Watts Water Technologies Inc (WTS) 2004 Q1 法說會逐字稿

Good day and welcome to your 2004 first quarter Watts Water Technologies earnings conference call.

My name is Jean.

I will be your conference coordinator.

At this time all lines are in a listen-only mode We'll be taking questions towards the ends of the conference call.

If at any time during the conference call you require assistance, please key star 0 on your touch-tone phone and an operator will be happy to assist you.

At this time I'd like to turn the call over to your host, Mr. Patrick O'Keefe.

Sir, over to you.

Thank you.

Good afternoon, and welcome to the first quarter 2004 earnings conference call for Watts Water Technologies.

With me is today Ken LePage, our Assistant General Counsel, and Bill McCartney, Chief Financial Officer.

I'll turn it over to Ken for a little preamble.

Thanks, Pat.

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 provision of 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: Certain Factors Affecting Future Results in our annual report on Form 10-K for year ended December 31st, 2003, filed with the Securities and Exchange Commission and other reports we file from time to time with the Securities and Exchange Commission.

In addition, any forward-looking statements resent 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, even if our estimates change and therefore you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

During this call we will be referring to non-GAAP financial measures.

These non-GAAP measures are not prepared in accordance with generally accepted accounting principles.

A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the Investor Relations section of our website, www.wattswater.com, under the heading: News Releases, in the press release dated May 4th, 2004, relating to our first quarter 2004 financial results.

I will now turn the presentation over to Pat and Bill.

Thank you, Ken.

The way we're going to conduct the call today is I will make some general comments, and then Bill will make some general comments, then we'll open it up for every and anyone to ask questions you may have.

The first thing I want to say is, we're very pleased with the results of our first quarter.

Not only North America but also in Europe and we're also very pleased with the progress we're making in China.

The first thing I want to talk about is on a consolidated basis, sales are up $24.9 million, or 15.1%, which is a very good strong showing in terms of sales performance.

In terms of earnings from continuous operations, they increased from 8.9 to 11 million, or 23%.

If you were to exclude restructuring charges, which were .3 in 2003 and .7 in 2004, you have a 2.5 million improvement in earnings before discontinued operations, or, excuse me, before discontinued operations and restructuring charges or a 28% increase.

So that's a pretty good performance.

Now I'd like to take you through some of the revenue numbers to give you a feel for where the revenue came from.

On an overall basis we had an organic growth rate of 3.3%.

We had foreign exchange kicking in for 5.4%.

We gained 3.6% from acquired companies, and the adoption of FIN 46R, which is the inclusion of Jameco International LLC into our numbers added an additional 2.8%.

So that's really what makes up the 15.1% increase.

Now, if you break that down and look at North America, we had a 12.6 million improvement in sales in North America or 11.2%.

Of that amount, 3.2% came from organic growth.

The foreign exchange added .8%, acquired companies added 3.0%, and the adoption of FIN 46 added 4.2%.

One thing I want to talk about is the growth in our wholesale channel was pretty robust in this quarter, with organic growth in the wholesale channel being at 6.3%.

It was driven by a pretty much across the board increase in demand for our product lines.

Backflow prevention led the way, plumbing and heating products followed.

On the retail side, we had a relatively tough quarter in terms of comparison to the prior years.

If you remember, in 2003 we had two things going on.

We had one, the introduction of our Watts Brass and Tubular product lines to Home Depot.

We also had a number of product lines that we were in the process of repositioning on the shelves and remarketing on the shelves, so there was some additional products that were sold in the first quarter of 2003, as a result of the remerchandising program.

So with that being said, retail for the first quarter of 2004 was down 1.1%.

We'll talk a little bit later about our expectations for the retail market.

If you move on to Europe, you'll see that we were up 11.3 million, or 23%.

The majority of that came from foreign exchange which was 16.2%.

The organic growth was 1.8%, and acquired companies contributed 5.3.

If you look at in that terms of what's happening in the European market, the OEM market which is important market for us, grew at 9%, primarily growth from customers that are boiler manufacturers and solar heat system manufacturers.

The wholesale channel which has continued to lag behind the OEM channel for us, particularly a soft Italian market and a soft market in France, we saw the wholesale market in Europe decline by 7% during the quarter.

In terms of acquired companies, which represented 5.3% growth in Europe, we had two companies we acquired in the last 12 months.

One was Anello, and the other one was Martin Orgee.

In terms of China, we were up slightly, $.9 million, 22% increase in earnings, excuse me, in sales, so overall I think a pretty good performance in terms of sales growth from a combination of organic growth, acquisitions, foreign exchange, and other issues.

So I think pretty good showing overall.

In terms of earnings, there's a couple of things I want to point out.

First of all, the good showing in terms of earnings from continuing operations up 23%.

The strong earnings, if you were to add back the restructuring you see a 28% increase in total overall earnings.

The other thing I want to point out is when you look on an earnings per share basis, we are on a continuing operations basis we posted 34 cents versus 33.

If you add back 2 cents for restructuring in '04 and 1 cent in '03, you can see that we posted 36 cents for the first quarter of 2004 versus 34 cents a year ago.

The 2004 numbers are inclusive of 4.6 million additional shares that were issued to the market in December with our public offering.

So we feel pretty good about those results.

Some of the issues that drove our results is, one, a very positive mix.

Two, China is relatively stable compared to the prior year.

We think that we've made significant improvements in the quality of our management team and the quality of our financial and operating controls in China.

We believe that most of the issues there are behind us.

We were favorably impacted, obviously, by foreign exchange, and to a certain extent, some of the -- we had significant leverage.

I think if you look at our numbers for the quarter, in terms of operating earnings from continued operations, you saw an 80 basis point improvement.

If you were to exclude the restructuring you have 115 basis points improvement.

So you can see we leverage very favorably in the quarter in terms of exercising our operating leverage on that additional sales volume.

The only thing that was offsetting some of the progress that we made was really some additional costs in really three areas.

One was cost to comply with the Sarbanes-Oxley initiative.

The second was some small increases in shipping costs, particularly fuel and tariff charges, and a small increase in product liability.

So overall a very favorable quarter.

With that I'm going to turn it over to Bill who will take you through some additional commentary.

In the quarter we completed three acquisitions, if you will.

The first being Flowmatic, we closed on January 5th.

Flowmatic has approximately $12 million in revenue, performed up to our expectations in the quarter.

And we're continuing to work on the synergies which we anticipate with our existing reverse osmosis filtration company, Premier.

We also completed TEAM Precision U.K..

We acquired 90% of the shares of that.

That did not impact us in the quarter.

We closed that acquisition after the end of the first quarter, and the results will be seen in our second quarter results.

TEAM has revenue of approximately $9 million U.S., it manufactures specialized and configured typing systems which are used on boilers and air conditioning systems.

It will extend our product offering in the OEM market in Europe.

We feel it makes us more important to that OEM group of customers.

With the TEAM acquisition, we anticipate we will now have a business in Europe in the OEM marketplace which will exceed $100 million.

And on March 29th, the first day of our second quarter, we purchased the remaining 40% of our joint venture in southern China, the Cheng Guan metal hose factory, so we now have 100% ownership of that factory.

The cost was $6 million.

We felt at this time that was a good thing for to us do.

We have enough experience in China at this point in time that we feel we don't really need to have too many partners there.

So we now have two wholly owned foreign enterprises and one remaining joint venture, and we think that with the 100% control we'll be able to introduce product in and out of that factory in a much more efficient and rapid pace, if you will.

During the course of the quarter we've had several people ask us to comment on Sarbanes-Oxley, so I wanted to give a brief overview of what we're doing relative to that.

It's very hot topic this year.

But during the course of fiscal 2004, we're estimating now, that approximately $2 million will be spent to implement and become compliant with Sarbanes-Oxley, section 404.

We've been told that based on conversations with our auditors, KPMG, that they believe that that $2 million is about average for a company of our size, which is international and decentralized, as well as a company such as Watts that has done so many acquisitions.

So we have a lot of locations that we have to document and test to become compliant there.

We've developed a schedule which I am monitoring weekly, and KPMG is monitoring as well, and we feel that the schedule that we developed right now we are maintaining that schedule.

The other topic we wanted to address was just to mention we anticipate questions on it, would be the raw material price increases, we talked about those during our fourth quarter conference call.

As most of you know, we are a large consumer of copper-based metals, both brass and bronze, as well as stainless steel and cast iron.

And starting in November, going through until recently, we saw some significant cost increases on those base metals.

At the beginning of January, we effectuated a price increase for our North American group of a little bit over 3%, and during the quarter, the first quarter, we did see some of the higher metals starting to travel through our P & L. Again, remember, we have five months of material in our inventory on average at any given point in time.

So the cost increases that we experience in the latter part of 2003 did hit our P & L during the first quarter, and we believe that the price increase has covered those cost increases.

Now, when it comes to the second quarter, we will start to recognize in cost of goods sold, metal prices which are higher than we had experienced during the first quarter.

To offset that we have announced a price increase of 7% for most of our North American businesses, which is effective the second week of May.

So at this point in time, we have not had any major discussions or rebuttals from our customers regarding their willingness to accept these price increases, so we're anticipating that our costs will, in fact, be covered at this point in time based on the feedback we're getting from our customer base regarding price increases.

And the other point is we've actually seen copper come down from its high a couple of weeks ago when we were up to about $1.37, and copper now is below $1.20.

So we're getting some settling down of those metal prices.

Thank you, Bill.

That concludes our prepared comments.

I'd ask the operator now to open the lines up for questions.

Thank you, sir.

At this time ladies and gentlemen if you'd like to ask a question please key star 1 on your touch-tone phone.

If you would like to withdraw your question please key star two.

Questions will be taken in the order they're received.

Please hold for your first question.

We'll take a question from Michael Snyder, Robert W. Baird.

Good afternoon, guys.

Hi, Michael.

Excuse the background noise.

I'm sitting in an airport, here.

On raw materials, Bill, you indicated that you did put in a price increase of 3 plus percent in the first quarter, and you saw some of the cost increase towards the end of the quarter.

From that should I assume that you probably benefited to some extent from the price increase before costs began to rise, and looking into the second quarter, then maybe you don't get a margin benefit given that the 7% probably just offsets what you've seen in the second quarter?

I think that's a good question, Michael, but based on our analysis, we don't think we received the net benefit.

We did have a gross margin improvement during the quarter which we believe is attributable to the mix.

We had a favorable mix relative to the wholesale becoming a larger percentage of the sales versus -- since retail was flat, down slightly, and the wholesale was up 6%.

We also have the benefit of some of the factory efficiencies and cost reduction programs that we've been implementing.

We also had a stable quarter relative to China, which we've been, as you know, had some ups and downs on that last year.

So if we did not have the price increase, we would have -- we would not have had the margin improvement.

I don't think we had a net benefit there because of our pricing increasing at a greater rate than raw material.

Okay.

That's good detail.

And you beat me to the punch on gross margins.

It's nice to see the factory consolidation and restructuring savings beginning to flow.

Would you estimate you're at a full run rate given the actions you completed as of late last year, or is there somewhat of a ramp still to occur in the second quarter?

Well, we're not going to forecast an increase in the gross margin just yet.

We have a lot of variables here.

As you know, we don't give looking statements regarding guidance there.

It's very difficult to forecast, Michael, I guess right now.

Okay.

Well, then, similarly on the operating expenses, I guess the one discouragement or discouraging point I would make is just on the SG&A.

Your gross margins responded nicely, but SG&A did not.

It was up basically equivalent to sales at about 15%.

Is that all Sarbanes-Oxley and some of these structural expenses, or are the acquisitions initially feeding in higher SG&A expenses?

Just some color on that line item.

Sure.

Sarbanes-Oxley is part of it.

We had higher variable expenses, variable sales expenses, such as commissions and freight.

We have tariff increases and fuel surcharges occurring there.

We did book some increase in our product liability accrual, a couple of hundred thousand dollars there, and I think those are the major components.

We also booked $175,000 of increased bad debt for our Chinese companies.

We take a very strict view of that reserve, and because of it, the triangular debt situation in China, and the AR went up a little bit.

We believe we will get that back, but we have kind of a formula, or an agreement, with the auditors on how we book that, so we recorded that as well.

Two final topics.

First, China.

Could you give us a sense of what local sales are today and what the profitability of the three joint ventures or three operations in China are combined?

In rough numbers.

One second .

If we look at -- on the revenue side we have TWT, which is our 60% owned joint venture, revenue in the quarter was a shade under -- trade revenue, was a shade under $2 million, and then our revenue out of our Cheng Guan metal hose factory was $3 million, and that's up -- that's a combination of 5 million, up from 4.1 million last year.

When we look at profitability, [Sheeter] was profitable -- was slightly more than a break-even, because we had -- we were going to purchase the 40%, remaining 40% of [Sheeter] in the second quarter.

We did book some accruals there which brought it down to slightly more than break-even.

We took a conservative stand there.

Normally we would expect on $3 million of volume that [Sheeter] would be making a couple hundred thousand dollars.

If we hadn't taken a conservative view on some of this due diligence, we would have made that.

TWT, earned, again this is the operating earnings line, 151,000, which is about what we would expect on that volume.

You have to remember, Mike, that our strategy on China is a sourcing strategy, and we look to keep these profit numbers relatively low.

And on our factory in China, our wholly owned enterprise, it's the greenfield which we're starting up, it was a loss of $265,000, which is some start-up expenses and some -- basically some scrap, which is the start-up expenses, and because of the metal pricing issue that we've seen there, there was a price increase from them that will lag next quarter,we'll make up most of that loss, we believe.

So when you pull that all together and you account for it on a, you know, taking out the minority interest and whatnot, the operating earnings for all of China were a net loss of 458,000 versus last year, a net loss of 483,000.

So when Pat was talking earlier that China was stable, that's where we were coming from, is the operating earnings line.

Okay.

I appreciate that.

Mike, the other thing you've got to understand is a lot of that benefit flows into the North American operations in terms of lower procurement cost on products

Right.

Okay.

And final topic is just retail.

Down 1%.

That's certainly a much lower number than we've seen the run rates of last year, and understandably a very difficult comparison year-over-year this quarter.

You make the statement in the release that you still expect high single-digit growth.

Could you give us a sense of what your visibility is on that and what the sources of that growth are as we proceed through the year?

Sure.

First of all, in the press release we said that we feel that we will be able to produce revenue growth rate in the high single digits for the full fiscal year.

That being said, the first quarter was a tough comparison because we had a large channel fill going on in Q1 last year.

From what we have learned and what we've been told, we believe that inventories were at a relatively low point during the quarter, in the retail channel, and that our run rate on sales is not necessarily indicative of the run rate that was occurring at the retail level.

So that's a little bit of what was happening.

We also have been told that between Lowe's and Home Depot they're going to open 340 additional stores during the course of 2004, that's a 14% increase on a combined basis on those two chains.

Home Depot and Lowe's are our two largest customers corporately.

Again, as we look forward into the year, we believe that we will realize a couple of million dollars of price increases in this channel.

We're also optimistic on some of the new products that we're introducing.

We've introduced recently a line of pre-soldered copper fittings which, on a trial basis, they've been satisfactorily accepted by the customers, so we're going to be expanding the number of FKUs as well as the number of stores that those are in.

We've introduced a line of plumbing tool belts, we've introduced a line of hot water recirculating pumps.

We also have introduced a line of plumbing access panels.

So we have several new product lines that are going to help -- new product introductions which will help us during the course of the year.

We also learned late in Q1 that we've been awarded the Water Heater Accessory Program at Home Depot, which is about a $4.5 million piece of revenue of which we will realize about $2 million during this fiscal year.

So there's a lot of positive activity still in the retail channel, but the comparisons are getting a little tougher because the base is so much larger, and that's -- as far as the visibility, I think it's tough to say on a quarter-by-quarter basis.

I think the comparisons might be a little bit more choppy than they've been in the past, but for the year, we're looking at high single digit increases.

Thanks again for the color.

And good quarter, guys.

Thank you, Michael.

Thank you, Mike.

We'll take our next question from Mr. David Person of Needham & Company.

Please proceed, sir.

Thank you.

What do you think the likelihood is the final partially owned joint venture could become a fully owned joint venture?

This is Pat speaking.

I think that's highly unlikely.

And let me explain why.

A year ago we had some problems at that facility.

In the process of negotiating and working through those issues, we have received permission for a change in the contract which we consummated last year which gives us managerial control, so we now have financial control, we have managerial control, so effectively we're operating it as a [woofy].

Got it.

So there is no need to go forward and make an additional investment because we have all the control.

And you don't run it for profit, you run it for sourcing.

Right.

That makes sense.

In terms of taxes, just slightly lighter tax rate than -- excuse me, slightly higher tax rate than I was looking for.

Does this mean we should look for like a 37 and change number for the full year or still saying 37?

I think the tax rate that we have now is probably indicative of the year, Dave.

Okay.

The difference between what we were anticipating and what happened, the mix of sales in Europe were generated in slightly higher tax jurisdictions, and we also had some tax planning opportunities in Italy which expired a little bit quicker than we were planning.

We were able to -- we had some very good planning, and the Italian government offered an amnesty program, so we were able to participate in that, to ensure the benefit that we had booked over the years.

So that -- we participated there.

That locked in what we had in the past, but we had to forgo a little bit of the gain we had left, and that's why the tax rate is up.

Okay.

In terms of SG&A, didn't you guys run the 700,000 or so of restructurings through that number?

In other words, I need to back it out?

The restructuring is in cost of goods sold, it's all accelerated depreciation on manufacturing equipment that will be out of service at year end.

So I took it out of the wrong line.

Okay.

In that case, there's -- is there any indication that there's going to be anything more like accelerated depreciation for the rest of the year, or is that pretty much done?

We had forecast 6 million for the year.

Towards the end of the year, there might be a little bit of cost to move some equipment, but, you know, it's still within the 6 million range for the year, and it's all going to be cost of goods sold.

And the majority of it is non-cash charges.

That's right.

Of the 6 million you probably have over five and a half that's non-cash.

In terms of acquisition targets out there, what is the pricing environment look like to you?

Is there anything on your radar of meaningful size that you think could be coming down the pike in the second half or maybe early '05?

Well, we don't generally comment about the size or those kind of things, but I can tell you we do have a pretty robust pipeline.

Okay.

We have several, you know, discussions going on at the moment that we would hope would come to fruition sometime later this year.

All right.

I'll hop back in the queue.

Thank you, Dave.

Thank you, Dave.

We'll take our next question from Devlin Lander of Morgan Joseph.

Please proceed.

Most of them have been answered but I just was wondering if you could tell us how retail sales fared sequentially, so, what they were versus the fourth quarter?

Sequentially they were close to even.

Okay.

And then can you give us a little more color on the European wholesale business?

Is that -- is it kind of stabilized, or is it getting worse, or do you see it getting better?

Unfortunately in the first quarter this year it continued to deteriorate.

We saw particular softening in the Italian market during the first quarter.

The second market that we were concerned about is the French market that showed some deterioration.

We had some positive pickup in the German market, but in general, there's a good deal of concern in Europe as a result of the recent companies that are going to come into the EU.

People are sort of holding off in terms of spending until they see what's going to happen with the integration of those companies into Europe.

There's a lot of concern that that will result in a surplus of low-cost labor coming in from the eastern block.

I think that's part of what's driving the lack of spending.

Okay.

And is that mostly residential or commercial?

Mostly commercial that you're referring to?

Well, we know there's a very high commercial vacancy rate in most of the major trading areas, but if you look at our product in Europe, they would be both, really, commercial and residential.

Great.

Thanks very much.

Thanks, Devlin.

We'll take our next question from Jeff Hammond of Key Bank Capital Markets.

Hi, good afternoon.

Hey, Jeff.

Bill, maybe could you run through the operating profit numbers for North America and Europe?

I think you gave us Asia.

Okay.

North America operating earnings, 18.2, versus last year it was 158.

In Europe, 7.4 versus last year of 4.9.

And then you have corporate expenses of 4.8 versus 3.7 last year.

The increase there is the restructuring charge.

Okay.

If I look at, you know, the organic growth, which was relatively tame in Europe, I guess you get some contribution from your acquisitions.

Where did most of the profit growth come from in Europe?

In Europe?

Well, I mean, you have -- let me think.

The profit growth in Europe.

I mean, it looks like you had, you know, about a 50% increase in the profit line on -- is that just simply leverage?

Well, in Europe you have a couple of things.

You have the euro helping you out there.

Okay?

The average translation rate in the quarter was like $1.25 versus last year was 1.07, so you have some translation gain in that number.

You have the fact that the gross margin in Europe was up because of, predominantly because of some of the restructuring benefits that we're seeing come through now.

And then you have, you know, the organic sales growth.

Okay.

And then on the North American wholesale business, can you give us a better sense of, you know, what you think is -- of that 6%, what you think is market share gain versus, you know, what is the overall market doing, and perhaps give us a sense of what April looked like, did that strength carry over into April.

Well, as far as the market share versus the market, you know, our Hunter product line was a little over $2 million in the quarter, which is up about 1.7, 1.8 million.

I think that is predominantly market share.

The rest of it would really, I think, be a reflection of a strong residential quarter with a sort of firming on the commercial side.

We didn't see huge gains on our commercial products, but we didn't see them decline like we had seen in the past.

I think it's 1.7, 1.8 million of market share through Hunter, and the rest was the market.

Okay.

And then how about April?

I mean, do you get a sense that that organic growth is carrying over?

Well, at this point, Jeff, we really haven't -- we've never really disclosed, you know, current month orders when we're outside of the quarter.

So I'd rather not get into that, if you don't mind.

Okay.

No, that's fine.

Okay.

I guess last question, on the pricing you talked about a 7% increase in mid-May.

Can you maybe differentiate between wholesale and retail, or is that, you know, across the board?

Well, the 7% is wholesale, and on the retail, we have gone in and given very targeted price increases, depending on the material, whether it's a copper based material or some of our products that are plastic-based, et cetera.

And how would you characterize how the retail side is reacting to price increases and these follow on announcements versus the wholesale side?

I think they tend to push back a little bit and give us a delay, but they are accepting the price increases with a short delay.

So they're being deferred more than they're being resisted.

Okay.

Perfect.

Thanks, guys.

Okay.

We'll take our next question from James Fong of Gabelle & Company.

Please proceed.

Hi, good afternoon.

Hey, Jimmy.

Could you kind of just give us an idea what the secular retail growth would be -- secular growth in the retail markets? [inaudible] compete against, as the comparison gets tougher because of the bigger base.

What could we look for in terms of going out a couple of years, what kind of growth you can have in your retail channels?

We have a hard time going out a couple of years, but if you look at the rest of this year we're looking at high single-digit growth rates.

Would that be the type of number we'll be looking at with regard to '05 kind of thing, or --.

I think it's too early to be able to tell, to be candid with you.

I think we have some positive developments which Bill talked about, one of which is that we got -- we were awarded a piece of business just recently for the hot water accessory business, okay, we have several other proposals in front of them, but there are also some reviews that will come up throughout the year which you have the possibility of actually losing pieces of business.

So at this point, I would be misleading you to even give you a guesstimate.

The other issue, Jim, is that they haven't told us how many stores they're going to open.

That's a big piece of the incremental growth as well.

Right.

There's really not enough information to go out past one business cycle.

The other important factor, Jimmy, if you want to make your own estimate, is, so goes the economy, so goes Home Depot and Lowe's.

And there's more discretionary spending, people spend it in those home improvement centers.

Let me just move on to the euro.

What was the average euro in the second quarter of last year?

I guess what I'm trying to get at, you know, how much kind of foreign currency translation benefit can we expect to see, you know, in this -- with regard to this year?

Jim, I don't have that number in front of me in terms of the --.

Average euro?

But in the second quarter of last year.

Okay.

But, I mean, the gain should begin to diminish, you know.

I would expect that they would, because we're at 107 last year, in last year's Q1.

Right.

And --.

Right.

The euro isn't that much higher right now.

Right.

So that's a correct.

So you might even be even Steven, right now, right, second quarter this year versus a year ago?

I think -- we're not going to be receiving as much benefit in the future as we have in the past based on where the euro is now.

I don't know the exact figures, though.

Right.

Okay.

And then could you just kind of give an update on the -- your two litigations, if there's any new news on that here?

Well, where we stand in the James Jones litigation is really no major development whatsoever.

Okay?

Okay.

There's one issue that we had a piece of -- we had a sort of a motion in front of the Court to be reimbursed the $11 million that we paid in the settlement of what we refer to as Phase I.

Right.

We recently received that $11 million from the Zurich insurance company.

However, they reserved all their rights to argue later about whether that money is -- was payable to us and so -- but we have the cash in hand.

Right.

So cash in hand is a positive thing.

Right.

So that has happened.

The second thing is, we have a bunch of motions that we have brought in front of the Court in an attempt to cut down the size of the liability.

Most of those motions will be heard over the course of this next couple of quarters, but nothing serious has developed in that case during the current quarter.

Anything new in terms of the Phase II group of cities in terms of -- I mean, I guess where are you now?

You're still doing discovery with the Phase II group of cities?

That's correct.

As you remember, Jimmy, the Phase II group of companies is a group of cities that we got to choose.

Right.

We chose that group of cities very carefully so that we could get discovery and be able to cut down the potential exposure in this case.

Right.

And then is the trial still scheduled for later this year, like November, I believe, or something?

The trial, if it were to be scheduled, would be scheduled sometime in the fourth quarter most likely.

Right.

Okay.

Of this year, right?

Yeah.

Okay.

And we're prepared to go to trial if we needed to.

And then asbestos, anything there in terms of any --.

no.

As you know, Jimmy, we believe that we've been named incorrectly in most of those suits.

Right.

So far I think we have been dismissed from six suits that have come to trial.

Right.

We continue to rigorously defend ourselves against those suits because we believe that trying to settle with one would just lead to a longer list of plaintiffs, so we've taken a relatively inflexible position with regard to the fact that we do not believe that we have exposure, and we do not believe that we would like to settle with anyone just as a convenience.

Right.

So we would prefer to spend money to defend ourselves rather than to settle.

Right.

Okay.

And then I didn't catch -- I guess I'm kind of not sure about the latest filing, but is Tim Home still selling stock, or is he finished -- in regards to his recent filing, I guess?

Well, you remember, he had some shelf registrations out, which allowed him to methodically sell shares under preplanned programs.

Okay.

As of this point in time, nothing that isn't out there in the public domain.

Right Do you know how much is left under the preplanned program?

I think it's about 500,000 shares that are -- that the family can sell.

Okay.

So that's the entire family, including Tim.

Right.

And all the trusts.

Okay.

Great.

Thank you, guys.

Okay.

Thank you, Jimmy.

We'll take our next question from David Kurzman of Needham & Company.

Thanks.

Quickly on capex for the year, are we still looking at around a 20 million number

I think so, Dave, that will be close.

In terms of new products, what did you come out with in the quarter what can we expect for the rest of the year?

Well, the majority of our new products are in the retail channel, which we just mentioned the pre-soldered copper fittings.

We're about to introduce the hot water recirculating pump, the plumber's tool belt which, you know, cute little product.

We're not betting the future of the company on it or anything.

Access panels.

The Hunter product line will continue to come out with new models and sizes as we continue to get some of those approvals

We also came out with a number of important new products in the thermostatic mixing valve portion of our business, so it was previously under both the Watts name and the Powers name.

What makes the thermostatic mixing valves different from the other ones?

We have a number of sort of unique applications where, we're in essence, introducing a combination of pressure balancing and thermostatic together.

We're also introducing units that are -- could be used on a laboratory sink, and in a very convenient way.

So these are extending the use of scald protection to additional points of use within the home.

Okay.

In terms of the Flowmatic acquisition you've had now your first full quarter, so to speak, with that.

Can you give me sense, in terms of how it operated from your expectations?

Have margins held up from before you owned it?

How has the sales force taken it, and so forth?

Yeah, it's actually working pretty much consistent with our expectations, maybe a little bit ahead of expectations.

We're currently working on a number of things.

One is we're working on the synergies both on the sales side in a cost reduction side.

I think they've been working almost from day one to procure some cost reductions by some consolidated buying opportunities.

They also are working on several new product introduction concepts, although the products have not yet been introduced, but I'd say from an integration point of view, about as good as it can get.

Excellent.

I think that's it for me.

Yeah, that will do it.

Thanks.

Thank you, Dave.

Thank you.

We'll take our next question from Mr. Stewart Scarf of Standard & Poor's Equity.

Good afternoon.

Hi, Stewart.

Couple of quick questions.

Most of them have been answered already.

What's the range of your debt to capital and based on additional acquisitions, do you still see it maxing out at about 35%, assuming you make additional acquisitions?

Yeah, we, in general, have internal guidelines that say that we don't want to see our total debt to capitalization go above 40% without another capital transaction to bring that down.

So I think for the right kind of deal we might go up or slightly above 40%, but most likely we'd be anticipating some kind of an additional offering if we got close to that number.

Got a long way to go.

Okay. [ LAUGHTER ]

Our net debt to cap at the end of the quarter was 14%, Stuart.

Yeah.

Okay.

And your acquisitions, are the asking prices getting steeper?

Are you still in the range of about four or five times EBITDA, or is it going up?

No, for companies that are in the water treatment, water purification market, the prices have clearly gone up.

For other acquisitions, I'd say they're also moving up, mostly because of the anticipation of improved earnings, and earnings that are improving in those acquisition targets.

So it's really reflecting more -- a little bit of the forward-looking improvement that they anticipate seeing in their EBITDA numbers.

So you're coming off historical numbers but you're looking into a better environment.

Okay.

Thank you.

Okay, thanks, Stuart.

Again, as a reminder, star 1 on your touch-tone phone if you'd like to ask a question.

We'll take our next question from Mr. James Fong, of Gabelle & Company Please proceed.

One quick question on Hunter.

Am I correct in seeing that new products from Hunter came on around second quarter last year.

Since going forward most of the market share gains from Hunter would be pretty much accomplished?

No, that's not true, Jimmy, and the reason it's not true, is because the Hunter line is a very complex line that requires approvals -- in order to get the product line, even though the product line is designed, it doesn't have all the approvals by all the authorities across the entire product line.

So as we obtain approvals, then we have the ability to gain additional market share in those portions of the line where we still don't have those approvals.

So we have some substantial leg room to grow in that business as additional approvals are obtained.

Most of those approvals will come within the next year.

Okay.

So we expect probably market share gains, I would expect during the whole course of the next year and probably into first half of the next year.

Would you kind of see it the same run rate that you currently saw in the first quarter?

Well, I'm hoping the economy improves, Jimmy, so it's actually better.

Okay.

So it actually could even accelerate.

Yeah.

Because remember that's a commercial product.

The commercial market is still not that robust.

How many approvals have you gotten so far, and how much is left?

Cheap numbers, we probably have 60% of the approvals we are seeking.

Oh, okay.

To date.

Okay.

All right, great.

Thank you.

Thank you.

I have no questions at this time, sir.

I'd like to turn the call back over to you for closing remarks.

Okay.

I think, just to wrap this up, I think we feel it was a pretty good quarter.

We think that the leverage that we experienced in this quarter was a very positive thing.

We appreciate you joining us on the call, and we look forward to talking to you next quarter.

Thank you.

Thank you.

Ladies and gentlemen, thank you for joining us on the call.

You may now disconnect.