Watts Water Technologies Inc (WTS) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q3, 2006 Watts Water Technologies earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to Mr. Kenneth [Lepage], Assistant General Counsel.

Please proceed, sir.

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 Certain Factors Affecting Future Results in our annual report on Form 10-K for the year-ended December 31, 2005 filed with the SEC 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 day.

While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so.

I'll now turn the presentation over to Pat and Bill

Thank you, Ken.

Thank you for joining us today for our conference call.

The first thing I would say is that I don't have to say very much, I think the numbers speak for themselves.

With net income being at $0.55 per share versus $0.40 per share a year ago, which is a 38% increase.

Income from continuing operations at $0.65, versus $0.41 a year ago, which is a 59% increase.

And included in both of those numbers, both years, continuing operations has roughly $0.02 per share for our manufacturing restructuring client.

The first thing I want to say is that overall, this was a broad-based improvement with all segments achieving significant improvement in sales and operating earnings.

We leveraged very well in each and every segment of our business this quarter, which is unusual.

Usually you have one or two segments that are a little bit off.

This particular quarter we leveraged in each and every segment of our business.

Revenue growth, on a consolidated basis, was achieved both based on strong organic growth, which was 14% and acquisitions, which was 24%.

So you can see, we're well balanced in terms of our growth between acquisition and organic growth.

I'm very pleased with the 14% organic growth.

All of our major acquisitions are on or above plan and are showing nice year over year growth both in sales and operating income.

We continue to implement price increases where necessary to cover escalating raw material costs.

This is the 12th consecutive quarter in row where we have been successful in addressing this issue.

I can tell you, a lot of ghosts and goblins came to my house last night but not the ghosts and goblins of pricing.

So, you can pretty much put that baby to bed.

One area where we are seeing some softening is in the residential construction market.

This is primarily showing up in the North American retail segment.

In general, this is very low margin business.

I'm not overly concerned about it.

The way I look at the business is we're hitting on 11 out of 12 cylinders.

The cylinder that we're hitting on is a low margin, low contribution cylinder, so I'm not very much concerned whatsoever.

In terms of the new construction market, we are seeing some of the softening in the wholesale channel but as expected, we're more than offsetting that with brisk demand for our commercial product offering.

In terms of -- if you're looking forward, in terms of the outlook, in terms of how I view the business here going forward, I think we continue to have the challenge of escalating raw material prices but I think we have that well underhand and we're managing it effectively.

I would say that in terms of the residential market, we as expected, we are seeing a softening.

As I said to you earlier, I'm not very concerned about that because it's being more than offset by the shift in product mix toward the higher margin commercial products.

We are also seeing that the remodeling market is staying strong, even in the residential sector.

We're not seeing a softening in the remodeling market.

I am very bullish in terms of the going forward demand on the commercial construction market, both the remodeling and the new construction.

I think we're probably one year into a five to six year up cycle.

So, very bullish on that.

In terms of Europe, we are seeing strong incoming order rates, particularly in the renewable energy.

Eastern Europe is doing well.

Our acquisitions are contributing well.

And the only concern I have is a little bit in terms of in the German market, the pressure we're experiencing in margins.

The other thing I want to mention is that our acquisition pipeline is relatively robust.

We have a number of deals that we're looking at in the preliminary stages at this point in time.

So nothing really to report in terms of acquisition pipeline.

It's pretty consistent with prior quarters.

And if you are --.

The last thing I want to mention is that I think you saw the notice on the addition of Bob Ayers to our Board.

I think Bob is a well experienced general manager who has a depth of experience in related industries.

I think he'll make a major contribution as we go forward.

With that, I'm going to turn it over to Bill who will walk you through the details in terms of the numbers.

Okay.

Thank you, Pat.

Just to reiterate a little bit what Pat said and I'll go through some of the detail of the segments and the gross margin as well.

But revenue was up 40%, that's an increase of $92 million, we closed the quarter at $325 million.

Look at earnings per share, from continuing operations, excluding our restructuring charges, which is kind of the way we view the business here, that was $0.67 per share, compared to $0.43 in Q3, '05 so that's an increase of about 56%.

The shares outstanding are relatively flat at $33.051 million.

In the quarter, we did record $1.3 million of restructuring charges, $1 million of that is associated with the relocation of our joint venture in [Tanjing] China.

We released a 150 people from that plant and we're in the process of building a new building across town.

So, we took some charges associated with that, predominantly severance charges.

We look at the revenue growth, on a consolidated basis, breaking the $92 million out for you.

Organically, $32 million or 14%.

Foreign exchange, $5 million or 2%.

And contributions from acquired companies of $56 million or 24%.

And that gets to you the $92 million or 40%.

Spend a little time now on the segments.

North America closed out at $212 million, that's an increase of $52 million, 32%.

Organically, we're up $17 million, 11%.

Foreign exchange a small number, which is the strengthening of the Canadian dollar.

And then acquisitions, $34 million or 21%.

So that breaks out to $52 million, 32%.

Looking at the acquisitions of $33 million.

The two largest are Core Industries, which we acquired late in December and Dormont , also acquired late in December, '05.

While we do include them as part of our acquired growth, Core is our back flow and strainer business and we did have an organic growth rate there of about 32%.

So we're very pleased with the growth at Core.

Dormont had a growth of about 5%.

It's predominantly -- we're seeing growth in their commercial food service segment of Dormont .

When we look at the organic growth, and on the two segments, if you will, of retail and wholesale.

As Pat mentioned earlier, we did see a soft quarter on the retail side.

Revenue closed at $45 million, which is an increase of 7% but if you back out the impact of acquisitions it's about 1.5% increase.

We step back and look at what's going on inside the retail.

And this quarter, we did not have as many roll-outs in Q3, '06 versus Q3, '05 so that's was an unfavorable variance, if you will.

But we saw a slowdown at Home Depot, which we -- as we read the press releases from Depot, they're attributing that to the slowdown in residential starts.

So, Depot represents about 60% of our total retail business.

So obviously as they slow down, we are somewhat impacted by that.

We did experience some pricing in the retail, some price increases.

And we also had a lot more product that was in transit to the retail stores, which we cannot recognize as revenue but that revenue does come in in Q4.

So that was about $1.3 million more in transit, so that adversely affected the numbers.

So really, it's consistent with what we've been saying in the past in terms of sort of mid single digit to high single digit growth.

If we adjust for some of the in-transit and the difference in the roll-outs, it would be sort of mid single digit growth, which was softer than what we've seen and we're attributing that to the residential slowdown particularly as it impacts Home Depot.

On the wholesale side, wholesale revenues were $167 million, an increase of 41%.

If we back out the acquisitions out of the number, wholesale grew at a rate of 14% in the quarter.

Some of the products inside of the wholesale market, we saw some nice growth in our underfloor rating heating business.

Some of the products inside of the wholesale market, we saw some nice growth in our underfloor rating heating business.

That continues to grow very nicely.

On the plumbing side, revenue was up about 16%.

About 12 pricing foreign units, with very solid growth in our OEM segment as part of our plumbing business.

The back flow was up 19%, heavily skewed towards the pricing but still 5% on units.

We continue to see the synergies there of having a more extended product line with FEBCO and of course our Hunter and Ames product lines as well.

Some of the other product lines associated with the commercial side of the business did well, our drainage business, our acid waste business, et cetera.

So what we saw really was -- inside of North America we saw our mix go towards the wholesale.

And then inside of wholesale, we saw a nice mix go towards the commercial side.

So that really was very helpful in terms of sales growth as well as margin and operating earning performance.

Looking at the revenue in Europe, sales of little over $100 million, that's 55% growth.

Organically, Europe grew 22% or $14 million.

Foreign exchange is $4 million or 6%.

And then acquisitions of $18 million or 27%.

So that comes to the $36 million, 55% increase in total revenue.

Just looking at the organic growth rate in Europe of $14 million. $4 million is pricing, $10 million of unit growth.

What we see in Europe is pretty consistent with the way we've discussed the business with you in the past, where we see good growth in some of the wholesale markets.

We continue to see the boiler manufacturers slowing down, the traditional gas and oil fired burners.

But we make those sales up with the vibrant market we see in the solar, pellet boiler, geothermal markets, into which we sell our underfloor rating heating and electronic controls into those markets.

Eastern Europe continues to be strong and we continue to see some -- we saw some very nice business in our gauge business this quarter.

So, that was a nice performance as well.

On the acquisition side in Europe, the largest one, ATS, about $14 million of the $18 of acquired growth.

And we saw a nice organic growth rate at ATS as well, as we start to integrate them into our European distribution channels and that was about 8.5% organic growth in units.

We also saw overall, if you look at the performance excluding the acquisitions, the wholesale channel grew at about 20%, which is sales into Eastern Europe gaining some market share in Germany and as well as Italy.

And on the OEM side, we saw some nice growth at about 36%, which is where we see a lot of the solar and underfloor rating heating business.

Looking at China, a small base but still we saw some nice growth overall.

We closed $12 million of revenue.

That's up 67% or $5 million.

Breaking that down into the components, organic growth was 4%, about $300,000.

Foreign exchange, 2%.

And then acquisitions contributed $4.5 million.

Which total's $4.8 million of total growth.

What we saw in China, which we I think described to you in our second quarter 10-Q was we did have a work stoppage at one of our plants in China.

The four week work stoppage.

We estimate that if we had been shipping out of that plant for the four weeks, we would have seen revenue into the domestic market increase about 25% quarter over quarter.

Those issues at that plant have been resolved and everyone is back to work and we're progressing nicely there.

But we did see some nice performance.

We're pleased with the performance of the two acquisitions, which is Changsha Valve Works, the acquisition we did in May that addresses the China infrastructure market.

And then we bought a small plant, [Ningbo], manufacturing commodity and plumbing products and there was a small variance favorable to our plan.

Just moving on to the gross margins on a consolidated basis, we're at $34.4, that's up 0.10 point.

If we back out the impact of acquisitions in the quarter, the margin would have been up 0.9 point to 35.2.

The main issue here is that we have a lot of amortization that we're recognizing in cost of goods sold.

As we allocate purchase price from those acquisitions to inventory, so that's something that's ongoing.

Looking at the margins in North America, 34.9%, that's an increase of 0.4 point.

The main story here in North America is we see the mix towards wholesale.

And again, as I mentioned, inside the wholesale we saw a nice mix towards the commercial side.

And as we've discussed with all of you in the past, we have slightly better margins on the wholesale/commercial side, so we had a favorable mix.

We also had continued progress on our cost reduction programs, some of the international sourcing.

And in last year's Q3, we also had a heavy flood safe roll-out into the retail, so we didn't have as much roll-out expense in Q3, '05 -- Q3, '06.

On Europe, the margins were down slightly at 30.5%.

That's a decline of 0.7 point from Q3, '05.

Really what's happening here, as Pat alluded to earlier in the call is some of the pricing pressures we do see in the German market.

And we had good revenue performance there in Germany, so we really had a bit of an unfavorable mix that occurred in Europe, which contributed to the decline in the margin.

We do have some price increases that are going out the beginning of the very end of Q3.

So, we'll realize some pricing as we move into Q4.

The gross margin in China at 23.8% is up about 4 points from last year's third quarter.

The main issue here is that we have our wholly-owned subsidiary in Tanjing now.

We have that fully absorbing where the volume, including the inter-Company volume is up significantly.

And so we're experiencing favorable manufacturing variances in significantly improved fixed cost absorption in that facility versus last year.

On our SG&A expenses, it's $75 million but what we saw was a decline of 130 basis points in the SG&A versus last year, we closed the quarter at 23.2%.

What we're seeing inside of our SG&A right now, if you look at it, it was $18.6 million increase.

Of that increase, $12 million is associated with the inclusion of acquired companies.

About $3 million associated with the variable of selling expenses of commissions and freight out, et cetera.

So, we saw the base business increase nicely, so we're able to leverage our SG&A.

The bulk of the increase is really acquired companies.

Brings us down to our operating earnings.

So if we look at our operating earnings in the quarter, excluding the restructuring charges, $37.3 million, that's 11.5%, so we have an increase of 120 basis points.

An increase of 56% on an absolute dollar basis.

And if we look at our various segments of Europe, North America and China, and we focus on just the organic growth in sales and the organic growth in earnings, we see that we have been able to leverage the business very nicely, in that all three segments had their earnings grow at a faster rate than the revenues.

So, we're very pleased with that.

The tax rate in the quarter was lower than we had experienced year to date as 32.3%.

That's down about 3 points from last year.

A couple things happening here.

First of all, we have an income mix that moved towards China.

And we also had an investment tax credit of about $250,000 that we booked against the Chinese tax rate.

In Europe, we had a lower tax rate because of the favorable mix of income and some tax planning opportunities that we established earlier in the year.

And the rate in North America is pretty consistent with what it's been in the past.

So again, we look at the net income, excluding restructuring charges, $22 million, an increase of $8 million or 57%.

So with tha, I think we can open it up for questions and answer any and all of your questions you might have.

[OPERATOR INSTRUCTIONS] And your first question comes from the line of Mark Grzymski with Needham & Company.

Please proceed.

Good morning.

Nice quarter.

Thank you, Mark.

Just wondering if we could touch on the residential and the commercial side.

If you're seeing a mix going to the wholesale market and that directly into the commercial, is there any way to kind of gauge what percentage of overall revenue in the quarter was directed towards commercial as opposed to residential?

Well, what we've been telling folks, Mark is that overall, we think we're about 55% commercial versus 45% residential.

The retail sales, which are all residential, dropped by 5 points inside the North American mix.

So, wholesale went up 5 and retail went down 5 in terms of the total mix.

And I can give you that number.

It went from 26% to 21% and the wholesale went 73% to 78%, I guess, 79.

So that's, in terms -- that's the best numbers we're going to be able to give you on this call.

Okay.

And can I assume, then, that if you have pricing improvement in the retail, that volumes were down and if so, what was the number?

Well, unit volumes on an absolute basis were down slightly, 2 percentage points.

But again, the reason they're down is the difference in roll-outs.

We had more roll-outs last year than this.

We had much more product in transit to the Home Depots and some of the other stores than we had last year.

Okay?

So from our -- if you sort of normalize to that, we think that the organic growth in the quarter would be low single digits.

Okay.

But on an absolute basis, you're right, units would be down, offset by some pricing.

Okay.

And it is softer than we've seen in the past because of this -- the residential slowdown and the stuff you can read about what Home Depot is saying.

Mark, you have to understand that all of that we're losing is at the low end of the margin spectrum.

Right.

Right.

Yes.

No, no, understood.

Yes, and obviously this isn't anything new if you're in touch with the newspapers.

But just kind of moving over to Germany, I just want to -- you mentioned that the weakness there in margins.

Just curious, of over all, in quarter, what percentage of the revenue in Europe was Germany?

It would -- Germany tends to be about 30% or roughly of our total.

Just curious, as far as mix is going in that market.

Is there any shift there or that's hurting margins or could you shed some more light on that?

Well, what we're seeing there, I think I mentioned earlier that the improvement in both the OEM and the wholesale, so we're -- from an organic standpoint, we're seeing a bit of a mix shift towards the OEM because they grew at 36% versus the 20% on wholesale.

Historically, before we did this ATS acquisition, Europe overall was 50% and 50% OEM and wholesale.

Okay.

So you're going to see a mix shift going a little bit towards the OEM market.

And that's again, what we're seeing is that solar business and the underfloor radiant heating business is what's drive that.

And Mark, there's also some pricing actions that are being negotiated as we talk.

Okay.

Great.

And then my last question, Bill, probably directed at you.

SG&A, just kind of some guidance there as far as -- obviously it looks like you're going to get some more leverage there.

Should we expect a pretty favorable number there?

Well, I think the way Pat and I have been talking about the performance of the third quarter here, there's really not a lot of unusual stuff in terms of accounting issues or anything like that.

It's a very straight forward quarter from that perspective.

So we don't --.

These are very pure numbers.

We didn't have a lot of unusual transactions.

So we kind of see the business going forward pretty straightforwardly.

The only, I would say that because we had some significant acquisitions in the second and third quarter, you have some acquisition accounting issues where you have gross up of inventory and it rolls through on the first inventory turn.

But other than that, not much in terms of what I would consider to be unusual trends.

Okay.

Great.

Thanks for taking my questions and a great quarter.

And your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

Please proceed.

Could you give us some -- do have you any free cash flow details, cash flow from operations?

Yes.

CapEx?

Yes, I do.

Free cash is $27 million versus $5 million last year.

That's a year-to-date number, so cash from operations less CapEx.

The cash provided from operations is $34.4 million versus $19 million this time last year.

And can you just update us on your inventory turn initiative in terms of trying to really improve your inventory levels, where do you stand with that?

Yes, Jeff, right now we haven't really seen the results of that in the third quarter.

We expect to see positive results on that in the fourth quarter and throughout next year.

There's a number of things that have taken place, a number of policy decisions that have been made and a number of changes in the organization have been made.

But really, within the third quarter, you didn't see a significant improvement.

Okay.

Good.

And then you mentioned the growth in Core Industries.

I think over the last couple quarters, you had had indicated there was a good bit of work to be done there.

And then they've been surprising you on the top line.

Maybe just give us an update with respect to that acquisition because it seems to be tracking ahead of expectations?

The best way to describe that acquisition is, first of all, it's a very synergistic acquisition from the point of view that it's a direct tie-in to other products that we already manufacture.

Although, it specializes in terms of market segments on the irrigation market and some segments that heretofore Watts has not penetrated as significantly as we would have liked to.

But really what's going on in that operation is our integration plans are pretty much on-track.

Because I think we're conservative, we probably underestimated the cost efficiencies that could be achieved in pursuing those integration plans.

I also think that -- I often say that the rate of decline and the rate of incline are proportionate to each other.

So, if it took you five years to screw up a good Company, it will take you five years to fix it.

In this case here, the buoyancy and people coming back to that line when we invested in inventory and invested in improved quality and invested in customer service people and things like tha, has been, quite honestly, greater than we anticipated.

It's good to hear.

Yes.

Certainly you've gotten a lot of pricing this quarter, seemingly that would carry over into the fourth quarter.

But as you look at your commodities, with things maybe stabilizing here, what's your need or want to raise prices from here?

Well, we are always looking at pricing.

And we buy so many different commodities and we have different percentage impact on different products.

I could tell you even this week, there was a lot of conversation about specific product lines that still need to be adjusted and will be adjusted here in the upcoming months.

So, it's one of those things where I think the way I would describe it, Jeff, we're on top of the game but it's a game that requires constant diligence.

I'm not concerned about it.

I think our management team has done an outstanding job in managing.

It I said in the call that ghosts of concerns about pricing didn't show up at my house.

And then I guess finally, Bill, you mentioned some moving pieces in the tax rate.

What would you look at an effective tax rate into the fourth quarter in '07?

Between 33 to 34.

In that range.

You think that's sustainable over a period of time?

The way the current mix of income is, Jeff, I think that that's okay, yes.

Okay.

Great.

Thanks, guys.

Your next question comes from the line of Michael Schneider with Robert W. Baird & Co. Please proceed.

Great performance again.

On pricing, just to beat this topic, can you describe, Bill, maybe where you are in at least your average cost of copper?

And basically to some extent what has yet to flow through or have you seen the peak in your copper costs?

Most of our business units right now, Mike, have copper going through cost of goods sold that approximates the spot market right now.

Okay.

So, you're fully caught up at least on the cost side.

Yes.

Most of our units.

Not all but most.

Do you believe you're caught up on pricing?

Well, as Pat mentioned earlier, it's a constant issue.

We're looking at certain product lines that have to be adjusted and there have been some price increases, which have been announced early in the fourth quarter and some late third.

So you haven't seen all the pricing come through yet that will come through.

Specific, Mike, on specific products we're still in arrears.

And we have other pricing actions that either have taken place or will take place to cover those escalating raw material costs.

Okay.

Maybe a different way to attack it as well is just organic growth, Bill was 14% in the quarter.

Globally, do you have an estimate as to what pricing contributed to that number?

On a global basis it would probably be 60%, 2/3.

It's hard to come up with exactly.

But it's --?

Fair enough but about 2/3, say roughly, of the 14% organic growth would be pricing alone?

Approximately, yes.

And then the reason I ask is, so then looking forward, would that contribution rate increase or decrease in Q4?

I'm trying to get a sense of how much yet has to flow through.

Well, when you're comparing it to Q4 last year you're probably going to see similar numbers because we've had a whole series of price increases during the course of this year, as copper has just gone wild during the course of '06.

Right.

As you go -- if you keep going into subsequent quarters on a sequential basis, that pricing comparison will decline during '07 and we'll be focusing more on unit growth, assuming commodities stabilize.

But Q4 is, presumably on a sequential basis, is an even greater contribution because of the early Q4 price increases?

Well, it's because of the whole series of price increases that we've had during the course of the year.

Yes.

Comparing Q4 over Q4.

And we've had numerous price increases.

Fair enough.

Okay and then just on the DIY side, so you mentioned there's more freight in transit or product in transit this quarter.

That sounds, just a different way of saying what we've heard from some other players, which is the DIY guys, Home Depot specifically, are taking product much later this year or this season.

Do you sense that as well or is there a shipping issue that's just unique to Watts?

Well, I think --.

Within the third quarter it was unique to Watts, Mike.

Okay.

So --?

And we haven't seen anything here quarter to date that is unusual.

Okay.

And the just the idea around year-end, as you know these guys on are on a January year-end, they always squeeze inventory.

Pat, what's your call as to the magnitude?

Do you sense it's worse than normal, as usual?

No, I think it will be same as last year, Mike.

And don't forget, depending on who they're picking on, they squeeze it in January or they squeeze it in December.

I have no idea what they're going to do this year.

Okay.

But last year they squeezed us sort of before the end of the year.

Okay.

And --?

So we got a bunch of orders because they stocked out in January.

So the outlook from here, guys, $0.65 this quarter.

Sequentially normally, you would report actually a larger fourth quarter than third quarter.

And given that you do have some DIY product that was pushed out into the Q4, is that a normal seasonal trend you expect in earnings?

Well, that stuff is pushed out is not going to have a big impact on the numbers, Mike.

$2 million of low margin business.

So, I wouldn't put that into your thinking.

But I mean, typically the way we think about our business is that fourth quarter tends to be a little bit softer than third just because you have the holidays and Europe gets quiet particularly when you get close to Christmas.

So -- but the seasonality this year should be nothing different than we've seen in years past.

So a Q4 sequential increase is in the cards?

I didn't say that.

[Laughter]

I said the seasonality would be consistent with prior years.

Hi, Mike, I think we've had the understanding, you're the forecaster, not Bill and I.

Well, we've been consistently low on, especially gross margins, so any commentary you can give us, in particular on gross margins in Q4, would be helpful.

Because I don't think any of us have appreciated how substantial the pricing contribution would be vis-a-vis the raw material inflation.

I think when you look at that, Mike, we overall the commodity markets have been more stable the last month or two than we've seen in 24 months, I would think.

Right?

So we're being -- as Pat says, we still have some pricing to come through and we still have selective pricing issues to address.

But hopefully, it's a more stable environment as we go forward.

Well, maybe just a final question on a different cut at gross margin.

Despite the success of all the pricing, gross margins are still down year-over-year, presumably somewhat due to the acquisitions.

But would you expect Q4 to be the quarter where you actually show gross margin improvement year-over-year or is that an early '07 issue?

Again, we're a little reluctant to give guidance on that detail level, Mike on gross margins.

You look at the overall trends of the business, what Pat said earlier, and the numbers speak for themselves and the trends are continuing in terms of commercial construction and commodity markets seem relatively stable versus what they've done over the last couple -- say the last four, five quarters.

Right.

Right.

Mike, our approach because we don't give guidance is generally to give a pretty good understanding of what is in the quarter that has just been reported in terms of whether it's recurring or non recurring.

In terms of things of significance.

And this was a very straightforward quarter.

Bill and I were scratching our head this morning before this call as to what do we describe as fitting into that category and there wasn't much.

Right.

Right.

Okay.

Well, thank you again and great performance.

Your next question comes from the line of David Smith with Citigroup.

Please proceed.

Good morning, guys.

Nice quarter.

Can you just clarify -- I think I caught some numbers in there but just clarify what the core residential was up or down in the core nonres or commercial markets business?

We didn't say -- we didn't really disclose that.

I don't think we have that specific number.

We with talked about retail, wholesale, if that's what you're referring to.

Okay.

So just as far as inference goes, it sounds like residential, I could take as down and then commercial is up.

We think -- if we look at in general the product lines, the mix went towards the wholesale,and then the insider wholesale it went towards the commercial side.

Some of the products you can't say exactly if they go to residential or commercial, so you can't do that finite a breakdown on it.

But generally speaking, the larger devices and the higher pressure devices, et cetera, things like drainage and acid waste products, which are all up, that's only commercial.

Okay.

Not to belabor this point but on gross margin again, coming back to it on a sequential basis it was down.

Is that mainly on acquisitions?

You talked about some inventory adjustments, things like that.

But what can we kind of infer from that?

Gross margins are down sequentially.

Yes.

I think the primary issue is the mix of the business, that is booked quarter to quarter in terms of we have a wide variety of contribution margins and margin -- and it just really where it's coming from on a worldwide basis.

Okay.

But if the nonres or the commercial piece is up, I just would have thought that they may have done even a little bit better on the gross margin side.

If we look to Q4 and that kind of comment, just from a minute ago, it does bode for an increase, I would think.

When we're making our comparisons, we're really looking at the same quarter last year.

Okay?

We don't really focus on the sequential as much as you guys do, I think, because we do have certain seasonality in the business where now we're starting to enter into the heating season.

And so to go from Q2 to Q3, that's not really how --.

So basically, it sounds like you seasonally nothing was surprise there?

Right.

No, nothing surprising at all.

Okay.

So, was one of the pressure was some inventory adjustments related to acquisitions it sounds like?

Well you have the gross up of -- you effectively, for example, you take your inventories and you gross them up and you amortize that additional gross cost across the first turn of the inventory.

So, we traditionally do that because of the fact that there was some significant second quarter acquisition, that amortization period fell heavily into the third quarter.

Yes.

Okay.

On the price increases, are you guys getting push-back in any of the channels on the increases you're putting through?

There's always push-back.

I think all of our price increases have always been intended to simply cover the costs of metal and maintain our margin performance and we tend to work with our channel partners to see if they can't push that cost increase through the channel.

It's not our efficiency that's driving it, it's the cost of raw material that's driving it.

So, I'd say you get push-back but we manage it.

One -- the reason why I ask is that dodge stated that on the rolling three month starts space, it looks like it's slowing down pretty significantly, like low double digits.

But it seems more price driven.

It seems more delays.

It's not really demand driven.

Are you seeing any of that?

We haven't seen that in the fourth quarter.

Just on Europe, the drivers on the solar business, can you just discuss a little bit more on the solar and geothermal side and the opportunity you've got there?

Yes, a number of government agencies in Europe are subsidizing through tax breaks and incentive payments homeowners and commercial businesses to invest in alternative energy packages.

We're seeing it in the solar, we're seeing it in the geothermal.

We're seeing it in the pellet boiler, all forms of alternative energy.

And so, we're selling control packages into that industry.

Our guys were pretty clever in that they identified that shift some time ago and developed a host of new products that -- or I should say they modified their existing product lines to appropriately address that marketplace.

And we've been a net beneficiary of that growth.

And the acquisition we did earlier, Dave, of Kim Safe Corp. during the middle of the summer, that also -- that's electronic controls for that alternative energy market.

So, that helps strengthen the product line as well.

Is that an area of focus on acquisitions, is looking like things like alternative energy markets?

Yes, that's one of our focuses, correct.

And then just lastly on the size of deals that would you do, what should typically what the size you're looking at now?

Are you looking at something that could possibly be like a Jacuzzi size deal or would that be way too big for you?

Are you guys looking at under $100 million?

Just a size, if you can give us that?

Our sort of sweet spot is something in the neighborhood of -- we would do deals and feel comfortable with deals up to 10% of our market cap.

So, if you look at the size of the organization we had today, we're let's a $1.2 billion.

So to us, a nice acquisition is sort of $100 to $120 million range.

Got it.

Okay.

Our ideal is someplace probably I'd say low side $50, we'ed like to do deals in the $50 million range.

On the high side, for the right deal with good synergies, we'd go to -- we'd do a larger deal.

Okay.

That's great.

Thank you.

Thank you, Dave.

Your next question comes from the line Richard Paget with Morgan Joseph.

Please proceed.

Keeping on that same topic over in Europe, those alt energy.

With energy prices coming down, natural gas, et cetera, do you see that market softening at all or the incentives that the government is giving still going to make that continue to be strong?

Hard to tell, but I think you're correct in that you'll probably see some softening because some of that demand is driven by the headlines on energy prices.

And it really also depends on what countries -- almost all of these incentives need to be renewed.

They have sunsets on them.

So, it really depends on what they do.

But don't forget, we offer products for traditional energy sources as well as alternative energy sources.

So, we've been probably -- we got an advantage here of being first mover.

The other part of that issue, Richard is, is that fuel in Europe is almost twice as expensive as its is here in the States.

So, those folks have much more of an incentive to lower their operating costs by these alternative ways to augment their heating bills.

Okay.

And then getting back to the commodities.

I know there's been somewhat of a stabilization here, a lot of people talked about things possibly, prices coming back down once the speculators got out of the market, really hasn't happened too much.

What do you get, what kind of sense do have you from your suppliers about supply and demand and where prices might go?

Well, we had a lot of conversation about that recently and the only thing we can figure out is we're not good predictors of that. [Laughter] We're more looking at strategies to make sure that, for example, that we could stabilize our raw material inputs for a reasonable period of time.

So that when we're negotiating price increases and things with vendors that we have some assurance that our margins are predictable.

I've sort of guessed a couple of times that I thought that market was going to soften and it didn't go that way.

And we had to go back out with more price increases.

So, if I were really good at that I'd be probably in Chicago trading commodities.

Okay.

Thanks, that's it for me.

Your next question comes from the line of Ian Fletcher with Friedman, Billings, Ramsey.

Please proceed.

And I apologize if you answered this but with respect to your gross margin, what was the magnitude of the nonrecurring or asset step-up costs there?

The magnitude of the nonrecurring?

Yes, you said you had some inventory step-up costs from acquisitions.

It's about $2 million in the quarter.

Okay.

And just to circle back on Europe, it was very strong.

Even if you adjust for maybe the price component of that.

Is the primary driver that alternative energy market or can you touch on maybe the key drivers to that solid organic growth?

When you look at the European theater for us, I would say that particularly strong was the alternative energies, particularly strong was Eastern Europe.

But it was relatively broad-based across all of our geographical entities.

So, it wasn't one specific market.

I think to be honest with you, almost all of them were up.

And that includes --.

We've done a lot of other things there, Ian, to help improve the situation, with marketing programs in Germany and changing out some distribution partners in Italy and we're -- it's just the normal management of the business.

That we did a lot of work on our gauge business to solidify that product line and we're seeing dividends there.

So, there's a lot of things that we do, hitting a lot of singles.

Then you have the good performance in the alternative energy markets as well.

It was very broad-based.

Just so you don't misunderstand that, it was not a one-trick pony.

Right.

And do you think that's a reflection of the improved overall economic climate to some degree over there?

To some degree, although it's still -- it's hard to find a pulse on that economy.

Right, right.

And just one final clarification.

You noted some increased administrative costs in your corporate as an offset to the good margin performance.

We have cost of expensing stock options and as we've grown larger as a corporation, like last year we were $900 million, now our run rate is more than $1.2 billion, so we've asked some folks to help us run the Company.

We have some extra salaries in there as well.

Okay.

Thanks very much.

And your next question comes from the line of Ryan Connors with Boenning & Scattergood.

Please proceed.

Good morning.

Great results.

Thank you, Ryan.

Most of my stuff's been answered.

But I wonder if we could revisit the pricing issue real quick.

You mentioned, obviously, it's anybody's guess kind of where copper heads from here.

But if we were to look at a scenario where input costs start to drift downward, what would be the stickiness,for lack of a better term, of the price increases that you have put through in '06?

Well, you got to understand, if you look at the channels of distribution that we go through, in general, we've seen this before in the early '80's when we had rapid inflation.

And then we had a period of what I would consider to be slow but methodical deflation.

The customers in these channels do not want to lower prices because they are fearful that copper is going to take a U-turn and go right back up.

So, there's a lot of channel resistance to lowering pricing.

A week ago we had about a dozen of major customers in here and we were doing some dialogue with them back and forth.

And I found it interesting that to -- across the board, they are somewhat resisting lowering prices because of the fear that they don't know where copper is going.

Okay?

So not knowing where copper is going, they're somewhat reluctant to give it back.

A number of people asked questions here, what direction do I think copper is going?

And I don't know.

And I think what I got from my customer base is they don't know and until they know, they're going to be very reluctant to give it back.

And if they give it back they'll be very stingy about giving it back.

There's a lot of channel resistance.

Okay, great, Quickly, back on the retail side, you mentioned that retail volumes were down slightly.

Do you keep numbers for remodeling versus the rest of retail?

You said remodeling was stronger.

Was that actually -- was that side actually up or was that also down slightly?

Well, we can't really break out the remodeling market, per se, versus replacement and whatnot.

It's just -- we hear all the information anecdotally back from our marketing guys and our customers about the strength of the remodeling market.

So your sense is that that market actually had a positive year-over-year performance?

Yes.

And that's verified by some of these customer visits we had.

They're giving us information that's saying, "we're seeing it, we're getting hit big time on the new construction but the remodeling seems to be holding its own or increasing slightly."

Great.

Thanks, guys.

Your next question comes from the line of Bruno [Yang] with Citadel.

Please proceed.

I was just -- great quarter by the way but I was just surprised at how muted the impact from the residential side has been for you guys.

I know there's lots of things going on in different aspects of the business.

But was wondering if -- because some people have been saying you guys are a lagging indicator to new starts, given that plumbing goes in last in a lot of these residential developments.

And therefore, you might not see an impact right away but at least on the new start side you will see that in a lagged fashion.

Can you comment on that?

Well, go ahead.

Let me take a pass at it.

One thing you have to remember is that well more than -- a significant amount of our revenue, more than 40% is addressing the replacement market.

We have a very large installed base of products and that's constantly needing to be updated and replaced.

So, that's a big piece of our business.

Then we think that the rough estimate but 15 to 20% of our revenue correlates with North American residential starts.

And then we have another 15% to 20% that correlates to commercial starts.

So that we've been saying all along that even if in a downturn on the residential side if it's 20% and the residential goes down by 30%, that's about 6 points or something on our growth rate.

But it's more than offset by the commercial side.

The commercial side is vibrant right now and the margins are higher.

So we've been -- as we discussed this issue with the investment community over the last year or so, people have become concerned about this issue, we've been saying that we think when it happens, we will be impacted by it but we'll be moving towards more favorable mix because of the strength of the commercial market.

I think what we've been saying, I think, is what's happening.

Okay.

Got it.

The other thing you have to understand is if you look at the acquisitions that have occurred over the last 36 months, they have predominantly been l oriented entities.

So that, we have deliberately been shifting away from residential marketplace toward a commercial mix over the last 36 months.

The reason we were doing that is because;

One, is we thought that we were in the beginning of an up cycle on the commercial marketplace.

And that that cycle generally will play out over someplace between five and seven years, that's the historical trend.

So, it's a relatively long trend.

So if you can get into it early you can enjoy the benefits of it for a number of years.

The other is, we were convinced that the housing market was going to soften.

And that if we were going to continue to grow, we were going to have to find ourselves more fertile soil to plant our seeds in.

And I think we've been successful in doing that.

And the other thing is that because of the engineering content in the commercial product lines, they tend to be higher margin because they're highly differentiated products.

So, I know people have had this fear.

I'll be candid with you, I've often thought that you guys had the phone on mute here while I was talking.

Right.

Because I don't get it.

Right, right.

Okay.

Second question on -- you talked about acquisitions.

And I know you guys are pretty acquisitive and have done some smart acquisitions.

But I was -- I know you can't comment on anything specific.

But I was just looking at the whole [Mueller] water spin-off and how that's coming out?

And was wondering if that's like a line of business that you would be interested in getting into?

It seems like it would be very complimentary.

Can you comment on that?

Well, we don't make comments on any specific company but we are in the water business.

And if you look at our strategy as we describe it on our Website, we have -- we would look at anything that is water related and we think that's a good driver.

So we're looking at businesses like that.

I won't really specifically comment on any particular acquisition target.

Got it.

But you guys would be interested in infrastructure water for example.

When you say water, you mean the whole spectrum of water, right?

We mean the whole spectrum of water?

And don't forget, if you look at the acquisitions we've recently made in China, they're infrastructure companies.

Because we look at the China market for infrastructure and say for the next 20 years it's going to be a growth market.

Right.

You can say the same for the U.S. given the aging of the water systems?

There's one significant difference.

In the U.S., unlike China, the China government is committed to funding projects in the infrastructure market.

In the U.S. you have to wait for referendums that are -- some of which will be on the ballot next week.

Where individual taxpayers have to vote to fund those projects.

So you get a little bit of choppiness in terms of when these projects are funded in if U.S.

But long-term, you would come to the conclusion that that's a growth market long-term.

It's just a market that will have some choppiness to it.

When the Chinese make up their mind, it's funded.

Okay.

Thanks, guys.

Your next question comes from the line of Stewart Scharf from Standard and Poor's Equity Group.

Please proceed.

Most of my questions have been answered but just on acquisitions, what are the multiples now?

Are looking at those in the same range or have they come up a bit?

All the acquisitions we've done this year have not substantially different in terms of range from the prior year.

I think you know we're very disciplined about our acquisition program.

We run the same model.

We've run the same model for the last five, six years.

I don't see a significant appreciation.

I know that there was some recent deals in our sector that went at very high multiples but those aren't the ones we participate in.

Okay.

And then what's your debt to capital and target range?

Right now, Stewart, we're at 37% as we close the quarter, net debt to cap, and we feel comfortable going into the low 40's.

Okay.

Thank you very much.

We do have $116 million in cash on-hand today.

Okay.

Thank you.

Your next question comes from the line of Jim Foung with Gabelli and Company.

Please proceed.

Great quarter.

We thought you'd like those numbers.

Yes, we love it.

All of my questions have been answered but there is one that no one has touched on, just the charge in discontinued operations.

Could you just kind of expand a little bit on that, what the contingency reserve for, for this reimbursement?

We will go through -- we have sort of exhausted a series of appeals that we went through with regard to the dispute over the deductible and agreements and which deductibility agreements will apply to the defense costs.

Okay?

And what we have done, Jimmy, is put a provision in place for our best estimate at the cost of resolving this matter.

We have not sat down and started those negotiations.

We have not proceeded down that path.

We just have a triggering event, which is having exhausted all of our remedies in appeal that led us to come to the conclusion that this is now probable and estimable and we booked or best estimate.

So, this is an event the panel rules that you have to pay for your own defense costs instead of Zurich.

No, we have to pay certain deductible amount.

Certain deductible amount, okay.

So that's what the reserve is for then, right?

That's what it's for.

And then could you talk a little bit more about how just an update on that litigation case?

It's been in your -- it's been moving in your favor for for some time now.

Could you just give us some updates?

Well, first of all, Jimmy, I think you know this, this is very complex.

Right.

It's not going to get resolved any time soon.

Okay.

Okay?

And we had -- I think we've announced in our various filings all the significant appeals, et cetera, that have been heard.

And you're correct, that some of those go for us, some of those go against us.

In general, if you take the preponderance of them, I think they've been in our favor.

But you're in sort of a very deep period of arm wrestling and I don't see anything being resolved in this in the near term.

Okay.

I spend -- I take this very serious because there's a lot at stake here and I would like this thing to be resolved on the basis where the majority of this is absorbed by our insurance carriers.

Right.

Okay.

But I think you're right, if you look over the last two years, the preponderance of the decisions have moved in general in our favor.

But it's one of those gains where you take two steps forward and one step backwards.

I'm not overly concerned about it but I'm keeping a watchful eye on it.

Sure.

So, it looks like you're still far away from this being settled, then?

Jimmy, you may retire before I settle this. [ LAUGHTER ]

You and I, I guess.

Let's just shift on to just a couple quick questions.

In Europe, outstanding year-over-year numbers here.

What do you thing think is the normal growth in Europe?

With the acquisitions you've made and the changes in your markets, what should I look at just when I'm look into '07 and into '08, what kind of a normalized growth rate I should put in for Europe?

Jimmy let take -- let me give you some information on that.

What we always like to tell investors is that when you view Watts over a business cycle and over long-term, that from an organic standpoint in unit growth, we think we can grow at GDP plus 3 in any given market. and we still feel that that's a reasonable way to look at our business.

And if you look at what we've done historically over the last 10 years, our unit growth really has been at GDP plus 3, and maybe a little bit more.

Maybe another point at the most.

Right now in Europe, we have some unusual situations going on because we are getting pricing, so you back the pricing out and we get closer to that GDP plus 3.

But we're also addressing some very vibrant markets right now in Europe with Eastern Europe growing nicely in this alternative energy market.

But if you look at the other parts of our business, the non-Eastern Europe and non-energy parts, it probably is more like a GDP plus 3 kind of growth.

If I used a shorter time span, Bill, with the Eastern Europe into the points that you've indicated in these markets, where do you think the next couple year's growth rate could be?

GDP plus 3 is more of a longer --?

GDP plus 3 is what we're going on record with.

Okay.

When do the incentives for these alternative energy products expire?

Well, they're in many, many countries.

Okay.

You have to look at it country by country.

I don't know the exact answer to your question, but the whole northern tier of Europe they all have these type of incentives.

The concern is when they expire, do we kind of start looking for some fall-off in sales with the expiration of those incentives?

Well, it's difficult to say.

But you also -- that's not the only thing that drives that market.

The cost of heating a home in Europe is significantly higher than it is in the United States because the fuel is taxed and it's more expensive in general to buy a liter of fuel in Europe than it this the states.

So, they have an economic incentive to lower their operating costs.

And these incentives right now just help that.

Right.

Okay.

And then just lastly, you talked about North America retail being mid to high single digit kind of normal growth.

Could you do the same for wholesale distribution?

What do you think the normal growth of that would be?

Again, that goes back to this GDP plus 3 kind of concept, Jim.

So, you still hold that?

Jimmy, you go back and there's a chart in our Website that shows our historical growth rates.

And we have always said that our internal objective is to growth by 50% of that would be organic growth, 50% of that would be through acquisitions.

So I think on the Website today is a 10 year chart and a three year chart and you can get a pretty good feel from looking there.

Okay.

Great.

Great quarter, guys.

Your next question comes from the line of Michael Gaugler with Brean Murray, Carret.

Please proceed.

Congrats on the great quarter.

Thank you.

Most of my questions have been answered also.

But one that I didn't hear an answer to was, Bill, I was wondering if you could expand on the China segment?

I've noticed the numbers have been rather impressive, especially the last two quarters in terms of margins and revenues.

Do you think these levels are sustainable from the margin side of the equation?

Well, I think that we've had some excellent results there.

What we're seeing right now is the rate of improvement probably isn't sustainable but the absolute dollars we should be able to do okay on because we have some very favorable variances coming in from our factory.

This time -- our factory where we manufacture our bronze and brass plumbing goods in Tanjing.

At this time last year that factory was not 100% at capacity utilization.

Now. we have production levels are much higher.

We have the dynamics of the Chinese market itself.

We're just in the very early stages of seriously addressing the infrastructure market.

We are looking at putting more production into our facility in southern China, our Watts Plumbing Technologies facility.

We're transferring more an more work there.

So, I think China will continue to be a very meaningful part of our profitability going forward.

The rate of improvement year-over-year is hard to sustain, though, Mike.

I was just wondering from a margin standpoint.

I know your mid 20's and above is -- that's quite an improvement when you look year-over-year.

Right.

I mean, I think it's --.

Driven by a substantial improvement in our absorption as a result of we ramp up that buy in.

That's the thing that is driving is more than anything is the improved manufacturing efficiencies, if you will.

All right.

That's all I had.

Thank you, gentlemen.

And your next question comes from the line of Curt Woodworth with J.P. Morgan.

Can you give us an update on how the margin profile of the FEBCO and Dormont acquisitions are progressing this year with regard to cost synergies?

I know FEBCO is the one where you saw the most upside.

And I'm just curious to know how the margins look today versus when you bought those businesses?

We generally don't comment about specific margins on specific businesses because we get down to micro analysis here.

But both of those businesses are on or above plan in terms of the acquisition plan we put together and the integration plan that we put together.

I think if you look at FEBCO, the surprising thing about FEBCO is that the buoyancy in the sales that we got when we put customer service resources in place, we put inventory in place, so that delivery performance and on-time delivery was substantially improved.

And I think the thing that we underestimated there, to be occurred, is how long it would take the customers to recognize that improved service and reward us with additional orders.

And it's working out to our favor, which says something about the strengths of that brand and it says something about the strength of their reputation and things of that nature.

So, they surprised us on the positive side.

We thought it was a brand that was somewhat tarnished and the tarnish came off quickly.

But on the other side of it, we're very happy with Dormont.

Dormont's operating well.

They've got a young management team in there.

They continue to execute against our integration plan and are performing consistent or above that plan.

And has the margin profile improved at Dormont as well because I know they were already operating at very high EBIT levels when you bought them?

They're improved but I wouldn't say not rocket kind of levels.

We're seeing substantial improvements at FEBCO.

We're seeing sort of normalized improvements at Dormont.

And if you exclude the $2 million step-up charge and the gross profit this quarter, for an EBIT number it looks like the true performance is up more like 150 basis points year on year.

And my question is, how much of that is driven either by getting back to parity on the price dynamic?

And how much of that was driven by acquisition benefit, which I do believe were accretive to your margins?

If you have those numbers.

Well, it's going to be both, Curt.

You're right, it is both.

What we saw in the -- as I mentioned earlier, we were able to leverage both -- from an organic standpoint, where our operating earnings from an organic standpoint grew at a greater rate than our sales growth but the acquisitions contributed also.

So, when we look at the organic side, it's a combination of several ingredients.

One, is going to be the fact that we were able to get some pricing.

But we also had higher copper costs coming through cost of goods sold.

So, that helped to offset that.

You also have the fact we have a more favorable mix.

And you also have the fact that we're able to control our costing.

Okay.

Where the SG&A, excluding a small amount of variable selling expenses didn't move.

Okay?

So, it's all of that.

It's a leveraging the business, maintaining your costs, getting the pricing and the mix.

Based on my model and the numbers I was running, it looked like the accretion from the acquisition, just the mix benefit of rolling those into the P&L was about 70 basis points, the EBIT margin this quarter.

Is that reasonable?

Well, we haven't done that type of detailed analysis on it and we don't really get into that level of disclosure.

We were very happy with the acquisitions.

They've contributed at or above the plan and all the discussion we had when we bought ATS, Dormont and Core.

We had conference calls on all those deals.

And what we've done with the deals is equal or a little bit better than we told everyone.

And we're leveraging the business.

Curt, from a business point of view I look at this and say what happened in this quarter.

One, is we covered well on pricing.

Okay?

Two, is our acquisitions are coming in on or above plan.

Okay?

Three is, we're leveraging the volume that's coming through our facilities.

Right?

Yes.

Four, is we are seeing what we thought we would see, which is a shift toward commercial products.

So we're losing the low margin products and we're gaining modest in high margin products, so you have a positive shift there.

So I look at it from that point of view.

I understand what you're asking but --.

I'm just trying to get a sense of the --?

I would do it because I have everything going in the same direction.

I was just trying to get a sense for the relative contribution.

Because you're essentially flat year-over-year on the first half of the year on operating margins.

And now, again, if I adjust for the step-up, you're up 150 basis points year-on-year on the third quarter.

So, to me looking out to '07, it seems like you're going to get continued mix benefits especially as FEBCO ramp.

The mix shift should be probably equally in '07.

So, I'm just trying to get a sense for how to think about that going forward and that's fine.

The other question I have is on the year-to-date basis, how far behind are you on the price versus cost dynamic?

It seems like you were at definitely at parity this quarter.

But year-to-date do you feel like you're pretty close to parity or --?

What we said was on the wholesale side, we think we've done a good job on staying close to even with that and I think that's still a correct statement.

And on the retail side, historically, we've been behind.

And now we're hoping to be catching up now with the latest round of price increases that came in in third and fourth quarters.

So how --?

We are behind on the retail.

It's easy to say $2 million there.

$2 million year-to-date?

Yes.

And when we look at the whole portfolio, don't misunderstand me, but there's always something that's behind.

Right?

Correct.

Unless copper goes maybe to 250 next year.

Well, then if it does, then that's a different scenario.

And we'll address it at the time.

Right now you still have some items that need to be addressed.

Yes.

And then just final question, given the FIFO accounting and it seems like you guys were very, not aggressive, but pricing was very strong this quarter.

Were there any spread benefits?

Were you able to get ahead of price, specifically, in the wholesale channel and maybe there was some margin benefits from that?

Your customers are too smart to let you do that.

Okay. [Laughter] That's too bad.

Okay.

Fair enough.

Thank you.

I show no further questions.

I would now like to turn the call over to Mr. Pat O'Keefe for closing remarks.

Please proceed, sir.

I want to thank everybody for joining us for the call.

I think I said this earlier, the numbers speak for thetch themselves, this was a very nice quarter.

We look forward to talking to you about future developments.

Thank you.

This concludes the presentation.

You may all now disconnect.

Good day.