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Operator
Good day ladies and gentlemen, and welcome to the second quarter 2011 Watts Water Technologies Inc. earnings conference call. My name is Amesia, and I will be your coordinator today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session toward the end of the conference.
(Operator Instructions)
I would now like to turn the call over to Mr. Kenneth LePage. Please proceed.
- General Counsel, EVP of Administration and Secretary
Thank you. On the call with me today are David Coghlan, our President and Chief Executive Officer, and Bill McCartney, our Chief Financial Officer. Please be aware that remarks we 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 31, 2010, and 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.
During this call, we may refer to non-GAAP financial measures. These measures are not prepared in accordance with general accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available (technical difficulties) quarter 2011 financial results, a copy pf which may be found in the Investor Relations section of our website, www.wattswater.com, under the heading Press Releases.
I'll now turn the presentation over to David and Bill.
- CEO and President
Good afternoon, everyone. This is David Coghlan. Thank you for joining our quarter two earnings call.
I'd like to be gained by giving you an update on Socla's performance since the acquisition, then provide our latest view on market conditions, and review some of the key drivers in our second quarter performance, and then finish up by highlighting some points with respect to the second half. Bill McCartney will then review our financial performance in more detail, and after Bill's discussion, we will open up the call to your questions.
So first let's talk briefly about the Socla acquisition. As many of you, know the Socla business was acquired on April 29th. So our operations for the second quarter reflect approximately 9 weeks of Socla activity. I'm happy to report that the Socla business contributed approximately $0.03 to operations on an adjusted basis during Q2, which was slightly ahead of our expectations. Its performance was driven by higher sales volumes, from stronger sales into Eastern Europe, and from a successful sales promotion in the French market. Margins were in line with our expectations.
Operationally, we've begun a concerted integration process where we are aligning the best processes and people, whether they are from Watts or Socla, to insure the business achieves the synergies we expect from the acquisition. We are very pleased with the progress we've made to date.
Next, let's switch to talk a little bit about market conditions and our view of them. As anticipated, we experienced no improvement in our key end markets in Q2. We are being challenged with the same macro-environment that has stymied any meaningful business growth for over 3 years now. The US economy is recovering extremely slowly, with the latest data showing that a downwardly revised 0.4% growth rate in GDP in Q1, and a pretty anemic 1.3% GDP growth rate in Q2.
In this environment, the US residential market continues at low levels. The housing inventory drop persists due to foreclosures, tight credit, higher unemployment and lower housing prices, all of which are keeping new construction starts low. New home starts did see an up-tick in June to about 629,000 units, but expectations are that 2011 overall will likely be flat with 2010, at about 585,000 starts. McGraw-Hill is projecting a 2% decline in overall residential square footage for the second half of 2011, with single-family down 6% and multi-family up about 16%.
Existing home sales remained pretty consistent in June, at 4.77 million units. We expect existing home sales to remain steady, as the cost to buy an existing home is lower versus a newly constructed home. This data, together with the latest LIRA data, the L-I-R-A, data, makes us feel comfortable that the repair and replacement market should continue to hold up for the balance of the year. As we look forward, some economists and market watchers are forecasting continued growth into 2012 in the new multi-family market, which has grown nicely throughout 2011.
On the commercial side, the US commercial market also continued its slow performance through the quarter. The ABI Index, which made positive strides through Q1, trended down throughout the second quarter. Commercial vacancy rates approximate 13%, almost 40% higher than the average over the last 10 years. These indices do not pretend to return to nonresidential market growth, at least through the remainder of this year or the early part of next year.
In Europe, we experienced similar market dynamics as in Q1, with Germany and Scandinavia, and some parts of Eastern Europe doing fairly well, with France, Italy and the UK soft, and with distressed markets such as Spain more or less dead. Germany continued to perform well for us, particularly for products sold into the radiant heating marketplace. Finally, as the quarter progressed we saw our Blucher drains business picked up, as both land-based and marine business activity started to improve. So overall, we see continued softness in new construction into next year, with repair and replace continuing to hold up.
Next, let me address our second quarter performance. We were not able to fully recover increased commodity costs with pricing during Q2, especially in Europe and in the North American retail channel. Our copper costs in Q2 2011 increased approximate 12% sequentially from Q1 2011. And stainless steel costs in Europe were 15% higher in the first half of 2011, as compared to first half of 2010.
As we discussed last quarter, we reacted aggressively to commodity cost increases by raising our selling prices for various products in most of our major markets through Q1. And in Q2, we implemented additional price increases to cover additional commodity increases. For example, in North America we implemented a 5% increase on copper-contained products in the wholesale market. However, those increases went into effect late in the quarter, and so will not impact the business until Q3.
In some markets, mainly in Europe and in the US retail market, we did not achieve the kind of price realization we wanted in Q2. In Europe, we are competing at a very fragmented industry against competitors who are anxious to keep their factories busy. And in the US retail market,, we are continuing to work hard at driving necessary price increases into some of our big box customers. These issues serve to reduce our adjusted operating margins in Q2 when compared to last year.
During the quarter, our focus and operational excellence helped offset commodity pressures. We saw meaningful cost reductions during Q2 in North America and Europe from our continuous improvement and footprint consolidation efforts. And concerning SG&A spend, we maintained organic spending at 2010 levels, and we plan to continue to watch spending very closely as the year progresses. Finally, we continue to make progress on days of working capital, which excluding Socla, was down 2 days on Q1 2011 and 3 days on Q2 2010.
As we look forward to the second half, I wanted to point out 2 things. First, we have been very busy this past year on several organic growth initiatives, which are now beginning to hit the market. Our water quality business in North America has traditionally focused on the water quality dealer channel. However we've been working with Home Depot on a 50-store home install pilot for point-of-entry and point-of-use products, and this is now being extended to select markets in Florida and, California. And we're also in the process of launching a full line of water quality products under the Watts Pure Water Brand into the wholesale market, which is a completely new channel for our water quality business with very promising prospects.
We implemented a soft launch of a new line of residential fire protection products several weeks ago, and we are now rolling that line out nationwide into the wholesale market. In addition, we are launching a line of BRAE rainwater harvesting products into the wholesale channel.
Our North American HVAC business has launched 2 new products to the radiant heating market, which traditionally ramps up in the fall. One is FlexPlate for hydronic applications, where it enables more uniform heat flow and simplifies the installation process. The second is Slab Heat, which is an electric radiant product for indoor slab heating applications.
In Europe, our Blucher stainless steel drains business is also launching some potentially significant new products. First, a set of hygienic drainage systems for the food service market, which we have not enter before. And second, a line of siphonic roof drains to sell in conjunction with their existing Euro-pipe systems. And finally, our European team have just opened a new sales office in the Middle East where we bring together relevant products from both our North American and our European product portfolio to bring to bear on this market. We're hopeful for significant potential here.
The second thing I wanted to highlight is the announcement today that our board has authorized a stock repurchase program for up to 1 million shares. We believe that at current market prices, our stock is undervalued, and so this is a good time for us to be buying stock to offset dilution caused by employee stock trends.
I'd like to turn it over now to Bill, who will provide you with more insight into our operating performance in Q2.
- CFO and Treasurer
Okay. Thanks David. Let' s move on to the detail (technical issue) open it up for any questions.
As you know, revenue closed at about $376 million. That's an increase of $52 million or 16%. The components of that growth, organically we grew a little bit less than 1%.
The foreign exchange rates, particularly the Euro strengthening, increased our revenue by almost $17 million, which was about 5%. Then the acquisitions of Socla and a little bit of a contribution from Astroflex, increased our revenue by $33 million, or 10%.
What I'd like to do now is just run through some of our EPS numbers, just so you have a feel in terms of GAAP numbers, and as well as how management views the EPS for the quarter. When you look at these numbers, we reported $0.39 earnings per share, and that's a US GAAP number, but that also includes a $0.05 of income from discontinued operations. If we look at continuing ops, $0.34. Now, that includes $0.10 of restructuring charges. Of that $0.10, $0.04 is associated with Socla, which is part of the figures we discussed with you when we made the announcement of Socla, some of the restructuring and other charges. And then we also have $0.06 of restructuring associated with other ongoing restructuring projects, and the entire $0.10 is associated with projects in Europe.
So that brings you to $0.44. But when we adjust, inside the $0.44, there's a couple of pennies for the opening book charges associated with Socla, some of the step-up for inventory and backlog. So those charges equate to $0.06.
So from an operating standpoint, we thought that we operated at $0.50. Now, that $0.50 has Socla in there for 9 weeks, and if we separate out Socla, as David mentioned, we had a $0.03 contribution from an ongoing operations basis without Socla, we, on an adjusted basis, if you will, we earned $0.47. So if we look at Socla -- we expected Socla to contribute about $0.035 for a full quarter, if $0.03 for the partial quarter, so that's a run rate of about $0.045 for the full quarter. So on an ongoing operations basis, with Socla, we are in the $0.50 to $0.51 range from an operating standpoint.
Just a quick mention, we did record $1.8 million of income and discontinued operations. And that is based on our ongoing discussions with the SEC staff regarding our settlement of the SCPA issue that we have. So we, right now, believe that we will pay $3.8 million. We adjusted the accrual accordingly, and those discussions are still ongoing. Nothing is settled, and that is our best estimate at this time.
So at this point, just to look at some of the results of the segments. North America, total revenue of $212 million. That's an increase of about 3%, or $6 million. Organically we are up 1%. FX is about 0.5 a point. And then the US operations of Socla contribute about 1.2%.
We look at the2 components inside of North America, wholesale and retail, Wholesale came in at $167 million, an increase of almost $9 million, or 5%. And really, that's a reflection, as David mentioned, of the difficult macro-environment that we are in, with housings starts down, remodeling holding steady, and kind of commercial being lackluster, shall we say.
Looking at the retail space. Retail came in at about $45 million. That's a decrease of $3 million, or 6%, versus Q2 last year.
If you recall, last year we had a very different environment in the housing space where we still had the first-time home-buyer tax credit, and we had a lot of our retail customers were actually increasing their stock. And since that time we've seen them go through a de-stocking. And we've seen a little bit of des-stocking in the current quarter as well. And we've seen some of the comp sales for some of the big box customers that we have, have declined in Q2 as well. So very different environment versus this time last year, so the comparatives are very difficult.
Looking at Europe -- Europe came in at $158 million. That's an increase of $46 million, or 41%. From an organic standpoint, Europe was flat. The strengthening of the Euro contribute $15 million, or 14%. And then the contributions from the acquired company, Socla, and a little bit from Astroflex as well, contributed $30 million, or 27%.
The foreign exchange rate that we use for the Euro in the quarter was $1.44, compared to last year's Q2 of $1.28. And Europe now represents about 42% of our revenue in the quarter. With Socla in for a full quarter, that will go up to between 44% to 45% of our total revenue. And again, as David mentioned, a very mixed environment in Europe with some of the countries, like Germany and so on doing well, and some of these smaller countries in Southern Europe, because of the debt crisis, very struggling.
In China, $6 million of revenue, a small increase of $300,000 primarily due to the contribution of Socla., with partially offset by some small decreases in the export markets coming out of our Chinese companies.
Looking at the gross margin, which is the issue that we struggled with in the quarter. The gross margin, if you look at it excluding Socla, and without restructuring on a consistent basis to last year's second quarter came in at 35.5%. That's a decline of 1.7 points versus last year's second quarter. And that decline is entirely due to the inability to cover all of the increased cost of copper in Europe and the big box market in the United States.
If you look at the gross margin on a GAAP basis, it was at 34.7%. And the difference between that and the number I just quoted is the impact of the amortization and write-down of the inventory for the opening book charges of Socla. We did record $3.6 million of expense in the gross margin associated with that. In Q3, we will record $2.2 million, and then we will be done with those opening book step-ups, and those numbers are consistent with the figures that we shared with you when we had our conference call when we announced the acquisition of Socla. So all those numbers are holding true to the forecast and the model that we shared with you.
On SG&A, $98 million up from $85 million last year, an increase of $13 million. As we mentioned earlier, though, we did hold the SG&A from an organic standpoint. So as we walk across from $85 to $98, what we see is from an organic standpoint, a slight decrease of $100,000. The impact of the foreign exchange rates increased our SG&A by $4 million. And then the inclusion of the expenses of Socla, and a little bit of Astroflex impact, that increased our SG&A by $10 million. So that gets you up to the $98 million.
Looking at operating earnings. If we look at them on our as-adjusted basis, which would be reflective of the $0.40, really, the $0.50 earnings per share, that would show that we had operating earnings of $35.7 million, which has declined from last year's Q2 of $700,000, or $36.4 million. So really, the story there is that we had additional operating earnings coming out of Socla, which offset the reduced gross margin from the core business because of the inability to cover the copper and the flat SG&A. And that represents 9.5% -- that adjusted number represents 9.5% of revenue.
Below the line, other income and expense. Interest expense is up a bit, associated with the additional funds we used to finance the Socla acquisition. And then we had some additional charges associated with foreign exchange where we are marking our working capital to market.
The tax rate, 34% in the quarter, is up 11 points versus last year. If you recall, last year Q2 we released the reserve we had in Europe from net operating loss because of some changes in the Dutch Tax law, which is now allowing us to capture that NOL. And last year the rate was 23%. So the ongoing rate of 33.8% is more representative of our traditional tax rate. So net income on an adjusted basis, $19 million, a decline of 2.4%, again associated with the decreased gross margin.
So, I think what that, we are ready. We can open it up for questions.
Operator
(Operator instructions)
The first question comes from the line of Kevin Maczka with BB&T Capital Markets. Please proceed.
- Analyst
Hi, good afternoon.
- CEO and President
Hello, Kevin.
- Analyst
I guess first David and Bill, just a high-level question. It seems like some of the macro indicators that we follow here kind of weakened as we went through the quarter. Did you see that trend in your business as well? Was there anything that started the quarter better and ended it weaker?
- CEO and President
I would say probably our retail business weakened a little bit as we went through the quarter, and obviously the ABI index that we watched, that weakened as we go through the quarter, and in some of our European markets we saw some fluctuations in our order rates as we moved through the quarter.
- Analyst
Okay. Then in terms of pricing, I wanted to shift gears and ask a pricing question, David. So you've got some additional price coming -- that came later in Q2, that will more fully impact the P&L in Q3, but what is your message there? Is your message that margins should be higher in Q3 as result of that, or will we still be kind of behind the curve in terms of copper?
- CEO and President
Well, here's the way I describe it, in the first quarter and through the second-quarter, we've covered the copper cost increases that have hit the wholesale channel with price, pretty much dollar-for-dollar, and we are confident that we can continue that trend. The area where we have work to do is in Europe, where we took a hit in the second quarter, due to the competitive dynamics we are facing in that market, with a lot of small manufacturers who are chasing volume to keep their factories busy. We don't see that situation getting any worse as we go forward, and we are working to make it better, but we are a bit concerned about it. If we look at retail, we are working very hard to overcome the situation that we saw as we went through the second-quarter, where the price increases we worked on with some of our big box customers didn't take hold the way we would want them to, and we will be working that very hard as we go forward into the third quarter. So I guess the way I would put it is that we don't expect a deterioration, and we are working to get a little bit of upside over our current margins due to price.
- Analyst
Got it, and then just finally from me, you mentioned the big box retailers. So those negotiations, I assume, are never very easy, and they have maybe some annual line reviews coming up as well. How does that normally work? Are you able to go back to them and have that kind of negotiation, or have they been less successful because you are not able to have that conversation until the annual review?
- CEO and President
Well, in fact, at the moment, we are in a slight bifurcation, in that we are working in a good partnership model with some of our customers and I think the industry is struggling with some others, and so where we are struggling, the line reviews are not being scheduled on an annual basis. They are being scheduled when you put through price increases, and so we are working our way through that process, and we are both winners and losers in that process, but it is a tough one to get your price increases through in. We are taking some different actions to try to push price through. I don't know if that answers your question.
- Analyst
Yes, that does it for me. I appreciate that, and I will get back in queue.
- CEO and President
Thank you, Kevin.
Operator
The next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Please proceed.
- Analyst
Hey, guys.
- CEO and President
Hello, Jeff.
- Analyst
So can you just parse out this $5.5 million or, I guess, restructuring and write-off between the different segments?
- CFO and Treasurer
Sure. The restructuring, Jeff, is $5.3 million pre-tax, and the entire amount is in Europe, and we are just differentiating of that amount, $2.5 million of that is Socla and the rest is just ongoing projects that we've already announced.
- Analyst
Okay, and how do you think about that run rate into the back half?
- CFO and Treasurer
Well, I think most of the other restructurings are close to complete, and the numbers that we shared with you on Socla, in terms of how much the dilution is going to be, and so on, those numbers are all holding. I think we said $0.21 of dilution in this year. Once you strip away the opening book charges and some other restructuring charges that we are taking, which are part of that number, we said that Socla would contribute $0.035 a quarter. Socla is a little bit ahead of that run rate, but we feel comfortable that they will continue to at least meet the $0.035 contribution ex-charges. Is that answering your question?
- Analyst
Yes. That's perfect. And then just, I mean, big picture, David, you talked about the macro. It sounds like second half versus first half, you expect more of the same kind of this muted, no growth environment, is that fair?
- CEO and President
Yes. If I was to sum up, we are bumping along the bottom, and we continue to see repair and replace hold. We are seeing a little bit of a bright spot, but it is a small number, in multi-family new construction, and the rest is status quo.
- Analyst
Okay, and then final question from me. I guess you talk about Europe pricing challenges, I'm just wondering what is different this cycle versus last cycle, or if there's any particular markets where you are seeing it more than others? Just what's changed there in your mind?
- CEO and President
I think that's a great question, Jeff. Maybe the way I might typify it is that after 3 years of a pretty rough sledding in Europe we've got some, our sense is we've got some folks in the marketplace who are struggling, and so in the past, when we led with price, we got follow. At the moment there is a scrap for volume, and price, perhaps, is not first on their list.
- CFO and Treasurer
Jeff, I think this cycle has just been much more prolonged and much more severe than previous cycles and people aren't quite as rational at this point in the current cycle.
- Analyst
Okay. Helpful guys. Thank you.
- CEO and President
Thank you.
Operator
The next question comes from the line of Garik Shmois with Longbow Research. Please proceed.
- Analyst
Thank you. Good evening. The first question is just on the organic growth, the $1.8 million in revenues. Is it possible to break out how much of that was volume versus price?
- CFO and Treasurer
We would have a couple, say 3 to 4 points of pricing, and volume going the other way.
- Analyst
Okay. So most of that was on the price side, and then just turning to Europe for a second, OEM, it looks it is the second-quarter in a row that business has been doing better. How sustainable is the growth that you are seeing in OEM in Europe?
- CEO and President
That's a good question. We think it is pretty sustainable. What we are finding is that our OEM customers, who are traditionally based in Germany, are being very successful with their product offerings, particularly in export markets, as well as, to some extent, in their home market and our sense is that as we look at our order rates and as we listen to our customers, our sense is that is sustainable. They are taking share in other regions, and we are getting pulled along behind that.
- Analyst
Have you given some thought as to how to leverage your position here even more? It seems like a theme has been that Germany is a strong market and will likely remain so. How can you target that market even more to capture that?
- CEO and President
We are working very closely with all of the major OEMs in Germany. We've got fairly strong relationships with a number of the leading players, and the biggest opportunity we have to differentiate ourselves against some of the smaller, local competitors is to leverage our global presence, and so with some of the big OEMs in Germany, who are active in China, for example, and are active in North America, we've been building very solid relationships with them so that we can replicate our position there. At the moment, there's quite a lot of export, sub-assemblies, et cetera, coming out of (technical difficulty) those operations for assembly, but as they vertically integrate, we will be very well-positioned to maintain their key partner and to grow with them.
- Analyst
Okay, thanks for that, and then just 1 question on the buyback program. Is it possible to provide any color with respect to the timing that the program has to be worked through, or if there even is a cap on that, and I'm assuming it will be funded through cash, is that correct?
- CFO and Treasurer
The life of the program, Garik, is indefinite. It is 1 million shares. Our intention would be predominately to provide support when the stock gets a little softness but also to potentially cover the creep. We have about 400,000 or 500,000 shares a year of creep. We want to prevent the dilution as we go forward. It will be funded from cash. We have a very strong liquidity position with about $267 million of cash on hand at June 30, with another $175 million or so of liquidity available from our revolving line of credit. So this program will not impede any of our growth plans at all.
- Analyst
Okay. Great. Thank you very much.
- CEO and President
Okay.
Operator
The next question comes from the line of Wendy Caplan with SunTrust. Please proceed.
- Analyst
Thank you. Good afternoon.
- CEO and President
Hello, Wendy.
- Analyst
The inventory increase, you called out that it was from higher commodity costs, but just to confirm, have you been increasing inventory to keep some of your plants, as some of your competitors have been busy or?
- CFO and Treasurer
Well, if you look at the dollar increase in the inventory, Wendy, so on a year-to-date basis, about half of that is associated with higher commodity costs, and the other half is associated with some, basically as we've gone through some of these restructuring projects, we have built inventory to make sure we don't miss any deliveries. So as those restructuring projects wind down, we expect that we will get those inventory dollars back into our cash flow.
- Analyst
Okay. That's helpful, and the status of the French restructuring program. Can you just give us an update on that?
- CEO and President
Yes, we are making good progress. I was there a couple of weeks ago, and we are in full flow in our new centralized manufacturing plant. We are actually starting on a pretty aggressive move with our continuous improvement journey, and so they've been launching some significant Kaizen events there. So they are up and running on that front, and then I was also down at our new centralized distribution center, which is now fully in operation. The last act that we had to do to get the project winding down was to integrate the 3 computer systems. That has now been done, and that will allow us to consolidate common SKUs, which are being sold through 3 brands. So that we now reduce the number of SKUs and improve our material planning. So we are into the wind-down phase of that, and we should start to see some of the improvements coming through in inventory, et cetera. The 1 point I will make, though, Wendy, is that some of the price cost pressures that we referred to earlier in Europe, are hiding the benefits of the restructuring in France. We are seeing the restructuring dollars coming through as we anticipated, but that price cost issue is offsetting them.
- Analyst
Okay, and I was interested to hear about your new products, David, that you cited. Can you talk about 1 or 2 of them that you think have meaningful opportunities?
- CEO and President
Yes. First of all, under the third leg of our strategy, something we call One Watts. We've really been looking to leverage our products across all of our channels, and as such, we are really pleased with the progress we are making in water quality, where largely that business has focused on a water quality dealer channel to market. The pilot that we are doing with Home Depot is meaningful, and the extension into Florida, select markets in Florida and California, if that pilot is successful, offers significant opportunity. The other piece of that, that we are really excited about, is that, as those of you who know us well understand, we have a very strong presence in the plumbing wholesale market, but we had never leveraged our water quality line into that channel, and the launch that we are going through right now takes a full line of water quality products into the wholesale channel, and we are very excited about the potential there.
The other one that I talk about is residential fire. Obviously, at the moment, with new construction starts being very low, this is not going to be a big impact launch in the short-term, but as we get familiar with the product, as our distribution and customers get familiar with the product, as we work our capabilities in both the plumbing channel and the fire protection channel, we will be learning and setting ourselves up for when the market comes back. So there's just a couple of examples on the product site. The other one that I mentioned on the geographic reach side, is the office that we are opening in the Middle East. We have looked long and hard at that market, and we had been treating it as an export market with very little resources dedicated towards it. By opening our own office, and by having our own team on the ground in Dubai, we think we are positioning ourselves for that market well, and we see potential there. So that's just a sample, Wendy.
- Analyst
Thanks very much, David.
- CEO and President
You're welcome.
Operator
The next question comes from the line of Michael Gaugler with Brean Murray. Please proceed.
- Analyst
Good afternoon, everyone.
- CEO and President
Hello, Michael.
- Analyst
2 questions. First, I would like to kind of start up with how you are feeling about making acquisitions at this time. I know that your decision to buy back shares was based pretty much on the creep, but should we view your outlook overall as one that has, perhaps, lessened your appetite for transactions?
- CEO and President
No. I don't think so Michael. We are still working an acquisitions pipeline with some attractive candidates in there, and so our appetite hasn't changed. The 1 thing that obviously will change is we will take a brief pause from acquisitions of any scale in Europe as we digest Socla, but we are continuing to work an active acquisitions pipeline elsewhere, and we are committed to further deals.
- Analyst
Okay, and then I want to switch back and kind of expand on your comments about your new water quality offerings. I believe you said they were point-of-entry products, the pilot in California and, Florida.
- CEO and President
Point-of-entry and point-of-use, yes.
- Analyst
Filter or UV-based, and that aisle at Home Depot is currently dominated by General Electric, correct?
- CEO and President
Well, let me just clarify a little bit. First of all, its point-of-entry and point-of-use, both, and secondly it is filtration, but the area that we are working with Home Depot on is not that aisle, but we are actually working with their home install team, and so Home Depot have been broadening the range of offerings through the whole home install program, where you can ask for new windows, new roof, new water quality product line, et cetera, and so it is not the aisle, it is the home install program.
- Analyst
Got it. That takes care of my questions. Thank you.
- CEO and President
Thank you.
Operator
And the next question comes from the line of Brett Long with Piper Jaffray. Please proceed.
- Analyst
Good afternoon.
- CEO and President
Hello, Brett.
- Analyst
With the multiple organic growth initiatives, can you quantify any of that potential?
- CEO and President
Not at this stage. We are hopeful, though, that they will help to get us back on the organic growth path as we start to implement them, and some of them, we think, could be significant.
- Analyst
Okay, and any insight into timelines there?
- CEO and President
All of these launches are taking place as we speak, and so as we go through the act-learn-act cycle, we should start to see, over the next couple of quarters, some benefit coming out of them.
- Analyst
Okay great, and any initiatives in China?
- CEO and President
We've just hired a new President for Asia, and he comes with a strategic growth pedigree. He joined us from Ariston Thermo, which is a HVAC manufacturer in Europe where he ran their Asian business, and before that he ran Asia for ITTs flow business, and so we've done some work to look at growth opportunities in China, and Elie will be helping us firm those up, and then move to execution over the next several months.
- Analyst
Very good, thanks.
- CEO and President
Thank you.
Operator
The next question comes from the line of Todd Vencil with Davenport & Company. Please proceed.
- Analyst
Thanks, good afternoon.
- CEO and President
Hello, Todd.
- Analyst
I just had one follow-up on the stock repurchase. You said that you feel like the stock is undervalued and that you will be picking it up when you think the valuation looks right. How do you think about that, and how are you evaluating that relative to other capital opportunities?
- CFO and Treasurer
Well, first of all, we look at our multiple versus the multiple in, whether it is the water universe, or industrial manufacturing universe, and so on. So we've lost a bit of time here. We have been, our multiple has been lower than those comp companies, if you will, and then in terms of our ability, if I'm understanding your question properly, this will not hurt our ability to do acquisitions. We have plenty of capital, plenty of cash, plenty of borrowing ability. Our net debt to cap ratio was only about 18% at quarter end. So we have plenty of flexibility, Is that answering your question?
- Analyst
Yes, and I wasn't, I agree that you guys have lots of capacity to walk and chew gum in that regard. My question was just more are you thinking about, if there's some secret sauce to how you are thinking about returns relative to, say, an acquisition, and how you pencil out the economic returns on those, but I think you probably answered the question.
- CFO and Treasurer
It is not that scientific. We just want to control the dilution, and we think the stock is undervalued relative to our, most peer groups that you would put us in.
- Analyst
Got it. Thanks, Bill,
- CFO and Treasurer
Okay.
Operator
The next question comes from the line of David Rose with Wedbush Securities. Please proceed.
- Analyst
Good afternoon, this is just a clarification question. On your assumptions going forward, in terms of margins. When we last spoke, we were talking about sort of the lean initiatives and where you are on your journey. That includes, your estimates include, what you have sort of as an ongoing process of lean initiatives, are there any other material initiatives that could change your margin outlook, and can you provide us with a little bit of timing on what you expect to do?
- CFO and Treasurer
Well, we remain, first of all, we remain committed to our, what we call our continuous improvement program. We have actually added some very capable people to our staff as recently as during the second quarter. We feel there's a lot more room for improvement in our improvement program, a lot more opportunity there, and I think in terms of the next, we also remain committed to achieving our 12% operating earnings objective. It is a very difficult environment at the moment, as we have discussed, with some of the pressure on copper and so on. We do believe that we are creating, or improving, if you will, our operating leverage so that if we get help from the macro-environment, which will then firm up the pricing environment, the 12% is still very much within our reach and an achievable objective, and then the other part of that discussion would be, do we see any significant changes, if you will, in any footprint consolidation programs, and there's nothing there that we are ready to discuss at this point in time. I mean, as we do acquisitions, and as we free up factory space as part of our improvement program, sort of that basic landscape is constantly changing, and we are going to continue to evaluate it, but nothing today that we are ready to discuss.
- Analyst
Okay. Thanks Bill.
- CEO and President
Okay,
Operator
And the next question comes from the line of Jamie Sullivan with RBC Capital Markets. Please proceed.
- Analyst
Hi, good evening.
- CEO and President
Jamie, how are you?
- Analyst
Good, thanks. Just a follow-up on the water quality products that you are rolling out, partially with Depot. Is there kind of a timeline for that pilot before it would move forward to the next level?
- CEO and President
Yes, Jamie, we've had a 50-store pilot in operations for the last couple of months, largely focused around, New Jersey, and the recent decision was to expand the focus of that pilot to include locations in Florida and California. So I think that expanded pilot will run for a couple more months and then Depot will sit back and assess, and determine where to go from there. So the fact that we went from a 50-store pilot, largely focused in New Jersey, to include Florida and California, 2 key water quality markets, is a significant step forward in our view.
- Analyst
Great. That's helpful, and then one of your comments on the pricing discussion, you talked about some different actions that you are taking with some of the larger customers. What you are referring to there, is there anything on the material substitution side, or cost side, or is that more about some alternative methods of negotiation that you are looking at there?
- CEO and President
I guess all of the above would be the best answer.
- Analyst
Okay, and then I think that's all I had. Thanks.
- CEO and President
Thank you.
Operator
Ladies and gentlemen, this concludes the question and answer session for today's call. I would now like to hand the call over to Mr. David Coghlan for closing remarks.
- CEO and President
Okay. Well, thank you, everybody. I would just like to summarize by saying that the second quarter was really a continuation of the first quarter. Our top line growth was dampened by some of the macro headwinds we've been facing in our key markets, and as Bill mentioned, particularly with respect to retail, we had some tough comps versus last year. Escalating commodity costs are a challenge. We expect to mitigate further margin erosion through pricing actions that we've taken, through accelerating operational excellence program, and by staying close to our customers. We are also seeking to get back on the organic growth trail, through the impact of the organic growth initiatives that we have discussed. Beyond that, we've also implemented several cost-containment initiatives to ensure that we've got full control of our discretionary spending levels as we get back into the second half of 2011, and so that's really is a summary, I guess, of where we are at and where we are going. We thank you for your attention. Thanks for your questions, and we look forward to talking to you next quarter.
Operator
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.