Watts Water Technologies Inc (WTS) 2018 Q2 法說會逐字稿

Good morning, my name is Amanda, and I will be your conference operator today.

At this time, I would like to welcome everyone to the 2Q '18 Watts Water Technologies, Inc.

Earnings Call.

(Operator Instructions)

At this time, I would like to turn the call over to your host, Mr. Tim MacPhee, Treasurer and VP, Investor Relations.

Please go ahead, sir.

Thank you, and good morning, everyone.

And welcome to our Second Quarter 2018 Earnings Conference Call.

Joining me today are Bob Pagano, President and CEO; and Shashank Patel, our CFO.

Bob will provide his perspective on our second quarter results before turning the call over to Shashank, who will address the results in more detail and offer our latest outlook for the second half of this year.

Following the prepared remarks, we will address questions related to the information covering -- covered during the call.

Today's webcast is accompanied by a presentation, which can be found in the Investors section of our website.

We will reference these slides throughout our prepared remarks.

Any reference to non-GAAP financial information is reconciled in the appendix of the presentation.

Before we begin, I'd like to remind everyone that during the course of this call, to give you a better understanding of our operations, we may be making certain forward-looking statements.

These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from such statements.

For information concerning these risks and uncertainties, see Watts' publicly available filings with the SEC.

The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Now let me turn the call over to Bob Pagano.

Thanks, Tim, and good morning, everyone.

Before I speak to the quarter, I'd like to welcome Shashank Patel to the Watts team.

He began on July 2 as CFO and brings a strong financial skill set and wealth of experience from a long tenure at Xylem and ITT.

I've known Shashank for over 21 years and believe he will be instrumental in driving our near-term productivity efforts and our long-term strategy.

Now please turn to Slide 3 in the presentation, and I'll provide some commentary on the second quarter.

The team delivered another strong quarter, including record sales, adjusted operating margin and EPS.

We topped $400 million in quarterly sales for the first time, expanded adjusted operating margin and surpassed $1 in quarterly EPS.

The results reflect our commitment to driving profitable top line growth through commercial and operational excellence as well as favorable benefits from tax reform.

The Americas delivered strong organic sales growth and solid operating margin expansion during the quarter.

The sales increase is partially attributed to the pre-buy impact of our July price increases, but the underlying growth was impressive.

APMEA, driven by the Middle East and other regions outside of China, delivered solid organic growth.

In Europe, we experienced top line softness within our Fluid Solutions platform, which in turn, drove a margin reduction year-over-year.

We have seen limited growth in this platform along with pricing pressures and the impact of continued inflation.

Therefore, we have decided to reduce that platform's cost structure.

We are currently finalizing a restructuring plan primarily focused on headcount reductions.

The cost will be recognized in our third quarter results and highlighted as a special item.

Now let me quickly mention our view on the markets.

Overall, the markets are performing as anticipated.

In the Americas, growth expectations are still solid in both the nonresidential and residential end markets despite some weakness noted in the recent June housing starts and permits.

The U.S. repair and replacement market is also seeing continued growth.

For Europe, end market growth is moderated since the first quarter, and we've seen softness in the French wholesale market recently due to de-stocking.

And in APMEA, we expect growth in most regions will continue with a caveat.

Some markets may be hindered by ongoing trade pressures.

Further, we continue to see softness in the residential market in China, which has been soft for a number of quarters.

As discussed in April, we announced price increases that went into effect at the beginning of July to address inflation and the impact of enacted tariffs.

As the third quarter progresses, we'll be able to assess the market reaction to these price increases, However, given the existing cost pressures and potential incremental tariffs, we believe the market will accept the price increase.

We'll continue to monitor this very fluid tariff situation.

During the second quarter, we invested approximately $4 million for growth initiatives, at the high end of the range we provided back in May.

We're comfortable with the added investment due to our strong second quarter top line and operational performance.

And because we expect that performance to continue, we are increasing our expected full year investment spending to $13 million, $3 million more than our original outlook.

Much of the incremental spend will be made in the Americas and focus on growth and productivity improvements.

Finally, we are raising our full year organic sales growth for 2018, which Shashank will review momentarily.

We expect solid organic growth in the second half of the year, moderating slightly in the Americas as compared to the first half, given the impact of pre-buy sales and, in general, some tougher second half comps.

And we expect our operating margin for the full year should expand by approximately 50 basis points.

Now I'll turn the call over to Shashank to talk about our second quarter operating performance and provide more detail on our second half outlook.

Shashank?

Thanks, Bob, and good morning, everyone.

First, I'd like to say how excited I am to be joining the Watts team.

My first impressions are very positive, and I look forward to working with our investor community over the coming months and years.

With that said, please turn to Slide 4, and let me walk you through the second quarter results.

Reported sales of $408 million were up 8% and represented an all-time quarterly sales record for Watts.

Organically, sales were up 5%, with strength in the Americas and Asia-Pacific, being partially offset by softness in Europe.

Foreign exchange, mainly driven by a stronger euro, increased sales by $10 million or 3% year-over-year.

As planned, product rationalization was approximately $2 million, representing a 50-basis-points headwind in the quarter.

Adjusted operating profit was $52 million, an increase of $5 million or 10%.

This translated into an adjusted operating margin of 12.8%, up 30 basis points versus last year and a record for the company.

This was achieved while continuing to invest approximately $4 million in our growth initiatives.

Volume, price and productivity were the main drivers of the record margin performance, more than offsetting general inflation, including higher commodity and transportation costs.

Adjusted EPS of $1.05 was 27% better than last year and also represented a new all-time record for Watts.

Operations drove $0.08 of the increase, while tax reformed, lower nonoperating expenses and foreign exchange provided $0.14 in total.

The effective tax rate in the quarter was 27.6% or 450 basis points lower than the prior year, mainly due to the benefits of tax reform.

Year-to-date, free cash outflow was $14 million as compared to a $2 million outflow during the first half of 2017.

The incremental outlay is related primarily to inventory, tax payments and additional capital spending.

We made progress in the second quarter, and consistent with our historic seasonal patterns, we expect that cash generation should improve in the second half.

During the second quarter, we repatriated approximately $39 million in cash.

Year-to-date, we have repatriated about $110 million, using a majority of that to pay down debt.

In the second quarter, we purchased approximately 59,000 shares of our common stock at a cost of $4.5 million.

Year-to-date, we've returned a total of $25 million to shareholders in dividends and share repurchases as part of our balanced capital deployment strategy.

Overall, we are very pleased with our second quarter performance as we set new highs in sales, adjusted operating margin and earnings per share.

Turning to the regions, on Slide 5, let's review Americas' results for the quarter.

Sales of $272 million were up about 9% on a reported basis, and up 8% organically.

Similar to the first quarter, we saw broad strength across a number of product lines, including plumbing, water quality and electronics.

Our Heating and Hot Water platform had double-digit growth, with both AERCO and PVI product lines performing well.

We also benefited from favorable comps versus prior year.

We estimate that about 2 points of our second quarter organic growth was driven by customers pre-buying ahead of our announced July price increases.

Strong price realization drove approximately 1 point of growth in the quarter.

Adjusted operating profit in the Americas was $46.7 million, a 13% increase year-over-year.

Operating margin expanded by 70 basis points to 17.2%.

Volume, price and productivity offset increased inflation, commodity and transportation costs and incremental growth investments.

In summary, a continued strong operating performance for the Americas in the second quarter.

Let's turn to Europe's results on Slide 6. Sales of $117 million were up 6% on a reported basis but down 2% organically.

Foreign exchange, primarily the euro, positively affected sales by about $9 million or 8% in the quarter.

We saw continued solid growth in our Drains platform, which was driven by products sold into the marine end markets.

Regionally, Drain saw strong growth in the Nordics.

In the Fluid Solutions platform, sales were down mainly due to the softness in our water, plumbing and HVAC products.

By region, Fluid Solutions sales into France, Germany and Italy were down in the quarter.

In France, the decline was driven by product exits and a slower wholesale market due to customer de-stocking.

Germany's softness was driven by a slowdown with OEM customers and some softness in the wholesale channel.

And Italy saw continued headwinds related to heat metering products and the exit of a product line.

Adjusted operating profit for Europe in the quarter was $12.9 million, which translated into operating margin of 11%, a decrease of 80 basis points versus the second quarter of last year.

The margin degradation was driven by reduced volume, unfavorable sales mix, inflation and incremental investments being only partially offset by productivity and price.

Overall, a soft quarter in Europe, and as Bob mentioned, we are taking actions to reduce fixed costs within our Fluid Solutions platform.

We are in the process of finalizing the action plan.

We believe that the sales downturn in the second quarter is a timing issue, but we are addressing this proactively, should that not be the case.

Moving to Slide 7, let's review Asia-Pacific, Middle East and Africa results.

In the quarter, sales were approximately $19 million, up 9% on a reported basis and up 5% organically over the same period last year.

Excluding product rationalization, organic sales were up 11%.

As we saw in the first quarter, sales outside of China more than offset softness within China.

Sales outside of China increased organically by 26%.

We saw strength in the Middle East, New Zealand and Australia from higher demand for our plumbing and HVAC products due to our broad channel expansion.

China sales excluding product rationalization decreased 12% as continued demand for our commercial valves sold into data centers and semiconductor markets was more than offset by softness in our residential underfloor heating products.

Adjusted operating profit in the quarter for Asia-Pacific decreased 27% to $1.6 million, which translated into adjusted operating margin of 8.3%.

The key drivers of the margin reduction included transactional FX headwinds and incremental investments.

As expected, Asia-Pacific, Middle East and Africa's top line growth gained some momentum in the second quarter.

We expect growth to continue into the second half of 2018, fueled by our growth investments in Middle East and Africa.

Finally, turning to Slide 8 and our outlook for the second half of the year.

On a consolidated basis, we expect continued solid organic sales growth in the second half, with overall second half growth of between 4% and 5%.

By region, the Americas should see consistent growth from relatively healthy end markets and pricing, offset partially by tougher second half comps and the pre-buy impact mentioned earlier.

In Europe, we expect sales should be flat to up marginally.

And in Asia Pacific, sales should pick up in the back half of the year as our business outside China continues to expand and China returns to growth driven by easier comps.

Our consolidated adjusted operating margins grew by 40 basis points to 12.2% in the first half of 2018.

We expect better year-over-year margin expansion in the second half due to higher price realization, partially offset by the impact of higher commodity inflation, driven by the impact of tariffs.

We expect full year operating margin to be approximately 12.4%.

This margin expansion includes an increase in our growth investments during the second half.

As Bob mentioned, we have increased our total expected investment spend this year from $10 million to approximately $13 million.

We now expect expect about $7 million of spend in the second half for growth investments.

And we are forecasting strong cash flow generation in the second half, consistent with our performance over the past several years.

We are still focused on achieving 100% free cash flow conversion for the year.

Before I turn the call back over to Bob, a few items to keep in mind regarding the third quarter.

We are expecting consolidated organic growth in the third quarter to be in line with our second half expectations, with the Americas at the lower end of our growth outlook, given the second quarter pre-buy impact and some tougher third quarter comps.

Product rationalization should be approximately $1.5 million in the third quarter, of which $1.3 million is in Europe and $200,000 is in Asia-Pacific.

Consolidated operating margin expansion in the third quarter may be slightly below our full year expectations.

This is primarily due to an increase of expected investments during the quarter.

We expect price to more than offset net inflationary costs.

Regarding investments, we anticipate incremental investments of $4 million in the third quarter, $3 million in the Americas, $1 million in Europe and $300,000 in Asia-Pacific.

These investments should be partially offset by approximately $1 million in incremental restructuring savings, about $500,000 each in the Americas and Europe.

We expect our third quarter effective tax rate to be in line with our full year outlook of 28%.

Finally, based on current foreign exchange rates, the translation impact should be fairly neutral when compared to the third quarter of last year.

With that, I'll turn the call back over to Bob before we begin Q&A.

Bob?

Thanks, Shashank.

To summarize, the business delivered record sales adjusted operating margin and earnings per share in the second quarter.

Much of the upside was driven by the Americas, which continued to deliver a strong operating performance.

Europe came in softer than expected, and we are taking actions to address that.

APMEA growth picked up in the second quarter, and we expect that to continue into the second half.

And we are raising our full year sales outlook based on a strong first half and our most recent expectations for the second half.

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

(Operator Instructions) And your first question comes from the line of Nathan Jones from Stifel.

Bob, I'd like to just start off on the increased growth investments, clearly some strong top line here gives you the opportunity to invest a little more.

Can you talk more what kinds of things those investments are targeted on?

How should we think about the growth investments next year?

Do you think they maintain at this kind of level?

Do they go up even further?

Do they come down?

Just how we should be thinking about that?

Yes, so the incremental $3 million investments are going to be focused on connected products, channel expansion, primarily in the Middle East and Latin America, training and continuous improvement through the Watts performance system.

So we believe those are -- actions are going to help us as we go.

A lot of times, these investments take 3 to 6 months to realize, so more seeds are being planted to look outwards on that.

From an investment point of view into the future, we really look at -- we're in the midst of our strategic planning process right now.

And with continued growth, we hope to continue to invest more for the future.

So a little early for that.

Some of these are onetime in nature, but a lot of them will continue into the future and support our growth going forward.

So no color on whether it should be up, down or the same in 2019 yet?

Not yet.

But I hope to be able to spend equal or more based on where we're seeing volumes and what's happening in the business.

Because we're seeing great return on our investments.

And in this environment where acquisitions are at high multiples, I think, it's prudent to invest in organic growth.

Organic investments always have the best return.

On the price cost front.

So you talked about implementing price increases in July.

If there's any color you can give on how the market has accepted those in the first month they've been out there?

Any color you can give on where you were on the price cost equation in the first half?

And how you think that -- the price increases in July impact where you are on price costs in the second half?

Yes, so price costs, I think, we held our own in the second -- or the first half of the year.

I think, we talked about realizing about 1% price that more than offset the inflationary costs that we saw.

When we look at the second half, we believe we're going to get another incremental 1 point of price.

In particular, in the Americas.

So that's giving us confidence.

And in July, early indications are positive that we're getting the price.

So it's still too early to say, but right now, given the inflationary pressures that are out there and that everybody's seeing, we believe it's going to stick.

Do you -- you said you could see another point of price in the second half.

Does that correspond with another point of inflation that you're seeing?

So you remain about the same?

Or are you seeing more or less than a point of inflation?

Just how are you relative to the first half overall?

We think that the incremental 1% will at least cover inflation.

So it should be maybe a little bit positive.

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

I just wanted to follow up there on the -- Nathan's question there regarding price.

I mean, obviously, price cost has been volatile in copper and brass.

I mean, we had a huge runup earlier in the year, but now lately, all you read about is the big decline in copper.

So, I mean, how does that impact not just your own cost structure but the tenor of discussions around price?

I mean, the headlines are kind of out there going the other way now.

Well, copper has been very volatile.

It's going up and down.

It all depends on what you read about, whether China's slowing or accelerating and how much investment is going into China.

So right now, we believe we can still hold our price.

And the big wild card that we're all looking at right now is these proposed new China tariffs.

And that's still out there, and the more we heard that it's going to go from 10% to 25%, we'll be looking at that.

And if that does go through, we're going to pass on even a further price increase.

Got it.

Okay.

My other one was regards to -- you mentioned 2% contribution of this pre-buying effect to the growth in Americas in 2Q.

Can you just talk about the -- whether that was channel stuffing relative to actual demand pull-through on the end customer side and how that leaves the channel inventory situation for third quarter and what your near term outlook is for volumes on that basis?

Yes, so I think people were trying to buy and fill the channel.

On the flip side, July started out pretty strong also.

So that would tell us that the overall demand is still in the market.

So we're cautiously optimistic right now, in particular, in the Americas in what we're seeing in the growth.

The pipeline's full, the quoting's high and we feel pretty good about North America.

Great, and one last one.

On this European restructuring initiative that you're going to embark on here.

I mean, correct me if I'm wrong, but we've had over the last number of years several rounds of restructuring in Europe.

I mean, are we at the point where -- I mean, I'm surprised there's that much left to do, I guess.

So what -- can you just comment on that?

I mean, what was left on the table from the last few rounds or the last couple of rounds?

And whether we might not be at risk of cutting into bone?

Yes, no, we're looking at this, and we're very careful about cutting into bone and stuff.

I mean, we're looking at overhead.

We're looking at productivity.

And yes, we've done recent restructuring, but if you think about it, Europe has not been growing as originally planned in many of our forecasts and our past forecasts.

So I keep on looking for productivity.

We're driving productivity and we're investing, in particular, in our European platforms of drains and electronics, which are growing globally.

So this is more of the Fluid Solutions business.

And as you know, in Germany, we're more tied to OEM business, and we're at the mercy of some of the OEMs on some of this where they can take back some of the work internally.

So we are rightsizing our business for the volume we see as well as driving productivity.

Your next question comes from the line of Mike Halloran from Baird.

So could you talk a little bit about what you're seeing on the hot water side, PVI, AERCO.

Obviously, a couple of good quarters in a row here after some choppiness before that.

How are you looking at the landscape on a forward basis?

How sustainable do you think the progress you've seen over the last couple of quarters is?

And what's the competitive dynamic right now?

Yes, so Mike, we're seeing -- we said double-digit growth in that platform.

And we're seeing robust product demand.

And I think a lot of it is with our new product development, et cetera, in there.

Some of the smaller competitors that were very aggressive in price on last year, we're seeing them come -- they're not as strong.

We're still seeing pricing pressure, but our new products' development and our new products that we're launching are grabbing -- taking back some share from that point of view from the smaller ones.

So again we feel pretty confident the team -- the pipeline is active and overall, we feel that'll continue through the rest of this year.

And that makes sense.

And then on the M&A side, capital deployment side.

You alluded earlier that multiples are still pretty high.

Obviously, your balance sheet's in good shape.

Talk a little bit about what the market looks like on the M&A side from a pipeline and actionability?

And what your alternatives are if you aren't able to push forward any accretive on a returns-basis acquisition?

Yes, Mike, so we really believe in a balanced capital deployment strategy, and our pipeline is full.

We'll continue to cultivate relationships, but we're going to be disciplined in that.

And you never know when a potential M&A opportunity will come up, so you keep cultivating.

But we're going to be disciplined.

And as we said earlier, some of our internal investments are really paying off, so we've made a strategic decision to go faster and forward with some of those, given the current environment out there.

Your next question comes from the line of Brian Lee from Goldman Sachs.

I guess another question on pricing.

This is an off-cycle price increase.

Have you guys seen your peers take similar actions?

Just wondering if there is any reason to have guarded optimism around price ticking as you move through the year.

Yes, this is off cycle.

And we have seen competitors follow through just right with us or behind us.

So yes, they're also, from our intelligence, increasing price also.

Okay, great.

And then second question just -- I may have missed this, but on the outlook, last quarter, you guys provided a bit of a region-by-region margin view in addition to the organic growth views.

Those were all for positive margin expansion across each of the regions.

Wondering where you stand on the margin outlook here by region?

And if you could speak to maybe some of the drivers around the 50-basis-point margin expansion view, which, I think, is in line with what you said before: 50 to 70 bps, but I guess, is down a smidge at the lower end even on a higher revenue growth outlook.

I don't know if that's just related to the mix of the regions here or the incremental growth investments you're making?

But any color on that would be helpful.

Yes, so in total, it's impacted by the incremental $3 million of investments that we're doing.

So that's part of the story.

Certainly, Europe is probably a little softer on the margin improvement that we were expecting, but North America should offset that.

So in general, as Shashank commented in his comments on the second half, we look at the second half is going to increase -- approximately what the full year margin improvement's going to be.

So I take a look at that.

Americas is a little bit higher, Europe a little lower and Asia-Pacific will continue to grow.

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

This is Brad filling in for Jeff.

Just 1 -- just had 1 on price cost and specifically the cost side of the equation.

I think you're expecting somewhere in the neighborhood of $10 million of price in the second half of the year.

Can you bucket out the costs where is -- as it relates to commodities, transport and tariffs as you see it if you've done that type of granularity?

That'd be helpful.

Yes, we've not done that in the past.

And so we're going to stay away from that.

But in general, the transportations have -- we've seen about a 10% increase with all the trade headwinds and stuff.

We're seeing some of that from some of our products that we do get from China and Europe, particularly on the steel and aluminum.

But in detail, we believe the price and cost equation -- that our pricing will more than offset equal or more than offset inflationary impacts.

Your next question comes again from the line of Nathan Jones from Stifel.

Could you guys give us any color on what the expected run rate savings are from the restructuring that you're going to do in Europe, if I missed it?

Yes, we didn't provide it.

It's still early on, and we think it's going to approximate $5 million, the restructuring and have about a 3-year payback.

We think about $0.5 million favorability in the fourth quarter.

So that's rough estimates at this point in time.

Teams are still working it.

And -- but that's kind of the early indications.

Got to love those payback periods on Europe restructuring, don't you?

I understand this.

That's (inaudible).

So just on the European softness.

You talked about French de-stocking, and you also said some lower wholesale in Germany, so maybe some de-stocking there as well.

Plus you talked about the Americas pre-buying ahead of price increases.

I would assume that would normally be what you would have expected in some of those channels in Europe as well, which would imply that maybe the underlying markets are even a little softer there than they appear.

Talk about what the underlying demand drivers are that are [waiting] for this de-stocking in the channel over in Europe.

Yes, so our price increase in Europe was more in the April time frame.

So I don't think there's any dynamics inside of that.

So, from a -- moving to pricing, the July increase was in the Americas to offset the tariff impact that was in there.

Regarding the equation here, again, French de-stocking, I think in the second quarter, if you recall, there was a lot of uncertainty with the Italian elections, a lot of discussions on trade.

So I think people just laid low a little bit to determine what was happening here.

Now as I said earlier, July looked like a small rebound right now, but again, the market's down in Europe today and elsewhere just because of trade uncertainties.

Everybody's thinking that Asia might be slowing, and obviously, Europe does a lot of transactions in there.

So again, we're [paying] a cautious outlook in Europe.

You know I've always done that because I'm just concerned about that and the high cost structure.

So we always are looking at how we're going to reduce costs, improve productivity, be conservative there, and if we get the incremental volume, that would be great, but let's not plan on it.

So that's kind of our color in Europe.

Okay, that's helpful.

So not really any deterioration in the underlying markets necessarily, just customers being cautious worried about some of those impacts?

Right, it's a question of when new construction's happening, people slow down based on uncertainty and the same with the repair and replacement market.

I think some of the customers are just -- a wait-and-see attitude, and we hope that'll bounce back in the third quarter.

But again, my team knows that hope is not a strategy.

So we're going to be cautious.

(Operator Instructions) Your next question comes from the line of Joe Giordano from Cowen.

In Europe, do you feel like you're losing share?

It's like if you look at some of the headline numbers, at least from the residential side in like France and Germany, they look okay.

So is this -- do you think this is a product problem?

I don't believe in France, in particular, that's the case because again, we got -- we get wholesale reports, and it looks like there was a de-stocking, in particular, in May, when they have many, many holidays in -- year-over-year.

So that's not what we believe.

I do believe in Germany that we talked about -- which is merely OEM.

A large portion of our business in Germany is OEM-related, and we do see some of our OEMs pulling back some work that they've outsourced to us, given probably some of the softness they saw in the second quarter.

So again, that's a timing.

We get it.

They pull it back, and we have to adjust our labor as a result of that.

So we don't feel a significant market share loss from those point of view, but again, we're being cautious in our outlook in Europe.

And then -- okay.

And then in Americas, what kind of indicators are you looking at, kind of, on the fringes for potential like inflection points?

I know like, on the resi side, something like existing home sales on a trailing 12 months has been negative over the last couple of months now for the first time in a while.

So I'm just curious as to what you're seeing in terms of like kind of incoming conversations there?

Yes, so remember, 65% of our business in North America is repair and replace.

And remodeling is up, we're seeing -- the Dodge Momentum's up, the AVI, those things continue to show activity, and we're seeing more remodeling in the residential side.

Our residential is 35% of our business, and 14% of that 35%, so a really low number is tied to new construction.

So...

No, I'm talking -- existing home sales, right?

Would that be a better proxy for renovation spend?

It's a piece of that, but again, a new report came out this morning talking about there's still a belief that the housing is still going to go up and still be fairly healthy.

So we're not seeing the residential falloff that we would look at from a new construction point of view.

So we're still seeing that part of our market very -- it's performing very well.

Your final question comes from the line of Walter Liptak from Seaport Global.

This is Steve Friedberg filling in for Walt.

Yes, I've got a tariff-related question.

How much of the product manufacturing actually comes out of the Asia segment?

What we produce in America, I mean, again, we -- our Asia factory, about 40% of the their output supports, let's call it, some of the U.S. products.

Now in the U.S., we import products from China.

But also remember, there's an indirect impact of some of our suppliers that give us products that -- they get products from China.

However, as you know we have our own foundry here in North America that does a lot of our work here.

So compared to some of our competitors who outsource a lot of their products to China, we're going to be less impacted with this new potential tariff that's out there.

So again, we're looking at all angles in the tariffs.

We're looking at alternative supply chains and accelerating inventory buys, et cetera, to minimize the impact of this, but we're all waiting and seeing on this next round.

Okay, good.

That's what we -- we're thinking.

And a follow-up to that thought.

Since you guys have more North American manufacturing and, let's say, a competitor.

Are you guys able to increase prices dollar for dollar versus them?

Or maybe a better way of asking it is: is there an advantage?

I guess -- how much is the pricing advantage -- do you get from being North American-based?

I'm not going to comment about pricing in general.

I just believe that as leaders lead in pricing.

And we're putting out prices that we believe that will equal or more than offset any inflationary pressure.

So each -- individually I don't comment about us versus our competitors' pricing.

At this time, I would like to turn the call back to Bob Pagano for closing remarks.

Thank you for taking the time to join us today for our second quarter earnings call.

We appreciate your continued interest in Watts, and we look forward to speaking with you, again, in our third quarter earnings call in early November.

Take care and enjoy the rest of your summer.

Ladies and gentlemen, that does conclude today's conference.

Thank you for your participation.

You may now disconnect.