Watts Water Technologies Inc (WTS) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, welcome to the fourth-quarter 2008 Watts Water Technologies earning conference call.

(Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr.

Ken Lepage, 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 under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various factors including those discussed under the heading "Risk Factors" in our annual report 10-K for the year ended the December 31, 2007, filed with the SEC, and other reports we file from time to time with the SEC.

In addition, 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 in the future, we disclaim any obligation to do so and, therefore, you should not rely on these 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 today's date, relating to our fourth-quarter 2008 financial results, a copy of which may be found in the Investor Relations second of our web site, www.Wattswater.com under the heading "Press Releases".

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

Thank you Ken, and good afternoon everyone.

Welcome to the fourth quarter conference call and thank you for joining us today.

We will follow our usual format.

After my remarks, Bill McCartney, our CFO, will provide you with some color on the financial highlights for the Company, both for the quarter and the year.

And Bill will also discuss individual sector results.

Then we will address your questions.

First, I'd like to take some time to highlight the 2008 operating initiatives that made an impact on our business in 2008, and we'll continue to have a positive impact on the business as we move into 2009.

I'd also like to update you on new programs this year.

Our 2008 goal of maximizing cash flow and promoting operating efficiencies and productivity proceeded well.

Regarding cash flow, I am again pleased to inform you that we continue to generate positive cash flow at record levels for the Company.

For the entire year we generated positive cash from operating activities of approximately $146.4 million, which compares favorably to $91.7 million of cash generated from operating activities in 2007.

Our focus on working capital management generated approximately $68 million more in cash in 2008, as compared to 2007.

Our free cash flow for 2008 was approximately $121 million, or 120% more than in 2007's free cash of approximately $55 million.

This accomplishment was the result of focus and dedication by many hundreds of people throughout the Watts organization and I would like to thank them for their effort.

We intend to continue our focus on cash management as we move into 2009.

Squeezing cash from from working capital has only strengthened our conservative capital structure and our liquidity position.

At December 31, 2008, our net debt-to-capital ratio was 22.4, somewhat higher than 2007 only because of the cash we used in 2008 to purchase Bulcher Metals and buy back stock to our stock repurchase program.

Bulcher has and will continue to be a strong contributor, and our stock repurchase program has been suspended for the time being.

At December 31 we had approximately $166 million of cash on hand.

We had approximately $260 million of available credit from our bank group to fund acquisitions and operations, and our next large debt payment is not due until May of 2010.

I think we are in a solid financial position to work through what is shaping up to be a challenging 2009.

Let me now update you on various cost reduction and efficiency programs and new initiatives undertaken this year.

As I mentioned last quarter, we undertook a reduction in force in the US during Q4.

As an immediate reaction to the softness that we were seeing in the commercial and residential markets.

This plan was essentially completed in November, resulting in a one-time severance cost of approximately $2.2 million, and providing annual savings of approximately $10 million.

The second initiative we mentioned on our last conference call, was a salary freeze in all US locations, at least through September of this year, saving approximately $2 million in forgone salary increases.

In addition to the salary freeze, we recently announced to employees that effective February 1, 2009, all salary employees within the Watts regulator business unit and salaried corporate personnel including all executives will be subject to a temporary 5% reduction in base salary for the foreseeable future.

Further, our direct and indirect production staff will be subject to an unpaid furlough of one to two additional days per month.

This action is being undertaken in lieu of additional work force reductions, and we'd be re-evaluated on a regular basis by our senior management.

We expect to save approximately $200,000 per month while the program is in effect.

Other operations not affected by the various personnel decisions including our international subsidiaries are all closely reviewing their near-term activity levels.

And we'll have contingency plans in place to reduce personnel costs should their business outlook decline significantly from planned levels.

Lastly, I spoke -- I briefly spoke during the third quarter call about our footprint review being undertaken to further consolidate our manufacturing operations.

As you probably noted in today's press release, our Board has approved a program to potentially remove three rooftops from their existing manufacturing footprint in North America and China.

The program will involve moving operations to existing facilities or centralizing operations for a particular product line into a new, central location.

At this time, I am reluctant to provide with more details on the exact locations because employees who will be affected have not yet been fully informed.

We expect the cost of these moves will be approximately $17.2 million after tax, including severance, relocation, asset writedowns, and one-time charges.

We expect to spend approximately $4 .8 million in capital to consolidate these operations, and our net after-tax annualized savings will be approximately $4.8 million.

We expect that approximately 400 positions will be eliminated by the consolidation.

We anticipate that most costs will be incurred in 2009 with some overhang into 2010.

The expected timeline for completion of these projects is approximately 10 months, so savings will not be realized until 2010.

We expect the projects will be self-funded through the sale of buildings and other assets disposed.

We believe these initiatives will put us in a stronger competitive position when our markets do bounce back.

Regarding ongoing operational improvements, we have and will continue to embed Lean and Six Sigma Methodologies in our operations.

As I mentioned last quarter, lean leaders and steering teams have been put in place at key sites throughout the US.

Lean scorecards have been initiated that focus on customer satisfaction, cost savings, inventory movement, and other key metrics we are trying to address through the lean process.

In 2009, we hope to develop a Watts Six Sigma certification program.

We remain committed to this endeavor and are pleased with our early successes.

Let's talk about the results for the quarter, but first let me address one pending matter.

We have announced that we expect to take a noncash impairment charge for goodwill between zero and $22 million, which will reduce our preliminary net income for the fourth quarter of 2008 and for the entire year.

The impairment was determined as part of our annual review of goodwill and intangibles.

The impairment relates to reporting units that primarily sell filtration devices into the residential and light commercial marketplace.

This impairment results from lower expected growth rates of the business in general but specifically from our business located in southern California.

Business in 2008 has declined due to the loss of sales with key customers as a result of recent customer bankruptcies, and to tighter credit markets reducing sales into the dealer marketplace.

Also, proposed legislation which would have banned water softener products that produce salt was being proposed in California.

Although the governor of California vetoed the proposed legislation, the results of the ongoing debate negatively impacted our sales in 2008.

Further, California municipalities can unilaterally determine if they want such a -- to ban such products, which would possibly reduce our future sales prospects.

Absent the pending goodwill charges, our results for the fourth quarter were in line with our internal expectations, and generally consistent with what we experienced in the markets during the third quarter.

The macro themes that continue to affect our business were a slowdown in the commercial sector, exacerbated by tightened credit markets, residential market looking for a bottom, especially in the US and the European business making nice gains on the back of its alternative energy offering.

One concern that materialized during the quarter was the softness we experienced in the US wholesale channel.

Sales in this channel declined 5% in the fourth quarter, whereas in the second quarter and third quarter, wholesale channel sales were basically flat.

My feeling is that wholesalers were -- have done some destocking, but the bigger issue here is that the commercial end markets have now slowed substantially.

This recent phenomena requires us to take a look and revise our internal outlook for 2009.

I don't think I need to preface my latest outlook with any dire macro economic statistics.

From reading the papers I'm sure you know that none of the trends are positive.

And that there is -- they provide little insight into when the US and the growing worldwide recession may end.

Therefore, from a consolidated perspective, our best guess at this point is that organic, top-line sales may decline in the slow double digits.

Consistent with the last call, we believe our 2009 challenge in North America will continue to be in the commercial markets.

Last quarter, it was anticipated the US commercial activities would decline between 10% and 12%, with a 5% reduction in residential activity.

It what we are seeing recently in sales activity in the wholesale channel, we may be optimistic.

We now anticipate a decline in organic sales volume in North America in the low to mid double digits in 2009 as compared to 2008.

Europe was again a bright spot for the Company, as the fourth-quarter organic growth was approximately 8% with double the organic -- which was double the organic growth in the third quarter.

And second quarter, as well.

Continuing a trend of increasing sales of our products and packages sold into then alternative energy marketplace.

However, we recently see order rates in Q1 softening from those experienced during the second half of 2008.

We expect further weakening in the European core business during 2009 as a recession spreads to all major industrial nations.

Some of this weakness is -- will be offset by the inclusion of Blucher for the entire year and alternative energy product growth.

Another issue that impacts the fourth quarter and we expect to impact 2009 European results, is the foreign currency swing.

Q4 FX rates negatively affected our fourth-quarter results by approximately $0.03 as compared to the fourth quarter of 2007.

Much of the loss was related to the weakness in the Euro against the US dollar.

Based on the average 2,000 exchange rate of approximately $1.46, we anticipate that the Euro will decline against the US dollar by approximately 15% in 2009.

Now let's talk about China.

As we mentioned during our last call, one of the issues we faced in China was the underperformance of one of our facilities in Tianjin.

Approximately 52% of the business related to intercompany activities with Watts US and European sister companies and 48% was third-party sales into the domestic Chinese butterfly valve market.

In August we entered into an agreement to sell the domestic business to a third party while transferring the intercompany business to another Watts facility in Tianjin.

In October, we entered into our second agreement with the buyer to effectively turn control of the operation over to them immediately.

This sale significantly reduced the operating loss being recognized in our Chinese segment during the fourth quarter.

Our Chinese segment realized an operating profit of approximately $900,000.

As for 2009, we continue to expect moderate organic sales growth in China led by Changsha which makes large-diameter hydraulic butterfly valves used in the domestic infrastructure projects.

Order rates at Changsha remain strong.

Our China companies are also exploring new markets and focusing on improving service to help grow their domestic sales.

There may be some disruption in sales activity due to the manufacturing footprint issue noted previously.

We have recently hired experienced program managers to oversee the footprint project, so we hope to keep this disruption to a minimum.

I'd like to address how we see the overall margin trending during the coming year.

In general, we anticipate margins will be tighter during the first half of 2009, with a combination of higher copper costs and continued underabsorption in the US and China plants.

As we discussed in the past, our inventory takes approximately four to five months to turn.

Therefore, we expect some older and higher cost copper to affect Q1 and Q2 margins.

As discussed earlier, the benefits of our footprint reduction will not be realized until 2010.

So we can -- we will continue to be challenged throughout 2009 by plant underabsorption.

But as higher cost copper works its way through our plants, we see margins expanding during the second half of 2009, offset by continued pressure from underabsorbed plants and some inefficiencies due plant moves.

Another challenge we faced which could affect margins is pricing pressure from our customers given the recent declines in commodities.

We believe that these pricing issues are manageable and will not result in across-the-board reductions in our selling prices.

I believe the parties throughout the selling channel will be slow to move on price reductions.

Finally, I'd like to update you on several programs that have been discussed previously.

As announced last quarter, our stock repurchase program was temporarily suspended in October as a means to conserve cash.

In 2008, we invested $44.5 million in the program, and since inception we have invested approximately $68.1 million to repurchase approximately 2.45 million shares of the Company stock.

The accretion-to-earnings per share from repurchasing the shares in Q4 '08 was $0.02.

Next let me address the acquisition program.

Consistent with our discussions on the last call, we are somewhat in a holding pattern.

Although we continue to make inquiries and are looking at several specific targets.

We believe we are in an advantageous position given our cash availability to get a deal completed when the right target or targets are identified.

Finally, regarding the progress on our 2007 restructuring program, in Q4 we took an additional pretax charge of approximately $600,000, related mostly to asset writeoffs and relocation costs in the US.

In general, we are on target regarding the timing and implementation of various restructuring programs in the US and China.

Our European restructuring program was delayed for much of 2008.

It is expected that we will start this program in earnest during 2009.

Now let me turn the call over to Bill McCartney who will take you through the financial highlights.

Then we will answer your questions.

Bill?

Okay, thank you, Pat.

As you know from reading the press release, revenue at $347 million was up just slightly, about 0.5%.

$1.8 million.

We look at the breakout there.

You know, from an organic standpoint, we had negative growth of $1.7 million.

Foreign exchange was unfavorable at $13.2 million.

The acquired revenue of Blucher and TGI totaled $19.9 million.

And then the disposal of TWT reduced our revenue by $3.2 million in the quarter for a total of $1.8 million.

Net income excluding restructuring was $15.6 million.

A decline of 30%.

With that result in EPS excluding restructuring of $0.43 compared to a consensus estimate of $0.42.

In our restructuring in the quarter, $1.7 million after tax, primarily composed of the $2.2 million that Pat mentioned, which is a pretax number for the severance surrounding our reduction in force.

Moving on to North America, revenue for North America was $202 million, which is a decline of about $11 million or 5%.

Looking at the $11 million, we had negative growth of $8.3 million.

Negative foreign exchange, unfavorable if you will, of $3.3 million, which is the Canadian dollar.

Then slight offsets from TGI acquired in November of about $1 million, which comes to about $11 million.

As we normally do, we break out North America into both wholesale and the retail segments for you.

Wholesale at $161.6 million is down $9 million or 5%.

And that's even down from third quarter, which wholesale was $178 million during the third quarter.

What we're seeing in the wholesale -- pricing is steady, but this is basically a -- a decline in unit volumes and some destocking, as well.

There was an article today on yahoo that said the inventories, due to destocking at the wholesale level are at the lowest level in -- in many, many years.

So combination of the softness in the commercial markets starting to hit us, as well as wholesalers destocking.

On the retail side, revenue at $42 million is essentially flat with last quarter.

Last year's fourth quarter.

And right now, we're hoping that retail is close to a bottom.

Retailers where we sell our repair products for residential applications, though essentially flat with last year's fourth quarter.

On Europe, $136 million for the quarter.

That's an increase of $17.8 million or 15% versus last year's fourth quarter.

Breaking out the $17 million from an organic standpoint, we increased 8%, $9.5 million, offset by unfavorable foreign exchange of the Euro, of $10.7 million, and then we include the acquisition of Blucher of $19 million.

So those items total $17.8 million or 15%.

When we look at the organic growth in Europe, the same story that we've been discussing with you over the last couple of quarters, in that the alternative energy markets across Europe remain strong in all of the western European countries.

And somewhat offset by very soft markets in eastern Europe, we believe primarily driven by the poor economy and availability of credit in eastern Europe.

Our acquisition of Blucher is doing well in up to the plans in which we expect it.

China, $9.3 million, a decline of $5 million or 36%.

Looking at the factors there, organically we were down $2.9 million or 20%.

Foreign exchange rates, strengthened there so they contributed $800,000.

And then the disposal of TWT reduced our revenue by $3.2 million in the quarter for the total of 5.3%.

The average exchange rates we saw in China was $14.6 versus $13.5 last year.

So the yuan strengthened about 9% versus last year.

But when we look at the -- the end markets themselves as Pat mentioned, the infrastructure market is still strong.

We had some orders that were pushed out at customer requests into the first quarter.

But the incoming order rate was fine.

We have a strong backlog there.

And the other market that we serve in China is some of the commodity plumbing markets, in export markets out of China into other parts of southeastern Asia and Australia, and whatnot.

And those markets were down as well about 12%.

The gross margin on the month -- excuse me, on the quarter, 33.8%.

The margin is down versus last year's fourth quarter of 35.3%.

What we see here is a couple things.

First of all, we have a bit of a mix towards Europe with the strong alternative energy sales, and we see the softness in the US commercial sales.

So as you know, commercial is some of -- US commercial is some of our higher gross margin, and Europe's margins typically run about 30% to 32%.

A little bit of an unfavorable mix.

Additionally, we reduced our production levels in the US to reflect the lower volume.

We had some unfavorable absorption variances.

We did reduce inventory in the United States in the fourth quarter by $16 million.

So we did get some cash out of the deal even though it did hurt us on the margin side.

For the margin, it's up slightly from the third quarter, which the margin was $32.7%.

And it is two things really that impacted us there.

One, is the sale of TWT which had very low gross margins which we closed in October 18.

Then, the third quarter we had some purchase price amortization of Blucher with the backlog and the inventory writeups, and that is behind us now that we've come into the fourth quarter.

The SG&A at $84 million is down about $1.5 million versus last year.

When we look at the components of that from an organic standpoint, we were down $4 million or 5%.

Foreign exchange caused the reduction of $2 million.

The disposal of TWT breached our SG&A by $1million, and then the inclusion of the SG&A expenses of Blucher was $6 million.

So we are trying to leverage our SG&A through some of the cost reductions that Pat's been mentioning in his remarks.

And then offset with the acquired expenses of Blucher.

The operating earnings excluding the restructuring, 9% -- 9.5% of revenue at $33.1 million, which is a decline of $2.6 million versus last year's fourth quarter.

And this is basically where we see the impact of the lower gross margin in the quarter due to the mix in the production levels partially offset by the reduced SG&A.

But when we look at the $2.6 million and break it out into its components from an organic standpoint, the reduced margin and reduced sales decreased our operating earnings by $3.3 million, chang in the foreign exchange rates reduced it by $2 million.

Blucher contributed almost $2 million, and then no longer having the losses at TWT increased our operating earnings by $800,000.

And those items totaled $2.6 million.

Looking at the expenses below the line for a moment, other income and expense.

This year we had $10.4 million versus last year at $3.2 million.

An increase of $7.2 million.

Major components here, we had reduced interest income because of the use of funds with acquiring Blucher and doing our stock buyback.

Interest expense decreased about $800,000, which is a function of lower interest rates.

And then we had about $2.5 million of charges associated with marking our working capital to market.

And we had -- had some copper and foreign exchange hedges which we marked to market, as well.

That had an impact of $1.8 billion.

The tax rate in the quarter down slightly versus last year at 28.9% versus last year at 31.5%.

Predominantly, this is because of the income shift as a mix toward Europe, which has a low tax rate within the United States.

So net income from continuing ops excluding the restructuring at $15.6 million down about $6.5 million or 30%.

Which brings us down to earnings from -- earnings per share from continuing ops, excluding restructuring at $0.43 versus last year at $0.57, a decline of about 25%.

And as Pat mentioned earlier, the $0.43 includes $0.02 of accretion from the buyback, and unfavorable$0.03 because of the change in foreign exchange rates.

And then, just a brief commentary on the cash flow before we open it up for questions.

As Pat mentioned, free cash flow at $121 million, a significant improvement over last year at $55 million.

The main issue here being that working capital was a source of cash for us of $44 million, compared to last year working capital was a use of cash of $25 million.

That improved working capital management at a $69 million swing in our cash flows for the year.

Our depreciation and amortization for the year was $45 million.

I think with that we can open it up for any questions, and you can ask for either Pat or myself.

(Operator Instructions).

Your first question comes from Michael Schneider with Baird.

Please proceed.

Good afternoon, guys.

Hi, Michael.

Hey, Michael.

Obviously conditions are tough.

So I guess maybe, if we could just start by parcing out pricing contribution in the quarter, so we can understand what volumes are actually down?

Maybe either by segment or -- or by channel, as well, if you have it?

Well, in North America, Mike, the pricing was up maybe 1% or 2% versus last year.

The rest of it was all units.

Unit declines.

And I don't have the specific breakout for Europe.

But I think the answer would be something very similar where pricing was very modest, and the change really, is in units.

I mean, you know, we are seeing as Pat mentioned, more pressure on pricing.

So some of the price increases that we have talked about in the past are starting to be given away to remain competitive.

And can you give us a sense of what that -- what's it looking like in terms of percentages, Bill?

Are we talking low single-digit price declines or are they greater than that?

Well, in total, it's -- it's only a couple of points so far.

It's not -- it's not a major issue.

We're trying to manage it because we still have high cost copper in the inventory.

Okay.

And then could you just give us a view into January.

And what -- what the order trends look like again, by segment and by channel.

And then I guess just final question, if you could just comment on earnings run rate in Q1.

Should we expect -- I presume that sequentially earnings will be down as they have been in the last three years.

But should we also expect earnings to come in below the $0.39 of a year ago?

Yes.

I mean -- Mike, as you can tell from Pat's comments, I mean, the order entry rates, we are seeing a decline.

So as you know, we don't give specific guidance.

But you can expect that earnings will be down in the first half because of lower volumes.

Yes, Mike, the way I would describe it is we saw a leg down in terms of incoming order rates starting in November.

Continuing right through to today.

Okay.

Thank you, guys.

Okay.

Thanks, Michael.

Your next question comes from the line of Keith Hughes with SunTrust.

Please proceed.

Thank you.

Just first to clarify and your comments, you talked about revenue declines.

At one point you said low to mid-teens and then mid-to high teens.

Is that for 2009 and which segments were those referring to?

Yes.

From a consolidated perspective, we're looking at at the clients in the low double digits.

So that's consolidated worldwide.

When you look at North America, okay, we're looking at mid-double digits for 2009.

Okay.

And -- and within that framework, I assume we'll see destocking both in the North American retail channel as well as in the European channels, is that correct?

Yes.

We think we've seen quite a bit of destocking already in the North American channels.

But we're anticipating destocking in the European channels, which has not been as brisk as it has been in North America.

Okay.

And any kind of pricing assumptions in those numbers, price decline assumptions?

Those are -- that's where what we would refer to as volume declines.

Volume, okay.

And final question, on the income statement, there's an "Other" category and fourth quarter, of $4.8 million.

Could you just briefly tell us what that is?

Hold on.

A lot larger than it normally is.

Below the line, the other income and expense, you mean?

Yes.

After "Minority Expense," there's an "Other" of $4.8 million.

Yes.

That's where we -- as I mentioned, Keith, that would be where we're marking our working capital to market, foreign exchange, and we have some foreign exchange hedges and copper hedges that we're marking to market there.

Okay.

All right.

Thank you.

Thank you.

Your next question comes from Jeff Hammond with KeyBanc Capital Markets.

Please proceed.

Good afternoon, guys.

Good afternoon, Jeff.

Just wanted to come back to price.

It sounds like just to clarify, you've got one to two points of price realization this quarter.

that correct?

Approximately.

Okay.

And -- and would that have totally made up for your commodity inflation, or were you in the hole on that still?

We're -- probably a break even in the quarter.

Hard to say precisely, but --

Okay.

And then for '09, you're not assuming any price good or bad?

Well, as we look -- as we look into '09, we were expecting that unit pricing will decline, as copper -- as we start to realize lower copper in the second half of the second quarter and into the third quarter, we're going to wind up giving pricing back to staying competitive.

And that's captured in that low double-digit decline, all in?

We're thinking we have unit volume declines as Pat mentioned, in that range, then you'll have some unit pricing over and above that that will -- that shouldn't affect profitability in the second half, but will affect profitability in the first half a little bit.

Okay.

How -- how should we think about detrimental margins?

You know, on that volume decline?

I mean, before you think about the restructuring savings?

Well, we usually use a figure here about 30%.

Okay.

Just shifting gears to the DIY, that business was, it looks like up in the quarter.

Can just talk about what drove that?

It was essentially flat.

Yes.

I would have thought that would have been under a lot more pressure.

What do you see there that's holding that up?

Well, our view is that that market is primarily residential repair.

It's gone through a tremendous downturn already.

And we're hopeful that the retail side is seeing the bottom.

We're not sure, but we're hopeful.

We're also seeing and hearing from those large big box customers that the product categories in which we participate are not declining at the rate that the entire store is declining.

Right.

Okay.

And then finally, can just talk about order momentum in that alternative energy piece?

Are you still seeing good order growth that gives you confidence that grows, or is that -- has that softened up, as well?

No.

We're still seeing good growth in that marketplace.

But last year, we had what I would consider to be impact orders, where there was orders that were given to us in order to build stock in the channel.

And those -- those impact orders have been fulfilled, and they've gone through with sort of like a -- a snake swallowing its prey.

And we saw this go through the organization.

We -- we were a little bit behind in delivering those orders.

We caught up.

So now our on-time delivery rate is consistent with the incoming order rate.

But it should be up overall.

Okay.

Thanks, guys.

Okay.

Your next question comes from Christopher Glenn with Oppenheimer.

Please proceed.

Thanks.

Good evening.

On the production consolidation across North America and China, can you talk about if net production is coming back to the US, and quantify it to the extent possible?

Well, we're a little reluctant to be too specific right now because, we have some plans that we've announced in a general way.

But we have not announced specific plans internally to our employees and to the plants affected.

So we prefer to kind of wait on that, Chris.

Okay.

Just some production coming back or did -- did you cover that with your initial answer?

Let's consider it covered.

Okay.

And then just going back to Europe.

Pat, did you say -- call it a 15% change in the exchange rate or were you saying a 15% headwind to European growth in '09 from currency?

We're seeing a 15% change in exchange rate.

Okay.

And what do you think that translates to for you?

I think if you look at exchange rates, if they remain where they are right now for the rest of the year, it's probably about a $0.20 headwind here.

Okay.

At segment margin basically?

Talking earnings per share.

I'm sorry.

Okay.

And then I'm not sure if you said -- I didn't catch it, the outlook for unit volume declines in Europe.

Did you go into that?

Outlook for what, Chris?

I'm sorry.

Unit volumes in Europe.

I think we mentioned that we -- we said a specific number other than that we're -- we're seeing things starting to soften there.

The -- let's see.

Yes, we're starting to see the order entry rates soften in Q1 versus what we've been seeing over the past couple of quarters.

It's probably more likely to be mid single digits.

Okay.

Last one, just tax rate for '09?

Place holder?

I would say consistent with what we were for the -- probably a point or two versus '08.

Okay.

Great.

Thanks a lot.

Okay.

(Operator Instructions).

Your next question comes from Todd Vencil with Davenport.

Please proceed.

Good evening, guys.

Hi.

If we think about China, thinking about the piece that you've sold and leaving aside I guess, the question of the footprint changes that you're looking at.

I mean, what's -- what's kind of the base that we ought to be thinking about of sort of top line, for going forward where I guess you're looking for a bit of growth there.

But, you know, how much did we lose from that divestiture?

Lost about $12 million of revenue.

Okay.

And we were losing about $4 million a year at the operating line with that particular venture.

$4 million up or $4 million down -- you were losing $4 million from that.

Okay.

So that's that sort of follows under my next question.

So if we take that -- we're thinking about China, I mean would you expect to be just kind of given the footprint that you've got now and what you see in the business, would you expect to keep this small -- small profitability that we saw kind of in the fourth quarter?

Well, we still consider China to be, not as profitable as we think it can be.

Still very focused on, improving the operations, working with our colleagues in China on Lean manufacturing and Six Sigma, right-sizing some of the facilities.

So on.

So there's -- we're not -- we're not satisfied that China is completely turned the corner.

We're pleased to see that we've turned it profitable in the quarter.

And that's the result of selling TWT and some of the operating improvements that have been implemented.

It's a combination of both of those, but we're going to continue to work on the operations.

So if I take that -- if I take that Bill, is that -- is that saying that you think you're going to remain profitable and try and be more profitable or your going to be working for a little while to hold on to being profitable there?

I think we'll see China become a little bit more profitable each quarter.

That's our -- our plan at the moment.

Got it.

Thank you for that.

And then kind of a -- a balance sheet question.

And you may have covered this with some of your comments and I may not have caught where this was falling.

But you accumulated other comprehensive income that's fallen off sharply in the last couple of quarters on the balance sheets.

What's going on there?

That is a change in foreign exchange rates in what we wind up booking for pension liability.

Got it.

Okay.

And then on the -- on the US business, I thought -- at first you said US wholesale.

Then you said for the whole US.

You're talking about top line declines in the low to mid-double digits.

Have I got that right?

For all of North America?

Really I think we're talking about wholesale.

Okay.

And just to clarify, when you're talking about mid double digits, that's 50% or somewhere, that would -- 50% is in the mid double digit range, right?

Mid-teens.

Mid teens.

Okay.

That's why I was asking that question.

A good question.

Thank you.

That changes things little bit, I will tell you.

All right.

Finally, a little bit of a flyer.

Reading through some of the stimulus plans that are getting kicked around and goodness knows that they don't know what it's going to look like yet.

But some of the pieces that Obama has talked about going all the way back to the campaign and the primaries was, energy efficiency, programmed to sort of rehab a lot of government buildings or schools in the area of energy efficiency.

I mean, is that something that you guys would have a particular angle on either from the standpoint of -- of some of the things you've done in Europe or some of the things that you're doing in the US, do you think?

Yes.

There's two things I'd say.

One is that those units that we're manufacturing in Europe, some of them end up back here in North America.

Because we sell them to large OEMs who have a significant presence here in the North American marketplace.

Yes.

We also are -- have underway plans on bringing some of those products and selling those products to those people who are in the heating and air conditioning and ventilation market in the United States direct.

Okay.

The two avenues.

Product coming through the European channels, and products being sold directly here in the US.

Okay.

So -- and based on the things that you heard, is that -- is that the kind of things that they're thinking about with that program as far as anybody can tell?

That's what they're hopefully talking about.

Okay.

The question is, when will the money be awarded?

Wow.

That -- that's the question across a lot of my coverage.

At least we've got a marker in there.

Thanks a lot.

Your next question comes from the line of Ryan Connor with Boenning and Scattergood.

Please proceed.

Hello.

Yes.

Most of my things have been answered guys, but I wonder if you could take a minute, Bill, to talk about the balance sheet.

Obviously on the surface things appear very healthy, given where the cash level is, in particular.

But I wondered if you could -- if there's anything that does concern you in terms of covenants, et cetera as earnings kind of deteriorate and/or whether there's any scenario you can envision where things deteriorate to the point where financial risk does enter the equation.

I don't think that's a concern for Watt.

We've done a lot of analysis on this point.

Balance sheet I think is in really good shape.

Liquidity is not an issue.

We don't have any liquidity events until May, 2010, when we have to come up with $50 million.

We're generating a lot of cash.

We expect that we will have a good cash year coming up.

And even if sales decline, that will throw off more cash as we reduce inventory and receivables.

So from the cash standpoint, I think we're in good shape.

From the covenance standpoint, we have a pretty wide berth right now.

So we're not even close to having a covenant issue.

So I think we're in an enviable position relative to liquidity based on everything we see coming at us in 2009.

Okay.

Well, thanks.

That's good hear your update there.

Thanks for the time tonight.

Okay.

Thank you.

Your next question comes from the line of Jeff Hammond with KeyBanc.

Please proceed.

Hi, guys, just a couple of followups.

Last quarter you said you were looking for $8 million to $9 million of cost savings from restructuring.

Sounds like you've done some additional restructuring.

Can you update us on what you think all in the benefit is from all those actions taken in '09.

Yes.

I mean, we have the reduction in force and the salary reductions and so on.

We should be at least $10 million maybe to $12 million of those.

And then the -- we have a $2 million of benefit coming in from the restructuring this year that we did last year, in 2008.

One of the factory moves that we did.

And then the factory consolidation work that Pat discussed in his remarks will have the benefit of that in 2010.

Okay.

And then just back to the price cost gap.

At what point in the year do you think you're at parity, where you get the lower cost copper coming in, and if you look at the whole year, just given how dramatically copper has fallen, I mean, is there -- do you expect a net benefit from -- on that price cost line, or is it more neutral because you give some price up?

How should we think of that on a full-year basis?

Well, I think first of all we'll have -- we should be at, $1.61 copper in the third quarter.

Completely in the third quarter.

We'll start to see some benefit late in Q2, assuming that volumes hold about where we -- we think they will come out.

And we have some -- some benefit in -- in the second quarter.

When it comes to the price volume, we'll probably be unfavorable impact in the beginning of the year, and slightly favorable as we go toward the end of the year.

So all in, though, about neutral?

Neutral to slightly favorable.

Okay.

Thanks, guys.

Okay.

Your next question comes from [Jay League] with JANA Partners.

Please proceed.

Hey, guys.

How are you?

Hello?

Hello?

Hi, can you hear me?

Yes, sir.

Great.

I'm curious -- so for the fourth quarter in North America, I mean the performance, you mentioned organically was down about 4%.

But you mentioned you really saw order trends shift in November.

And so I'm curious, the guidance that you have -- sorry, not guidance, but sort of the approximation for, call it mid-double digit -- or mid-teens, sorry to clarify, mid-teens volume declines.

Are you expecting a further deterioration in conditions to get to that?

We're expecting things to get a little worse than they are right now.

Yes.

So that's -- okay.

I mean, that's pretty substantial change from where you ended up in the fourth quarter.

So I guess, I'm just trying to understand sort of how significantly you're expecting to add markets to shift.

Yes.

I mean, volumes versus last year were down and even if you look at volumes versus the third quarter, they were down.

All right?

I mean, volumes versus the third quarter in North America were down about approximately 9%.

Okay.

And then, one other question, you mentioned the FX.

If they stay at current rates now you would expect to have about a $0.20 impact on EPS.

Yes.

What would -- what kind of impact would you expect it to have on a sales basis ?

Top of my head I'm not sure.

But the average rate for the Euro was $1.46 for the year verse us what it is now, about $1.27?

Okay.

About $1 to $0.80.

Okay.

And I guess that will be on roughly 35% to 40% of your revenues?

Europe's about 38% I think.

Okay.

Canada's about 5%.

Okay.

Great.

Thanks a lot, guys.

Okay.

Your next question comes from the line of Brian Meyer with Robert W.

Baird.

Please proceed.

Hi, guys.

Hello?

Just a few questions for you here.

First on the tax rate, did you guys -- you said it was up a little bit verse this year in '09, is that right?

I would say that in '09 I would expect it to be up a point or two versus 2008.

Okay.

Got it.

And then on the -- getting back to the North American growth assumption, you clarified that double-digit -- down double-digit number, mid teens number was for wholesale.

Just curious, what are you guys assuming for retail in '09?

Oh, we're hoping it's flat.

Hoping it's flat.

Okay.

Got it.

And then just another point of clarification.

Just talked about the decremental margins.

You said that 30%, was that -- an operating margin decremental?

Operating earnings.

Great.

And then more on the maintenance side, the restructuring charges this quarter.

Any way you could divide that up by segment?

Okay.

China would be $100,000.

North America would be $2.7 million.

$2.7 million?

Yes.

So nothing in Europe then?

Europe is zero.

Okay.

Got it.

All right.

And then -- then getting back to the European alternative energy demand.

Is there any way you can quantify maybe what -- obviously that's all in the OEM channel.

Can you quantify what the OEM growth was in Europe versus distribution or the wholesale growth?

Water?

Yes, for the quarter.

OEM growth in the quarter, local currency was 19%.

Okay.

Distribution was 2%.

Plus 2%, though?

Yes.

Okay.

Got it.

I think that's it, guys.

Thank you very much.

Okay.

Thank you.

Yes

Your next question comes from Christopher Glenn with Oppenheimer.

Please proceed.

Yes, just to follow up on pension year-over-year?

Yes.

What is it?

Pension expense you mean?

Yes.

What's the change?

Pension expense will increase about $2 million.

Okay, that's it.

Thanks, Bill.

Okay.

At this time, we have no additional questions in the queue.

I will now hand the call back over to Pat O'Keefe for any further remarks.

Please proceed.

I just want to thank everybody for joining us for our fourth-quarter conference call.

And we look forward to talking to you -- with you at the end of the first quarter sometime in April.

Thank you.

Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference.

This concludes our presentation.

You may now disconnect and have a wonderful day.