Exhibit 99.2
Watts Water Technologies, Inc.
First Quarter 2006 Earnings Conference Call
May 2, 2006
Transcript
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Operator
Good day, ladies and gentlemen, and welcome to the first quarter 2006 Watts
Water Technologies earnings conference call. My name is Anthony, and I will be
your coordinator for today.
At this time, all participants are in a listen-only mode. We will be conducting
a question-and-answer session towards the end of today's conference. If at any
time during the call you require assistance, please press star, followed by
zero, and a coordinator will be happy to assist you.
I would now like to turn the presentation over to your host for today's call,
Mr. Kenneth Lepage, Assistant General Counsel. Please proceed, sir.
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Kenneth Lepage - Watts Water Technologies, Inc. - Assistant General Counsel
Thank you. Before Pat and Bill begin their presentation, I want to inform you
that various remarks they may make about the Company's future expectations,
plans, and prospects constitute forward-looking statements for purposes of the
Safe Harbor Provisions under the Private Securities Litigation Reform Act of
1995.
Actual results may differ materially from those indicated by these
forward-looking statements as a result of various important factors, including
those discussed under the heading 'risk factors,' in our Annual Report on Form
10-K for the year ended December 31st, 2005 filed with the Securities & Exchange
Commission and other reports we file from time to time with the SEC.
In addition, any forward-looking statements represent our views only as of
today, and should not be relied upon as representing our views as of any
subsequent date. While we may elect to update forward-looking statements at some
point in the future we specifically disclaim any obligation to do so.
I will now turn the presentation over to Pat and Bill.
Patrick O'Keefe - Watts Water Technologies, Inc. - Chief Executive Officer
Thank you, Ken.
The first thing I'd like to do is just let you know that the way we will be
conducting the call today is I'll make some opening comments, I'll turn the call
over to Bill McCartney who will walk you through some of the financial details
and help you understand the numbers in a detailed manner, and then we'll open
the lines and answer any and all questions you may have.
First thing I want to let you know is we're very pleased with the overall
performance for the first quarter of 2006. You can see from the press release
that revenue increased 26 percent to 275 million, net income came in at 15
million or $0.46 per share, which compares very favorably to $0.37 per share a
year ago.
Most importantly, we achieved our record results with all segments contributing
to our growth in both sales and earnings, so this is a broad based improvement
across the Company, with all geographical areas and all markets participating in
the upswing.
Consolidated revenues grew as a result of essentially 10.6 percent internal
growth, 17 percent acquisition growth, offset by 2 percent which is the impact
of foreign exchange, a negative 2 percent for foreign exchange.
When you look at the actual consolidated gross margins, they're off just
slightly, which is primarily due to the margins realized on the sales from
FEBCO, Mueller Steam Specialty and Polyjet product lines, which were acquired.
And we told you this, I think, when we acquired the Company, we saw the first
couple of months as being sort of a turnaround situation with margins expected
to improve throughout the year.
When you look at consolidated earnings, operating earnings, they increased 5.2
million or 24.5 percent, and were essentially in line with the prior year at 9.6
percent of net sales. When you look at that 24.5 percent increase in operating
income, it was a result of -- roughly 2.6 million of it was from internal
growth, 2.6 million of it was from acquisition growth, half a million of it was
due to lower restructuring costs which was offset by another half a million
going in the opposite direction for foreign exchange.
During the quarter we basically saw strong demand from all of the end markets. I
would describe the residential construction and remodeling market as it remains
strong. The commercial construction and renovation market continues to improve.
I think we saw that in the fourth quarter, we saw it here in the second and the
first quarter of this year.
North America retail and wholesale markets both showed strong organic growth in
the 9 to 10 percent range. Europe wholesale and OEM markets are strong with
organic growth rates in the 4 to 5 percent range. China came in with an organic
growth rate of 16 percent.
The one concern is the cost of copper and other raw materials which remained an
issue for us to manage throughout 2006. So far, we have been able to realize
price increases which are necessary to maintain our margins. But it's a big
issue going forward, and we'll be discussing that further.
We're working on a number of productivity improvements in cost reduction
initiatives which we expect to realize going forward. The integration of our
recent acquisitions of Dormont and FEBCO and Mueller Stream Specialty are
essentially on plan at this point in time. And our acquisition pipeline remains
very strong.
So, in summary, I think this was a really strong quarter. We look at a broad
base improvement across all markets, all end markets remained strong.
And, with those opening comments I'll turn it over to Bill who will walk you
through some of the details and the numbers.
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Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
Thanks, Pat.
As Pat mentioned, revenue closed at 275 million, an increase of 25.5 percent.
Income from continuing ops at 15.1 million was an increase of 21.7 percent, so a
few percentage points less than the revenue growth. The main reason for that
disparity was the inclusion of the Mueller, FEBCO product lines, almost $15
million of revenue at essentially a breakeven. In addition to that, we expensed
about $450,000 both pre and post tax for stock options, so those two issues
caused our growth in earnings to be slightly less than our growth in revenue.
There's a geographic footnote on the press release, so you can look at that, for
the segment, sales and segment operating income, but, as Pat mentioned, all
segments were up very nicely, and we're pleased with that.
On a consolidated revenue growth to give you the specific figures that Pat
referenced, organic growth was 23.3 million, that's 10.6 percent. Foreign
exchange was unfavorable 4.5 million, that's negative 2 percent. And acquired
revenue, 37.1 million or 17 percent for a total of 55.9 or 25.5 percent.
Looking to the segment information, North America came in at 196 million, that's
an increase of 33.3 percent. Organically North America grew at 9.5 percent,
that's 14 million, and I'll give you some detail on that in a moment. Foreign
exchange was favorable in North America, $800,000 or half a point, and that's
the strengthening of the Canadian dollar versus the U.S. dollar. And the
acquired revenues with 34 million or 23.3 percent. So, North America grew in
total 49 million or 33.3 percent.
The acquired revenue of 34 million was the result of Alamo, Savard, and
Flexflow, three smaller acquisitions we did last year, and then Core and Dormont
completed in December of 2005.
When we look at the individual markets inside of North America, the total sales
for retail were 46 million, that's up from 40 million last year, that's an
increase of 14 percent. We do have the inclusion of the Dormont retail in there,
so if you back that out we have retail sales organically grew at 9.6 percent,
that's 44.3 million. So, the total retail revenue, 46.2.
When we look at the organic growth we had several areas of strength that helped
us, we believe we are gaining market share in the Canadian retail market with
some new customers. We continue to see growth in our supplier lines as a result
of our introduction last year of our flood safe water connector. We continue to
see nice growth in our floor warming products, that's our under floor electrical
system. And then our C Tech acquisition continues to gain shelf space this year
so far, as well. So, it's a combination of several product lines.
On the wholesale side, the North America total revenue is 150 million, that's an
increase of 40 percent. Organically, we grew at 9.4 percent on the wholesale
side. The large growth in total was because you see most of the revenue from
Dormont and most, almost all of the revenue from Core is contained in the
wholesale - actually, all the revenue from Core is contained in the wholesale
side.
When we look at the organic growth on the wholesale, as Pat mentioned earlier,
it was fairly broad based. We saw increases in both our commercial and
residential end markets, back flow and plumbing were very strong. Our under
floor radiant heating, the hydronic based product continues to show growth.
Water purification products were up, as well.
Dormont, our acquisition for the gas connector market, was right on track with
what we expected, and we saw some nice growth in the Canadian market which kind
of mirrors the U.S. wholesale market. So, it was very broad based increase.
Looking at the European sales, in total, Europe was up 8.8 percent, that's $72
million in the quarter. Organically, we posted an increase of 12.7 percent,
which is the strongest quarter we've seen in many, many years from our European
segment. That was partially offset by unfavorable foreign exchange. We had an
unfavorable adjustment there of 8.2 percent or 5.4 million, and acquired growth
was 2.8 million or 4.2 percent, so it adds up to 8.8 percent in total.
But organically we saw, again, very broad based increases. We've analyzed it and
we see basically all countries, all of our markets, and all of the product lines
seem to be up fairly evenly across Europe.
We feel we're gaining market share in Europe with selling some of the packages
that we developed, the under floor radiant heating packages with manifolds and
safety control valves.
The solar market continues to be strong with the higher cost of energy and the
tax incentives that are being offered in the Nordic countries and Germany for
solar related products, that's very helpful. Eastern Europe was up about 20
percent in the quarter, as well.
We still continue to see the boiler manufacturers as soft, however, and that
offsets some of this broad based growth that we've just mentioned.
In terms of the end markets, wholesale and retail, Pat mentioned we're up both
about 4.5 percent. If we adjust for the foreign exchange, both of those markets,
we show growth between 12 to 13 percent, so Pat's numbers included some foreign
exchange in them, as well. So, we had a little bit of a mix towards the
wholesale and very broad based growth. And our two acquisitions in Europe,
[Electro Controls] and Microflex at l2.8 million, were on track from what we
expected to see.
The revenue in China at 6.1 million is an increase of just under 20 percent.
Organically we grew at 16 percent, and foreign exchange was favorable 3.5
percent, and that will give you 19.7 percent.
We also had a significant increase in our inter-company revenue, which you don't
see, but it does impact the numbers in terms of our capacity utilization and
absorption figures and what-not, and inter-company sales were up about 50
percent versus last year. So the end markets in China continue to be vibrant for
us.
Moving on to the gross margin, consolidated we were at 34.9 percent, that's a
drop of about four-tenths of a point versus the first quarter of last year. If
you exclude the acquisitions the margin would have gone up half a point to 35.8
percent. And this is really the impact of core. Again, as we mentioned, core
broke-even. The gross margin is much lower than our Corporate average, so it had
an unfavorable impact on the gross margin percentage.
Looking at the margins by segment, the North America, our gross margin was 35
percent, that's down 1.5 points from last year, and this is where we see the
impact of core in North American segment. Excluding that, the margins would have
been up about two-tenths of a point.
We're looking at nice improvements in the mix where we see some of our
commercial products increasing, control valves, drains, and back flow, and
what-not, and that was partially offset by some continued softness in the
margins as a result of retail pricing in copper. We did achieve price increases
during the first and second quarter of 2006 here, but, again, not enough to
offset all of the copper issues, so that offset some of the favorable mix that
we saw.
We also in the quarter expensed $960,000 against cost for sales associated with
Core and Dormont for the amortization of purchase price, in which we are
required to write-up our inventory to market. And that is behind us now, and we
will not have that amortization as we move forward into the second quarter.
So, all in all, we feel it's a fairly solid performance for gross margin in
North America.
Looking at Europe, the gross margin, 33.1 percent, that's up eight-tenths of a
point versus last year. Here, the acquisitions actually helped a little bit.
Excluding acquisitions the gross margin would have only been up three-tenths of
a point. So, the acquisitions there helped us by half a point. We don't have any
of those amortization issues in Europe as that is behind us and we expensed that
last year.
But the margin from an organic standpoint is up, and what we're really seeing is
improved productivity. We've done a lot of restructuring in Europe. We've
restructured our instrumentation group. We have some restructuring ongoing in
Italy where we have some reduction in our headcount during the first quarter,
and with the improved increased sales revenue, particularly into the, out of our
Italian factories we have some improved absorption. We also see a little bit of
favorable move on the wholesale side, a little favorable mix, if you will, and
that helps the margin, as well.
In China the margin is up slightly to 15 percent versus 14.3 percent, and again
just a reminder that that margin is heavily impacted by the significant
percentage of inter-company sales, so it's not representative of trade sales.
However, the margin is up slightly, and that's a result, again, of more volume
going through the factories, and some of that transfer pricing being more
current with some price increases back to the North American market.
The SG&A, 69 million versus 55.7 million last year, that's an increase of 13
million, and SG&A declined slightly as a percentage of sales to 25.1 percent. In
terms of dollars an increase of 13 million.
The main factors here in SG&A is the acquired companies at $8 million of S&GA
expense. We had some incremental or variable selling expenses of about $3
million, and then the expensing of stock options is about a half a million, so
that's about 12.5 of the 13.3 million.
So, that brings us all the way down to operating earnings, an increase of 24.5
percent over last year. We're 9.6 percent of sales, which is down from 9.7, and
this is really the impact of the lower margin due to the amortization issue I
mentioned, offset by some lower SG&A.
The tax rate in the quarter, 34.6 percent, that's down from, versus last year
35.2 last year. Two major issues inside the tax rate. One is the rate in China
was essentially a break-even versus 9 percent last year, and we had booked some
recovery associated with, I would compare it to an investment tax credit where
we, because of our investments there we got a portion of that back from the
government, so we booked that in the first quarter. That will not be recurring
for the rest of the year.
And because of the strong performance in Europe, we had a slight mix, a
favorable mix, where the tax rate in Europe is only 32.9 versus the average, so
it's a little bit less than the average. So, we would anticipate a rate of about
35 percent for the rest of the year, and that would be barring any unusual
acquisition activity that might change the mix.
The net income, up 21.7 percent, at $15.1 million.
And with that, I guess, we can - well, a couple other points, I'm sorry, before
we open up for questions. In the quarter our capital expenditures, $7.1 million.
Depreciation and amortization is $7.5 million, and so slightly more than the
capital expenditures.
So, with that, I guess, we can open it up for questions?
Patrick O'Keefe: Yes.
QUESTION AND ANSWER
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Operator
[OPERATOR INSTRUCTIONS.]
Our first question comes from Mike Schneider from Robert Baird. Please proceed.
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Mike Schneider - Robert Baird - Analyst
Good afternoon, guys.
Patrick O'Keefe: Hi, Michael.
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Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
Hi, Michael.
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Mike Schneider - Robert Baird - Analyst
I guess first just on pricing, obviously, copper is the hot topic. Can you give
us a sense of what magnitude of price increases you've gone out with at least
YTD, and then what you think is necessary to cover what we've seen just in the
last 30 days?
Patrick O'Keefe: Mike, what we saw in the very beginning of the first quarter,
we had a price increase in wholesale of about 5 percent, which are being phased
in over Q1 and Q2. Europe we had increases of about 6 to 8 percent.
And we have a price increase which is announced on the wholesale side and
actually effective today, that is wholesale in the U.S. of about 5 percent. And
the Europeans will be having an increase of, a price increase between 6 to 9
percent that will be effective sometime in early June. And we're continuing to
monitor it and, if need be, we'll be doing additional price increases.
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Mike Schneider - Robert Baird - Analyst
And retail, where do you stand there, or are you locked in now for the year?
Patrick O'Keefe: Well, we have price increases that I just mentioned, that
really represents where copper was, sort of around January 1st, late December,
which is about $2.00, so we'll need to address that as time goes on.
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Mike Schneider - Robert Baird - Analyst
And last year in the second half, or it was the third quarter, when we were
talking about the squeeze that in particular was going on in retail, is the same
thing going to unfold this year where you're pretty much behind the curve until
you get into the fourth quarter and first quarter again and can reset the bar in
retail?
Patrick O'Keefe: Well, it takes a lot longer to get price increases in retail
and, you know, right now we still are somewhat behind the curve on retail. So,
it's not as easy as it is in the wholesale, so I guess the answer is we will be
behind a little bit.
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Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
Well, we have been and we continue to be. However, when you look at it on an
ongoing basis we have other price increases that we're already starting to, you
know, communicate with the customers on and try to get into effect.
So I'm not sure, Mike, if you're going to have, if you really look at it,
whether we would see the same situation as we did last year. I think we're
probably, particularly given the recent run-up in copper, the need for those
price increases is much more important earlier. But I will say you're correct in
that they push-back pretty hard with regard to their objection to those price
increases.
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Mike Schneider - Robert Baird - Analyst
Right. And gross margins then for the year in light of copper and the pricing
interplay here, do you suspect that the 34.9 this quarter is as good as it gets
for the year because this is the least of the pressure for the next four
quarters or I guess how are you guys looking at gross margins for the year?
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Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
Well, I think we're looking for our price increases to just basically cover our
copper costs, we're not looking to do anything more than that. And we'll get a
little bit of a relief because we won't have that inventory amortization that I
mentioned, and that's almost a million dollars, so that'll help the margins a
little bit.
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Mike Schneider - Robert Baird - Analyst
Okay.
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Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
But I mean, you're right, that's the number one challenge we have right now in
front of us is this thing, you know, with this copper.
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Mike Schneider - Robert Baird - Analyst
Okay, and in the [inaudible], I guess I was impressed with the growth there this
quarter, nearly 10 percent organic which is a rebound from last quarter. One,
can you just give us a sense of how I presume orders rebounded strongly in
February and March, given that you were in the hole in January with Home Depot.
Patrick O'Keefe: That's right.
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Mike Schneider - Robert Baird - Analyst
What does that tell you? You sensed or you expressed caution on residential
last quarter, what's your latest read, Pat?
Patrick O'Keefe: Yes, I think you did see the big retailers do fairly well in
this first quarter, and I think it surprised us in a positive sense, Mike.
There's no reason that we don't see that going forward either. I think we see it
going forward.
You know, although, one thing you're seeing is it's coming from same-store
sales. It's not coming from additional new stores, because you can look at the
numbers, Lowe's and Home Depot had significantly fewer stores being brought
online this year compared to last year. So, it's really same-store kind of sale
increases.
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Mike Schneider - Robert Baird - Analyst
And is it also a function of new rollouts? Because I wasn't really aware of any
significant rollouts in the first half. But have you commenced some?
Patrick O'Keefe: It's actually a result of rollouts that we had in place, Mike,
that are starting to, we're starting to see the volume roll through those
stores.
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Mike Schneider - Robert Baird - Analyst
Okay, fair enough. And then, finally, just on pricing, I guess, with Home Depot
having moved into now the wholesale distribution channel, can you give us an
update as to what you've heard in the channel about the pricing implications of
that?
Patrick O'Keefe: Yes, we're having conversations with those organizations with
regard to how we would go forward in terms of pricing and what kind of programs
they would like to see us put in place, but it's very preliminary, Mike, and
nothing has been decided at this point in time. But I could tell you that it's
their intention to leverage the size of their organization to their advantage
with regard to improving the overall programs that they have.
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Mike Schneider - Robert Baird - Analyst
Sure, that's natural. Okay. Thanks again, guys.
Patrick O'Keefe: Thank you.
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Operator
Our next question comes from Mark Grzymski from Needham & Company. Please
proceed.
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Mark Grzymski - Needham & Company - Analyst
Good afternoon, guys. Congratulations.
Patrick O'Keefe: Hey, Mark. Thank you.
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Mark Grzymski - Needham & Company - Analyst
Just kind of following up on that last question there, I mean with the change at
the big box retailers and the pressure that they're putting, I mean I guess a
lot of the acquisitions that are made are too diversified, the product lines get
more product into those stores so that you guys can leverage yourself a little
bit better against them. Can you comment on that in any, in that regard?
Patrick O'Keefe: Well, first of all, if you look at the recent acquisitions,
they tend to have a blend of exposure to the retail market as well as OEM market
or to the wholesale market, so we tend to stay away from product lines where we
can't differentiate ourselves and where they're more commodity oriented, which,
to be candid with you, many of the products that are going through the retail
channels tend to be the simpler products, the products that have less
engineering content in them and, therefore, by definition would be more
commodity oriented.
So, as we make acquisitions we're evaluating that exposure. To the extent that
it represents an inability to differentiate ourselves, we avoid those type of
acquisitions. I would say, quite honestly, our acquisition program is probably
moving us away from some of those categories.
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Mark Grzymski - Needham & Company - Analyst
Right. So, you're looking for more highly engineered, where you have better, you
know, where you'd be the leading provider of that product?
Patrick O'Keefe: Yes, where there's patents, where there's technology that is
unique and you can differentiate yourself and, therefore, allow you to, you
know, get paid for the engineering content in those products.
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Mark Grzymski - Needham & Company - Analyst
Do you think that since a lot of companies are looking to kind of expand in that
same fashion that that's putting any pressure on the pricing environment for
acquisitions?
Patrick O'Keefe: I think, quite honestly, the biggest pricing pressure that we
have seen is the financial buyers who have significant amount of leverage in
today's credit market, and they are actually the people who - you know, when we
walk away from deals in today's marketplace we're losing them to financial
buyers, we're not losing them to strategic.
I really don't have a big issue at the moment with regard to finding
acquisitions that are, meet our criteria for acquisitions. I think we're finding
plenty of opportunities. We have always been relatively selective in the
acquisitions that we actually consummate. We've always been relatively
disciplined in terms of being able to say no at any moment on an acquisition,
even one that we think from a strategic point of view would make sense if it
doesn't make sense from a financial point of view.
So, I don't really think it impacts us that much. The deals that have gone down
recently that we've walked away from, and there have been a number, have all
been taken by financial buyers.
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Mark Grzymski - Needham & Company - Analyst
Okay, great, and thanks for that color. Jumping to the SG&A area and with copper
being a thorn in your side, you know, is there any way - can you talk in more
detail about how you might be able to lower SG&A? Obviously, the acquisitions
there are impacting that. You know, what can that do for you going forward to
the operating income line?
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Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
Well, we have a couple of things that we've been working on here, Mark, in terms
of SG&A. You know, we've seen a nice decrease in our SOX expenses, we expect
another decrease this year. Some of our insurance and product liability issues,
we've seen some very nice decreases, and that's really a result of improved
management.
You know, we're looking at how we source our product and move our product from
Asia to the States, and we're looking at some consolidating distribution centers
and those kind of projects. And there's opportunities there, as well.
So, I mean with Bill Martino coming onboard, he's bringing a lot of experience
in terms of how much larger companies manage these issues, and there's a lot of
projects that we're working on to address that issues.
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Mark Grzymski - Needham & Company - Analyst
Okay.
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Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
You know, it takes a year or two to implement a lot of these things.
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Mark Grzymski - Needham & Company - Analyst
Sure.
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Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
You just don't turn a switch. Because there's a lot of projects that are
actively being worked on today.
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Mark Grzymski - Needham & Company - Analyst
Right. But you can't quantify, you know, what...
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Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
It's a little early to do that right now.
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Mark Grzymski - Needham & Company - Analyst
Right, okay, okay.
Patrick O'Keefe: Hey, Mark, the other thing you've got to be careful of is when
we make acquisitions.
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Mark Grzymski - Needham & Company - Analyst
Right.
Patrick O'Keefe: We're relatively indifferent in terms of - a lot of times if
you buy a business that is highly differentiated and has significant engineering
content and ability to differentiate yourself from your competitors you'll have
high gross margins and simultaneously high SG&A, so the real question is I'm
indifferent between buying a business as long as the contribution to operating
earnings and the contribution to net earnings is attractive.
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Mark Grzymski - Needham & Company - Analyst
Okay. Great. And then, finally, Pat, I mean you guys touched on, or you
specifically said that across the board you're seeing strength in the
residential markets. You know, geographically are there any, I mean I would just
assume that certain areas are slowing down and certain retail areas are also
rationalizing their inventories. Is that true, or is it just really continued
growth in residential spending?
Patrick O'Keefe: No, I think you're right. You see, if you were take it apart
state by state you see some unevenness in those numbers, but you've got to
remember we're not significantly influenced by lower end housing starts. We're
more, you know, we tend to get the order on the person where a plumber goes in
and he's replacing things that have been in a house that's been in existence for
four to seven or eight years, something of that nature.
So, we've never done well in the tract housing market, but that's sort of where
you're seeing a contraction. There's various states, for example, I was having a
conversation earlier today with some salespeople with regard to some changes
happening in the Florida market, okay? And the Florida market appears to be
seeing some softness in the real estate markets and things of that nature, and
the boom market that we've experienced the last couple of years may be sort of
softening or slowing down a little bit.
But, you know, when you look at it overall, when you look at our business, even
Europe had a very strong performance in Europe across the board, which quite
honestly I find was a little bit surprising to use because we know that Europe
has traditionally for the last 24 to 36 months been a relatively slow growth
environment. It wasn't a single country issue, it was a broad based issue.
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Mark Grzymski - Needham & Company - Analyst
Right.
Patrick O'Keefe: So, for the first time we saw, you know, Europe hitting on six
cylinders.
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Mark Grzymski - Needham & Company - Analyst
All right, guys. Thanks, and good luck.
Patrick O'Keefe: Thank you.
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Operator
Our next question comes from Jeff Hammond from Keybanc Capital Markets. Please
proceed.
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Jeff Hammond - Keybanc Capital Markets - Analyst
Hi, good afternoon, gentlemen.
Patrick O'Keefe: Hi, Jeff.
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Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
Hi, Jeff.
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Jeff Hammond - Keybanc Capital Markets - Analyst
Hey, a couple of questions on the markets. I guess to follow-on on Europe, you
did a pretty good job illustrating what's going on there, but can you give us a
sense of visibility going forward? Is that sustainable? Were there any
anomalies? What really changed there?
And then, also, separately on the U.S. commercial market, I think, Pat, you used
the term last year, 'it's lie watching paint dry.' It seems like there's more
conviction, you know, fourth quarter, first quarter, you know, what's the
visibility there as well as you look forward for the sustained improvement?
Patrick O'Keefe: Well, first let's talk about Europe. I mean I think I said this
to the previous question, I think on the positive side I was surprised a little
bit by the strength of Europe. I was particularly surprised by the evenness of
the strength, it's not one country.
Bill said earlier that the one area that still concerns us is probably the
boiler manufacturers where we make a lot of OEM products for various boiler
manufacturers, including the control packages, the pump packages, things of that
nature. And they seem to be still a little bit sluggish.
But, you know, when you talk about the other big economies, the French economy,
the Italian economy, the wholesale market in Germany, they all showed
significant positive improvement across the board. And some of that was offset
by the negative foreign exchange that we recorded. So, when you look at it in
currency it's even stronger than it is when you look at it in U.S. dollars.
So, I think, quite honestly, we think that there's an up tick happening in
Europe. I think if you go back and now that we recognize it I think we probably
saw some of that starting to happen in the fourth quarter, as well. So, it's not
one quarter, it's probably two quarters at this point, so I feel pretty good
going into the second quarter here with regard to the opportunity for us in
Europe, and I think if you look at the operating earnings, the operating
earnings leveraged very well there.
Now, if you come back and you look at the commercial marketplace I think you
were right, I was looking for vindication a year ago in terms of I've been
predicting that the commercial marketplace would improve, but unfortunately was
slow in coming. But I think now we've seen a couple of quarters here in a row
where we've seen some meaningful changes and not lightning fast changes, but
smooth and consistent changes in terms of the improvement in that marketplace.
What that results in is a slight shift in our product mix to probably a little
bit richer kind of margin. Some of that being offset by the way we did our
acquisition accounting and things and other things in this quarter.
So, you know, I feel bullish about Europe. I feel bullish about the commercial
marketplace. I'm a little bit cautious with regard to what's happening in the
residential marketplace. I think the residential marketplace will probably
soften over time, and I think hopefully we will have the offset in the
commercial and European market.
- --------------------------------------------------------------------------------
Jeff Hammond - Keybanc Capital Markets - Analyst
Okay. And then I guess moving back to the copper issue, can you just talk about
what your price realization in the quarter, and then any clarification between
what you saw in wholesale versus retail? Was there any retail price realization?
And then, also, as you look forward, you know, what level of these follow-on
price increases do you need to realize to cover? I mean do you need 100 percent
realization or just partial of those?
Patrick O'Keefe: Well, Jeff, on the retail side, I mean I mentioned 5 percent
that's being phased in over Q1 and Q2, and it's probably two-thirds of that will
be Q2, one-third in Q1. On the wholesale side I mentioned 5 percent price
increases, and we're getting most of that.
- --------------------------------------------------------------------------------
Jeff Hammond - Keybanc Capital Markets - Analyst
Okay. And then as far as the follow-ons, do you need 100 percent realization
there, or?
Patrick O'Keefe: Well, it's - copper is moving so fast, I mean we - there is -
you do need most of that to recover, and the way the markets are right now the
customers seem to understand that we're in a very unusual time and price
increases are sticking, and we're not the only ones that are going out with
price increases. I mean it seems to be, you know, most of the market, most of
the competitors are there.
- --------------------------------------------------------------------------------
Jeff Hammond - Keybanc Capital Markets - Analyst
And then can you remind us how you're thinking about hedging, if you're doing
any at all? I think my recollection was that you were doing little, if any?
And then, also, as we think about your FIFO accounting and inventories on hand,
what would be the timing at which $3.00 copper would start to work its way
into...?
Patrick O'Keefe: Yes, I mean if you look at copper at December 31st it was about
$2.10. I think it closed tonight on London at $3.30. So, it's up $1.20 since
December 31st. So, we have about on average now we have five months of material
in our inventory, okay? So, it takes five months once we buy a product for it to
hit cost of sales, and that really is not changing. Now, is that answering your
question?
- --------------------------------------------------------------------------------
Jeff Hammond - Keybanc Capital Markets - Analyst
Yes, that's perfect. And then hedging, you're not doing any hedging?
Patrick O'Keefe: We're not hedging at the moment. We continue to wrestle with
that topic, to be honest with you. I think that we will start some kind of a
hedging program. We're in discussions internally as to what is the right time to
enter into our first hedge, and we're thinking that we do need a hedge.
- --------------------------------------------------------------------------------
Jeff Hammond - Keybanc Capital Markets - Analyst
Okay. And then just a final I guess housekeeping item, can you quantify what the
inventory step-up would have been in the quarter if that goes away?
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
9.6 million.
Patrick O'Keefe: 960.
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
960,000, excuse me.
- --------------------------------------------------------------------------------
Jeff Hammond - Keybanc Capital Markets - Analyst
Okay, thanks, guys.
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
Sorry about that one, Jeff!
- --------------------------------------------------------------------------------
Operator
Our next question comes from David Smith from Citigroup. Please proceed.
- --------------------------------------------------------------------------------
David Smith - Citigroup - Analyst
Hi, guys.
Patrick O'Keefe: Hi, David.
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
Hi, David.
- --------------------------------------------------------------------------------
David Smith - Citigroup - Analyst
Just a question on the gross margin front. I'm a little surprised, I guess,
given that it takes five months for copper to flow through that gross margins
might not have been up a little more. And maybe you can just explain that
metric? It looks like its roughly flat to down. And I think maybe some of this
acquisition impact is playing in, but if you could go over that in a little bit
more detail?
Patrick O'Keefe: I mean you have two major things coming in from the
acquisitions. You have that 960,000 charge that we took, you know, as a result
of the acquisition accounting.
- --------------------------------------------------------------------------------
David Smith - Citigroup - Analyst
Now, just one second, though. Is that inventory related or is that amortization?
Patrick O'Keefe: Well, what we're doing, a step-up on the inventory value.
- --------------------------------------------------------------------------------
David Smith - Citigroup - Analyst
Oh, it is, okay, okay. I got you.
Patrick O'Keefe: And then you also have the fact that we brought in 15 million
or so of revenue at roughly 22 percent gross margin with FEBCO, Mueller. You
know, if you look - then you have the issues of the retail copper that we talked
about, but a lot of that being offset by improvements because of a little bit of
a mix towards commercial with drains and control valves, and back flow being up.
And Europe did an outstanding job in their gross margin as a result of all of
their restructuring that, you know, the productivity issues that we saw. We
talked about some of them last year but we're starting to see the benefit now.
- --------------------------------------------------------------------------------
David Smith - Citigroup - Analyst
Okay, so, net net that copper, would you say then that you were getting a
positive net benefit, I guess, from the copper, because it would have been
bought five months ago, and your price increases went through this quarter I
suppose, right?
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
You've got to keep on looking at it as a roll. I mean our objective is to
maintain our margins despite the escalation in raw material costs.
- --------------------------------------------------------------------------------
David Smith - Citigroup - Analyst
Right.
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
So, every quarter we're making - I can't think of a quarter in the last 12 that
we haven't had some type of a price action.
- --------------------------------------------------------------------------------
David Smith - Citigroup - Analyst
Right.
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
Right? So, it's really the question is what's the net roll.
- --------------------------------------------------------------------------------
David Smith - Citigroup - Analyst
So, net net it's fair to say, you almost sound like you've got at least one
quarter headstart on these cost increases then, and as long as you get these
continued price increases through we should see improvements in gross margin
looking at the rest of the year?
Patrick O'Keefe: Well, we're not going to go out and say we're going to improve
gross margin at this point, Dave, but I mean we have been successful in covering
copper up to this point in the wholesale channel.
- --------------------------------------------------------------------------------
David Smith - Citigroup - Analyst
Yes, I guess so.
Patrick O'Keefe: Just to make sure that the number came across, Dave, you know,
excluding the impact of acquisitions, gross margins were up half a point.
- --------------------------------------------------------------------------------
David Smith - Citigroup - Analyst
Right.
Patrick O'Keefe: Okay, I just wanted to make sure you heard that.
- --------------------------------------------------------------------------------
David Smith - Citigroup - Analyst
So, if I forget about this 960K step up, and then some improvement on the
breakeven impact and then the mix in Europe, it sounds like absent the copper
side plus the fact that you've got a few months headstart on the pricing it
sounds like there's a positive tailwind there. Is that what I'm...
Patrick O'Keefe: I tell you enough tailwind that we think it's achievable to
maintain our margin.
- --------------------------------------------------------------------------------
David Smith - Citigroup - Analyst
Right. I got you. Okay, thanks.
Patrick O'Keefe: Okay, Dave. Thank you.
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
That's a tricky wicket there, Dave, though. I mean this issue of pricing is
probably the trickiest thing we're playing with at the moment, and it's been a
continuous challenge for the last, I don't know, I think 30 months.
Patrick O'Keefe: Yes.
- --------------------------------------------------------------------------------
Operator
Our next question comes from [Stuart Scarf] from Standard & Poors Equity Group.
Please proceed.
- --------------------------------------------------------------------------------
Stuart Scarf - Standard & Poors Equity Group - Analyst
Good evening.
Patrick O'Keefe: Hello, Stuart.
- --------------------------------------------------------------------------------
Stuart Scarf - Standard & Poors Equity Group - Analyst
How are you doing? Most of my questions have been answered. Just wondering if
you could expand a little bit on your overseas production, whether you're
looking to expand any further, try to reap some benefits in margins that way,
low cost production in Bulgaria, Tunisia, as well as China? Just add any color
to that?
Patrick O'Keefe: Yes, let me just start by saying in essence, and this is a
continuous process. We have been increasing our capacity in most of the low cost
countries that we participate in. As an example, we increased the capacity in
our Tunisian operations during the last 12 months. We increased the capacity in
our Bulgarian operations over the last 12 months, and we've recently announced
an acquisition in China and continue to expand our capacity for procurement of
products in our wholly owned subsidiaries in China and our joint venture.
So, Bill, you might have the percentage, but the purchase, if you look at the
percentage of purchases that we're buying outside, from low cost countries. Our
intention is to increase that percentage over time on a relatively smooth basis,
and we've been doing that, because every project takes a considerable amount of
manpower and a considerable amount of time to do it correctly.
But, you know, I would say you're seeing the same thing, which is one of the
ways that we've maintained our margins is by continuously moving product to low
cost countries from higher cost operations.
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
Yes, and I think the other important point there is that one of our factories in
China, where we're manufacturing a lot of our bronze and brass plumbing
products, we still have a lot of capacity available, and we're continuing to
move product into that facility during the course of 2006. So, it's still a very
active program, Stuart, we're still continuing to expand and increase the
percentage of our sourcing from these low cost areas.
Patrick O'Keefe: Okay, thank you very much.
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
Okay, thank you.
- --------------------------------------------------------------------------------
Operator
Once again, ladies and gentlemen, if you wish to ask a question or you have a
comment please press star, followed by one.
Our next question comes from Ned Armstrong from FBR & Company. Please proceed.
- --------------------------------------------------------------------------------
Ned Armstrong - FBR & Company - Analyst
Good afternoon.
Patrick O'Keefe: Hi, Ned.
- --------------------------------------------------------------------------------
Ned Armstrong - FBR & Company - Analyst
You typically said over the past couple of years that your mix between
residential and commercial markets is about 50, 50. Given the recent activity
you've alluded to in the commercial markets has there been any tip there to
where it's noticeably more commercial now, or is it still pretty much even?
Patrick O'Keefe: I'd say it's pretty much even. Don't forget we - I think it's
more influence - we'll have to take a look at that, there's more influence on
some of the recent acquisitions we've made, for example, when you talk about
FEBCO, Mueller, which are substantially commercially oriented product line, you
talk about Dormont it's got a significant commercial exposure, as well. But I
think we'd have to look at those numbers. I don't have them computed at the
moment, but I think because of our acquisition program we're moving toward much
heavier mix of commercial products.
- --------------------------------------------------------------------------------
Ned Armstrong - FBR & Company - Analyst
Okay, and that could infer from that once the commercial market normalizes, so
to speak, that you would be more heavily weighted towards commercial than you've
traditionally been?
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
Yes, and I think we can't give you answer because we haven't gone back and
crunched the numbers, but I think sometime shortly we'll have to do that and
then give everyone an opportunity on another call to hear what our conclusion
is.
- --------------------------------------------------------------------------------
Ned Armstrong - FBR & Company - Analyst
Okay, and my second question involved inventory levels. If I understand
correctly from remarks that the two of you have made earlier, inventory levels
will stay at around, stay at the same levels they are or increase some over the
course of the year. Did I hear that correctly?
Patrick O'Keefe: The impact is don't forget the raw material costs by themselves
are driving up the value of your inventory, on a dollar basis. We have programs
underway, though, to manage our inventory more effectively in terms of quantity
on hand.
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
In terms of just unit volume that's in the inventory, Ned.
- --------------------------------------------------------------------------------
Ned Armstrong - FBR & Company - Analyst
Yes.
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
I think what we talked about on the last call is that we're looking for a slight
reduction in inventory this year, and, you know, Pat has explained to folks in
the past that one of Bill Martino's major responsibilities coming in as a new
COO is to help us improve our working capital management, and some of the
programs that I alluded to from an earlier question that are in place and
ongoing are also directed at improved working capital management, so it's a big
focus area for us.
So, at the end of the day, if copper keeps going our inventory will be higher
because of pricing, commodity issues in inventory, but on a unit basis we're
trying to be flat to down.
- --------------------------------------------------------------------------------
Ned Armstrong - FBR & Company - Analyst
Great, thank you very much.
- --------------------------------------------------------------------------------
Operator
Our next question comes from Jim Fong from Gabelli. Please proceed.
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
Hey, Jimmy.
- --------------------------------------------------------------------------------
Jim Fong - Gabelli - Analyst
Hi, great quarter, guys. Just on the two recent acquisitions, Dormont and FEBCO,
Mueller, now that you've owned them for a quarter, were there any surprises that
you saw? Either positive or negative?
Patrick O'Keefe: I think, Jimmy, the best way to explain it is both of those
acquisitions are essentially on target in terms of our expectations. You know,
there's always some surprises, positive and negative, but I think at this point
in time I'd say they sort of even themselves out in terms of impact positively
and impact negatively.
One of the things we set as an objective is to make sure that FEBCO broke-even
during the year, and we achieved that in the first quarter in that we
broke-even, including the cost of capital with FEBCO, Mueller.
- --------------------------------------------------------------------------------
Jim Fong - Gabelli - Analyst
So, actually, it was much quicker than you expected, you achieved break-even in
the first quarter. And you expect to make profit in the remaining quarters from
FEBCO?
Patrick O'Keefe: Well, we expected to break-even for the entire year, and what
we did is we broke-even for the first quarter.
- --------------------------------------------------------------------------------
Jim Fong -Gabelli - Analyst
Right. And so can I assume it's going to be profitable in the remaining three
quarters?
Patrick O'Keefe: You're the forecaster, not me, Jimmy!
- --------------------------------------------------------------------------------
Jim Fong - Gabelli - Analyst
Well, it sounds like a good trend there. And anything on Dormont, pretty much
you're on track there with your plan?
Patrick O'Keefe: Now, Dormont, as we talked about, I think is pretty much on
track. There's a number of opportunities there for us to get synergies between
the two organizations. And we're essentially working on the game plan that we
put together when we went through our due diligence and immediately after
consummating our transaction, we're pretty much right on course there.
- --------------------------------------------------------------------------------
Jim Fong - Gabelli- Analyst
Okay. And as I recall, FEBCO, Mueller you can get back to your corporate margin,
maybe acquisition over a 12-month period, you were hoping to get back to your
corporate margins. Those businesses are still capable of doing that, is that
correct?
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
Well, Jimmy, I mean what we're pointing out is that the margins at FEBCO Mueller
at 22 percent were much lower than our comparable products that we have. We
didn't make a statement that said we'll be hitting those margins to our
corporate average or to the comparable margins of products in Watts on any
certain timeframe, we were just pointing out that as to why that acquisition was
attractive to us because we had that opportunity to improve those margins over
time.
- --------------------------------------------------------------------------------
Jim Fong - Gabelli - Analyst
Right.
Patrick O'Keefe: It'll take some time, though, Jimmy.
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
It's not a one-year move.
- --------------------------------------------------------------------------------
Jim Fong - Gabelli - Analyst
Okay. It provides some up side opportunities.
Patrick O'Keefe: Yes.
- --------------------------------------------------------------------------------
Jim Fong - Gabelli - Analyst
Okay. And then just shifting a bit on just going back to copper, again. I guess
with the announced price increases that you'll be implementing in North America
and Europe, is that enough to get caught-up on today's current copper price? Or
are you still behind in terms of getting caught up?
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
Well, we're already planning the next price increase because we're concerned
about making sure that we cover completely.
- --------------------------------------------------------------------------------
Jim Fong - Gabelli - Analyst
Right.
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
So, we've implemented recent price increases. We're now doing the analysis and
preparing to make further price increases if they're necessary.
- --------------------------------------------------------------------------------
Jim Fong - Gabelli - Analyst
Okay.
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
So, my gut reaction is that we have been successful and we intend to be
successful in maintaining our margins. You know, there's no choice but to pass
on those kind of cost increases.
Jim Fong - Gabelli - Analyst
Right.
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
This is an absolute 'must', it's not a 'nice to do' kind of thing.
- --------------------------------------------------------------------------------
Jim Fong - Gabelli - Analyst
Right, right. Okay.
Patrick O'Keefe: Jimmy, I think what we've said in the past is that we have this
five months of material on hand and it takes about three months to increase the
price increase from the time of analysis of stock, and so it's actually
effective, and you have to reprint your price list and get them out to the
field, et cetera.
So, there's always that time lag and then you have the fact that copper is
increasing on a steady rate, so you're, you know, by definition each price
increase is covering what's going to be happening from a couple of months ago.
So you're always, you know, we have to be in a constant mode of analyzing and
adjusting our pricing so copper settles down.
- --------------------------------------------------------------------------------
Jim Fong - Gabelli - Analyst
And so I guess the way I can look at this so long as you can get your price
increases you can maintain your gross margin?
Patrick O'Keefe: We can get price increases out faster than the copper hits our
cost of sales.
- --------------------------------------------------------------------------------
Jim Fong - Gabelli - Analyst
Right, because of the five-month lead-time you have.
Patrick O'Keefe: Right.
- --------------------------------------------------------------------------------
Jim Fong - Gabelli - Analyst
Okay. Okay, great. A terrific quarter, guys.
Patrick O'Keefe: Thank you.
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
Thank you, Jimmy.
- --------------------------------------------------------------------------------
Operator
Our next question comes from Francesca McCann from Sanford Financial. Please
proceed.
- --------------------------------------------------------------------------------
Francesca McCann - Sanford Financial - Analyst
Yes. Hi, there. Congratulations. Most of my questions have definitely been
answered. Just one follow-up question, the DIY channel, the 10 percent growth, I
guess how long do you think that's sustainable? And what efforts are you doing
to move into other stores if most of it thus far has been same-store sales at
one point do you hit saturation there?
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
Well, we - Pat and I have been saying for awhile that we think long-term the DIY
has a sustainable growth rate of the high single digits, so we're sort of there
right now with 10 percent. And the 10 is a point or two of pricing that's in
there, so on a unit basis, you know, we're sort of at that level that we've been
talking about.
But we still have the ability to grow at that rate. I mean there's new products
that we came out with. You know, we're not necessarily in all of the stores for
a given chain. You know, we do acquisitions, we have the ability to introduce
those products into the retail segment, as well, so there's a lot - and they
still have, even though they're still growing slow they still intend to grow.
- --------------------------------------------------------------------------------
Francesca McCann - Sanford Financial - Analyst
Okay. But so the idea is within the same-store sales to expand the product line
before or instead of moving to kind of more store expansion?
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
Well, we look at all of the above I think to grow the business but, you know,
with the same-store sales it's new product and folding in acquisitions.
- --------------------------------------------------------------------------------
Francesca McCann - Sanford Financial - Analyst
Okay. All right. I think that's it then for right now. Thank you.
- --------------------------------------------------------------------------------
Operator
Our next question is a follow-up question from Mike Schneider. Please proceed.
- --------------------------------------------------------------------------------
Mike Schneider - Robert Baird - Analyst
Guys, on this unit price issue, do you have a rough sense of what pricing
contributed to the quarter? You reported 11 percent organic growth, just
wondering what units and price?
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
It's tough to come up with that number exactly, Michael, but I would have a
guess of 4 to 5.
- --------------------------------------------------------------------------------
Mike Schneider - Robert Baird - Analyst
In price?
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
Yes.
- --------------------------------------------------------------------------------
Mike Schneider - Robert Baird - Analyst
Okay.
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
Because so many product lines and, you know, it's very, very difficult to
calculate that number precisely.
- --------------------------------------------------------------------------------
Mike Schneider - Robert Baird - Analyst
Sure. And when you look now at the retail channel, on this question of
sustainable growth there, earlier this year you were talking and then revised
down I think your expectations to kind of mid single digits, but, Pat, you sound
much more optimistic about retail now.
Is your expectation to continue to grow this now for the balance of the year in
this high single digits, or was there some sort of channel fill that when you
blend first quarter and second quarter were still that kind of 7, 8 percent?
Patrick O'Keefe: No, we still think we can grow this at high single digits,
Mike. I think we might be a little bit higher than we might average for the
whole year.
- --------------------------------------------------------------------------------
Mike Schneider - Robert Baird - Analyst
Right.
Patrick O'Keefe: But, you know, we thought that made sense, and we tried to give
you a feel for where we were, you know, high single digits compared to some
other years, we were much higher than that.
- --------------------------------------------------------------------------------
Mike Schneider - Robert Baird - Analyst
Right. And are there any product rollouts going on in the second half then ?
Patrick O'Keefe: There's - there are some. We have, you know, we bought a
company called C Tech which has a number of fitting lines and things like that,
that will be rolling out later this year. So, there are a few. I have to go
back, Mike, and figure out when the timing of some of those are, but there
should be some rollouts throughout the year.
- --------------------------------------------------------------------------------
Mike Schneider - Robert Baird - Analyst
And a theoretical question, I guess, when you look at copper and its
alternatives, I guess within construction, you guys have any sense of early
rumblings of people looking for substitute materials, be it PVC or whatever, to
try and dodge what's going on today in the copper market?
Patrick O'Keefe: Yes, there's no doubt, Mike, that people are looking at
alternative materials. In some cases you're actually going backwards and making
some products out of cast iron that, you know, traditionally were made out of
bronze. And you're seeing people, you're seeing the demand for that cast iron
version going up because it's, at net basis it's a lower cost.
You're also seeing what's called plastic type products, people looking at and,
for example, you know, the classic example is Pecks which is cannibalizing
copper in terms of a piping system. And we benefit because of our C Tech fitting
in terms of the quick connect fittings. And we're seeing, you know, we're seeing
pretty strong growth in that area.
So, I would say the answer is yes. If I were in the copper pipe business I would
say that the cannibalization is taking place quite rapidly because of the
escalating cost of copper.
- --------------------------------------------------------------------------------
Mike Schneider - Robert Baird - Analyst
And do you think you truly come out of it at neutral for this, or on the margin
as a link in the growth?
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
I don't think it has immediate margin impact, that's going to be more of a
long-term trend, alternative materials, because you have to change the products
out and get approvals and do all of your testing. In the short run on the tax
side it helps us because we have a lot of extra capacity.
- --------------------------------------------------------------------------------
Mike Schneider - Robert Baird - Analyst
Sure.
Patrick O'Keefe: And, Michael, you have something else which, plumbers and
pipefitters are habitual buyers. They don't switch easily, so that that process
of switching at the contractor level takes longer than you think.
- --------------------------------------------------------------------------------
Mike Schneider - Robert Baird - Analyst
Right. Thank you.
- --------------------------------------------------------------------------------
Operator
Our next question comes from Deborah Coy from Sanford Group. Please proceed.
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
Hey, Deborah.
- --------------------------------------------------------------------------------
Deborah Coy - Sanford Group - Analyst
Hey, Bill. What's up?
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
Hi.
- --------------------------------------------------------------------------------
Deborah Coy - Sanford Group - Analyst
Actually, Michael basically asked my question on trying to divide out price
versus unit growth, and it's also related to the ongoing expectations.
So, I guess the only additional follow-up, it sounds like a pretty similar
picture in Europe, your organic growth was up more but your pricing was a bit
higher, too. So, are we looking at true underlying organic growth expectations
in Europe, as well, kind of in this mid to, hopefully, upper single digits, and
is that kind of the expectation across the business?
Patrick O'Keefe: I mean I think so, Deborah. I mean our organic growth in
Europe, I mean well, our organic growth in Europe was the best we've seen in
four or five years, maybe half of that was...
- --------------------------------------------------------------------------------
Deborah Coy - Sanford Group - Analyst
Was price?
Patrick O'Keefe: Pricing. Again, it's difficult to come up with a number
exactly, but we know the Europeans got some pricing early in the quarter. And
but it's hard to say, but I think it's reasonable to expect based on what we're
seeing and what, you know, reading the transcripts from other calls, trying to
get a peg on what's happening in Europe from our guys and from other companies,
it seems to me that we should be able to have that true unit organic growth.
- --------------------------------------------------------------------------------
Deborah Coy - Sanford Group - Analyst
Yes, in fact, your organic growth, even trying to back-out price, it seems I
think a little surprisingly high, which is I think why Michael is asking the
question is was there any channel sales to speed that up, you know, borrowing
from...
- --------------------------------------------------------------------------------
Bill McCartney - Watts Water Technologies, Inc. - CFO and Treasurer
Not appreciably, no.
Patrick O'Keefe: No, I mean if you look - the thing that was nice about Europe
from our perspective was, you know, our largest customers in Europe still have
the boiler manufacturers, and we were down with those guys.
So, it's a lot of the sort of program that we've been trying to work on over the
last year or two with addressing some of the more dynamic markets, such as
Eastern Europe, the [solo] market, the geo thermal market, the underfloor
radiant heating market, trying to move-up the value chain which kind of sounds
trite to say that, but, you know, we're selling more packages and more highly
engineered product and getting away from the commodity side of the business.
And all of that is coming together and I think giving us some true unit growth,
and as opposed - and that's helping us in what still appears to be a soft
economy, maybe not as soft as it's been, but we think we're gaining market share
and a little bit better than average over there.
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Deborah Coy - Sanford Group - Analyst
That's what I was going to say, that has to be the conclusion that you're
gaining share.
Patrick O'Keefe: We believe so.
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Deborah Coy - Sanford Group - Analyst
Yes, good job. Thanks.
Patrick O'Keefe: And we just want to mention one other point about Europe, you
know, one of the projects we're working on there is a restructuring of our
Italian operations. And I think we mentioned in the last quarter that we were
anticipating about $3 million in restructuring for the entire year, about two
from Europe.
And what we have done is we have sold one of our facilities in Europe, and we
have done a sale/leaseback of another building. And we're going to consolidate
two of our facilities into this new building during the course of 2006.
But the sale of our existing building took place during the month of April, so
during the second quarter of 2006 we will book a onetime gain of $0.12 per share
associated with the sale of that building. So, when you consider that as a
restructuring effort, our restructuring activities, you would expect them to
turn positive this year as opposed to a $3 million pretax charge. In total
there'll probably be about $0.08 positive for the full year, so we just wanted
to inform you folks of that.
We'll move on to the next question.
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Operator
Gentlemen, we have no further questions in queue. I'd like to turn the call back
over to Mr. Patrick O'Keefe for closing remarks.
Patrick O'Keefe: Well, thank you very much for joining us on our call. I think
this was a very robust quarter. We're very happy with the results. I think you
can see that it was across the board, widespread improvement. And we look
forward to having you on our call in the first week of August. Thank you.
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Operator
Thank you for your participation in today's conference. This concludes the
presentation, you may now disconnect. Everyone have a wonderful day.
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