Watts Water Technologies Inc (WTS) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2006 Watts Water Technologies earnings conference call. (OPERATOR INSTRUCTIONS).

As a reminder, ladies and gentlemen, this conference is being recorded.

I would now like to turn the presentation over to your host for today's call, General Counsel Lester Taufen.

Sir, over to you.

Good afternoon.

My name is Lester Taufen and I am the General Counsel of Watts Water Technologies Inc.

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 31st, 2005, 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 represent our views only as of today and should not be relied upon as representing our views as of any subsequent date.

While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so 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 may refer 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 press release dated February 13, 2007, relating to our fourth quarter 2006 financial results, a copy of which may be found in the investor section of our website, www.WattsWater.com, under the heading "Press Releases".

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

Thank you.

Thank you for joining us today on our call.

The way I would like to conduct the call today is, I am going to make some opening comments first about the whole year of 2006 and then talk a little bit about the environment we are in.

And then we will go in and talk in detail about the fourth quarter results for 2006.

If you look at the whole year for 2006 you can see that we had revenues increase to $1.23 million -- so -- 1.230 billion. 33% increase.

If you look at net income it's increasing 35% and if you look at operating income for continuing operations it is increasing 40%.

So overall it was a very good year when I look back and talk about a cup of things.

One is, that it was a year in which we struggled with passing price increases through to our customers to cover the escalating costs of raw materials.

That was probably the #1 headwind that we faced all year long.

I think the major accomplishments that I would like to point out is that we made a number of large acquisitions last December a year ago; and we were so far successful in integrating those operations that pretty much all of those acquisitions made in 2005 and the five that we made in 2006 are mostly on track.

Now I want to look a little bit and go forward and talk about the environment we are in today.

I think what we are starting to see now is a couple of things.

We're starting to see that the commercial marketplace is continuing to show strength.

I think we saw in the fourth quarter a little bit of a lull as some projects were requoted and repriced and things of that nature.

I think that was really a temporary pause in a general upward trend in terms of nonresidential construction market.

Now what we are seeing in the residential construction market is a significant slowdown.

I think you can see some of that in our numbers for the fourth quarter.

I think the other side of it that is giving as a little bit of concern is not only are new housing starts down but homeowners are reluctant to make investments in their home in terms of renovations and remodeling, given the uncertainty of being able to recover that remodeling cost in terms of a selling price.

So in general, I would say you have a big malaise over the residential marketplace and I think we saw that significantly in the fourth quarter.

Now the other thing I think that is starting to happen is that we are starting to see the cost of copper starting to come down.

I will tell you that in general we are getting very little pressure from the channels of distribution to do any kind of price reduction, because there are other metals that are moving in the opposite direction at the same time.

The most important one being zinc which is a component of our brass castings and bronze castings; the second one being nickel, which is a very important component in stainless steel.

So we have continuing pressures on certain raw materials but we have a softening in terms of the pricing structure in the cost of bronze, which is our primary raw material that we use in our process.

The other thing I want to just mention is that if you are looking at the markets in general, I think you are starting to see some recovery in the European market.

I think we saw that in 2005, the end of 2005 and all of 2006 and we think that will continue going into 2007.

So we think there is some upside opportunity in terms of our European performance.

Especially in light of some of the larger acquisitions we made this year, particularly ATS.

Now I want to turn a little bit and talk about the fourth quarter.

The fourth quarter was a challenging period.

You can see that we had a sales increase of 35%.

If you look at net income it only rose 21% and if you look at income from continuing operations, it was about the same, up 19.5%.

I think the major issue that we saw in the fourth quarter was really operating margins were affected by basically four major things.

One was an increase in copper cost; the second was an increase in acquisition-related charges.

We took a number of charges in the fourth quarter.

The third was an increase in our manufacturing and restructuring costs.

We stepped up to some major restructuring issues.

And the fourth is really an increase in administrative costs and Bill and I will talk about these in detail.

But you can see that we have a little bit of margin compression here as a result of some costs that we incurred in the fourth quarter.

Now I guess the most important thing I want to talk about is, when you look at cost of copper I think what we saw in the fourth quarter, late in the third quarter and early in the fourth quarter was the highest mark where copper in terms of our purchasing was someplace in the neighborhood of $340 to $350 a pound.

Now we see it much lower than that.

I think right now it is someplace in the $240 range.

So I think what we are starting to see is that the very high-cost copper was rolling through our P&L in the fourth quarter.

We did in fact cover the cost of the copper but we did not fully recover the entire margin on that copper.

So I think that's probably the most pervasive issue that was affecting us in the fourth quarter.

The second issue which is the acquisition-related cost, we stepped up and really looked and scrubbed the balance sheet of all of our acquisition so we could get those acquisitions fully booked before the close of the year.

As a result we took some one-time let's call them one-time or nonrecurring charges in terms of they were significantly higher than they were in the prior fourth quarter.

Then again and the same thing -- we talk about the manufacturing restructuring.

We have a major remanufacturing restructuring going on in Italy, a second one in China and we stepped up and charged some cost through our P&L for those at the same time.

When it comes to administrative cost, the primary culprit there is really the expensing of stock options and an increase in personnel costs, mostly related to bonus payments.

So I think those are the big issues on an overall global basis.

Now what I would like to do is have Bill walk you through the numbers in detail, segment by segment, so you get a good understanding of what happened.

Thanks Pat.

Looking at the consolidated numbers as Pat mentioned revenues up 35% to $330 million.

The individual factors that contributed to that growth.

Organic growth was $29 million which is about 12%.

Foreign exchange is $8 million which is 3% and then acquired revenue is $49 million, which is 20% and that brings you to the 35%.

Net income from continuing ops up to 21%; but if you back out the restructuring for the quarter, net income was up 25%.

A little detail on the restructuring, we booked $3.9 million pretax charge in China which is predominantly associated with severance.

In Italy, we booked $700,000 of income which is predominantly due to the gain on the sale of one of our buildings.

We closed two buildings in the last couple of quarters and sold them and we had a small gain there if you will.

Looking at the earnings per share, at $0.51 is the GAAP number.

That is up 11%.

Backing out the restructuring, we would show $0.54.

That would show an increase of 15%, but the other thing you have to consider when you are looking at the EPS in the quarter is the impact of the dilution from the offering we completed in mid-November.

So there's $0.02 of dilution there so that's $0.56.

Consensus estimates were on First Call reported as $0.61.

Originally before we did our offering, the consensus estimates were $0.62.

About half of the analysts adjusted their models for the dilution.

If everyone had adjusted the consensus would have been $0.60.

So we are $0.04 shy of consensus.

And we will go into more detail so you can understand the reasons for that.

Now I would just like to look at the segment information.

North America, total sales at $205 million, an increase of $39 million or 24% and again breaking out that 24% organic volume increases of $13 million or 8%.

A small number for foreign exchange 2/10 of 1 point and then the acquisitions contributed $26 million or 16%.

The acquisitions in the quarter predominantly Dormont and [Call] with some small contribution from Calflex.

Looking at North America, on breaking it out into the retail and wholesale markets.

Total retail sales at $46 million, that's an increase of $5 million or 12%.

If you back out the acquisitions, we saw an organic growth rate inside of retail of 6%.

Now what is happening in retail is we had a couple million dollars of product rollouts, new product introductions.

And we also had some price increases.

And those price increases were offset by some of the slowness on the residential volume that Pat mentioned earlier.

So really pricing and volume basically offset and the net increase is due to the new product rollouts.

On the wholesale side, total sales, $158 million.

That is an increase of 28%.

If we again back out the acquisitions, we would see an organic growth rate of 9% on the wholesale side of the business.

And essentially what we are seeing here is on the wholesale side as that is all pricing offset by some unfavorable volume because of the slowdown on the residential side.

So again we sit back and look at the entire situation for North America.

We did see unit growth from the rollouts and purification business.

We saw the residential have a slight decline which predominantly occurred in the latter part of the quarter.

The commercial is steady for us and the pricing was positive.

Looking at the European revenue.

Total sales of $110 million, that's an increase of $39 million or 56%.

Again providing the detail of that the organic growth in Europe was $14 million.

That is 19%.

Foreign exchange of $8 million or 11% and then the acquired revenue was $18 million or 26%.

That gives you 39 and 56%.

The average rate we used of foreign exchange was $1.29 in Q4 '06 versus $1.19, Q4 '05.

Comments on the organic growth rate in Europe, somewhere between 1/3 to 1/2 of that would be pricing and we continue to see some of the strength in the markets consistent with the way we discussed it with you all year long in that the alternative energy markets continue to be strong.

Manifolds [underfloor] rating heating -- all the products that contribute to alternate ways of heating water.

That was somewhat offset by the decline we continue to see in the petroleum-fired, gas-fired boilers.

On the acquisition side of Europe, 18 million comprised of ATS Black Teknigas and Kimsafe.

Again what we saw in Europe just to give you a little more color there is, on the wholesale -- this is organic growth now -- on the wholesale side we saw a 17% growth rate which is going to be sales into Eastern Europe and price increases on the OEM side.

We saw an increase of about 24% which is really where we are seeing the increases on our alternative energy product line.

Without acquisitions the DIY is a relatively small piece of the total pie there.

Looking at the China segment.

Revenue closed at 15 or, say, $16 million -- an increase of 7.5 approximately 89% and looking at the components there, organic growth is up $2 million which is 25%.

Foreign exchange, a small number which comes to 4% and the acquisitions of $5 million which is 61%.

The acquisitions in China, the inclusion of the revenues for Changsha Valves Works, which we acquired in May of 2006.

But to move onto the gross margin now.

On the consolidated basis the gross margin was down 1.8 points.

What I would like to do is talk about that on more of a segment basis.

The gross margin in North America for the quarter was 35.4%.

So that is a decline of 1.6 points.

The major contenders to the decline really was -- one is, as Pat mentioned the higher copper costs.

We had price increases and we did not recover the gross margin.

Percentage on that we covered the cost of the proper itself.

Additionally in the last half of the quarter we did see some declines on the residential product lines.

Towards the end of December, we also had a poor mix of products inside of North America in that some of our better margin products associated with the heating business had lower sales because of the unusually warm fall season that we had in North America.

Looking at Europe, the gross margin is 29.5%.

That is a decline of 1.4 percentage points.

Some of the issues in Europe are similar to the U.S. where we did see some of the highest price copper hit the P&L during the quarter.

We also had plant expansion that we did in the UK that we opened up early in the quarter and we had some efficiency issues in the start up of that plant.

Particularly with a new work force, a significant number of new people and some other startup-related issues.

We also, Pat mentioned some of the adjustments we made at year-end to clean up our opening balance sheets.

These were booked predominantly in Europe.

So that impacted the margin as well there.

In China the gross margin is up to 22.1.

That is an increase of 6.7% percentage points.

Two things happening here that contributed to the improvement.

One is the volume at our wholly-owned sub in [Tienjin] is up significantly versus last year.

This is a captive shop.

We were manufacturing our small diameter bronze and brass plumbing products.

So we have improved capacity utilization there.

And then the impact of Changsha Valves Works which we've had in the full quarter and that helped the gross margin as well.

On the SG&A is up $21.9 million to 81.8.

Looking at the components of that 21.9 increase you have acquired SG&A of 12.9.

The foreign exchange impact is 1.5 million and then the organic increase is 7.5.

Inside the 7.5, you have some variable sales expenses associated with the incremental volume.

We have some FAS 123 expenses and some increased Sox and audit expenses associated with our newly acquired companies.

Operating earnings from a GAAP basis are up 14%.

If we exclude the restructuring, operating earnings would have shown an increase of 24%.

The tax rate in the quarter was down by about 5 points.

The tax rate is 31.4%.

We had a couple of unusual adjustments here in that, in China, we -- because of the restructuring charges we took we were able to tax effect those at one of our entities and the wholly-owned subsidiary, they had a significant improvement of volume is on a tax holiday.

So the tax rate in China itself helped us.

our Then we also had a favorable mix of income where our income moved towards the Chinese side and that helped the tax rate as well.

As I've mentioned in the past sort of a steady-state tax rate would be more of a 33.5% or so would be a better indication of our overall tax rate going forward.

Net income on a GAAP basis was up 19% and, again, if we exclude the restructuring net income was up 25%.

So we think it's a pretty solid quarter in a difficult environment.

But I would just like to provide you with a couple other comments I know that people will be interested in.

When we look at our free cash for the full year, free cash flow which is after dividends $57 million versus $23 million last year.

So the improvement there is a result of the improved earnings.

We've made some progress, if you will, on the working capital front where working capital without the cash decline by 2.5 points, relative to sales.

So most of the increase in working capital really is associated with the increased costs of metals as well.

The depreciation and amortization for the year is $35 million versus 28 last year.

Our net capital expenditures for the year $14 million; however that includes the sale, the net sales of buildings in Europe which were $11 million.

On a gross basis the CapEx was more along the lines of $25 million.

With that, we would like to open it up to any questions that you might have.

(OPERATOR INSTRUCTIONS) Curt Woodworth with J.P. Morgan.

Bill, you talked about some of the price dynamics in all of the segments and specifically in the North American segment.

Can you talk about the unit volume trends you saw on the residential side as well as the commercial side?

And in terms of the copper issue going forward what was the headwind in absolute dollar terms this quarter?

What was the delta?

And how do you see that evolving over the next couple of quarters?

If you look at the major business segments here, what we saw was our purification business was up about 10%, but you look at the core plumbing and heating business, and unit volumes were down about 3% which we started to see that towards the latter half of the quarter.

Now that decline in unit volumes is a net number.

So that would be -- it's difficult to give you a specific number relative to unit volumes on commercial versus residential, other than that we know that the commercial somewhat offset that decline in the residential.

Some of our products can go into both markets and etc., so -- .

Now when it comes to your other question on the copper, if you look at our -- on a GAAP basis, the decline in the operating earnings if you will was about 170 basis points.

While it is difficult to come up with this an exact figure, probably about two-thirds of that decline is associated with these copper issues.

And the rest of it would be some of these charges that we took relative to cleaning up the balance sheet, etc.

Now we did see in the quarter the highest copper that we have bought to date through this run-up come through the P&L and hit the cost of goods sold during the fourth quarter.

So right now the spot price of copper is running anywhere from 240 to 260.

I just checked a second ago and I think it closed about 257 tonight.

We have seen it hit as low as 240.

Now what we are -- what will happen to us is consistent with what we have been saying all along in that we have four to five months of raw material on hand at any given point in time.

So the copper that we are buying now and that we bought sort of late December, that copper just say mid $2 range will start to come out and hit cost of goods sold late in Q2.

Mid to late Q2 and then all of Q3.

With all other things being equal if copper stays where it is the entire third quarter and second half would see copper at the mid $2.00 range.

That answer your question?

Yes.

And if I was to normalize this quarter and use it as a pro forma share count and get to an EPS number around $0.46 which is sort of flat year on year, and I'm wondering looking forward into the first quarter usually seasonally, you see some improvement.

Can you give some commentary on what you are seeing in terms of demand friends and pricing?

Seemed like you had some annual step ups in SG&A which probably revert next quarter.

So any guidance you can give on first quarter will be appreciated.

Let me just say something, Curt.

This is Pat.

The first thing is if you look at the fourth quarter -- and I just want to talk about things that were unusual in the fourth quarter -- you usually see in our business a large buy in hydronics that takes place in July and August and then a rebuy in December.

And because of the warm fall there was no rebuy.

Wholesalers were actually stocked to the hilt and all those products that we typically see as demand in December there was no rebuy.

The wholesalers had no reason to restock because they hadn't sold the stuff they had bought back in July and August.

So that is one thing that doesn't recur.

The second thing I guess is, I don't ever believe my January numbers because you have a cyclical business here.

When (indiscernible) cycle is someplace in December and January so we really don't have enough evidence at this point in time to have a good feel for how the first quarter is going to develop.

With that being said we do know that we have another couple of months' worth of high-cost inventory on the copper side that has to be digested.

And then the other side of it is like you say, if you look at -- you are not going to have the recurring cost in terms of the big recurring cost that we talked about.

SG&A will probably come down to a more modest level.

The restructuring charges will probably be much more modest.

And the acquisition-related charges will not be there.

So that's about as much color as I came give you.

We are too early in the quarter to have any really decent feel for where it is going.

And this is a business that quite honestly you have to get into March before you really feel confident about the first quarter.

Andrew DeAngelis.

KeyBanc Capital Markets.

On the acquisition contribution, I believe you mentioned something related to the balance sheet in terms of adjustments that you may bear.

I guess could you just get more granular with respect to those adjustments?

Basically this is when you buy -- when you do an acquisition you have to true up the balance sheet to sort of replacement value of market -- to market value.

So you have to write up your backlog and your customer list, etc.

So we made some adjustments which were associated with that.

So if you look at the entire amount versus last year's fourth quarter we had about $3 million of increased amortization of purchase price hitting the P&L.

Now that's entirely proper because we have done so many deals since last December.

Of that 3 million, there is about 150 that we would view as non-recurring.

And that would be embedded within -- it sounded like primarily the European segment?

It's predominantly in cost of goods sold and it's predominantly in Europe.

Then secondly if you could maybe comment on the acquisition pipeline and anything that you are seeing there?

Just comment on valuation there.

Yes.

There's a couple of things going on.

I think in terms of the pipeline it's a fairly normal pipeline in terms of the volume of deals that we are starting to see.

The thing you are starting to see, though, is multiples are moving up on us, particularly with the financial sponsors pretty active in the market and I expect that that will continue through the year.

You are probably going to pay one-half to one turn higher than you might have had to pay the last couple of years.

For a good strong company.

Then, I guess within North America could you comment on the FEBCO business?

It sounded like there might have been some seasonality just within that kind of business model, based on some of your prior comments in earlier quarters.

If you could comment on how that business performed in the fourth quarter?

Yes.

Well let me just say overall we are very pleased with FEBCO as an acquisition.

I think our expectations I think we told you this maybe a year ago was that we only had the expectation that that business would break even.

And it's substantially exceeded our expectation.

With that being said, it is a business which is heavily oriented towards the irrigation market, the turf irrigation market in particular which is very seasonal.

So you see a very strong first and second quarter in that business and its low point is the fourth quarter.

We saw that.

With that being said, though, we are operating at a point where we are in the positive and we are doing very well.

I think I look at the quarter and think if you can weather the downside of the cycle the way we did in the fourth quarter, it's a good business and it's seriously back in terms of meeting our expectations.

It's back on track as a business.

Super.

Thanks.

Mike Schneider with Robert W. Baird.

Maybe we can just circle back to copper.

I guess I'm curious because on the last call I specifically asked if your copper cost had peaked in the P&L and I am looking at the transcript and it seems that you agreed.

What changed I guess as you look at Q4 and I guess in hindsight now what different than expected on the copper cost?

Because it appeared as though last quarter you thought the worst was over.

I think what happened there was that we did have some cost come through in this quarter that would be higher than last quarter as far as average copper cost coming through.

And the price increase that we put out we put some serious price increases out during the end of the third quarter and some during the fourth quarter.

Those price increases were meant to cover the cost of copper and not to maintain the margin percentage.

That's the big difference.

Yes with hindsight we should have been more aggressive in terms of pushing harder back in September, October on pricing.

You know you saw the highest peak was probably September, October kind of time frame in terms of the highest peak in terms of where copper went to.

And we probably with hindsight should have been more aggressive in pushing further price increases through at that point in time.

We covered the cost but we didn't fully cover the margin.

So now rolling forward do you, in a period of declining volumes, do you go out with more price or do you just let the copper cost average cost come down in the P&L and eventually restore that margin?

What we are doing now like is we are selective.

There are certain product lines that have when we look at our costs need to be adjusted so we are going out on a very -- on a more selective basis.

I don't think at this point in time you are going to get across the board pricing that is supportable in terms of increased pricing on copper based alloys.

So the selective price increase again going back to the last transcript, you were talking again about selective price increases.

You hadn't been caught up on every product line.

These are new product lines that you are addressing?

Or this is the same strategy?

No.

I think it is.

It's the same thing.

At any given moment you have products that you are ahead of the curve on and you have products that you are behind the curve on and you are addressing those that you are behind the curve on.

And I think that is where we are.

There's certain product that we weren't as aggressive as we should have been and we are truing some of those up.

But when you talk about an across the board increase I don't think the market at this point in time with declining copper is going to support you.

You are not going to get an effective across the board price increase.

Bill, do you have an example of what your average cap per cost within Q3 and Q4 so we can get a sense of actually how much copper costs you sequentially?

Sequentially I don't have an exact figure but it would have been 20, 25% perhaps.

I would have to double check that number though.

Okay.

The thing is if you look at the way the spot was moving -- the spot hit $4.00 at one point.

That's kind of the copper that we're not -- I'm not saying we are having $4.00 run through the P&L the fourth quarter.

But that's the issue that we are dealing with is we had those high copper costs.

Those are hitting the P&L in Q4 and as Pat described, relative to the pricing, we didn't try to -- we couldn't really recover gross margin.

We just tried to cover the absolute dollars.

I'm just wrestling with the extraordinary margin you posted gross margin you posted in Q3 was actually flat, year over year.

This quarter we are obviously looking down 180 basis points.

If you look at copper during the second quarter -- [made it] -- May and June really was the peak period.

That should have been rolling through equally in your Q3 and Q4 and Q4 would have benefited for you much more so from cumulative pricing increases through the year.

So it's difficult to understand how you gave up 180 basis point gross margin on higher copper loan when you've had more pricing contribution in Q4.

It's not just the higher copper.

It's also some of these other things we are talking about.

We trued up some of that balance sheet and we had a tough mix.

It's not just the copper.

I mean there is a couple of other things that happened as well.

Okay.

Then on the acquisitions you mentioned that was probably the third of this gross margin decline and about 850 nonrecurring.

Are these adjustments that I guess were done just because of the calendar year end?

Or is there some kind of audit or something that went on in Q4 because I presume these are acquisitions that were done early in '06.

Under GAAP you get one year from the time you make an acquisition to true up your balance sheet and the process you go through to true up your balance sheet on acquisitions is you have appraisals done and all those kinds of things.

So what happened is because of the timing of our acquisitions they all came together and we completed that whole process during the fourth quarter.

And under event driven accounting, you are required once you understand what you have to do to book those entries.

So we went ahead and booked them.

And to be clear this is writeup of PP&E values.

It's not writeup of inventory (MULTIPLE SPEAKERS).

The biggest items would be the writeup of inventory to market value or replacement market.

It's writeup of the customer list.

It's writeup of the backlog.

It's writeup of the fixed assets.

Any other intellectual property or intangibles that you might have.

Patents.

Under GAAP, under this new FAS 142 you are required to write all of this up and then you amortize it over its determined life.

And if you notice on the verbiage, the disclosures when companies do acquisitions we always say initially we are doing this on preliminary purchase price allocations and then we have to wait until the finalize that purchase price allocations; we use outside experts to help us with devaluation.

We get these outside expert reports and we make the true ups in that quarter.

And then commercial construction.

Pat, I think I heard you at the outset of the call say that you did witness some softness in commercial construction just as a fourth quarter "lull", I think you described it?

Yes.

That's exactly the way I would describe it.

I think what you saw is that there was a number of jobs that if you were to follow them, track them like we do that you would have expected would have been let in the fourth quarter or the third quarter.

Late in the third quarter early in the fourth quarter and they weren't let.

They were taken back in and repriced.

So you have sort of what I would consider a flat spot in an otherwise increasing market.

Yes you describe it as steady.

So in other words, it just didn't meet your expectations.

It's not as though you have, say, a reversal?

No.

There's no reversal.

It's just that when you talk to the architecture and engineers they are telling you that that job is delayed.

It's not canceled.

It's delayed.

And that's what we saw.

Bill.

Can you quantify just the higher administrative costs related to stock options and then the other items presumably year-end comp?

Yes there's about $700,000 related to FAS 123.

And then the year-end comp would be I want to say about $1.5 million or so.

And that would be -- the 9.5 would be incremental the last year or is that just the (MULTIPLE SPEAKERS) amount.

Yes.

Incremental.

Thank you.

Ian Fleischer with FBR.

Can you just go back to the manufacturing and restructuring cost and quantify that one more time for me?

I want to make sure I understand it.

Basically, this is inside the quarter now.

I can give you after-tax or pretax or which would you prefer?

If you could give me both, actually that would be helpful.

In China we booked 2.9 million pretax which is predominantly associated with severance and there's some accelerated depreciation.

This is due to the plant relocation that we are doing in Tienjen.

So on an after-tax basis that is 1.5.

Then in Italy we booked 700,000 of income -- 1.7 is the gain on the sale and then we had 900 approximately 900,000 on severance.

So it nets to approximately $700,000 pretax income and on an after-tax basis that is $0.5 million of after-tax income.

In total we took a $1.1 million after-tax charge.

And at the operating income level it's about 3.2 million.

Is that correct?

Yes; that's correct.

Just with respect to the offering and the proceeds from the offering, you mentioned that multiples had moved up a bit.

What's your time frame for deploying the cash from the acquisitions?

What type of time frame are you targeting?

We typically look at something in the neighborhood of one to two years.

If you look at the last time we did an offering I think we did an offering roughly almost 36 months -- December '03.

Between offerings.

Okay.

Just to touch on the North American wholesale and North American retail channels one more time.

Can you break out price and volume between those two groupings?

On the retail side, I think we had total organic growth of $2.5 million which is almost all associated with the roll out and then price and volume roughly $4 million each, the price offset volume.

And on the wholesale side pricing would have been about 11.

Volume was down 2.

Volume was down 2.

Great.

Thanks very much.

Keith Hughes with SunTrust.

Thank you.

Just following up on your commercial comments.

It seems as though you are saying that business picked back up towards the end of the year and did that continue into the first quarter of '07?

I think the activity is kicking back in, yes.

I think what we saw in the fourth quarter was sort of a lull going into the quarter and sort of a pickup coming out of the quarter.

Any one commercial end-user market that was concentrated in or just across the board?

I don't have the details on that.

And specifically on the residential markets you had talked about your view there, the malaise as you called it.

Any change there in terms of business as we go through the first six weeks of '07?

I think I have to repeat what I said earlier which is I'm very reluctant to forecast off of January numbers as they are heavily impacted by weather patterns.

They are heavily impacted by the way wholesalers and retailers plan their year-end inventory position.

So you get a lot of noise in the numbers in January.

But my gut reaction says that I don't, I guess, for planning purposes we are thinking that the retail that the residential market will be soft for most of 2007.

And we will see an improving commercial market.

Thank you.

Jim Foung with Gabelli & Co.

Bill I missed your total onetime charges in the quarter.

Could you repeat that?

On the restructuring charges, you mean, Jim?

Yes.

Restructuring pretax is 3.2 million.

After-tax it's 1.1 million.

And that's just restructuring charges?

Yes.

Then what about the -- .

We had about 850,000 of amortization.

Amortization.

Onetime amortization if you will.

There's about 1.5 million or so of other administrative stuff.

Year-end bonuses and things like that.

Were you able to kind of isolate what the copper costs -- ?

What -- how did that hurt in the quarter?

The higher copper cost?

I can't say anymore than I have already said on the call.

I mean it's -- .

Now on the copper cost was that the -- did the fourth quarter represent the peak prices you pay for copper?

Yes.

So we could see that trading down over the next two quarters?

I think what I said was that we would see the lower copper in the mid $2.00 range start to come in late second quarter.

Then you made a comment on the residential housing and remodeling.

You saw that weakness appearing in December.

Was that -- is that what you said?

What we saw was -- .

Yes.

Late in the quarter.

Late in the quarter right?

So it's difficult for you to extrapolate what January is, but you saw some deterioration beginning in December then, right?

Right.

The thing we have a difficult time determining again is, you don't really completely get a straight answer from wholesalers and retailers as to what their plan was for their year end inventory and you've got two factors.

Most wholesalers are on a year-end calendar year.

And most retailers are on a January 31st.

So that's why I tell you it's awful difficult to forecast during this kind of a period because you still have people who are planning inventory position.

I think quite honestly what we saw is, we saw a late quarter drop off consistent with what we know about our business which is roughly some place between 15 and 20% is exposed to new home construction.

Lastly on that volume decline in the wholesale distribution side of the business was that due to the commercial kind of [loans] in commercial markets?

No.

We're talking units, we believe it's predominantly due to the weakness in the residential side.

Yes.

It's predominantly residential because what you have is lower dollar value per item, higher volume.

So it's really -- okay.

You saw that commercial starting to come back up then.

Thank you.

Ryan Connors with Boenning & Scattergood.

Most of my stuff has been answered but if I could just clarify the pass-through and your outlook on the pass-through kind of conceptually.

So, you mentioned that you did get enough pricing to kind of pass-through the copper itself but not necessarily enough to restore the margin or sustain the margin.

But then you seem comfortable with kind of a 250 spot price level of copper.

So does that mean that the pricing you have now is kind of sufficient to enable you to sustain and both recovered the copper price and sustain margins as long as copper stays around 250?

In other words if copper stayed at 250 from now until eternity do margins kind of go gross margins go back to kind of the 34, 35% level, assuming stable pricing for you?

I think that's a fair assessment of the situation.

What we are thinking is that we are going to have sort of a more difficult quarter here this first quarter and then getting into the second, third quarter it will go the other way where you know and I think that's what we saw in 2006.

In certain quarters where you pushed hard on your pricing you got ahead of the game and this fourth quarter was one where quite honestly the market pricing -- the market cost got ahead of us.

So it is kind of a coincidence, is it right, that that 250 is where you are comfortable?

In other words if we were at 290 right now you would still be pushing for more price -- to get that margin back?

Let's put it this way.

I am always pushing for price if I can legitimize it by having cost increases that are pushing it.

Okay.

Because we are in the business of recovering our costs and making a normal margin.

What I'm saying is the market conditions at the moment, the market is not asking for a price reduction but it's probably going to be very reluctant to take price increases given the modification that has occurred in copper.

Thanks for the time and all the detail.

Curt Woodworth with J.P. Morgan.

Just a quick question.

When you look at the acquisitions this year in aggregate, do you feel like they were at margin breakeven to the Company or given that you had some of these charges in the fourth quarter would you say that they were margin diluted?

Just to get a sense for kind of maybe what the base business did versus the acquisitions?

Margins on a total basis, Curt, definitely contributed to earnings per share.

We told folks at the beginning of the year when we had our conference calls on Call and Dormont that for instance, Dormont would contribute $0.08, EPS would contribute a little bit more.

We said it to people that Call would be break even.

It did a little bit better than that.

So and then ATF is about a break even now so far which is what you would expect.

Because you have to amortize all that inventory and backlog, etc., in the first six months.

It usually takes about six months to get rid of that heavy amortization.

So that is pretty much on track.

I mean everything we see from ATS up to this point says that it's going to meet our expectations.

So there's no surprises there.

So I think it's on an absolute basis, these things are contributing.

On a ratio basis, they probably are diluting, they definitely are diluting in the first year because you had this heavy amortization.

On the margin side?

Yes.

Particularly ATS in the fourth quarter.

But wasn't -- I think when you bought ATS didn't you say it had like 20% EBITDA margins?

Yes but that's before you get -- it would still have 20% EBITDA margins but in terms of a GAAP income margin, it would be significantly less than that in the first year because you have this heavy amortization.

You are taking a good chunk of your purchase price and running it right through your P&L during the first six months you own the business.

So what would the EBIT margin look like to that business?

For just ATS?

Yes.

It would be -- I'll hazard an estimate here.

Probably -- well, you are talking without the purchase price in here?

Yes.

Well I -- I mean (MULTIPLE SPEAKERS) the essence is, I wonder if the margins, if you didn't have all these acquisitions what would the base business have done on margin this year?

Would they have been up versus down 30?

On EBIT?

You are talking fourth quarter now, right?

No I'm talking for the full year.

Let me just look at something here.

Would have been [about] flat.

So the 30 basis point headwind or 30 basis point dilution is kind of a fair number to talk about for the acquisitions on margin rate, not EBIT?

30 basis points, well, what happened in the quarter was a one-time catch-up if you will.

Yes.

I was just trying to think about for the year the margin dilution from integrating these acquisitions on the EBIT line.

I'm not sure we are getting 30 basis points.

I don't know.

Well I thought you said that the core business would have been flat.

Above flat, yes.

Right and with the acquisitions your total Company performance I have it down 30.

So that's how I got to that.

Sounds logical.

Tom Brinkman with Davenport.

I have a question for you about prospective acquisitions.

And I think that the FEBCO acquisition looks like a really good one for you.

Are you targeting and this also plays into what you mentioned in the last quarterly conference call.

Talking about engineering content of the commercial product lines and how the differentiated products.

Going forward should we expect you to continue to try to go after these differentiated products like FEBCO?

Is that the sort of focus for acquisitions?

Yes.

We try to stay away from businesses that don't have some significant ability to be differentiated.

So if you look at the business we bought over the last couple of years, each one of them is not perfect but most of them have heavy engineering content.

Tend to have a significant brand of presence and their own can be enhanced by associating the Watts brand and can be enhanced by exposure to Watts channels of distribution.

So I would say we feel very comfortable there's a lot of those types of acquisitions out there.

It's a matter of when they come to market and when they're ready to sell their business.

Okay and you said in the past your comfort level of size of acquisitions may be about 10% of your market cap or maybe approximately $150 million on the high end.

Is that a more critical cutoff factor than the valuation?

No.

We have a standard valuation model that we take all acquisitions through and the one thing we try to be very disciplined about sticking to that analysis and making sure that we are looking at basic valuations which -- the valuation techniques that we use is cash flow return on investment and economic value added.

At the end of the day we evaluate them based on those criteria.

Now with that being said, there's plenty of businesses that we think we can achieve our -- that fit into our business model and especially if you add synergy, meet our requirements for cash flow return on investment in EVA.

I understand.

In particular, I was wondering about the [ZURN] acquisition and it's obviously very large, relative to you guys but just wondering if that type of business with a real complementary line of products of yours would be something you would look at in the future?

Yes, let me just say something.

We had an interest in [ZURN] struggle but there are a couple of obstacles to us being successful and being better for ZURN.

First of all, we don't have an expertise in managing the bath side of the Jacuzzi industries.

Jacuzzi brands.

So we didn't have been the management depth and management expertise to put solutions in place for their bath business.

Secondly they wanted to sell the whole thing together not pieces of it.

So we were interested in it but, quite honestly, the people from Apollo did a good job of putting the total package together and buying the bath business with the plumbing business.

I see.

That's, great, that's what I wanted to know.

Thank you.

Beautiful business and one that would be highly synergistic with Watts.

That's what I was thinking.

That's why I was curious about it, relative to its size.

Thank you.

We might have some Hart-Scott-Rodino issues, too, on top of it all.

Which we would have to deal with had we proceeded with it.

Thank you.

Andrew DeAngelis with KeyBanc Capital Markets.

Just a quick one on Europe.

Did you see any pull forward from the German VAT implementation or could you --?

I don't -- I don't -- .

I mean was that a discernible factor in the fourth quarter in your European business at all?

No.

There are no further questions.

I just want to think everybody for joining us on our call and we look forward to talking to you about the first quarter results in early April.

Thank you.

Thank you.

Ladies and gentlemen, this does conclude the presentation.

You may now disconnect.

Thank you very much.

Have a good afternoon.