Watts Water Technologies Inc (WTS) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Watts Water Technologies, Incorporated first quarter 2015 earnings conference call.

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

Later we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions).

As a reminder this conference call is being recorded.

Please be aware that remarks made during today's calling about the Company's future expectations, plans and prospects constitute forward-looking statements under the Private Securities and 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 the Company's Annual Report on Form 10-K for the year ended December 31, 2013 and other reports the Company files from time to time with the Securities and Exchange Commission.

In addition, forward-looking statements represent the Company's views only as of today and should not be relied upon as representing its views as of any future date.

While the Company may elect to update these forward-looking statements it disclaims any obligation to do so.

During this call the speakers 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 Wednesday, April 29, 2015 relating to the Company's first quarter 2015 financial results.

A copy of which may be found in their Investor Relations section of the Company's website at www.wattswater.com under the heading, Press Releases.

I would now like to turn the conference over to Treasurer and Vice President of Investor Relations Mr. Tim MacPhee.

Sir, you may begin.

Thank you, David.

Good morning, everyone and thank you for joining our first quarter earnings call.

Joining me today is Bob Pagano, President and CEO, and Todd Trapp our CFO.

Bob will begin by providing a summary of the quarter.

He will offer some color on the current market conditions and will update you on our various transformation and restructuring programs.

Todd will discuss the finance results for the first quarter in more detail and update our full-year outlook, Bob will summarize, and then we will open the call-up to your questions.

Now, I will turn the call over to Bob Pagano.

Thanks, Tim and good morning everyone.

Before I speak to the quarter I would like to mention two recent additions to our team.

Munish Nanda joined us on April 6 as our America's President, and on April 9, Todd Trapp came on board as our CFO.

Munish brings a strong operating and growth skill set from his time at ITT and other large fortune companies.

And Todd brings a strong financial skill set from his long tenure at Honeywell.

I believe both gentlemen will be instrumental in driving our near-term transformation efforts and our long-term strategy.

We welcome both to the Watts Water team.

Now, turning to Slide 3 in the earnings call presentation let me briefly provide an overview of our first quarter performance.

The quarter really played out as we had expected.

Overall sales were down both on a reported basis and organically.

Reported sales were significantly affected by negative currency movements as the US dollar continued to strengthen against the Euro and Canadian dollar.

As we discussed during our call back in February, organic sales in the EMEA were down due to a tough macro environment especially in some of our larger countries like France and Germany.

Americas organic sales were affected by the product rationalization effort and weather.

Harsh weather in the US drove a week January and much of February.

We saw our sales base increase in late February and into March, but we could not recover from the slow start.

Our core product lines did grow quarter on quarter excluding the effect of the transformation.

On the bright side, Asia-Pacific performed very well during the first quarter, and the EMEA Drains business had strong growth and sales into the EMEA emerging markets were up year-over-year.

Operating profits were hindered by volume reductions which caused plant under absorption, FX and increased G&A costs as compared to last year.

G&A costs were in line with expectations and our prior communications.

And AERCO was accretive to our results.

The year-over-year loss of non-core product sales as parts of the Americas transformation also a negatively affected our results.

Todd will provide more financial details in just a moment.

We continue to execute on our various restructuring and transformation initiatives in EMEA and the Americas.

I will provide an update of these important initiatives in a few moments.

Finally, from a shareholder perspective, the Board has approved an increase in the dividend of 13% starting with the second quarter dividend payment.

This marks the third consecutive year that we have increased the dividend by double-digits and is line with our balanced capital allocation strategy.

Moving to the markets, let's turn to Slide 4. Let's begin with the Americas.

Not much has changed since we spoke with you in mid-February.

The weather has certainly affected near-term construction activity this past quarter, but in general the US economy continues to grow, the key residential indicators we review like Wells Fargo data on housing start, builder sentiment and the remodeling index look encouraging and suggest continued the growth.

On the commercial side we continue to see positive trends in the Dodge Momentum Index, ABI and lending activity.

So, overall we believe the market trends are positive as we continue in 2015.

Now, let's review the EMEA markets.

The signs continue to be mixed for 2015.

Quantitative Easing may help stimulate incremental activity but to date we have not seen QE translate into orders, but that will likely take some time.

Continued tensions in the Ukraine, sanctions on Russia, Greece uncertainty and falling energy prices make forecasting difficult.

Some (inaudible) signs point to some stabilization but we see market growth as slow and uneven throughout EMEA this year.

Our geographical markets are up and down as well.

Germany from a macro perspective is doing okay driven by exports.

However, our end markets in Germany include the domestic German market or Eastern European destinations which remain fragile.

France is slow to recover and is expecting minimal GDP growth this year.

EMEA emerging markets will continue to be a good source of growth over the long-term and delivered strong growth for us this past quarter.

The Middle East is project driven so we are normally will experience lumpy growth quarter-over-quarter, but overall we saw exceptional growth in this region.

Finally, let's discuss Asia-Pacific.

While the growth in Asia-Pacific continued to moderate and China continued to see head-winds in the housing market, we were able to drive growth in the niche markets that we serve.

Our market strategy has not changed.

We continue to see demand in China for our localized products and our more highly engineered European an US Manufactured products.

In addition, we see continued growth in tier 2 cities, especially in key verticals such as hotels, office space and data centers.

We also see the heating market, which for us is about 70% retrofit, doing well.

So turning to go Slide 5 I want to update you on the Americas and EMEA transformation efforts.

Let's first discuss the Americas.

As a reminder, we have developed an action plan which will be executed in two phases.

The first phase is focused on driving both commercial excellence and global sourcing.

Phase-2 will involve a broader review of our existing operational footprint in the Americas.

Recall as part of phase-1, we wanted to focus on core products that will provide greater opportunity for us to distinguish ourselves in the marketplace and we want to strive to be a solutions provider, not merely a component supplier.

So we commenced a product portfolio rationalization effort focused on removing products that are non-core.

In Q1 we saw a sales reduction of approximately $7 million in the affected non-core products versus the prior year.

Our plans have been discussed with customers and the team has met with many of our larger customers, especially within the retail end market.

Their reaction to our announcement has been professional and reasoned.

Sales and operations are currently working with all affected customers to develop final transition plans by mid-May.

We are working with customers to ensure an orderly transition.

We are pursuing all options ranging from a sale of the identified product lines to a complete exit and wind down of the affected products.

We expect that by early Q3 we should have resolved whether the assets will be sold to a third-party or we move in another direction.

Assuming we do not sell the product lines we still believe our range of $80 million to $100 million in sales reduction for 2015 still holds.

Regarding the costs related to phase-1, if we are successful in selling some or all of the product lines then our total costs may be reduced accordingly.

The last point I would like to make about phase-1 is that we realized approximately $1 million in sourcing savings in Q1 which was in line with the annualized savings we discussed in February.

The final plans for phase-2 are still being completed.

Our new Americas President, Munish Nanda, started at the beginning of this month.

He brings a wealth of operational experience and has been through major transformation efforts before.

I wanted the benefit of his detailed review.

We are still focused on optimizing our Americas footprint in order to better serve our customers.

We expect that we will provide more details about this at our Q3 conference call.

Now, a brief update on the EMEA restructuring and transformation programs.

Both of these programs are proceeding as planned.

Cost and expected savings are still in line with our February presentation.

The only caveat is both expected costs and savings may be affected by foreign exchange fluctuations.

Now, I will turn it over to Todd to talk about our operating results in more detail and update you on our outlook concerning 2015.

Todd?

Thanks, Bob, and good morning everyone.

Before I jump into the material I just want to take a second and just say that I am really excited to be a part of the Watts Water team.

It's only been a few weeks since I joined, but I am very pleased with my experience so far and look forward to working with you and all of our investors in the weeks, the months and the years ahead.

So, with that said, let's turn to Slide 6 and let me walk you through the financial results.

In the first quarter we reported sales of $356 million, down 2.5% on a reported basis and down 1.9% on an organic basis.

As you recall, back in February we had discussed many of the known top line variances including foreign exchange, a softer European macro-environment, the Americas product line rationalization, the harsh winter in the US plus the addition of AERCO, and as Bob mentioned, it played out pretty well in line with our expectations.

Foreign exchange mainly related to the weaker Euro negatively impacted sales quarter-over-quarter by 6.6%, or approximately $24 million.

Which more than offset the upside from the AERCO acquisition which contributed approximately 6% growth.

The Americas product line rationalization also had an impact on our top line and if you adjust for this initiative our organic sales would have been flat.

Regionally, organic sales were down .9% in Americas and 5.7% in EMEA which more than offset a 40% increase in APEC.

Again, adjusting for the product line rationalization, Americas would have reported a 2.5% growth rate in the quarter.

I will provide a little more color on the regional performance in a few minutes.

Adjusted operating profit was down 12.5% to $29.3 million, which translated into adjusted operating margins of 8.2%, down 100 basis points on a year-over-year basis.

Volume reductions drove lower absorption in both EMEA and the Americas.

We had higher anticipated G&A spend for stock compensation compliance and other cost which we had communicated during our February conference call.

The negative impact of the volume reductions, higher G&A and negative foreign exchange were partially offset by productivity and the restructuring and transformation programs in Europe.

Adjusted net income of $15.9 million and adjusted EPS of $0.45 were approximately 18% below the comparable amounts of Q1 of 2014.

Adjusted EPS decline of $0.10 which included a negative impact of $0.06 in the quarter for foreign exchange and a $0.02 contribution from AERCO.

The effective tax rate was 33.2% which is 150 basis points higher than Q1 last year primarily related to the mix of earnings being more heavily weighted to the US in the quarter.

Free cash flow improved by almost $19 million, or 80% year-over-year aided by lower inventory levels and stronger collections and receivables.

We didn't have the inventory build-up this quarter as we did in Q1 of 2014 for the lead-free transition and overall we were more disciplined in managing our inventories.

This was reflected in our inventory turns which improved by 7% when compared to last year.

Now, turning to Slide 7 let's review the Americas results for the first quarter.

Sales were $237 million, a reported increase of 8.4% but were down marginally on an organic basis.

Again, adjusting for the product line rationalization, Americas would have reported a 2.5% growth rate in the quarter.

From a channel perspective we saw organic growth in wholesale and OEM being offset by a reduction in the DIY channel where the majority of the non-core products are sold.

I think it's worth mentioning a few discrete items that impacted Americas' organic growth in the quarter.

First, as Bob mentioned, weather was not on our side.

We talked to numerous customers and the messaging was consistent regarding the weather impact.

In the quarter we estimate that weather impacted sales by approximately $3.5 million.

Conversely, sales in the quarter were positively affected by about $4 million resulting from customers pre-buying ahead of a planned price increase that took effect April 1 of this year.

AERCO is performing very well as sales increased double-digits year-over-year led by strong boiler sales.

As we have mentioned previously, the first quarter is typically AERCOs slowest period of the year and we expect to see sales ramp up in the next two quarters.

Also worth noting that the integration of the business is on track and we still expect to realize the $1 million to $2 million in synergy savings that we communicated back in February.

Excluding the product line rationalization, orders in Q1 were up by about 2%.

Again, we believe the adverse weather early in the quarter impacted the trajectory of the order rates.

We saw order rates increase sequentially as the quarter progressed (inaudible) in March at approximately 6% over March of 2014.

However, as I just mentioned, the March number included the full forward of orders by customers due to the April price increase.

So all-in-all order rates were a little slower than expected.

Adjusted operating profit for the quarter was $27.9 million, a 13.9% increase.

This translated into operating margin expansion of 60 basis points to 11.8% despite an organic volume reduction.

The margin expansion was due to favorable product mix, pricing, material cost savings and lower G&A costs which more than offset lower absorption.

Overall we believe the Americas performed fairly well taking into account the effect of the product line rationalization and the tough weather conditions.

Now, turning to Slide 8 let's review EMEA's quarterly results.

Sales of $109 million were down $30 million on a reported basis, or approximately 22%, and down 5.7% organically.

Foreign exchange driven by the Euro decline against the US dollar, accounted for $22 million of the sales decline, or approximately 16%.

The organic decrease was concentrated in our larger locations mainly France and Germany.

Middle East sales were especially strong given the timing of project shift during the quarter.

Regarding channel sales, wholesale was down 7% driven by lower plumbing sales while OEM sales decreased 4% mostly related to HVAC products sold into the German marketplace.

We saw lagging markets in France as commercial projects were slow to convert and housing permits remain soft.

In Germany, major OEM boiler manufacturers experienced year-over-year sales declines which impacted our order and sales rates.

Adjusted operating profit for the quarter was $8.1 million, a decrease of $5.8 million, or 42%, which translated into operating margins of 7.4%.

Approximately $1.7 million, or 29%, of the operating profit decrease was due to foreign exchange.

Lower volume and absorption, stainless steel cost increases and SG&A investment primarily associated with the establishment of the principal Company more than offset the benefits from the restructuring efforts we have launched within Europe.

So, as expected EMEA continues to be a challenge, but we are forecasting to see some improvement in the second half of 2015.

Now on Slide 9 let me provide a summary of a APEC's results for the quarter.

APEC sales were approximately $10 million, a 40% organic increase over prior year.

The increase was driven by valves and under-floor heating product sales and some easier comps.

Sales have increased despite slower construction indicators in China as we have expanded our distribution presence.

As part of our growth strategy to expand into tier 2 cities our team is working hard in recruiting and establishing preferred supplier relationships in new territories with some of the more influential distributors in those regions.

We have started to see that growth strategy reflected in our results.

Adjusted operating profit increased 66% to $1.5 million in the quarter.

APEC's adjusted operating margins increased 240 basis points to 15.3%.

The key driver of the significant expansion were higher trade volume and productivity initiatives which more than offset a reduction in affiliate sales in the quarter.

So in summary another strong quarter for the APEC team.

This represents the fourth consecutive quarter that organic sales growth has exceeded 20%.

On Slide 10 a couple of points I would like to point out as it relates to our free cash flow from the quarter.

As I mentioned, our free cash flow outflow for the quarter was $4.8 million, an 80% improvement as compared to Q1 last year.

We improved DSO and inventory turns and our capital investment increased 14% mostly related to the addition of AERCO.

Our existing stock buy back program is on track as we purchased approximately 164,000 shares of our Class A common stock at a cost of $9.4 million within the quarter.

Historically, as you know, Q1 is a slow period for free cash flow generation.

We expect that performance will continue as the year progresses.

Finally, turning to Slide 11, I will provide a brief update on the full-year outlook.

Looking at sales we still expect organic growth in the Americas to be in the range we provided in February, but given the soft start to the year we are forecasting to be closer to the low end of that range at this time.

It's worth noting again that the guided range excludes the impact of the AERCO acquisition, the impact from the lower sales as result of the transformation efforts and the negative foreign exchange related to the Canadian dollar.

It should be noted that we expect to see a tough comparison in Q2 due to the timing of the is price increases both this year and last year and then see pickup in Q3 and Q4.

Very similar story to EMEA.

We had an estimated organic sale reduction year-over-year between 1% and 3%.

With a current market conditions, the first quarter performance and current order rates we believe the full year sales reduction will be at the higher end of that range.

As we communicated, we will still see a tough comparison for Q2 and then improvement in the second half of the year.

In Asia-Pacific we are still expecting organic top-line growth of 20% excluding the effects of the transformation program so no change from our February outlook.

With regard to our overall transformation we are still forecasting to eliminate between $80 million to $100 million in sales this year as part of our effort.

Most of this impact will be taking place in the second half of 2015.

Other items to consider; foreign exchange will negatively impact our 2015 operating results.

Our previous estimate of between $0.25 and $0.30, including both translation and estimated transaction costs, is still a reasonable range although we most likely will be at the higher end of the range given current foreign exchange rates.

As we have mentioned before, we estimate that every 1-point movement in the EURO rate will affect our EPS by approximately $0.01.

We anticipate spending between $30 million and $35 million in capital this year, an increase over previous years which includes AERCO and a broad upgrade of our existing equipment with a focus on improving productivity and supporting our strategy.

Depreciation and amortization charges are still expected to be between $55 million and $60 million.

We still expect our global tax rate for the year will be between 31% and 33%, similar to 2014.

We expect tax savings from EMEA's transformation process which will be offset by the mix in global sales weighted heavily towards the US which is a higher tax jurisdiction.

During our last call we discussed some expected incremental costs related to stock compensation, pension, recruiting and compliance that would be a headwind in 2015.

Our yearly estimate of $13 million in total costs still holds.

Finally, we are still expecting to settle our pension liability during the latter half of 2015.

The gating factor is the final IRS approval.

The timing and latest cost estimates have not changed from what we have provided to you back in February.

Now let me turn the call over to Bob who will briefly summarize.

Bob?

Thanks, Todd.

So to summarize, the year start the out as we expected.

Our top line in EPS were challenged by foreign exchange, continued macro issues in Europe, poor weather in the Americas and by the Americas product rationalization program.

We did see underlying core growth in the Americas despite the weather issues and the Asia-Pacific delivered a solid quarter as did AERCO.

The markets in the US we believe are positive, Europe is still shaky and Asia we expect to continue to grow.

We will continue to drive our various rationalization and transformation programs as 2015 progresses.

This heavy lifting is geared towards expanding our future margins.

So while this year may be a transition year we're very excited about our future results.

So with that, Operator, please open the lines for questions.

Thank you.

(Operator Instructions).

And our first question comes from the line of Jeff Hammond from KeyBanc Capital Markets.

Your line is now open.

Hi, guys.

This is James filling in for Jeff.

Hi James.

Can you just speak to the current process in exploring the option for a sale for DIY in terms of how would those products get pulled out from the commingled businesses, and also just to the time frame as to what needs to be accomplished before the early 3Q time frame that you laid out?

Yes.

So James for the most part most of these businesses are carved out in distinct locations.

There's some intermingling in distribution centers but that's limited.

So we're able to isolate and pull those out.

So the process is ongoing and as I said earlier, we're looking at all options in product line sales, and plant sales, et cetera.

So we're right in the middle of the process so I really don't want to comment on more details on that.

Sure.

And then pricing you said that you passed an April 1 increase.

Can you just cover, what products, the percentage of revenue maybe that covered?

Was it very broad-based?

And also regionally?

Yes.

So overall we did a broad-based price increase from 3% to 4%.

You know, we always expect about half of that to stick and we have been able to do that.

We feel more confident about that in the Americas versus Europe, as you know, is under a lot of pricing pressure right now.

So we're doing our best to pass along price in Europe, but we're getting a lot of pressure in that market.

Got it.

And if I could just fit in a final question.

Can you just provide an update on the decremental margins that are running through the DIY revenue?

Well, when you say decremental margins, we gave guidance of 15% to 20%.

That stuff was going to drop at.

You know the first quarter that was about the same, $7 million.

As we expecting, we announced it about February 22 so we had a lot of orders in backlog so we didn't see a large impact of that, but as we moved from the quarters it's going to start ramping up.

So double that probably in the second quarter and then it's really going to ramp-up even further in Q3 and Q4.

So, all of that depends on the timing and if there is an opportunity to sell, it may be a little faster.

Again, it's hard to speculate on that at this point in time.

Got it.

Thank you.

Thanks.

Our next question comes from the line of Kevin Maczka, from BB&T Capital Markets.

Your line is now open.

Thanks.

Good morning.

Good morning, Kevin.

Can we just follow up on that last point?

The product rationalization you still see about $80 to $100 million this year, it was more like $9 million in Q4.

It ramps as we go forward.

Can you give any more color on the cadence there that we should expect or is it just too early and you just know it will be more in the back half?

I think, like I said, in the second quarter I think it will be double the first quarter, approximately, and, again, and then Q3 and Q4 it all depends at this point in time on the timing of some of the stuff.

It is too early to tell.

We're getting final orders from our customers and they're supposed to be finalized in mid-May so that's all part of the plan.

So, unfortunately, we can't fully coordinate with our customers.

And when I say coordinate, what I'm talking about is, they're looking at their various options and certainly if we sell to another party, our customers are aware we're trying to do that.

So, they're looking at alternatives and as well as, you know, a potential buyer may fill that void in the gap.

So, again, it's difficult, but I would say it's definitely second half skewed.

Got it.

And so the sales impact is about double in Q2 and then more in the back half, but those decremental margins, those ought to hold throughout the year?

Or do those get better or worse in the second half as well?

I think for now those are the best estimates we have.

Okay.

You know, those same margin rates.

Got it.

And then can I shift over to the EMEA margin?

That 7.4 was lower than we had seen in quite some time and it's currently an impact here but it doesn't look like that was the biggest culprit.

It looks like, unless I'm not understanding, it looks like the volume decline was the bigger decremental on that was a bigger issue.

Can you just address that and talk about how we ought to think about EMEA margins going forwards when we have these decrementals but yet we also have the transformation and restructuring savings?

Sure.

Sure.

Kevin, this is Todd.

I would say from a year to year perspective the biggest driver without a doubt is the volume absorption in EMEA and there's a couple other things, too, worth mentioning.

We had higher stainless steel costs that hit us in the quarter as well as incremental G&A costs associated with the principal Company establishment.

You know, (inaudible) the benefit on the tax line, we are seeing that additional cost up in our margins.

Unfortunately, this more than offset the higher productivity and restructuring benefits that we saw in the quarter.

For me it really comes down to the volume of the absorption that we saw in Europe and we expect that to improve, I think, as we progress through the year given the fact that we think volume is going to somewhat moderate.

Yes.

So the volume declines have to moderate to get into that down 1 to 3 guide.

Q2, though, you mentioned in North America and EMEA you have a more difficult comp so, just based on that, we will see open more volume declines, I guess, unless there's some rebound in demand.

Yes.

So I think the way I would categorize is if you look at the year-over-year decline in Europe in Q1 it was down 5 points (inaudible) organically.

We think from a year to year perspective that is going to improve in Q2.

And so we're not going to see as much volume headwind from a year-over-year perspective in Q2 that we saw in Q1.

Okay.

So that's (multiple speakers).

And then just to add in Q3 and Q4 we have a lot easier comps because, if you remember, that's when we saw de-stocking in Q3 and Q4 because the OEMs were building inventory and in the first and second quarter.

So, our first and second quarter in EMEA is our toughest comp.

It gets much easier in Q3 and Q4 because we don't expect that de-stocking that we saw in Q3 and Q4 of last year.

So, in the EMEA market what we're seeing is lead times from our customers they're buying only as needed and are asking for faster deliveries to minimize their inventory adjustment.

So, I think as Todd said, Q1 and Q2 tough comps, Q3 and Q4 much better comps.

Okay.

And so, again, even though the comp is more difficult in Q2 just thinking about the near-term, you think the organic decline will be better and in turn the margin maybe would better as well in Q2?

Yes.

Yes.

Better than Q1 for sure.

Yes.

Okay.

Thanks.

I will get back in the queue.

Thanks.

Our next question comes from the line of Joseph Giordano from Cowen and Company.

Your line is now open.

Hi, guys.

This is Tristan for Joe today.

Could you maybe parse out the 2.5% organic growth that you saw in the Americas?

Can you parse out the growth between the non-res and the residential?

When you say non-res and residential, a lot of our products, we don't clearly understand where our wholesalers sell products.

But when we look at it overall in the quarter, in March, when we see the growth overall, we saw our res-com business was up about 5.5% in total from a sales point of view.

So, that goes to both markets.

We have a gauge where we look at our larger product portfolio and that year-over-year change was about 6% and that tends to be more of the commercial market on those larger sizes.

So that's kind of our proxy of what we're seeing.

So, that would imply a softer residential side of our overall market.

So, hopefully, that answers your question.

The only other color I will give you is our Drainage business.

That business, as we told you in the past, is usually a leading indicator because they put drains in first, was up on a shipment basis of about 9% in the first quarter.

So that was solid growth in that early indicator.

Okay.

That's helpful.

Thank you.

And maybe regarding AERCO do you still see synergy's to be put in place?

Aside from the $1 million to 2 million in savings that you anticipate, do you still see any cross selling opportunities maybe?

Yes.

I mean we just came back from AERCO the first two days of this week we had our Board of Directors there and had a great visit.

You know, the $1 million to $2 million I think is what we see this year only because some of the larger synergy's take longer to build.

But already, we're seeing opportunities where we're quoting together on some large projects and we think there's opportunity.

So we feel great about this acquisition.

It's delivering as we expected and we're excited about AERCO.

Perfect.

Thank you, guys.

That is it for me.

Thank you.

Our next question comes from the line of Garik Schmois.

Your line is now open.

Hey, guys.

This is actually Mark on for Garik today.

Just back on AERCO a little bit.

If you could comment on operating margins in the business and just seeing how they have progressed over the course of the year here and where you think they can peak at.

Also, if you could just a housekeeping question.

In your new guidance didn't see the share repurchase assumption of I think $27 million as well as interest expense about $6 million.

I'm wondering if those are both right numbers to think about this year?

Thanks.

Okay.

So I think we've talked about AERCO margins.

Usually the first quarter and their fourth quarter are their weakest margins given it's just a timing of growth.

So, their strongest margins are in the second and third quarter which ties to their volume.

So, we don't get into specifics about every quarter margin, but I would tell you we've said that in the 15% range, from an operating income point of view, it overall is a good proxy for where we will be and the team is doing real well in achieving that.

And year-over-year we continue to invest in growth in that business because we believe that business will grow double-digits so we're not constraining them.

We want them to grow.

It's one of our best growth opportunities for the Company.

And then your second question on the stock compensation I would say that we're continuing down the path of repurchasing approximately $10 million per quarter to offset any dilution from our stock compensation program and I think our interest expense is in line with our forecast.

Thank you.

And I am showing no further questions.

I would now like to turn the call back to CEO and President, Mr. Robert Pagano, for further remarks.

Thank you very much.

In closing, I would like to thank you for tame taking the time to join us today for our Q1 earnings call and we appreciate your continued interest in Watts Water.

We look forward to speaking with you again during our Q2 earnings call late in July.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes today's program.

You may all disconnect.

Everyone have a great day.