Watts Water Technologies Inc (WTS) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Watts Water Technologies earnings conference call.

I will be your operator for today.

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

We will be facilitating a question-and-answer session towards the end of today's conference.

(Operator Instructions).

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

Ken Lepage, General Counsel of Watts Water Technologies.

Please proceed.

Thank you.

Good afternoon.

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

Please be aware that any remarks we may make during today's call 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 December 31st, 2008, and also other reports we file from time to time with the Securities and Exchange Commission.

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 future date.

While we may elect to update these forward-looking statements, we disclaim any obligation to do so, and you should not rely on these statements as representing our views as of any other date.

During this call, we may refer to non-GAAP financial measures.

These measures are not prepared in accordance with Generally Accepted Accounting Principles.

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 2009 financial results, a copy of which may be found in the Investor Relations section of our website at www.WattsWater.

com, under the heading press releases.

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

Thank you, Ken and good afternoon, everyone.

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

After my opening remarks, Bill McCartney, our CFO will provide you with the financial highlights for the fourth quarter and the full year of 2009.

Bill will also discuss individual sector results.

Following Bill's comments, we will open the line for your questions.

Let me begin by providing a brief summary of the challenges we faced in 2009, both from a global and industry perspective and our response to those challenges.

We as with most business were swimming against a strong recessionary tide for most of 2009.

Our US commercial end markets continued to deteriorate throughout the entire year.

The residential markets scraped bottom with little if any upturn.

European OEM and wholesale markets experienced declines due to what I would refer to as a Pan-European recession.

Commodity prices fluctuated widely, whip sawing back from the low costs seen during the latter part of 2008.

This put a premium on managing the price cost dynamics.

In one of our Chinese operations, we uncovered potential violations of the Foreign Corrupt Practices Act.

Finally, the James Jones litigation was successfully resolved during the course of this past year.

So how did we as an organization deal with these challenges during 2009 and how will these efforts effect us in the year ahead, 2010?

With regard to our response to the recessionary pressures, we continued to focus on cash generation and preservation.

For 2009, our organization performed extremely well in maximizing cash flow.

For the entire year we generated positive cash flow from operations of approximately $205 million, which is a 41% increase over 2008, which was previously a record year.

We achieved this due to our continual focus on working capital management, our cost savings measures, and from lower commodity costs.

We took steps in late 2008 to address our cost structure with initiatives such as reductions in force, salary roll-backs and furloughs.

We continued to emphasize manufacturing efficiencies through our Lean and Six Sigma productivity programs and we pushed harder in consolidating our manufacturing footprint around the world.

Our free cash flow for the year approximated $181 million, a 51% increase over 2008 comparable free cash of approximately $120 million.

Again, this is a result of working capital management and also closely managing our capital spend.

As a result of our efforts to maximize cash, we continued to expand our liquidity throughout 2009 and into this year.

At December 31st, 2009, our net debt to capital ratio was 9.9%, which compares favorably to the 22.8 at December 31st, 2008.

We had approximately $258 million of cash on hand at December 31st, 2009, versus $166 million at December 2008.

Our cash position has increased despite a number of factors.

First, paying down debt of approximately $61 million during 2009, including completely paying down our line of credit.

Two, making a sizable incremental contribution to our pension trust of $10 million.

Third, settling the James Jones litigation and related legal costs which was a combined $20 million outlay.

And fourth, maintaining our dividend levels consistent with 2008, paying out $16.2 million in dividends for 2009.

As we look forward to 2010, we believe that our additional liquidity will be crucial in helping us to grow our business through investments in new technologies, new acquisitions and strategic headcount additions.

We responded to the deterioration of various markets by staying close to our customers and providing them with new product offerings that met or exceeded performance requirements for water safety, water quality or flow control.

For example, in 2009 we introduced products such as the tankless water heater valve, which is an easy to install flow control product for energy efficient applications.

We also in 2009 introduced a flood-safe water detector shutoff which will shut down the water supply in the power to a water heater if a leak is detected.

In late 2009, we introduced a full line of lead-free plumbing products, that meet the new legislative standards in California and Vermont which require almost no lead content in piping, fixtures and valves used to convey water for drinking and cooking.

This legislation was effective on January 1st, 2010 and we believe we have been successful in meeting our customers' immediate needs for product availability.

We also intend to continue to expand our product offering as we go into 2010 in alternative energy, providing market leadership in safety and control packages used in solar and geothermal systems to heat water.

As for commodity costs, we were able to maintain between pricing to customers and the continually fluctuating cost of commodities throughout 2009.

In some instances, we offset cost increases through productivity improvements and efficiencies.

In other cases, we went to the market with higher prices.

And in certain competitive markets, we were forced to reduce prices to meet competitive forces.

In 2010, we are already seeing substantial variability in the cost of copper.

Fortunately, the marketplace is much more comfortable with the tenuous commodity markets.

We will continue to work with our customers in 2010 to provide them with superior performing products that are fairly priced in the marketplace.

As we disclosed several months ago, we discovered that certain sales employees in our CWV subsidiary in China made payments to state owned agencies in China and these payments may have violated the Foreign Corrupt Practices Act.

To date we have conducted an exhaustive investigation which was performed by our outside counsel and we voluntarily self reported to both the DOJ and the SEC.

We are hopeful that we will reach a resolution on this matter with the SEC and DOJ by the end of the second quarter.

However, we do not control the timing of such.

As a result of these issues we encountered at CWV and our determination that CWV business was no longer a good strategic fit with the rest of our business, the Company put CWV up for sale in September of 2009 and that sale was finalized in January of 2010.

We also engaged outside advisors to perform an in depth review of all other locations in China and certain of our subsidiaries in Europe to determine if we had other FCPA risk.

No significant issues were identified.

Further, we have and will continue to stressed case regarding FCPA matters through training and other compliance measures.

At December 31st, 2009, over 1200 employees had successfully completed FCPA training.

We expect this effort in training and education will help minimize FCPA issues and help us to identify issues in a more timely basis should they occur.

Finally, as previously announced, we entered into a global settlement with the plaintiffs and our insurance carriers in the James Jones litigation.

We paid $15.3 million as our negotiated settlement amount, plus we paid our attorneys $5 million as a settlement fee.

This resolution brings to a close a long-standing issue which will no longer require management attention as we move forward.

Now I'd like to discuss our outlook.

In general, our thoughts about 2010 as discussed in our last conference call are still in line with what we are expecting.

We see the recession abating but market recovery will be uneven.

New construction we believe will I hit the bottom and we may see some growth in 2010.

Similarly, the remodeling and repair market are showing signs of an upturn, but expansive renovation projects appear to still be on hold.

We expect that the first half of the year will be challenging as the US commercial markets try to find a bottom.

Overall, we still see year on year reductions in commercial sales of 10 to 15%, with more of that reduction weighted in the first half of the year.

We see the US residential market as stable, with growth anywhere from flat to up 3%, and we see the overall European market up approximately 3% for the year, with more of that growth registered in the latter part of 2010.

To date we have not seen channel inventory build-up.

Inventories are still being controlled tightly.

As we mentioned last quarter, we continue to see turnaround orders, quick turnaround orders from customers, especially in Europe and our US wholesale operations.

We have experienced strong fill rates in these orders, which may be helping us to gain share because we are able to meet customer requests on a timely basis.

We intend to implement price increases in certain product lines to offset recent commodity cost increases.

We hope that we can be effective in passing along the increased commodity costs as we have done in the past, but at the same time, the sustainability of any price increase is market driven.

We also believe our margins will continue to be impacted by exposures to the commercial market downturn.

Just one note with regard to liquidity.

This year, $50 million of our private placement debt is coming due here in May.

Presently we're under review to possibly refinance this note.

As the credit markets open up, we are exploring what our alternatives are.

Obviously, we have the cash to pay off this note should we decide to pursue that channel.

Lastly, let me address our acquisition program.

As you know, 2009 was a quiet year on the acquisition front.

We presently are reviewing a number of acquisition candidates under various stages of review and due diligence.

As always, we continue to look at potential deals and as we discussed previously we believe we are in an advantageous position given our cash availability to get a deal completed.

Now I'd like to turn the call over to Bill McCartney who will take you through the financial highlights.

Following Bill's remarks we will open the line for questions.

Looking at consolidated revenue for the fourth quarter, we came in at $323 million, that's a decline of $18 million or 5.4%.

Looking at the pieces of that, from an organic standpoint, we saw a decline of 10% which is $34 million, and because the Euro strengthened during the quarter as well as the Canadian dollar, we had favorable foreign exchange of $15.7 million, which is 4.6%.

We had a small decline because of the disposal of TWT last year in the fourth quarter, so that nets to the $18.4 million or 5.4%.

Looking at the EPS, and we'll try to explain this because there's a lot of detail in this quarter's P&L.

It's a little bit difficult to understand unless you kind of do a dive here.

But from the US GAAP standpoint, our earnings per share were $0.43.

From a continuing ops standpoint, we had a $0.32 because we had $0.11 of income in our discontinued operations.

At the same time, we recorded $0.21 of impairment and restructuring charges in the quarter so that brings you up to $0.53.

As you look at the front page of our press release, you'll see that we had some one-time unusual release of reserves because we've seen some marked improvement in our product liability and workers' comp management areas, so we released about $0.08 of income to the P&L.

So that brings you back to about $0.45 from a run rate perspective in the quarter.

Compare that $0.45 to consensus estimates of $0.42.

Looking at the restructuring, on a pretax basis we booked $10.7 million of expense.

Again, about $1.3 million of intangible impairments, $4 million of asset write-downs associated with the closing of a couple of our facilities, part of our restructuring program in California and in China.

We reported almost about $5 million of severance, primarily in France, associated with the French restructuring plan.

That brings you to $10.7 million pretax, a tax benefit of $3 million, so $7.7 million net and that's a $0.21 impact in the quarter.

On the disc ops, $0.11 of income and that's primarily two factors in there.

One is the fact that when we settled the James Jones case, during the fourth quarter, we brought back about $9 million of income associated with that from reserves that we had established during the course of that case.

That was partially offset by the loss on disposal of Changsha and some FCPA legal fees that we recorded in disc ops.

So that nets you down to about $4.1 million of income or $0.11.

Now, just take a look at the segments a little bit here.

North America, $184 million of revenue.

That's a decline of $17.7 million or 8.8%.

That's primarily driven by a decline from an organic standpoint of $19.9 million, or 9.9%, partially offset by some favorable foreign exchange of $2.2 million or 1.1% which brings you back to the $17.7 million.

The FX is a result of the Canadian dollar strengthening this year.

In Q4 we had an average rate of $0.945 versus last year of $0.839.

Inside of our North American numbers we have our wholesale and retail.

Wholesale declined $17.7 million so it was responsible for the entire decline in North America, $142.2 million or 11%.

So basically what we saw in wholesale was that on the residential side some of the declines we had been experiencing during the course of the year started to moderate and we actually saw some product lines with some modest improvements over last year's fourth quarter.

And of course in the commercial side, as Pat mentioned earlier, we saw many of our commercial product lines with declines exceeding 15% during Q4.

So little bit of improvement from what we've been seeing in the past couple of quarters on the residential, with definitely the commercial continuing to slide, similar to what we saw in Q3.

The retail was flat in the quarter at $41.8 million.

Basically what we saw in retail was the favorable effect of very strong appliance sales in the quarter, so we are selling different types of water and gas connectors into that market, so we had some favorable effect there.

We also introduced some new products, a line of new lead-free valves and a new fittings line as well.

And those increases were partially offset by some decline in the base business but also the fact that last year we did have several roll-outs in Q4 as well.

But retail was flat on the quarter.

Looking at our European business, came in at $132.8 million, it's a decline of $1 million or just a little bit under 1% versus last year.

From an organic standpoint, in Europe we declined $14.6 million or 10.9% and that was offset by, again, the strength of the Euro which we picked up $13.5 million of revenue there and that nets the decline of $1.1 million or 0.8 of a point.

The Euro itself, the average rate we utilized during the quarter was 147.7, compared to last year, 132.4.

And Europe represented about 41% of our revenue in the quarter, versus 39% in Q4 last year.

Essentially what we saw from the business standpoint in Europe was that residential starts in Europe are down more than 20%, so we definitely felt the impact of that but of course we continue to have a strong replacement market in Europe due to the strong heating business that we have and again, as Pat mentioned earlier, because our fill rates are strong, we're providing good deliveries, so what we're seeing is an increased number of orders.

The orders are smaller but we're able to turn them around with the good deliveries.

We think we're picking up maybe a little bit of market share so that's helping us out.

Additionally, we had a deep freeze in Europe towards the end of the fourth quarter and when you put all the stress on those old heating plants that always helps our business as well.

We did see a nice improvement in Europe overall on a sequential basis.

In the third quarter we were at EUR81 million, in the fourth quarter at EUR 90 million.

So the good deliveries, strong replacement business, and the deep freeze all helped us in Europe during Q4.

China, $6.4 million of revenue in the quarter, slight improvement versus last year's Q4.

We had an increase of 7%.

So what we saw in China was that shipments into the domestic market were up, offset by fewer exports out of the Chinese market, primarily business that we shipped into the European market.

Looking at the gross margin, consolidated basis, our gross margin in the fourth quarter was 37%.

That's an increase of 2.8 versus last year's fourth quarter of 34.2%.

We also saw a nice improvement in the gross margin for the full year coming in at 35.5% which is an improvement from last year of 33.7%.

When we look at the quarter here, the gross margin, what we see is the impact from the workers' comp adjustment which we highlighted on our press release.

That goes against cost of goods sold so that helped the margin and we also had the improved revenue that we've seen from prior quarters helped give us better absorption characteristics for our fixed overhead in our factories, so that helped the margin.

And again, as Pat mentioned earlier, we had a good price/cost relationship in the quarter with copper being not at the lowest point of the year but at lower than we have seen it in other quarters.

So that's really helped the margin a bit as well.

The SG&A at $84.8 million in the quarter, that's an increase of $1.2 million versus last year's fourth quarter.

When we look at the components of SG&A from an organic standpoint, SG&A declined $1.9 million.

What we see here is the favorable effect of the product liability accrual being decreased, which, again, we mentioned on the first page of the press release.

And that's partially offset by some higher legal expenses associated with our FCPA investigation.

Other than that, nothing really unusual in SG&A.

So that brings us down to operating earnings.

$25.6 million, but if we look at operating earnings without the restructuring and impairments they them, operating earnings would be $36.3 million, a little bit more than 11% of revenue and that's an increase of $3.2 million versus last year.

Again, due primarily driven by the improved gross margins over last year.

Look at the expenses below the line.

Last year we were $10.5 million below the line, this year just about 4.9.

Interest income is up because of the higher cash levels and interest expense is down because of the debt that we've paid off.

And then we did not have some of the unfavorable foreign exchange charges below the line that we had in last year's fourth quarter.

If you recall, last year's Q4 the FX rates were quite volatile so we did have some charges for hedges below the line.

Tax rate at 43% is a bit higher than normal.

Normally we like to think we're about a 35% tax rate Company.

But we did put up a valuation allowance associated with one of our Chinese facilities because we are in the process of closing that facility, we are not going to be able to realize some tax benefits we had put up on the balance sheet so we reserved those during the fourth quarter.

So that brings you down to the net income.

Again, without the restructuring, $19.5 million.

That's an increase of almost 26% versus last year.

And again, to recap the earnings per share from a GAAP standpoint we're reporting $0.43.

If you deduct the disc ops of $0.11 income and you add back in the restructuring of $0.21, and you adjust for the income of the product liability and workers' comp reserves as we kind of view that as a one-time favorable adjustment, that brings you back down to a run rate of $0.45 and that's how we're looking at the quarter from a sort of a an as-adjusted or ongoing basis, EPS was in the mid-40s for the quarter.

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

(Operator Instructions).

And please stand by for your first question.

Your first question comes from the line of Mike Schneider with Robert W Baird.

Please proceed.

Good evening, guys.

Hey, Michael.

Maybe first we can just start with the -- some of the puts and takes in cost of goods sold.

Raw materials, one, can you characterize what is the benefit right now or tailwind in costs of goods sold on raw materials?

And then two, is it sequentially higher or lower than it was in the third quarter?

I'd say that the benefit is somewhere around a point, Mike, and it would be I would say a little bit less than last -- than third quarter.

Okay.

And pricing, what did you go out with at the start of the year and just approximately what percent of the revenue mix does it cover?

Well, in North America for all of our copper based products we out with about a six, which is right in the middle of what we're seeing everyone else come out with and that would cover maybe half our revenue.

Two-thirds.

Half to two-thirds.

In North America?

North America.

And then in Europe it would be 1 to 2%, in that range, it's much more modest in Europe.

That would be probably a third to a half in Europe, I would guess.

Okay.

And you only went out with price increases on the copper based material?

Right.

And the product liability and workers' comp benefit of $0.08, can you break that between the two so we can properly model it?

Yes, it's two-thirds of that is product liability going against SG&A and one-third is workers' comp going against the cost of goods sold.

Okay.

That's all I had.

Thank you.

Thanks, Mike.

Your next question comes from the line of Kevin Maczka with BB&T Capital Markets.

Please proceed.

Good evening.

Hey, Kevin.

I guess my first question on the gross margin side, kind of along the lines of Mike's question, so you got some benefit here on that line from the workers' comp item but better absorption, favorable or at least that equilibrium on price cost, these things should be sustainable, so should we think that something in the range of 36 to 37 that we did in the second half is also sustainable?

I think if you recall what we had on our -- I think we were on our third quarter call, Kevin, when we talked about this and we're thinking that a sustainable gross margin is more 35 to 36% range.

36 is the top end of that range.

Is that about where we would have been in Q4 without the workers' comp item?

In that neighborhood, yes.

Okay.

And then, Bill, you've been so focused on cash flow and limiting your CapEx, can you give us any kind of guidance in terms of your 2010 expectations there?

Well, our objective is to convert our cash to at least equal to our net income.

This year was an extraordinary year because as our sales declined we were able to take money out of -- take cash out of inventory and receivables.

Our operating people did an excellent job in that respect.

They were able to keep up with the business and actually took more out, they took more out of accounts receivable and inventories than we saw as far as sales declines.

So they -- I think they deserve a lot of credit, did an excellent job.

But as we look forward into 2010, we do have some pressure going the other way.

Copper's going to start moving against us and we also have -- what happens with copper then, then we're going to have price increases and inventory increases, so the price increases will force you to put more cash into accounts receivable.

And hopefully later in the year we'll see some sales gains as we reach better comparisons and so on.

I think this year was an extraordinary year.

I think the guys did a great job for us.

But as we go forward, we're thinking a reasonable thing for us to achieve is at least equal to net income.

Okay.

And then Bill, the most recent restructuring announcement, once that's completed at least for the foreseeable future, is that-- does that kind of put your footprint where you want it to be and can you talk about all in, all your restructuring actions that you've done, what your expectation is for incremental savings in 2010?

Yes, let me start out.

I think we have at this point in time announced most of the large restructuring projects.

There's some other smaller projects that we aren't done analyzing the impact of and we aren't prepared to pull the trigger on them or move forward on them at this point in time.

But the bigger pieces are out there, either completed or in process at this point in time.

And then Kevin, relative to your question on the savings, if you look at what we announced last year on the fourth quarter call, we announced $4.7 million of plants, restructuring activities, if you will, $4.7 million of savings from plant restructurings.

If you look at that, about $2 million of that is already in the run rate because that was a plant right-sizing, if you will, in China.

So that started coming in somewhere around the third quarter for us.

The other two plants are scheduled to be finished, the closures complete by the end of the first quarter.

That's about $3 million of savings there.

Now, that will start to phase in during the second quarter.

However, of that $3 million, we've lost about a third of that because of declining volumes.

So you have maybe $0.01 or so per quarter of savings that will come in because of those restructurings.

Additionally, we had some other smaller restructurings that we're working on as Pat mentioned which will start to phase in during the course of the year and then the French restructuring, that's not scheduled to be finished until 2011.

But that will be almost $3 million a year phasing in at the end of that.

Does that answer your question?

Yes, I think so, Bill.

Just to kind of summarize that, of the $3 million you're going to keep about $2 million of it or so that will start to phase in in Q2 and then the French restructuring is up over and above that?

Right, right.

And the thing is is if we get the volume back, that additional restructuring savings will get it back, but it's a function of the sales volume.

We're not selling as much of those products as we initially planned when we did our initial announcement.

Okay.

But the project is on -- those are on schedule and we're pleased with what we see.

Okay.

Great.

Thank you.

Okay.

Your next question comes from the line of Scott Graham with Ladenburg Thalmann.

Please proceed.

Hey, good afternoon.

Bill, I was just hoping if you wouldn't mind, I know a lot of the charges for the current quarter are -- I think they are European.

I just want to make sure of that, though, and if you wouldn't mind, by segment, North America, Europe, China, for each year, could you tell us kind of what is the charge that you ran through the operating income on your segment income area of your press release today?

North America, pretax is 3.4.

The aftertax is 2.4.

Europe, pretax is 5.1, the aftertax is 3.4.

China, pretax is 2.2, the aftertax is 1.9.

That should total 10.7 pretax, 7.7 aftertax.

Okay.

That's 2009.

Would you mind doing 2008 as well?

I don't have that in front of me but if you want to give me a call after the call, tomorrow morning, I'll be happy to give that to you.

Happy to.

I was hoping you could talk a little bit about the DIY results that you had in North America, which were pretty impressive to kind of get that number to a kind of a flat number.

And I'm assuming that some of that was new products.

Was any of that due to some shelf space gained from you're just doing better with service?

Could you maybe give us some color on that?

Well, there's a couple things happening there, Scott.

One is what we saw in the quarter was a lot of -- it was a very strong quarter for appliance sales.

Dishwashers, washing machines, water heaters, that type of thing and we sell a lot of fittings, gas connectors, water connectors, so we had a favorable follow-on because of that.

And we also introduced a line of new products called a lead-free line that Pat mentioned in his remarks.

So we had a little bit of sales into the retail space there.

That's more -- that's primarily a wholesale product but we did have some favorable impact on the retail space as well.

And we did introduce a new fitting line as well.

So we had a little bit of new products.

And then -- so it's -- you definitely see some falloff because of the economy where if we didn't do those things we would probably be down somewhat but those actions or programs, if you will, offset the economic softness.

Favorable comps compared to the fourth quarter last year which is a contraction.

Last year's fourth quarter was not the strongest.

If you look at the year for retail, we were basically flat on the year as well at $172 million.

You can see the fourth quarter run rate is not as strong as the year-to-date.

That's fair.

I actually have you up 1% in last year's fourth quarter.

Whatever the case, it still looked like a pretty good number this quarter.

Look at it from a product side, been on the shelf a long time.

There was a major contraction in the DIY segment.

Okay.

Last question is regarding your thinking on the commercial -- US commercial construction markets, your sales are down 10 to 15%.

You didn't change that from a quarter ago, which assumes that -- I assume that means you're seeing some stability there.

I will tell you that that market, I think for all of us looks a little tenuous and I'm just wondering what goes into sort of high end, in this case, the low end, the minus 15, what do you have to see for that to be realized, versus what do you need to see versus -- to see maybe better than minus 10 realized?

I think at the moment we're thinking it's probably closer to 15 than it is to 10.

Okay?

Because we get -- we do analysis of Dodge Reports and other data like that and our guys are telling us that in some of the markets where we would traditionally be seeing projects coming to fruition now, a year ago, the funding for those projects dried up so those projects are just not coming in.

So we're thinking that that market, will be sort of closer to 15 than it will be to 10.

And we're thinking that we're going to see a bottoming out of that probably some place in the middle of this year.

The other thing, Scott, you have to remember when you start looking at these numbers is we do have a strong replacement market.

So the market in total might be down more than that.

We typically do not go down anywhere close to the market because of the strong replacement business that we have.

Fair enough.

That's all I had for you.

Thanks a lot.

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

Please proceed.

Hey, guys.

Hey, Jeff.

Just another housekeeping item on the charges.

Where in the segments would the product liability and workers' comp have hit?

Product liability is SG&A and workers' comp is cost of goods sold.

Would that have gone through North America or corporate?

I misunderstood your question.

North America.

Okay.

Okay.

Great.

And then just to kind of follow on, I mean, the numbers you gave kind of zero to plus three for res, plus 3 in Europe, that's kind of market growth expectations, correct or that's expectations for your business?

That's market growth expectations.

For the markets as we participate in them.

So I think you mentioned US commercial you're maybe down less because you've got some replacement.

How should we think about your growth in Europe relative to the market on the res side?

In Europe we sell a lot of products through our OEM channel and that market has been driven primarily by energy efficiency products and things of that nature which we have a leadership position in.

So we're probably going to do better than the market in Europe in the OEM segment.

As far as residential, let's call it the wholesale channel, we see those as being relatively sluggish, probably closer to even with last year.

Okay.

And then just final question, back on price, have you gotten any feedback from your price increases ?

Sounds like your competitors are moving in line.

Is that sticking to date or are you getting a

Overall it's starting to firm up.

I think the positive note is that everybody is being impacted roughly the same percentages and we're not the highest in terms of the price increases that we put out, but we're also not the lowest.

So my feeling is that we have a pretty good chance of the majority of that sticking.

Okay.

Thanks, guys.

Thank you.

Your next question comes from the line of Garik Shmois with Longbow Research.

Please proceed.

Thanks for taking my question.

Just wanted to follow up on the pricing real quickly.

Assuming you get most of what you're looking for in these price increases, would it fully cover the raw material inflation that you're going to see?

That's our plan.

Unless you see further increases in the raw materials beyond what we're currently seeing.

That's based on the current pricing of copper but that's what we're trying to do.

Okay.

And just quickly on Europe, you talked about some positive developments that helped in the fourth quarter.

Just wondering how sustainable those are in the first quarter?

How sustainable they are?

The thing is, the issue around the quick deliveries, if you will, seeing more orders that are smaller and turning them around quickly, that's continuing.

Whether they have another deep freeze in Europe during Q1 remains to be seen.

I can't predict the weather here.

Understood.

Okay.

Thank you very much.

Okay.

Thank you.

Your next question comes from the line of Jamie Sullivan with RBC Capital.

Please proceed.

Hey, it's Mike Shlisky filling in for Jamie this afternoon.

Got a few questions on your European market.

Can you maybe share with us which regions or which countries in Europe did better than others in the fourth quarter?

Essentially what you're seeing is you're seeing strength in your German market, your French market and the markets that are sort of down and out are those in the southern part of Europe.

Italy, the environment is tough.

Portugal, Spain, that whole market, Greece, relatively soft.

So southern soft, northern sort of stronger.

Got it.

Had any commentary over the last few weeks from your customers in Greece, Portugal, Spain and so forth about sovereign risk and the climate there?

There's a lot of noise.

I'm not sure we got any wisdom out of it.

Right, right.

I guess turning back here to the US, any update for us on government budget, the stimulus plan and certain projects that have been released for that?

Are you seeing any kind of business from there?

What we're seeing is in the municipal markets which is not a huge market for us but we do participate in it, that you're seeing projects that are starting to flow through where they've been funded and they're starting to come through.

But, if you think about the majority of our market being a commercial market and a residential market, it's tough for us to see a direct impact.

Got it.

Just one more quick one.

Did you mention in your prepared remarks that your tax rate looks more like 35% going forward?

That's what we are budgeting for 2010 is 35% rate.

Are there any potential items that could change that materially going forward or are you pretty confident in that rate?

Right now we're confident but if you have a -- the thing we had to address in the fourth quarter, which is always potential with something like this to happen is if you have a business condition that changes and you have an NOL that you have to either recognize or reserve for or whatnot, that could change the rate.

But barring change in our NOL view, I would say that 35% is probably pretty good.

Great.

Thanks so much.

That's all I have.

Okay.

Your next question comes from the line of Mike Schneider with Robert W.

Baird.

Please proceed.

Guys, just one additional question on the European market.

You mentioned the OEM sales are down hard.

Is that just tough comparisons given last year's rebates and stimulus activity or is there something else occurring specific to the OEMs?

I think you had a strong fourth quarter in 2008 in the OEM sector so you remember that we talked, Mike, about the fact that the European economy seemed to be lagging behind the US economy.

So the US economy in 2008 went down hard in the fourth quarter.

We saw relatively stable conditions remaining in the fourth quarter in Europe in that OEM sector.

I think what you have is timing of when markets are -- when that market turned down in 2008.

I think also, Mike, you have OEM -- we're selling into the OEM, they're putting our products into boilers and water heaters and so on and that's going to be a little bit more of a larger expenditure and whereas the wholesale is going to be more replacement business, sort of smaller units, smaller price unit sales, so maybe there's reluctance out there for people to spend big dollar items as well.

But it's difficult to say exactly.

Was it concentrated in one product category or one OEM in particular?

It's not focused on products or any customers.

It's pretty much across the board.

Okay.

That's all.

Thank you.

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

Please proceed.

Good afternoon.

Wanted to just talk a little bit about cash deployment, Pat and Bill.

You mentioned the acquisitions but $260 million really is quite a figure on the balance sheet in terms of the cash.

I mean, has there been any thought given to a buyback, stock buyback and/or more hefty dividend increase I guess secondarily.

Back of the envelope, $7 a share in cash at this point.

What are your thoughts on that front?

We focus on cash very intently as you can see by the results we reported for 2009.

The primary reasons we did that is one to make sure we weren't dependent on the dysfunctionality of the banking industry.

We saw that as a huge threat a year ago and said we needed to insulate ourselves from that dislocation that was taking place in financial markets.

The second issue was we wanted to make sure that we reduced our exposure to debt, particularly near term debt, okay?

The third is, we want to maintain or increase our dividend rate as we go forward.

Right?

The other is we want to continue to have money available to be a good opportunistic buyer for good properties when they become available.

And the last thing I guess that we would consider is whether we would reinstitute the stock buyback program that we have.

But at this point in time, we're not convinced that that's the way to go.

Okay.

And then in terms of the acquisitions, Pat, are you -- in terms of things you're looking at are you seeing sellers with somewhat of a realistic world view in terms of valuation.

For many of the companies that we follow closely, we hear that the sellers they're talking to still want 2007, 2008 valuations which is just not realistic in this environment.

Are you seeing opportunities out there in terms of people have come down in terms of what they expect?

What you're talking about is a reality, is that people had high expectations.

The longer you go, the harder it is to substantiate an argument that you shouldn't count 2009 downturn in your numbers.

Because if you do any projections off of those numbers, as you know, we don't see the market popping back quickly.

We see it as a slow, methodical process of improving the markets and the volumes.

So there's still a gap.

I think it's closing.

I think it's pretty hard for a seller to not realize that his business has been impacted, and it will be impacted probably over the course of the next two to three years.

Put those real numbers in a forecast and it makes a big difference in what you can pay and get a return on your investment.

Sure.

Well, thanks for the color.

Thanks for your time.

Now I'd like to turn the call back over to Pat O'Keefe for closing remarks.

Please proceed.

I want to first of all thank everybody for joining us today for our fourth quarter conference call.

Our tentative date for our conference call for the first quarter would be on or about May the fourth.

So we look forward to talking with you on the next call.

Thank you.

Ladies and gentlemen, that concludes today's presentation.

You may now disconnect and have a good day.