Watts Water Technologies Inc (WTS) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Watts Water Technologies earnings conference call.

My name is Christine, and I'll be your operator for today.

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

Later, we will conduct a question-and-answer session.

(Operator Instructions).

I will now turn the call over to your host for today, Kenneth Lepage, General Counsel.

Please proceed.

Thank you.

Good afternoon.

Welcome to the Watts Water Technologies second quarter 2010 earnings conference call.

On the call with me today are Pat O'Keefe, our President and Chief Executive Officer, and Tim MacPhee, our Corporate Controller.

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 Harbour 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 31, 2009, 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 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.

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 second quarter financial results, a copy of which may be found in the Investor Relations section of our website, www.wattswater.com under the heading Press Releases.

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

Thank you, Ken, and good afternoon, everyone.

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

After my opening remarks, Tim MacPhee, our Corporate Controller, will provide you with financial highlights for the second quarter, including individual sector results, then we will address any and all of your questions.

Our CFO, Bill McCartney, could not be with us here tonight due to a death in his family.

I want to start out by saying we continue to be encouraged by the Company's results for the second quarter and for the first six months of 2010.

I believe execution on productivity and cost reduction initiatives, which we have established over the last two years, along with improvements in our end-markets, enabled us to deliver double-digit operating earnings growth for the second quarter and for the first half of this year.

Our sales grew organically by 7% for the second consecutive quarter, and for every additional dollar generated this quarter over Q2 of last year, we delivered a 37% increase in organic operating profit.

On a year-to-date basis, we delivered 48% in organic operating profit for each additional sales dollar.

After spending approximately $36 million in Q2 on acquisitions, we ended the quarter with approximately $255 million in cash on our balance sheet.

We continue to generate cash from operations but at lower levels than in 2009.

As the business grows, we increased our customer receivables and to a lesser extent added some additional inventory.

However, our working capital operating metrics are stable with Q1, and have improved from the beginning of the year.

We gained a net $25 million in cash by retiring a $50 million private placement note and replacing it with a $75 million 10-year note.

We also negotiated a new five-year $300 million line of credit with our relationship banks during the second quarter, which we believe will add capital flexibility for the future.

Our net debt to capital ratio at quarter end is 12.8%, which we believe to be conservative.

As we look at our business, we see the US repair and remodeling market continuing to show some upturn.

We experienced growth in the products which we sell in today's market.

We especially saw growth in the appliance arena where our gas connectors and water fittings are used in oven and dishwater applications.

We continue to see some minor restocking taking place in the US wholesale and retail channels, although the majority of wholesalers are maintaining relatively low levels of inventory.

This puts a premium on delivery to gain and maintain market share, and we believe we are well-positioned to meet our customer needs.

New residential construction appears to be slowing after the tax stimulus ended in the Spring, but sales of existing homes are up 15% year-to-date, which should help our replacement business in the coming quarters.

The commercial marketplace, as expected, continues to be a struggle during the quarter.

Our product offerings that focus almost exclusively on this end market were down, however, we did see moderation in the rate of decrease in Q2 over the rate of decrease we experienced in Q1.

There is a sense in the marketplace that the commercial sector is bottoming, but when this market will return to growth is still up for debate.

My guess at this juncture is we won't see meaningful growth in the commercial marketplace until the second half of 2011.

Europe performed ahead of expectations for Q2.

All three major channels, wholesale, OEM and retail, posted solid organic sales growth during the second quarter as compared to the second quarter of 2009.

Our drain business had strong sales growth, and our OEM business also had solid gains.

Our DIY sales grew substantially as we seized on an opportunity to become a key supplier to a large retail account.

Sales of our products sold in the underfloor heating and district heating market were very strong.

We also believe we have captured market share during the quarter with our alternative energy offerings.

As in the US, we see the renovation market improving, and we see customers expecting short delivery lead times.

Consistent with what we saw at the end of Q1, our order intake continued to increase in Europe as the quarter progressed.

Regarding commodities, we continue to see a lot of variability in copper costs.

As compared to Q2 of last year, our US copper costs more than doubled, but we believe we were, again, able to maintain equilibrium between our pricing to customers and the continually fluctuating costs of commodities.

In many instances, we offset the increased cost through production efficiencies and increased absorption.

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

Recall that we announced a price increase to the US wholesale channel that became effective on March 1.

We have seen a portion of that price increase effect the results during Q2.

We also announced retail channel price increases that became effective during the second quarter.

Now, let me give you a brief update on our footprint consolidation efforts.

In the US, we finalized our PEX production line relocation into one campus in Kansas City during the quarter.

If you recall, this initiative allows us to rationalize our PEX manufacturing, drive process efficiencies, provides a central location for distribution throughout the US and Canada.

We anticipate this project will provide annualized pretax savings of approximately $1.3 million, which will start in the third quarter of this year.

In Europe, two projects remain on schedule.

One involves the consolidation of two plants, which supports our European drain business into one existing plant.

Total expected outlays are $6.6 million, most of which is capital, with estimated pretax savings of approximately $1.8 million.

This project was substantially completed at the end of July.

The restructuring of our France operation also continues.

We took some additional restructuring charges in Q2 for severance and accelerated depreciation in accordance with this project.

We expect this project will be finalized in late 2011, so we are not anticipating any pretax savings, which is estimated to be approximately $5 million until 2012.

We continue to evaluate our existing global footprint to seek further operating efficiencies.

Now, let me discuss our outlook.

We continue to see the US commercial construction market being challenged.

As I mentioned previously, there is some sentiment that the market is finding a bottom, but I don't see any real upturn for later this year as we had expected.

The ABI index has been creeping up, but the index still is anticipating a decline in demand for design services.

At this point, our initial sentiment of year-over-year reduction in commercial sales of 10% to 15% is still valid, with sales declines receding as we progress through the year.

At our last conference call in early April, we were seeing residential housing markets showing improvement with solid unit starts and building permit increases.

At the time, I was hopeful for a gradual recovery but still cautious because of persistent high unemployment rates and tight lending standards.

The latest stat on housing starts in June down 5% sequentially, and almost down 6% against 2009, shows how fragile the housing recovery really is.

June building permits were up only slightly.

At best, the picture on new construction is muddled with the market appearing to be moving sideways.

On a positive side, as I previously mentioned, existing home sales are up 15% year-to-date through June, which bodes very well for the products sold into the repair and remodeling sector.

As I mentioned last quarter, the leading index of remodeling activities, LIRA, which is published by the Harvard University, is predicting a 5% growth in remodeling spending in 2010, and we believe that this is still a very reasonable assumption, as we continue to see our overall European markets up in the low to mid-single digits for the year with more of the growth registered in the latter half of 2010.

Our concern continues to be the financial malaise and its effect on the European economies.

This situation has already negatively affected the value of the euro, which resulted in reduced reported European sales and profits for us in the second quarter and year-to-date.

As mentioned, we have seen some modest channel inventory build-up, mainly in the retail channel, but inventories are still being tightly controlled.

Quick turnaround orders from customers are still evident, especially in Europe and in the US wholesale markets.

We are experiencing strong fill rates on these orders, which may help us gain share because we are able to meet customer requirements on a timely basis.

Lastly, let me address our acquisition program.

In April, we announced the acquisition of Blue Ridge Atlantic Enterprise, BRAE, which provides engineered solution for rainwater harvesting in commercial, industrial and residential applications.

We believe the acquisition of BRAE enhances our water conservation and drainage product lines, and provides us with expertise in national and local water conservation codes.

In June, we announced the acquisition of Austroflex, a manufacturer of pre-insulated flexible piping systems used in solar, district heating and underfloor radiant heating application.

Austroflex will expand our current product offering in this arena, provide expansion into the important German marketplace, and position us as a leader in the European insulated pipe market.

We presently are reviewing a number of other acquisition candidates and are in various stages of our review.

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

Now, I would like to turn the call over to Tim MacPhee, our Corporate Controller, who will take you through the financial highlights.

Following Tim's comments, we'll open up the lines and answer your questions.

Tim.

Thanks, Pat, and good afternoon, everybody.

I'll take you through the consolidated P&L, as we usually do, and give you some color on the sales regarding each sector.

So for the quarter, sales were $324 million, up $15.8 million or 5%.

If you break that down to the components, organic sales were up $21.9 million or 7%.

That's the second quarter in a row we have had 7% organic growth, and we did have the same number of shipping days this quarter as in Q2 2009.

Foreign exchange was a headwind to the tune of about $6.5 million dollars, or 2%.

Basically the devaluation of the euro against the dollar hurt us there, and from an acquired perspective, we bought a small company called BRAE, which helped us to the tune of about $400,000.

If you look at the quarter from an EPS perspective, from continuing ops on a GAAP basis, we were at $0.59 as compared to $0.41 on a GAAP basis in 2009, a 44% increase.

If you exclude or if you look at what we can call adjusted EPS now, which excludes restructuring and some one-off tax credits, we're at a run rate of $0.57 for the quarter, versus $0.39 run rate in Q2 of last year.

That is a 46% increase.

The consensus for the quarter was $0.47.

If you look at restructuring in the quarter, restructuring was about $3 million on a pretax basis.

Most of those costs were incurred in Europe as part of our French restructuring.

On an after tax basis, the costs were $2 million or $0.06 in the quarter.

Discontinued ops were minimal in Q2 this year.

We did have a large charge last year.

If you recall, we wrote off the disposal of a company in the UK.

Looking at sales in the North American sector, sales were $206.3 million, up about 6.1% or $11.9 million.

Internal growth was $9.2 million or almost 5%.

Foreign exchange was up $2.3 million, basically that was the Canadian dollar strengthening against the US dollar, and again, the BRAE acquisition was helpful to the tune of $400,000.

So those are the components relating to the sales increase.

If you take a look now at the wholesale side of the business, wholesale sales were up 5.7% to $258.6 million.

On an organic basis, wholesale sales were up 4.1%.

As Pat mentioned, we had good sales in the residential remodeling sector.

We probably had high single digits or low double digit growth in those product lines, as opposed to our commercial products, which were down again, but we had less of a decrease than we had in Q1 of this year.

Pat also mentioned existing home sales were up 15%, which should help our remodeling business as we go forward, and we do see that there is a sense that the commercial marketplace has bottomed out.

But again, we don't perceive any meaningful growth there until the latter half of 2011.

If you look at retail sales in North America, they were $47.7 million, up 7.7%, almost 7% on an organic basis.

What's driving the growth there again is remodeling.

We had some new product offerings going into our retail customers, and as Pat mentioned, we had restocking again at certain of our retail customers during the quarter.

Looking at Europe, Europe sales were $112.1 million, up $3 million.

On an organic basis, sales were up $11.8 million or almost 11%.

Foreign exchange was negative because of the euro, down $8.8 million or 8%.

During the quarter, as Pat mentioned, all of our major markets, wholesale, OEM and DIY were strong.

We saw the renovation market improving in the European -- pan-European marketplace.

We did see solar in the boiler marketplaces down, but we seem to be taking -- either holding or taking share in those marketplaces.

In France, we did have a -- we did take advantage of one of our competitors going bankrupt, and that also helped in terms of our sales in the DIY marketplace.

And in China, the sales are small but they did have a sizeable increase for the sector, $5.6 million in sales, up 19%.

That was all organic growth.

We saw most of that organic growth in the domestic Chinese marketplace.

Turning now to gross margins.

On a US GAAP basis, gross margins were 37.2%.

If you exclude restructuring, it would be at 37.4% or a 2 percentage point increase over Q2 of last year.

What is driving that, again, is volume.

We have better plant absorption, we have no period costs this year as we had last year.

We probably had several million dollars of what we call FAS 151 under absorption charges last year.

We've had a number of productivity gains through our various six sigma kaizen lean initiatives, we've put in some new machinery in various factories that also helped our productivity, and the productivity gains seem to be offsetting any commodity cost increases that we have had over the last year.

We've also had some favorable product mix especially in our European product lines.

SG&A was $84.8 million in the quarter, up about 6.1% or $4.9 million.

Year-over-year, we had some variable cost increases relating to freight, commissions and other selling expenses.

Legal costs, and some consulting and IT costs were up as we were investing in ERP systems in Europe, and we also had some legal costs go up for various matters.

Turning now to operating earnings.

On a GAAP basis, $33.3 million, up $4.8 million in the quarter, or 17%.

That internal growth -- the internal growth -- organic growth was $8 million during the quarter, and as Pat mentioned, that was a 37% drop-through.

On a year-to-date basis we're at 48%, so obviously we're doing a good job in leveraging our sales -- our incremental sales.

On a -- from an operating earnings perspective excluding restructuring, we're at $36.4 million, up $7.1 million or 24%.

If we just look at below the line for a second, other income and expense is down $1 million and that mostly relates to foreign currency hedges that we have in Canada.

They were negative last year.

This year, they're positive.

From a tax perspective, on the tax line, the rate decreased about 10 percentage points.

We had some favorable tax credits in Europe, basically relating to our restructuring of our businesses over there, so we were able to take advantage of some NOLs, and we also had a favorable German tax ruling that helped us out.

If you were to normalize -- if you take away the tax credits and normalize the tax rate for the quarter, we would probably be in the 33% to 34% range.

Bringing us down to net income.

From continuing ops on a GAAP basis of $22.2 million, up 46% in the quarter.

Excluding restructuring we're at $24.2 million or up 53%.

And as I mentioned, US GAAP EPS at $0.59, adjusted EPS or our run rate we consider at $0.57 versus $0.39 last year, up 46%.

That's it, so right now, we'd like to open it up to questions.

(Operator Instructions).

There is a question from the line of Jeff Hammond, representing KeyBanc Capital Markets.

You may proceed.

Hi, good afternoon.

Hi, Jeff, how are you doing?

Good, good.

Just wanted to hit on price costs.

I think the concern exiting for 2009 was that you had this period where commodity -- copper was down, and you see some pressure on the gross margin line that hasn't played out.

But as we get into the back half, how do we think about price cost?

Does it become more of an issue or still pretty manageable?

It becomes a slight headwind, is the way I look at it.

I think we're starting to see copper move through at higher prices, as we said in my initial opening comments.

It's moving upward and we can -- we think it's going to continue to move in that direction.

We see it putting a little bit of pressure on our gross margins but not significant.

We're still able to manage it through productivity improvements and the -- also the ability to pass pricing through to customers, which -- most of which has been affected already.

Okay.

And then just on the end-markets, you cited a number of economic indicators and kind of industry commentary, but as you take kind of the puts and takes, some of the negative res, some of the positive non-res are less bad, as you talk to your customers directly, the push between non-res getting less bad and res maybe getting worse, what kind of wins out between those two?

Well, when you take it all together and you put it in the total corporation, I probably -- we're looking at sales increases in the low to mid-single digits.

We have positive coming out of Europe, we have negative coming out of commercial marketplace.

We have very strong positives coming out of the remodel, repair market.

And that's on a -- is that year-over-year in the second half?

Yes, year-over-year in the second half.

Right.

Okay, and that includes currency headwind.

Yes.

Okay, perfect, and then, just last question.

Unless the currency goes crazy on us.

If it stays at today's level, I would say you're correct.

Right.

Okay, and then last question, you talked about high 30%'s, incremental margins in the second quarter, I think north of 40% for the first half.

What do you see as kind of a reasonable incremental margin on that low to mid-single digit growth in the second half?

Probably similar to what we saw here in the first half of the year.

I would say 30%, 35%.

Okay.

Thanks, guys.

Thank you, Jeff.

There is a question from the line of Kevin Maczka, representing BB&T Capital Markets.

You may proceed.

I have a question about Europe.

The strong organic growth that you have there.

I was hoping maybe you could give a little more color on what type of products are driving that.

Is that some of these alternative energy products that we have talked about in the past or, just wondering if you can give more color in general on why Europe was so strong?

Interestingly enough, the European results are relatively broad-based.

We saw it in all of our channels of distribution.

Our wholesale channel was up, our OEM channel was up, and our DIY retail channel was up.

It is, like you say, the products that are leading the way are alternative energy products.

We also see strong demand for under-the-floor heating products and district heating products.

But they are flowing -- you have strong OEM sales leading the way with strong retail because of the fact that we were able to take advantage of a major competitor going bankrupt and landing that account, so there's significant volume going through the retail as well.

Right.

So really a broad-based increase.

We also saw our drains products up quite a bit, which is one of our big platforms in Europe.

They were up in the high double digits, high teens.

Okay, and along those lines of the alternative energy, Pat, of the $112 million in European sales, can you quantify how much of those you consider alternative energy products?

Anybody have an idea?

Not off the top of my head.

We don't have the answer to that question at the moment.

Sorry.

Okay, and if I can just piggyback on the comment about the France competitor going bankrupt.

How meaningful is that?

Are there other weak competitors out there that are teetering, if you will?

If you could just say a bit more about that.

You always have weak competitors.

The question in my mind is, are they going to actually go out of business like this particular one did, or are they going to just be floundering around with somewhat -- what appeared to us to be relatively incoherent, illogical pricing and things of that nature.

So, you have a little bit of both.

You have some significant players who are hurting for volume and they're out there with low prices.

But in this case here, we won out because they went out of business, and we were able to service the account on a timely basis.

And generally it sounds like though you feel good about pricing and you have taken some recent increases, is that true in Europe as well, as you try to combat these more aggressive pricers?

Yes, I think, to be honest with you, over the last couple of years, we have proven to ourselves over and over and over again that we can manage that relationship effectively.

I don't see any reason why we would change our position with regard to pricing versus cost.

Okay, thank you.

Thank you.

You have a question from the line of Michael Cox representing Piper Jaffray.

You may proceed.

Thanks, guys, congratulations on a nice quarter.

Thank you, Michael.

I was wondering if you could comment a little bit more on the M&A environment, and also the -- what sort of contribution you expect from acquisitions through the balance of the year, the acquisitions you've already completed?

Yes, let's just talk about the pipeline.

There are some deals that we are working on at the current time, whether they will ever come to fruition is yet to be determined because they are at various stages of the development and the negotiation process.

We are seeing deals in our space start -- being more available than they have been over the last 18 to 24 months.

You saw that we did close the acquisition of Austroflex, and that had almost no impact on our second quarter.

So you will see that come in to our numbers throughout the rest of the year.

And we did the acquisition of BRAE, but BRAE is a relatively small contributor, so I wouldn't -- that's more of a forward-looking development project than it is an immediate accretion to sales and earnings.

Okay.

That is helpful.

And within the pricing commentary you've already made, do you have specific price actions planned for the back half of the year?

Or will it just be implementing the couple of actions you noted that have already been put in place in Q!

and Q2?

Well, for the most part, if you look at the biggest market, which is the North American wholesale, price increases went into effect in March.

It took a little while to firm them up, and that is why I said in my comments that we saw some results trickling through the numbers in the second quarter, and we'll see more of that in the third quarter.

We also effected price increases in the retail markets, both in Europe and North America, pretty much across the board as copper prices started escalating.

So it's not so much the need to announce additional price increases, it's more the process of managing and making sure that the effectivity of the prices that we've announced takes hold.

Okay, great.

Thank you very much.

Thank you.

There is a question from the line of Scott Graham, representing Boenning & Scattergood.

Please proceed.

Hi, good afternoon, and please pass along my best to Bill.

Thank you, Bill will appreciate that.

Sure.

Several questions for you.

A couple of, sort of housekeepers.

Could you tell us what the restructuring charges were specifically by region?

In the quarter?

Yes, please.

Sure, in North America, there were $300,000 -- this is a pre-tax basis.

North America, $300,000.

Yes.

And in Europe $2.8 million.

Great.

And similarly in Europe, could you tell us what the organic sales were bought in each of the three channels, wholesale, OEM and DIY?

The growth?

Hold on just a minute.

Yes.

Sure.

Sure.

The organic growth in wholesale was 9.3%.

OEM was 11.8% and DIY was 17.4%.

You can see why we said it was a broad-based increase.

Yes, yes, that is for sure.

Thank you.

And this question is really more just off of some of your comments, Pat.

What we're seeing in the general environment out there with residential construction spending.

Did you see things weaken as the quarter progressed?

Or was it just sort of uneven?

I think we saw in North America things weaken as the quarter progressed.

It was sort of the opposite in Europe where we got stronger as the quarter progressed.

So, you have a little bit of North America going one direction and Europe going the other.

Right.

Okay.

Here's the last one.

It's really kind of about the new product.

I know that 2010 has been lining up to be a very big year for new product launches, and I was just wondering if there was any way we can put a metric on that, or if you do internally.

Are you able to tell how much of the sales growth was from products launched this year?

Is there any way of quantifying that?

I'll tell you how we track it, I don't have the number available to me here at the moment.

But what we typically do is talk about products that have been introduced and these are the last 12 months, 24 months or 36 months, and we need that period of time because a lot of our products, you have to go out and do some missionary work in the marketplace before the sales kick in.

So we're clearly focused on incremental sales through new product additions and we have had a number of them.

But I don't have the figure available here.

Okay.

Thanks, anyway.

Nice quarter.

Thank you.

There is a question from the line of Michael Coleman representing Sterne Agee.

Please proceed.

Good afternoon.

Hi, Michael.

Just -- most of the questions have been answered.

Just wanted to go back to the comment that you made that solar and boiler market was down, but you believe you're taking share.

If you have some perspective on what your share is in that market, and how much you think you have taken over the last year or two or if you can elaborate on that comment, please.

We generally don't discuss share on these calls (inaudible).

Have you taken more than a point?

Is it meaningful or is this something that is inter-quarter fluctuation.

We think the marketplace, the solar marketplace is down about 25% in Europe this year, year-to-date, and our sales are only down about 5%.

Okay.

Thank you.

We have a question from the line of Jamie Sullivan representing RBC Capital Markets.

You may proceed.

Hi, good afternoon.

Hi.

Quick question.

Just on the adjusted operating income, as we move from 1Q to 2Q.

It looks like it was up a little over $7 million ahead of what the sales increase was over that period.

I was just wondering is that partly because of the restructuring efforts that you had going on in the quarter?

Q1 versus Q2?

Right.

I think from an operating profit perspective, I think we had a lot of heavy costs -- legal costs, audit costs, (inaudible) in Q1 at the corporate level, and from an operating perspective, we probably gained about $0.10 with -- between North America, Europe and China, just through organic sales increases quarter-to-quarter.

Okay.

That is helpful, and then what is the -- do you have the total revenue for European OEM and wholesale broken out?

We don't generally disclose those figures.

Okay.

And then just wondering about general sense for the repair remodel business, how much that grew in the quarter?

I'm trying to think here because I'm struggling because you have to add Europe and US, North America together.

I would say in North America you're talking about sort of 5% growth rates, and in Europe, you are talking about, because it's so heavily oriented toward to the retail sector, that we talked about being up.

It's up more substantially, more like 15% to something -- 15% to 18%.

Okay.

All right, and then just wondering about the trends that you mentioned throughout the quarter in 2Q.

Is that something that is continued thus far into 3Q or have there been any changes that you have seen in the market through July?

No, none that are noteworthy.

No.

Okay.

Thanks.

That's all I had.

Thank you.

Okay.

(Operator Instructions).

There is a question from the line of David Rose representing Wedbush.

Please proceed.

Good afternoon.

How are you doing?

Well, thank you, nice quarter.

I had a couple of questions on the tax rate going forward.

Do you have a little bit more guidance sequentially, and then into next year?

I think on a normalized basis, we should be in the 33%, 34% range going forward.

And no plans to repatriate?

No.

Okay.

And then on the top line, as far as the sequential outlook for sales, you see growth -- your organic growth moderating slightly from the second quarter.

Your assump -- I am assuming that is the case from what I have heard offsetting.

Europe would be slightly better, as you mentioned that as you went through the quarter, Europe started to pick up, the US started to tick down.

The US is a larger part of your business, so I can assume that your growth rate's going to start to moderate organically in the third quarter versus the second quarter.

Do you expect that to drop off significantly in the fourth quarter based on what you're seeing, or you're looking at basically your fourth quarter very similar to your third quarter?

We think it's going to slow down as the year progresses.

We're struggling a little bit with our crystal ball in the fourth quarter because there are so many elements going on there.

We're talking to our customer base because we're asking them, one, are they going to shrink their inventories again?

My feeling is that they will probably see some de-inventory, you see inventory levels come down in the fourth quarter, so that will impact us.

Okay.

Thank you.

You have a question from the line of Jamie Sullivan, representing RBC Capital Markets.

You may proceed.

Hi, just one follow-up to that last question and the impact on margins as we think about all the moving parts.

You have a number of favorable things going in, PEX kicking in in the third quarter, some of the European restructuring hitting in the second half.

The price increases, all of that.

Is the -- just wondering, what would be the headwinds on margin other than copper and potentially volume that we should think about, or is there any reason that the current levels, the high levels you have been delivering aren't sustainable?

You have the big ones, which is cost of copper is one, two would be absorption levels, particularly in the fourth quarter.

Okay.

And that would be volume related.

Okay.

And the other you have to worry about is the headwind from the currency, especially the euro.

Right.

Okay.

Thanks a lot.

Okay.

With no additional questions, I will turn the call back over to Pat O'Keefe.

You may proceed, sir.

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

We thought we had a great quarter, and we look forward to bringing you up to date on the next conference call, which will be scheduled some time in probably early November.

Thank you.

Thank you for joining today's presentation.

You may now disconnect.

Have a wonderful day.