continuing to deliver strong free cash flow. As always, we remain disciplined in our capital deployment strategy.

Over the last three years, we have made substantial progress in our journey to becoming a leaner, more customer-centric organization. We stabilized our foundation, executed on announced transformation efforts, and invested for the future. This year, we'll be keenly focused on growth through geographical expansion, new product introductions, and key account management. I'm confident that our team will continue to deliver on its commitments for 2018 and beyond. With that, operator, please open the line for questions.

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, please press star and the number one on your telephone keypad. Our first question comes from the line of Ryan Connors with Boenning and Scattergood. Your line is open.

Speaker 7

Great. Thanks for taking my question, and thanks for the detailed remarks. You covered most of what I was looking for. A couple ones, though. One, Bob, can you update us on sort of the channel, distributor inventory situation as the outlook improves? Is there a restocking going on, or what's the latest there?

Bob Pagano (CEO, President, and Director)

Yeah, in general, I think in North America, we believe stocking levels are, you know, just fine. I think if you remember in Q4 of last year, in Europe, we saw some destocking levels, in particular in the drains area, and we saw that come back up to speed in this quarter of this year. But overall, we're, you know, I think there's ample inventory in the system right now.

Speaker 7

Got it. Okay. My second one, you know, I recognize you may not want to get too deep in the weeds discussing individual product lines. I'm gonna give this a shot anyway. You know, last quarter, you called out backflow as an area that you thought was, you know, defensible against online-type competition. But since then, you've got this Backflow Direct guy out there really making some very bold claims about, you know, trying to revolutionize that market and even, you know, making those claims directly to the investment community. So I wanna give you a chance to kind of give the Watts side of that story, at least to the CliffsNotes version.

Bob Pagano (CEO, President, and Director)

Sure. Yeah, and normally, we don't talk about product lines, but again, long term, you know, this individual. Again, I probably shouldn't go into some of this level of detail, but, you know, we believe in the long term, you know, our channels are strong, and we offer complete offerings and solutions, versus they offer one single product line. And in the end, we believe the overall solution will trump the individual component. So anyways, that's all I'm gonna comment about that.

Speaker 7

Okay. Well, that, that is actually helpful. Thank you.

Bob Pagano (CEO, President, and Director)

Okay. Thanks, Ryan.

Operator (participant)

Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Your line is open.

James Picariello (Senior Automotive Analyst)

Hey, good morning, guys. This is James Picariello .

Bob Pagano (CEO, President, and Director)

Morning, James.

James Picariello (Senior Automotive Analyst)

Morning. So, could you just provide your current assessment of price costs for 2018? You know, commodities are clearly a headwind given current raw material inflation trends, namely copper. I mean, do you still expect net positive price for 2018? I think you also talked about the channel reception of your November price increase. Thanks.

Bob Pagano (CEO, President, and Director)

Yeah.

Todd Trapp (CFO)

So James, this is Todd. I think from a material inflation standpoint, we saw a significant jump last year when copper went from an average of $2.20 in 2016 to $2.80 in 2017, and during the year, we did expand margins by 50 basis points. So if copper stays at the current levels, a little over $3, I think it was a little over $3 yesterday, you know, that would definitely result in some incremental headwinds in 2018. With that said, we're still seeing some really solid performance out of our sourcing organization, which is helping to offset some of the material inflation. You know, and couple that with our Q4 pricing action, we should be able to offset copper at these current levels. Again, something we're watching very closely, but we feel like we're well positioned at this point in time.

James Picariello (Senior Automotive Analyst)

Okay, and then just the reception on the price increase, have competitors followed? Have you gotten any pushback or...?

Bob Pagano (CEO, President, and Director)

Right now, it's too early to tell. When we announced in the fourth quarter, most of our competitors announced in the, you know, beginning of the year. So I think it's too early to tell, but as of now, we're feeling, you know, okay at this point in time.

James Picariello (Senior Automotive Analyst)

Got it. And then just in your prepared remarks, you touched on AERCO and PVI, I believe. Can you just give your assessment of, you know, what took place in the quarter, what your outlook is for those businesses in 2018? Should we think about anything in particular in terms of the cadence for the year? Thanks.

Bob Pagano (CEO, President, and Director)

Yeah. The heating and hot water overall platform was down low single digits. You know, PVI had some slight growth, as well as AERCO was down a little bit. When we look at the market, AERCO's, you know, strength is in the 1 million BTU and above, and that tends to be more lumpier because it's highly spec. It's in the condensing side of that, and with no low natural gas prices, you know, the conversion from non-condensing to condensing is more lumpier than we would have expected. But overall, given the institutional growth we see growing faster in 2018, you know, we believe that business is poised for mid-single digit growth, you know, in total.

James Picariello (Senior Automotive Analyst)

Got it. All right. Thank you.

Bob Pagano (CEO, President, and Director)

Thank you, James.

Operator (participant)

Your next question comes from the line of Brian Lee with Goldman Sachs. Your line is open.

Hank Elder (Associate)

... Hi there, guys. This is Hank Elder on for Brian.

Bob Pagano (CEO, President, and Director)

Hey, Hank. Hi, Hank.

Hank Elder (Associate)

Hey, so, what are the capital allocation priorities for that cash repatriation? And then does that fuel potentially more tuck-in M&A or capital return? And then does that also drive some of the CapEx increase year-over-year?

Bob Pagano (CEO, President, and Director)

Yeah. So Hank, currently, we're reviewing all options at this time. But as you heard in my opening remarks, we are spending a little bit more on CapEx, as well as some more incremental investments in the U.S. in 2018 versus 2017. And we're also looking to potentially pay down some debt. So, still early in the process, reviewing all the options at this point in time, and we'll shed more light as the timing comes, as the timing plays out.

Hank Elder (Associate)

All right. That's helpful. And then on the effective tax rate for 2018, should we assume that 28% is kind of the longer term rate as well under the new regime? Or is there some one-time stuff in 2018?

Bob Pagano (CEO, President, and Director)

I mean, again, it's, it reflects what we know today, and there's still a lot of tax planning and analysis that are going on. So I think from a modeling standpoint, you know, 28% is what I'd use going forward.

Hank Elder (Associate)

All right. Thank you, guys. Drop back in queue.

Bob Pagano (CEO, President, and Director)

Thank you.

Operator (participant)

Your next question comes from the line of Walter Liptak with Seaport Global. Your line is open.

Walter Liptak (Sell Side Equity Research Analyst)

Hi. Thanks. Good morning, guys.

Bob Pagano (CEO, President, and Director)

Do well. Good morning.

Walter Liptak (Sell Side Equity Research Analyst)

And, congratulations on the record year. Nice to see. I wonder if I could ask first just about the 50-70 basis points of margin improvement. And I wonder if you could bucket those for us. You know, how much is coming from restructuring? How much is, you know, coming from picking up, you know, some of the price costs that you lost last year, you know, volume, et cetera?

Bob Pagano (CEO, President, and Director)

Yeah, so listen, I can tell you about it. I mean, with the transformation in our rearview mirror, you know, the big focus for us heading into 2018 is gonna be around plan optimization through lean, continued sourcing initiatives and functional excellence within SG&A. You know, as I mentioned in my opening remarks, you know, price realization will definitely be a key driver for us for Watts in 2018. We do expect to see restructuring savings of about, you know, $5 million in 2018 as well. And consistent with the last several years, you know, we're gonna invest a portion of that back into new product developments, selling and marketing, R&D&E and IT tools to the tune of about $10 million.

But bottom line, in order to get some of that, you know, 50-70 basis points of margin expansion, we do need to see top-line growth. So we do expect to see solid margin across all regions at this point in time, but it's gonna come from-

Walter Liptak (Sell Side Equity Research Analyst)

Okay.

Bob Pagano (CEO, President, and Director)

top-line growth as well as some internal initiatives.

Walter Liptak (Sell Side Equity Research Analyst)

Okay. Well, it sounds like with the 3% in your outlook, you're gonna get some growth, so that looks good. You know, I wonder if you could kind of go into a little bit more detail about the fourth quarter pricing. Was it across the board? You know, what was the date on it? Was it early in the quarter? And, you know, did you lose some sales if your competitors didn't raise prices until January? You know, I wonder if you could provide some color on, you know, the uptake of the pricing.

Bob Pagano (CEO, President, and Director)

Yeah. So we announced it at the end of Q3, effective in the middle of Q4, and various agreements scatter that throughout the year. I don't think we lost any pluses or minuses, you know, in the quarter. I don't think that changed anything. So in general, I believe, you know, starting out the year, we're starting to see it. Again, it's early in January. We'll watch it throughout the quarter, but again, we're cautiously optimistic at this point in time that it'll stick.

Walter Liptak (Sell Side Equity Research Analyst)

Okay, great. Then, you know, last one from me. You know, Bob, I think you commented on, you know, the outlook may be a little bit uncertain because of the stock market volatility. You know, I'm wondering if you could just comment, you know, is your business so sensitive that with the volatility in the last couple of weeks, you saw sales, you know, changing or being held back as a result of what, you know, what's been happening on Wall Street?

Bob Pagano (CEO, President, and Director)

Walter, it's too early to tell. My 30+ years of experience in this market, normally when there's uncertainty, projects just get stalled a little bit, right? So they start and go. It's too early. We haven't seen anything, you know, notable in any of our, you know, daily sales that we monitor. But, you know, normally, projects that get funded, people will just stall and, you know, with the uncertainty in the market, nobody usually accelerates things. So if anything, it stalls. It's just something we gotta watch and, you know, look at and make sure we're pacing and sequencing our investments accordingly.

Walter Liptak (Sell Side Equity Research Analyst)

Oh, okay. Just to be clear, you did not see, like, a slowdown in sales. It was just a concern that if it goes on, you know, maybe there could be a push out in projects.

Bob Pagano (CEO, President, and Director)

That's correct.

Walter Liptak (Sell Side Equity Research Analyst)

Okay. All right, I understand. Thank you.

Bob Pagano (CEO, President, and Director)

Thank you.

Operator (participant)

Your next question comes from the line of Joe Giordano with Cowen. Your line is open.

Speaker 7

Good morning, guys. This is actually Jake Stout on for Joe.

Bob Pagano (CEO, President, and Director)

Good morning, Jake.

Speaker 7

Morning. Just two questions for me. One on Europe. You guys mentioned that Fluid Solutions did low single digits in the quarter. Just wondering how the recovery is going and what you see going forward. And then second, in APMEA, just curious on the margin side, the volume decline, is that associated with the rationalization from the sales, or is that a separate buy? Thanks.

Bob Pagano (CEO, President, and Director)

Okay. Let's start with the Europe. We did see some OEM recovery in the fourth quarter, which was positive for us. You know, in the third quarter, that was not strong, so we saw a rebound in that, maybe a little restocking in the fourth quarter, but, again, too early to tell. So, but generally positive, you know, heading into next year. Regarding Asia Pacific, I think we have to remember, in Asia Pacific, that they produced a lot of the undifferentiated products that went into North America. So when we exited North America, they lost, let's call it, the intercompany pricing, and I'll just use an average of cost plus 10%. They lost that margin as well as they discontinued the production of that product.

Speaker 7

So you can imagine the cost per product that they had to fulfill, you know, had decent margins when they were producing a large amount for North America. As that volume went down, they've, you know, subsequently exited all that product line, and which had a lot of margin. So now we have to backfill that volume to cover all our... You know, there's significant fixed costs when you're running an organization in Asia, and that's why we've been putting a large investment on growing, you know, inside of China and outside of China to leverage our large fixed costs there. So it is gonna be a little bumpy as we grow in there, but we believe we're under-penetrated in the region and have ample opportunities to grow, and that's what our team's focused on.

Great. Thanks, guys.

Bob Pagano (CEO, President, and Director)

Thank you.

Speaker 7

Thank you.

Operator (participant)

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

Bob Pagano (CEO, President, and Director)

Thank you. In closing, thanks again for taking the time to join us today for our fourth quarter earnings call. We appreciate your continued interest in Watts Water Technologies, and we look forward to speaking with you during our first quarter earnings call in May. Have a great day.

Operator (participant)

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