Watts Water Technologies Inc (WTS) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2009 Watts Water Technologies Earnings Conference Call.

My name is Emisee, and I will be your coordinator for today.

At this time, all participants are in a listen-only mode.

We will facilitate a question-and-answer session towards the end of this conference.

If at anytime during the call you require assistance, please press star followed by zero, and a coordinator will be happy to assist you.

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

Kenneth Lepage, the General Counsel.

Please proceed, sir.

Thank you, good afternoon, and welcome, again, to the Watts Water Technologies First Quarter 2009 Earnings Conference Call.

On the call with me today are Pat O'Keefe, our President and Chief Executive Officer, and Bill McCartney, our Chief Financial Officer.

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 on Form 10-K for the year ended the December 31, 2008, filed with the Securities and Exchange Commission, 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 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 first quarter 2009 financial results, a copy of which may be found in the Investor Relations second of our web site at 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 first quarter conference call and thank you for joining us today.

After my opening remarks, Bill McCartney, our CFO, will provide you with financial highlights for the quarter.

Bill will also discuss the individual sector results.

Then we will address your questions.

We continue to maximize cash flow during the first quarter as we generated positive cash from operating activities of approximately $17.4 million.

This compares favorably to $14.8 million of cash generated from operating activities in the first quarter of 2008.

We were able to exceed last year despite negative current quarter operating results due to our focus on working capital management and our cost savings initiatives.

As to working capital, we generated approximately $11 million more in cash in Q1 of 2009 as compared to the first quarter of 2008, which -- with much of the net increase in cash due to inventory and accounts receivable reduction.

Our free cash flow for Q1 of 2009 was approximately $13.4 million, or more than double Q1 of 2008's free cash flow of approximately $6.6 million.

I would again like to thank our many dedicated employees throughout the organization for their efforts.

We intend to continue our focus on working capital management as 2009 progresses.

As to cost savings initiative, we generated $7 million in P&L savings in Q1 versus Q4 run rate based on programs initiated in 2008.

In addition, new programs in 2009 have been started and are being planned and involve salary reductions, workers' furloughs, and other cost reduction programs, whereas 2008 programs primarily related to our North American operations.

Our new initiatives will be implemented on a worldwide basis.

Cost reductions will be a major focus for our organization throughout 2009 and into 2010.

Our conservative working capital structure and our liquidity position have strengthened from the year-end 2008.

On March 29, 2009, we had net debt-to-capital ratio of 22.4, which is slightly lower than the 22.8 at December 31, 2008.

We had approximately $170 million of cash on hand at March 29, 2009, versus $166 million at December 31st.

We have approximately $260 million worth of available credit from our bank group to fund acquisitions and operations.

As a reminder, our next large debt payment is not due until May of 2010.

We believe our solid balance sheet will be a key in weathering the turbulent global economy.

Now let's talk about results for Q1 for a moment.

Our results prior to restructuring charge were in line with our internal expectations.

The first quarter, as part of the manufacturing footprint reduction program, we recognized the one-time ex charge of approximately $8.3 million related to the expected tax recapture on previous tax holidays enjoyed by certain locations and which will be forfeited once those operations are moved.

This swung the Company's operating results into a loss position for Q1.

Prevalent issues during Q1 for the Company included plant under-absorption, pricing pressure, and negative foreign currency movement.

We estimate that we reduced operating results by approximately $8.5 million due to under-utilization of our plants throughout the world.

We were able to partially offset these costs with cost savings initiatives discussed previously.

In general, we have been successful in maintaining our selling prices, but we continue to experience pressure for price reductions from our customers.

We still believe that pricing issues are manageable and will not result in across-the-board reduction in our selling price.

Currency movements as a result of the US dollar strengthening against the euro and the Canadian dollar negatively impacted Q1 EPS by approximately $0.04.

One note on China -- sales were down $2.1 million, or 21% versus Q1 of 2008.

The disposal of TWT, which occurred in late -- last October, accounted for $1.6 million of that reduction.

Organic sales in China were down 8% driven buying reductions to export customers.

Regarding our major end markets, business continued to slow down in the US commercial sector, exacerbated by a tight credit market.

Sales into the US wholesale channel in Q1 declined 18% organically against Q1 2008.

The wholesale channel declined 5% in Q4 of 2008 versus the prior year.

Although the channel sells into both the residential and commercial space, we believe the accelerated pace of decline is due to the commercial market.

We still see wholesalers continuing to do some restocking.

The ABI Index for March was up by more than 8 points from February to 43.7, but this indicator is still not indicative of an expansion in the non-residential construction market.

Given our belief that the US commercial marketplace lags the residential marketplace, we expect to see continued deterioration in the commercial marketplace for at least the remainder of this year.

The US residential market may have bottomed out in Q1 given our retail sales were flat as compared to Q1 of 2008.

Although the latest macro information seems to support that, perhaps residential construction has hit a plateau.

New single-family home starts in March were flat sequentially at 358,000 units.

Existing home sales for March, as reported last week, were at the same levels as seen for the last four months, however, given the amount of overhang in available housing inventory, continued foreclosure concerns and higher unemployment, we don't see a meaningful increase in new home construction until 2009.

Another marketplace of concern for us is Europe where organically sales declined 13% versus Q1 of 2008.

We mentioned during the fourth quarter conference call that we were seeing a slowing in incoming order rates and that trend has continued.

In general, destocking was likely an issue as European OEM may have overstocked during the fourth quarter of 2008.

Our perception currently is wholesale inventories are at low levels, while we believe the destocking activities have subsided.

Sales into Eastern Europe have slowed considerably due to the poor economic environment in countries like Poland, the Czech Republic and the Balkan states.

Their currencies continue to devaluate against the euro and we are much more cognizant of customer credit risk.

We are currently refusing one in five potential Eastern European orders due to credit concerns.

In our major countries, we saw higher sales in Germany in both wholesale and OEM channels due to the heavy spend on boiler repairs as a result of a very cold winter and successful marketing campaigns with many of our major wholesale customers.

We experienced declines in sales in Italy driven by lower wholesale and export activity and lower sales in France, in general, related to wholesale and DIY channel softening.

Turning our general outlook for the remainder of 2009, we anticipate that consolidated revenue will be lower versus comparable prior year's quarter by 15% to 20%.

We see sales declines being driven mainly by volume reduction and negative FX movement.

Our expectation has been lowered from the last conference call, i.e., low to mid-teens due to the acceleration and decline of US commercial markets and more weakening than we had anticipated in Europe.

We foresee that euro FX reductions of approximately 12% to 15% against prior-year comparable quarters.

As for China, we continue to expect moderate organic growth led by Changsha, a maker of large-diameter hydraulic butterfly valves used in the domestic infrastructure market.

But as mentioned last quarter, there may be some disruption in sales activity due to manufacturing footprint reduction efforts during the latter portion of this year.

We see our overall margins tending as anticipated during the last conference call.

We believe the under-absorption will be a factor for the entire year, and higher copper costs will affect us likely through at least the second quarter with some potential margin expansion in the later quarters as lower copper costs begin to run through our P&L.

If you recall, the benefits of our footprint reductions will not be realized until 2010, but we continue to be challenged throughout 2009 by planned under-absorption and potential plant moving inefficiencies later in the year.

On the lean and operational excellence effort, our lean and operational excellence efforts continued into 2009.

In the first quarter we conducted 48 Kaizen events at our manufacturing sites, each one focused on cost reduction, productivity improvement, and inventory velocity.

As of today, we have trained close to 70% of our total workforce on the basics of lean.

Q2 2009 we will kick off our six sigma certification program to further enhance the continue improvement effort.

We remain committed to this endeavor, are pleased with the progress as we develop a competency to consistently deliver year-over-year productivity savings.

Let's update you now on the recent restructuring initiative.

As you may recall, our Board approved the program in Q1 to potentially remove three rooftops from our existing manufacturing footprint in North America and China.

The program will involve moving operations to existing facilities or centralizing operations from a particular product line into one central location.

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 operations and our net after-tax annualized savings will approximate $4.8 million.

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

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

We expect project timelines to approximate 10 months, so savings will not be realized until 2010.

We expect these projects will self-fund through the sale of building and other assets being disposed.

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

Finally, let's address our acquisition program.

Consistent with our discussion on the last call, we are still cautious, although we continue to make inquiries and are looking at several targets.

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

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, thanks a lot, Pat.

I'll just run down the P&L, talk about the major factors here, then we'll open it up for questions.

Revenue compares at $295 million versus $344 million last year, declined $49 million; that's 14%.

If you look at the components of the 14 from an organic standpoint, revenue declined $48 million, which, again, is 14%.

Foreign exchange had an adverse impact of $16 million, which is 5%.

That was offset by the inclusion of the revenue of Blucher, which we acquired last year -- that was $17 million, or 5% contribution.

And then the disposal of TWT last year in the fourth quarter reduced our revenues by $1.6 million, just half a point.

So that whole thing comes to the $49 million, or 14%.

Net income -- based on our US GAAP numbers was a loss of $1 million.

When you exclude the restructuring charges, we have earned $8.4 million after tax.

That $8.4 million ex restructuring is $0.23 per share compared to a consensus estimate of 27, and that's a decline from last year's EPS ex restructuring of 41%.

Just a quick note on the restructuring charges themselves -- $9.3 million after tax.

There is $1.5 million of that is included in our SG&A, and then we have a tax benefit of $0.5 million in our tax line for those expenses, but then we also book $8.3 million of tax clawbacks.

We see a net charge in our tax line of $7.8 million.

So the $1.5 million in SG&A, $7.8 million net in the tax line gives us $9.3 million after tax in the US GAAP numbers.

Just looking at some of the segment information -- North America at $177 million of revenue.

That's a decline of 16% versus last year, and that's a decline in our run rate from the fourth quarter from $201 million.

As Pat mentioned, the wholesale business in North America was down 18% at $138 million, and we're down 15% from the run rate in the fourth quarter.

Basically, again, as Pat mentioned, we saw a lot of destocking going on, we believe, at the wholesale level, particularly the smaller wholesalers, and we know that they had a lot of objectives around significant inventory reduction at their locations.

On the retail side, the story is a little different in that essentially retail was flat at $43 million, and is up just a touch from the fourth quarter when retail revenue was $42 million.

Essentially, what happened is last year we had some rollouts that we did not recur this year, but we did offset them with some increased shelf space at a couple of our customers.

So retail was flat, and that's consistent with what we had discussed with you in our last call in terms of that was our view on retail.

On Europe, revenue was $109.6 million -- that's a decline of about 11% versus last year.

Looking at the components there, organically in Europe we were down 13%.

Foreign exchange had the adverse impact of 11%, $13.5 million offset by the inclusion of Blucher, which was 14%.

So, net bottom line for Europe was a decline of 10.7% for the revenue.

Then, as Pat might have mentioned, we saw the destocking both at the OEM in the wholesale level in Europe, and we started to see some slower sales in both Italy and France.

As we've discussed in the past, we have already seen in our numbers declines in Eastern Europe and Northern Europe, and we started to see that slower performance in Italy and in France during the first quarter.

China -- revenue was $7.8 million, that's a decline of 21% -- $2.1 million.

Looking at the factors there from an organic standpoint, revenue declined 8%, which is $800,000 offset partially by strengthening of the Chinese RMB, which contributed 3%, or $300,000 and, of course, as we compare to last year, we disposed of TWT in interim, so that's a decline of $1.6 million.

But basically the drivers here are the fact that our exports out of China into Europe have declined because of the slowing economy in Europe.

Our sales on the infrastructure side are flat.

That business is still doing well, but we're seeing that some of the orders are getting pushed out there a little bit because we believe of the impact from the stimulus bill in China where some of the funding is being readjusted in terms of where it's coming from.

So with that business, from an order entry standpoint, is still doing well.

The gross margin, 33% on the quarter.

This is down two-tenths of a point versus last year's Q1 and down eight-tenths of a point from the fourth quarter.

Essentially, what's happening here is the impact of volume.

Again, as Pat mentioned, we had about $8.5 million of unfavorable overhead absorption, and from a gross margin standpoint, that's about 280 basis points.

So we partially offset that 280 basis points with the inclusion of Blucher, which made a small contribution relative to the percentage and then partially offset the difference with cost savings.

Obviously, we didn't get all of it, but we did get most of the decline of the absorption variance through cost savings in spite of our cost of goods sold.

Again, this is the implementation of lean, it's the reductions in force, wage controls, and other productivity initiatives that we have been implementing.

On the SG&A front, we came in at $81 million.

This is a reduction of $6.1 million versus last year.

When we look at the components of that from an organic standpoint, we were down $6.3 million and, again, this is where we see the reduction in force, wage reductions, and other cost reduction programs that we're focusing on.

Foreign exchange rate, primarily the euro reduced our FX by $3.4 million.

The disposal of TWT, not including their SG&A reduced our SG&A by $1.8 million, and the inclusion of Blucher's SG&A was $5.4 million, so that total comes to $6.1 million.

That brings us up to the operating earnings line.

From a GAAP standpoint, $14.7 million, which is a reduction of 44%.

We exclude the restructuring charges $16.2 million of op earnings, which is a reduction of 41%, and that's entirely -- that reduction is entirely driven by the reduced volume.

Looking below the line, interest income is down $2.1 million, that's a function of the money that we spent on Blucher, which is not invested.

We bought Blucher last June and then lower interest rates on our interest income.

Interest expense is down about $1 million, and that's lower rates predominantly in Europe.

And then other income and expense is down from $2.2 million last year of expense to $500,000 of income this year.

And that's primarily less charges associated with marking our working capital to market below the line.

The tax rate from a GAAP standpoint, again, 109%, but, again, backing out the tax clawbacks, which is where we book those, the tax rate in the quarter would be 25.3%.

This compares to about 33.6% last year.

And we had some favorable tax credits that we booked in France, and we also had a smaller loss in China, which we did not -- we were not able to tax benefit that.

So the combination of the smaller loss in the tax benefits dropped our effective tax rate.

So bringing it all down to the bottom line, a $0.02 loss from operations including restructuring, ex restructuring charges, a $0.23 profit, and $0.04 of that decline is associated with the change in the foreign exchange rates.

And just a quick note -- I know people are interested -- our depreciation and amortization expense during the quarter was $11.2 million, and a $13.4 million of free cash flow that we generated, a significant improvement over last year primarily generated through inventory reductions.

So, with that, we'd like to open it up to any questions that you might have.

(Operator Instructions) Mike Schneider, Robert Baird.

Maybe first we can just start, I guess, with the bright spot -- that retail is flat, as you expected.

Can you possibly dissect that on a more same-store sales basis so we can understand exactly how much shelf space -- or additional shelf space you are gaining and benefiting from?

Because, clearly, Home Depot and Lowe's and these guys are reporting, I'll admit, single-digit same-store sales declines.

So it appears as though you guys are enjoying more shelf space.

Yeah, well, Mike, we did pick up some shelf space in a couple of different chains just through some -- it's not new product introduction, it's just getting some existing product into some additional shelf space.

And one of the things we talked about -- so that's part of the answer, and I think the other thing that influences it, when we talked about it, I think, last quarter on the call, is that when times are tough out there, homeowners will tend to do some of the projects on their own and not call a plumber.

So homeowners are going to go into these retail chains and buy that kind of product.

They're not going to go -- consumers aren't used to going into a wholesale shop.

That's where the plumbers go.

So we think that there is just a little bit more homeowner demand because the economy is difficult.

Okay.

And then just on product pricing -- Pat, if I heard you correctly, you said you have not seen and do not expect across-the-board price cuts, I believe you used -- could you just elaborate on that?

Because we're certainly hearing different feedback from the channel and the distributors we're talking to, especially in the plumbing space.

They are in the first quarter, Mike, we had a lot of inquiries at the pricing because it was so obvious to everyone that copper had dropped dramatically over the latter part of the quarter and (inaudible).

But that has subsided now because copper has moved back up.

So most of our customers -- there were some concessions made, there were some (inaudible) to competitive conditions made, but we don't see it as across-the-board dramatic changes.

So we're managing the combination of price and cost very effectively at this point, and we continue to do that throughout the year.

And can you give us a sense of what you think price contributed to sales this quarter either by region or by division?

What price contributed?

Yes, I believe you had said it was 1 to 2 points last quarter.

Well, Mike, we don't have that analysis right now, but we're still running expensive copper through our cost of goods, so I don't really think there is some type of relief margin, if that's what you're trying to get at.

Okay, and then I guess final question -- just on the sequential developments within the quarter.

You've lowered your revenue forecast, as you mentioned, due to US commercial and Europe, generally speaking.

Did you see -- it's my understanding of your business that late March is kind of the pivotal seasonal acceleration that you would expect.

Can you describe what you've seen in late March and April versus the earlier part of the quarter?

What we're starting to see, Mike, is we think now -- during the latter part of the quarter, we started seeing that two things were happening.

One is that we were starting to see a slowdown in the destocking efforts going on in the marketplace.

But people were having a more difficult time trying to get lower stocking levels.

And I think we saw that destocking sort of ease off a little bit, although it wasn't done, okay?

I think there is still some destocking actually taking place even today on slow-moving items.

The other thing I think, Mike, is that we saw that -- we're starting to see the flowthrough of real demand without the destocking.

But we didn't see -- what we didn't see, which you typically see, is a stocking program goes in place, particularly at the wholesale channel where they stock up in anticipation of the season.

We did not see that at the end of the first quarter.

And have you seen any seasonal ramp at all in April?

Not considerably.

We are very reluctant to carry inventory.

And you mentioned that destocking seems to be fading.

Can you -- have you witnessed that in your level of expedited orders?

Yes, the information that we collect, Mike, is people place orders, but the question is what percentage of the orders are where you are typically going to deliver in two to three days -- the answer delivery in one to two days, and that percentage has risen.

So we think that people are, [especially], at this point in time, probably close to the bottom in terms of destocking.

Okay, good, thank you.

Today we're seeing real demand.

Thank you.

Kevin Maczka, BB&T Capital Markets.

I guess first I'd like to just clarify two things I thought I heard.

First, on your organic and your total revenue comments, down low to mid-teens organically, 15% to 20% total -- is that total business, or was that in regards to Europe?

Well, the 15 to 20 is the total business.

That's what --

Consolidated sales.

Yes, that's our outlook, if you will, for the next couple of quarters.

Okay, that's the outlook for total revenue for the year for the total business, okay?

And then just to clarify on the destocking -- are you seeing that subsiding in Europe as well?

Because I would think if Europe is rolling over and maybe everyone except Germany has rolled and maybe Germany is yet to roll, that might be accelerating not subsiding.

We've taken that into consideration in terms of the estimates that we have of a 15% to 20% overall decline in revenue.

Okay, but you are seeing it subside -- the destocking subside, as well, across Europe?

So in Europe we saw considerable destocking at the OEM level.

We believe that is starting to subside, yes.

Okay, great.

And then just finally on the gross margins, Bill, I guess it held up fairly well, I thought, given the double-digit revenue decline, but I guess if you expect more significant volume declines, going forward, that ought to be a negative.

And maybe lower copper, as you get into the back half, ought to be a positive.

Can you just talk about your outlook given your lower revenue growth outlook -- do you think gross margins can still hold in this 33% level?

Well, the thing that are going to influence that, Kevin, obviously, are going to be the reduced volume but, at the same time, you know, we are still aggressively reducing inventories and despite the large inventory reduction that we had, we still maintain the margin there.

I think as we go forward in the year, some things that will impact it in a positive standpoint would be the price cost push, okay?

That's an opportunity, and then also, as we go further in the year, hopefully, as things settle down, we're thinking thing will settle down in this lower 15% to 20% range, the inventories later in the year come into parity where we might not have to have as much of a reduction in our production schedule.

We'll do a little bit more -- do a better job in terms of absorption.

So that will be a positive contributor, I think.

And then we're seeing as we go through the course of the year here, we do a little bit better job in lean as we go more and more time with lean.

We should have a little bit of help from improved productivity.

So I think there are some things, as we go into the year, that will help us sustain the margin but, you know, the big thing, obviously, is going to be what happens with the top line.

That's the biggest driver.

But I think we're doing everything we can as the management team in terms of what things can we manage?

I think all those things are being managed -- productivity, cost reduction, rolling your product schedule, how to maintain your cost price relationship and so on.

Richard Paget, Morgan Joseph.

There has been a lot of talk on the stimulus package and whether it's the GSA retrofitting some of their federal buildings to make them more efficient and greenify them and then there's some tax provisions for homeowners to make their houses more energy and water efficient.

Is that something that you guys -- that could be, at least, a positive catalyst within the next couple of quarters or in the back half of the year?

Anytime you change a hot water tank or a boiler or a heating source or anything of that, we benefit, because we make -- we don't make the boilers, and we don't make hot water tanks, but we do make all the components and all the controls that go around them, okay?

So we typically would be a direct beneficiary of that purchase pattern.

Okay, but do you have -- is there any way to quantify that in terms of percentage of your products that might fit into that category?

We have not been able to do that.

You know, Richard, the thing is, most of our products in the US -- you know, you generate lead points by installing them.

They are -- high percentages of them are focused around efficiency as well as safety and so on.

We also have -- I think this will be a beneficiary of this more meaningfully in the longer term, because when the economy starts to improve, people start to spend money on solar and geothermal, and those kind of alternative energies partially spurred on by tax incentives that have recently passed, partially spurred on by wanting to save money, be good green citizens.

We have a good opportunity there.

But that opportunity really is still -- we still need a little economy to become more of a tailwind.

But it is a good opportunity for us, and it's already been a fantastic opportunity in Europe over the last several years.

Now we're starting to follow that European model, and there's some good opportunity.

Okay, and then look at your competition.

Do you get a sense that any are in a distress mode, which might either, a, create an opportunity for acquisitions or, b, just once things turn around there will just be one less competitor out there for you guys?

I think the answer is that we are seeing, on occasion, some erratic pricing come in out of competitors who appear to be really struggling to bring some volume in the front door.

But we're not aware of any of them that are in financial difficulty at this time.

Okay, and then in terms of any of your major customers or distributors, have you gotten a sense there either?

We have an awful lot of people on credit watch because if they're not in trouble financially, they're slowing down their payment because they're managing their cash flow.

So I would say that we've added resources to our credit and collection effort, and we are watching that very carefully, although I would say that if you were to do an evaluation of the creditworthiness of our accounts, they're all fine.

We don't have anything unusual there.

Jeff Hammond, Keybanc Capital Markets.

I think you said in the opening you thought from cost-saving actions, you saved $7.5 million in the first quarter, is that right?

I think what we were talking about is the absorption variance was unfavorable about $8.5 million.

But we had cost savings -- some cost savings that offset that.

I mean, we reduced our SG&A about $6 million because of cost reductions, okay?

And then we also had -- if you look at the $8.5 million in (inaudible) variances, that's about 280 basis points, but since we only went down about 20 basis points, that may be half a point in there because of the mix including Bluchen, but we had a fair amount of cost savings inside of cost of goods sold to offset that.

I guess what I'm trying to get to is it sounds like your facility rationalizations the cost saving comes in 2010.

But, as you just look at cost control and cutting discretionary costs, do you see any uptake in the level of savings there as you progress through '09?

Yes, we do.

I mean, even though we've had a couple of larger programs that were dramatic, and we've announced those and talked to you about them, like the reduction in force, which was -- I think that was between $10 million and $11 million, and we had another couple of million dollars because of 5% pay reduction here in the States.

But we're continuing to focus on costs at every level.

Every month we sit with every plant manager and go through their productivity initiatives, their cost reduction initiatives, we're looking at -- we're working with the purchasing people relative to material and spend of cost reduction.

Just the continued implementation of lean, I mean, every quarter, theoretically, you have another Kaizen event that you've done, and you have more opportunity there to lower your costs and improve productivity.

So that's the long answer.

The short answer is yes, we should see improved cost goals as we go through the year.

Okay, and then you mentioned the down 15% to 20% sales assumption for the next couple of quarters.

Just kind of a finer-point question -- second quarter last year, as you recall, had a nice bump-up.

I think you positively pre-announced.

Have you incorporated that tough compare into that 15% to 20% decline, or is it maybe a little bit heavier in 2Q because of that?

We're thinking that we're down 20% versus the run rates for the full year.

I mean, we do have a little bit of a tougher comparison in Q2, you're absolutely right.

Okay, and then just a couple of housekeeping items -- how should we think about the tax rate for the rest of the year?

And -- oh, go ahead.

I would say about 33%.

Okay, and corporate expense jumped up in the first quarter -- what was behind that and how should we think of corporate for the year?

We had a little bit higher legal expense in the quarter.

I would think that -- I would just -- the run rate for corporate there that you see.

So you think the eight-seven is kind of the -- what you see for the rest of the year?

I don't think it will be more than that.

Christopher Glynn, Oppenheimer.

Just following up on the corporate, I think what Jeff was trying to say, the run rate was -- and you acknowledged -- was higher than it had been.

So sequentially, assuming that's a little bit of an opportunity, going forward.

Maybe the first go with a higher run rate?

Yes, I mean, we had a little bit higher legal expenses, Chris, and those will probably persist for another quarter or two.

Oh, okay.

And then the SG&A level again -- if we could think of it maybe in terms of $1 sort of run rate, would that be stable there or maybe trend down a little just dollar-wise?

Or is that just too tough to call?

It won't be going up, and the tendency here will be for it to trend down as we do more cost reductions as we go further and further into the year.

In absolute dollar terms, that's right?

Right.

I mean, you have to remember, though, our SG&A, if you just for the sake of discussion call it 25% of sales, 10 points is purely variable with revenue, okay?

And the other is what you call fixed or semi-fixed -- that management has to do something very proactive to reduce those expenses, which we're working on.

Okay, so about 40% of --

I'll give you the answer, I'm assuming the revenue is in a tight range to what we're talking about here.

Right, right.

Okay, and then just, lastly, the North America [decremental] margins were really not so bad at all.

Europe was roughly double what North America was.

Any obvious differences there between the two segments just on the negative contribution margins?

We had the same kind of math in both places, it's just how much absorption variances do you have and how much SG&A can we cut.

It's a little bit more absorption impact in the margin in North America, and the Europeans did a little better job on SG&A, I think.

But there is nothing major there to talk about, in my opinion.

Okay, and then just lastly -- thanks to bear with me -- just -- the sequential softening be a little steeper with the North American wholesale or the Europe, do you think, in terms of the year-over-year is getting a little more severe?

Probably Europe is a little bit more severe, just, I think, because they are earlier into their downturn than we are in the States, and the destocking is probably not quite as far through the system -- as complete.

Okay, and there were no one-times in the margin there that pushed the margin down a little further in Europe in the first quarter?

No.

Scott Graham, Ladenburg Thalmann.

I just have two questions for you.

The first one is on kind of a scorecard of the restructuring.

The $1.5 million, that's the line item of P&L -- now, that counts toward the 11.7 projected for the full year, is that correct?

Yes, it does, yes.

Okay, and how did that hit the geographic segments -- the 1.5?

I know it's a small number but still --

That would be -- at about $0.5 million in North America and $1 million in Europe.

Okay, great.

Further to the previous question is my second question, and that would be if North American wholesale sales declined, I think you say in your press release, about 18% organically, it would suggest to me that the commercial market was down in the order of maybe (inaudible)-ish, does that sound about right?

And, if so, is that a number we can -- that could actually get worse, going forward, because commercial construction spending is still weakening?

Well, commercial probably was down in that range that you just mentioned, but, again, we're looking at guidance that was supplied of that 15 to 20 -- that includes the whole book of business.

I think retail is flat, and so on, and so -- is that answering your question?

Kind of -- I guess it kind of leads to -- the ultimate question here would be that since I think your commercial businesses in North America are higher margin than your residential businesses, there seem to be, in your descriptions in the changes in the gross margin an absence of the mix effect, which seems to have been pretty starkly negative this quarter, and I'm just wondering how that fits into the gross (inaudible) discussion.

Well, again, we have a lot of cost savings that are helping to offset some of those mix situations.

You know, then inside of it, it doesn't mean that we're talking at a very high level here, Scott, so we also had some favorable mix inside of our wholesale and whatnot with some product lines, even though they are considered commercial, are doing well.

You know, sales into laboratories and things like those kind of end markets, which have good margin characteristics, we still had a decent quarter.

Okay.

I guess the last question -- and I said two, but analyst prerogative, maybe -- the third question would be since it looks like, obviously, the year-over-year change in SG&A, which you are largely attributing to declines in costs, yet the numbers that you guys have been talking about on an annualized basis for each, call it "restructuring," if you will -- the last one and then the one announced two months ago, they were to the tune of $4 million to $5 million of savings each.

So what you're talking about here are not those savings.

You are talking about pure block-and-tackle, Toyota-lean manufacturing savings here, yes?

That's correct.

Keith Hughes, Suntrust.

You talked earlier about not seeing a season, so far, in the order patterns out of wholesale.

Is that a comment on the residential/non-residential or both at this point?

We're seeing it across the board.

Typically, what we see is someplace between March 15th and April 1st that you see wholesalers, particularly, taking on inventory in anticipation of a building season.

This year they are reluctant to do that, and it's reluctant -- we did some survey work in the middle of the month of March, and what we were determining from that survey work that we did is our wholesale base would still be stocking and had very little interest whatsoever in terms of taking an inventory position going into the quarter.

Now, what we're seeing in the quarter is a lot of expediting.

So people are calling up and say, "Can you expedite this order and ship it in one day or two days," which is telling me that they actually have an order in hand, and they're trying to expedite the product because they have no inventory.

We are seeing expediting going on, but you're not seeing a substantial build in anticipation of a building season.

Jamie Sullivan, RBC Capital Markets.

Most of my questions have been answered, but I wanted to ask about the three plant consolidations that you have going on throughout 2009.

I'm wondering if the timing is similar for all three or are those staggered at all over the next 10 months?

There will probably be one that's finished in the fall, and the other two would take the entire year to complete.

Yes, maybe have a little bit into (inaudible).

I'm sorry, what was that last comment?

I missed it.

Pat mentioned that one of them might actually take us a little way into 2010 as well.

Okay.

We've always characterized it that the benefit -- that the reduction program will provide is a 2010 benefit, so we're not veering off of that because one of the projects will give us a little benefit late in the year, but the other one will take a little longer.

So it's still -- it's a 2010 benefit, for the most part.

Okay, and on your own inventory reduction efforts, how much can that contribute to your cash flows this year and how much room do you think there is to go?

Well, we think there is a lot of room in working capital, and we don't view it as a multi-year program.

We think that our inventory turnover ratio can improve dramatically from where it is, and we still view it as a likely scenario that working capital is a source of cash for the year.

We think the disciplines we've put in place are multi-year disciplines that will provide benefits (inaudible) for several years.

Okay.

Do you have a target for turns?

Well, I think if you just benchmark us against industry averages, thinking that we could have a turn of 4 to 5 over a multi-year period, I think that is reasonable.

But it takes quite a while to get there.

Todd Vencil, Davenport & Company.

Just circling around on the Europe comments and just on the fact that the decline from -- the year-over-year declines may be a little worse in the US because they're just sort of still going through the destocking phase.

You guys are also anniversarying Blucher during the second quarter, am I remembering that correctly?

That's correct.

Okay, so that will particularly have an impact as well, right?

Yes.

Okay.

And in the US, where you guys said you were looking at flat year-over-year comps in the retail space.

Is there any discernible pattern, sort of, geographically, or any places seem to be doing better for you guys -- or worse?

Not that we can discern, no.

Ryan Connors, Boenning & Scattergood.

What I did want to touch on is Other Income line, Bill.

You talked about it a little bit, but it really has been jumping around quite a bit, and it's not immaterial, if I'm showing it as a $0.25 expense last year, and now a couple of penny gain in the first quarter this year, so what is the outlook there?

Should that normalize back to a gain?

If so, at what magnitude?

Are there more of these impacts that you had in the first quarter where that should -- could -- need to be gain?

Just whatever your outlook is there would be helpful.

Last year, the biggest impact in there was the change in foreign exchange rates because, as you know, we have to mark our working capital to market, okay, in terms of what your current liability, et cetera, are.

You have to mark those to market, and you charge that into Other Income & Expense.

So if exchange rates are stable, that number won't change too much from what you're seeing in first quarter of 2009.

So if exchange rates start becoming volatile or as volatile as they were last year, that number could jump around.

Okay, so in other words, if you assume a flat exchange rate scenario, you basically -- you should run at that run rate you were in the first quarter -- or does that mean, assuming flat exchange rates, it's to go to zero?

Well, flat exchange rate, it's sort of on a sequential basis, right?

Whatever we charge there in June will be based on the change from the end of March.

So as long as the exchange rate are relatively stable during the course of the year, that number doesn't jump around to much on us.

Mike Schneider, Robert Baird.

I wonder if you could just circle back to the revenue forecast for the year being down 15% to 20%.

Have you assumed, just based on our prior discussion of pricing, that pricing changes, plus or minus from here, within that forecast?

We have some deterioration on pricing, but offset by -- if you look at the costs plus price relationship, the answer is probably we (inaudible).

It would be a benefit, I'm sorry, Pat?

What we're saying, Michael, is that there is going to be some price degradation as we go through the year, built that into our model.

We are also building in other factors as well.

I mean, the biggest thing is the economy.

Sure.

And then we're also considering what we're introducing for new products.

We have a big push on that, and put that all into the crystal ball, a very hazy 15% to 20%.

Fair enough.

And then in retail, your forecast said it should remain flat for the year.

Do you have a sense of just what additional program -- product rollouts you've got or store penetration that is yet to come that would offset what still seems to be some double-digit declines in new housing?

We have an analysis, Mike, we ran that demonstrates that the number of line reviews that are coming up on product lines where we are currently the incumbent on the shelf is offset pretty much one-for-one by the opportunities that we have to be successful where we're not the incumbent.

So it's sort of a breakeven analysis.

And do you guys have a housing assumption for the year that you've used?

We are assuming that it's going to stay where it's been.

Okay.

Just a quick comment, Mike, is that this part of the business really isn't driven much by housing starts, right?

This is homeowners doing their thing in small plumber -- small plumbing repair shops doing some shopping in Home Depot.

It's really not driven by starts.

Fair enough, fair enough.

And then on the sequential savings -- we've touched on it several times, but I think what we're trying to determine and begin to try to model, going forward, now is what level of savings out of the restructuring and the actions you took back in Q4, did you realize in Q1?

Then just even if you can just talk about Q2 alone -- what level of incremental savings you should realize in Q2 versus Q1 out of the restructuring you did in -- the restructuring you did this quarter and then even going back to Q4?

Well, again, the restructuring that we talked about in Q4, the program that we announced was a major restructuring that we really won't receive any benefit for that until 2010.

This is closing a couple of plants, right?

Okay.

So those plants are still up and operating today.

We don't -- we are spending money and time and effort on those projects right now.

So what we're talking about with these cost reductions that we've already seen some of them come through the P&L, and I think someone asked earlier, this is sort of just blocking and tackling.

It's getting improved productivity in all of our plants.

It's the reduction in force that we've done.

You know, and since we had the major announcement, we've seen our headcounts continue to decline.

It's cutting wages, it's clamping down on discretionary spending, it's working with purchasing and the vendors to cut out material costs.

It's all those items.

And that number, if I recall, was $10 million to $12 million in annualized savings?

That was just the RIF and the wage cut.

And was that amount fully realized on a run rate basis in Q1, or is there incremental savings in Q2?

25% of that RIF and the wage cuts were realized in the first quarter, plus a bunch of other projects that I just mentioned.

Okay.

And then just one question -- on the impairment -- where was that specifically in the income statement?

Impairment?

The impairment charge?

In the restructuring, there is a -- I think what you're talking about there's a $300,000 impairment of a trademark that we put in there because it's a one-time, one-off charge in the SG&A.

Okay, and that would be within North America?

Europe.

Europe, okay.

All right, thank you again.

[Immaculata Arlea], Sterne Agee.

Hi, guys, it's Mike Coleman.

I'm just wondering to what extent does the increase in expedited orders -- kind of the urgency -- help you maintain price in the year, or is that not really a consideration?

It clearly helps out, too.

One of the things we have going for us at the moment is we have very high fill rates, so our on-time delivery performance, our fill rates are extremely high at the moment.

We are intending to keep them that way with the idea that it's an opportunity to have customers who are not willing to carry inventory rely on us and potentially gain some share.

So I think it's a positive.

Okay, thank you.

We're seeing people call knowing full well that we have the inventory, too.

I will now turn the call over to Mr.

Patrick O'Keefe for closing remarks.

I just want to thank everybody for joining us on the call today, and we appreciate your continued support.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect, good day.